Huntington Plagued by Franklin Worries

Huntington Chairman and CEO Thomas Hoaglin said in a statement on Friday that "the provision that Franklin will be taking does not have any impact on our reported reserve level" which it already had taken Franklin-related losses into account. Huntington in November 2007 acknowledged problems with the portfolio, which it inherited in its acquisition of Sky Financial in July of that year.

Davis, however said "relative underperformance" for Huntington's stock is "likely" due to the Franklin issue. Huntington's bond portfolio also "may be a source of unexpected losses," he said.

"While there has been optimism that Huntington might be able to work a sale of the [Franklin] portfolio, it seems to be far-fetched barring a Merrill-type mortgage sale," Davis writes, referring to Merrill Lynch's(MER) decision to purge a chunk of its toxic securities still on its balance sheet at a deep discount.

Andrew Marquardt, an analyst at Fox-Pitt, Kelton Caronia Cochran Waller, writes that he remains "skeptical" of the ultimate impact to Huntington's credit quality and earnings.

Marquardt believes there are more writedowns to come at Franklin Credit "given the profile of ultimate borrowers (scratch and dent) and the weakening economic backdrop," he writes. "We view the biggest risk to [Franklin] is its borrowers' ability to pay rather than collateral value."

He questions if Huntington will be able to "rid itself of this exposure" without taking large writedowns. For perspective, a 50% writedown to Huntington's exposure equates to nearly $1 a share, he writes.

Huntington's relationship with Franklin is "the single largest headwind for the stock price," writes Sandler O'Neill & Partners analyst Scott Siefers. Huntington "must constantly justify the adequacy of the reserve and the overall relationship performance, and we believe its simple presence adds to questions regarding capital. ... Management clearly understands the significance of the [Franklin] piece of the story. To that end, management continues to make clear that reducing the exposure to $0 as quickly (but prudently) as possible remains the goal."