Huntington Plagued by Franklin Worries

Huntington Bancshares(HBAN Quote) stock slid as much as 13% Monday after some analysts questioned whether the bank's previous reserve assumptions for losses related to subprime lender Franklin Credit Management(FCMC Quote) would be high enough.

Late Friday, Franklin, one of Huntington's largest commercial relationships, delayed its quarterly filing with the Securities and Exchange Commission after warning of higher loan losses and significant provisioning on originated and purchased loans as a result of the deterioration in the housing and subprime mortgage markets.

Franklin Credit said it entered into additional amendments to its forbearance agreements with Huntington, its lead lending bank, where "the minimum net worth covenant was eliminated, and all identified forbearance defaults that existed as of June 30, 2008 were waived." The subprime lender currently owes Huntington $1.13 billion.

Analysts are concerned that Huntington's exposure to the Jersey City, N.J.-based lender could signal its own additional writedowns and provisioning that is higher than what it has already set aside for the credit.

Jeff Davis, an analyst at FTN Midwest Securities, on Monday slapped a sell rating on Huntington and cut his price target by $3 to $5 a share, following the news.

"The macro environment has deteriorated since December, increasing the downside risk to [Huntington's] cash flows," Davis wrote in a note. Huntington has already reserved $115 million related to Franklin Credit, he says.  

Franklin Credit said that it expects to record a second-quarter loss in the range of $280 million to $285 million, which reflects a significantly higher provision for credit losses, compared to $3.6 million in the year-earlier quarter. Franklin's provision for loan losses is expected to increase to between approximately $280 million and $285 million for the second quarter, the filing said. It also expects a stockholders' deficit between $242 million and $247 million for the quarter.