Huntington Plagued by Franklin Worries

Franklin Credit Management, one of the Ohio bank's largest commercial relationships, on Friday warned of higher loan losses, hitting Huntington's stock Monday.
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Huntington Bancshares

(HBAN) - Get Report

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)

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.

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."

Shares of Huntington most recently were down 7.8% to $7.35. Franklin Credit's shares dropped 22% to 35 cents a share.