Huntington shares fall on NJ mortgage client's troubles
NEW YORK (Reuters) - Huntington Bancshares Inc (HBAN.O) shares fell as much as 12 percent after a troubled mortgage client said it expected a big quarterly loss, and an analyst downgraded the U.S. Midwest regional bank to "sell."
In a Friday filing with the U.S. Securities and Exchange Commission, the client, Franklin Credit Management Corp, projected a $280 million to $285 million second-quarter loss, hurt by a "significant" increase in reserves for bad loans.
Franklin, a Jersey City, New Jersey-based specialist in "scratch and dent" home loans, also said its lenders have amended loan agreements to eliminate a minimum net worth requirement and waive some defaults.
Huntington said it has a $1.1 billion commercial lending relationship with Franklin. The Columbus, Ohio-based lender became exposed to Franklin after acquiring Sky Financial Group Inc of Bowling Green, Ohio, for $3.3 billion in July 2007.
Scratch-and-dent loans have problems in documentation or borrower credit histories, or may be delinquent or in default.
Thomas Hoaglin, Huntington's chief executive, said Franklin's announcement would not affect a $115.3 million reserve that Huntington established for the relationship.
But Jeff Davis, an analyst at FTN Midwest Securities Corp, downgraded Huntington to "sell" from "neutral," and cut his price target to $5 per share from $8.
He said Huntington has agreements with regulators to lower its banking unit's exposure to Franklin by September 30, requiring that it reduce the loan by $400 million to $700 million.
Davis said this can be done if Huntington buys the excess amount from the banking unit.
But noting Merrill Lynch & Co's MER.N recent agreement to sell $30.6 billion of troubled debt at 22 cents on the dollar, the analyst said a significant write-off could result in a $570 million after-tax charge at Huntington.
This could reduce Huntington's Tier-1 capital ratio, which measures its ability to cover losses, by 1.2 percentage points, Davis said. Huntington said it ended June with an 8.82 percent ratio; regulators consider 6 percent sufficient.
"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 wrote.
Huntington operates more than 600 branches in six states, and ended June with $55.3 billion of assets.
In morning trading, Huntington shares were down 54 cents, or 6.8 percent, at $7.43 on the Nasdaq, after earlier falling to $7.01. The shares began the year at $14.76.
(Editing by Maureen Bavdek)
