The woes at Franklin Credit Management have hit Huntington Bancshares, Inc., a regional bank that said today that it will take a $300 million loss on its $1.5 billion exposure to the troubled scratch-and-dent mortgage operation. From the bank’s press statement, comments by Thomas E. Hoaglin, chairman and CEO:

“We only recently learned of Franklin’s actions to reassess the adequacy of their loan loss reserves … Franklin’s mortgages represent the underlying collateral for our loans to Franklin. As a result of this new information, we needed to reassess the collectability of the Franklin loans. This has caused us to act promptly to review our estimates of the value of the cash flows and embedded losses over the life of these mortgages. The actions we have announced today, we believe, fully address the issues embedded in our Franklin exposure. The fact that this will result in a net loss for the quarter is regrettable and upsetting. Yet, we must take whatever action is necessary to deal with this issue.”

Doesn’t exactly sound like the bankers are happy here, does it? And with good reason, too; following its announcement, Moody’s said it was reviewing Huntington’s banking operations for a possible ratings downgrade. From Moody’s statement:

Moody’s placed Huntington’s ratings on review for several reasons. First, the size of the remaining net exposure to Franklin — in excess of $1 billion — is substantial and additional write-downs are a possibility, in Moody’s view. Second, the write-down will result in a sizable net loss in 4Q07 and, combined with a large quarterly dividend, will result in a material deterioration in Huntington’s capital ratios. Finally, Huntington is also at risk of a further deterioration in the credit quality of its loan portfolio, particularly in its Commercial Real Estate (CRE) exposures. A substantial portion of Huntington’s CRE footprint is in Eastern Michigan and Northern Ohio — a region of the United States where this asset class has come under significant strain.

If you’ve ever wanted to see an example of how the mortgage mess can reach where you might not expect, this is a perfect example. BTW, it’s also worth noting Moody’s just acknowledged that it is seeing “significant strain” in the CRE markets in both Michigan and Ohio.