Huntington Bancshares Inc. (HBAN) decided to take on its balance sheet exactly the kinds of loans other bankers are expected to sell.

Huntington's Chairman and Chief Executive Stephen Steinour said a deal announced Tuesday night to take on troubled mortgage loans from Franklin Credit Management Corp. (FCMC), a mortgage company, will benefit his bank. Huntington, of Columbus, Ohio, got the loans at what it calls a discount to face value, and it will get some of the profits Franklin expected to generate.

Getting the loans dissolves a loan Huntington made to Franklin that had long created headaches. Steinour said Huntington also benefits from the cash flow of the mortgages and can directly help delinquent borrowers working out their debt.

It's not often these days that the CEO of a sizable bank answers a "How are you?" with an emphatic, "I am great," as Steinour did in an interview with Dow Jones Newswires.

Investors apparently share his sentiment, sending Huntington's shares up about 14%, to over $1.90, in a rising market.

Huntington said it would take on $494 million in loans previously held by Franklin, resolving a $615 million in loans Huntington made to Franklin. Franklin was not making the required payments on the loans from Huntington.

Steinour's enthusiasm for the deal illustrates that what might be toxic waste to some could be attractive assets to others. Of the $427 million loans, only $127 million are current but even those were written down by about 18%. The loans are so-called Alt-A mortgages, made to borrowers with less documentation than Fannie Mae (FNM) and Freddie Mac (FRE) standards require. However, the portfolio had an average FICO score of about 700 at origination, well above subprime levels.

Huntington's move illustrates a problem facing the Treasury Department's Public-Private Investment Program. Bankers who sell the toxic assets would lose the cash flow the mortgages might be generating, such as partial payments from borrowers. And bankers would lose out if the loans eventually rise in value when the economy improves. Such concerns might, for bankers, outweigh the benefit of ridding of troubled loans that hurt capital and earnings.

During a conference call with investors, Steinour said his bank "would consider" participating in PPIP, but "we need to understand that program a lot better than at least I do today."

Steinour said in the interview he feels no pressure from shareholders, the public, or regulators to rid the bank of troubled loans. And he reiterated what several bankers said last week: He would only sell at a price that would reflect the potential upside in the loans.

Taking on the Franklin loans will also help Huntington's capital, in part because it can reverse the $130 million it set aside for the potential loss of its loan to Franklin. The transaction would add 26 basis points to tangible common equity, raising it to about 4.6%, but it slices 8 cents per share off first quarter earnings.

According to Thomson Reuters, analysts on average expect Huntington to report a first quarter loss of 7 cents.

Analyst Andrew Marquardt of Fox-Pitt Kelton Cochran Caronia Waller wrote in a research report, "Capital levels still look strained when we consider remaining credit costs and pre-tax pre-provision earnings power."

The relationship between Huntington and Franklin was "fundamentally misaligned," Steinour said. For example, Huntington sees a benefit from mortgage borrowers prepaying their loan and would waive the prepayment fee, something that was not in Franklin's economic interest.

Indeed, Steinour said Franklin was all but insolvent; the loans could have ended up on Huntington's balance sheet anyway. But in restructuring Franklin rather than letting it collapse, Huntington guaranteed itself a slice of the mortgage servicer's profit; 70% of which will be shared by three banks that extended loans to Franklin. Franklin has not originated or bought any loans since late 2007, but it is planing to service loans other banks might sell, including transactions under the Treasury's PPIP.

Franklin did not immediately return a phone call seeking comment.

-By Matthias Rieker, Dow Jones Newswires; 201-938-5936; matthias.rieker@dowjones.com