The busiest week of earnings season ended the same way it started – with banks struggling with how to handle new regulatory requirements for home-equity loans.

First Horizon National (FHN) saw its stock fall almost 5% in early trading Friday after announcing a $30 million charge tied to loans where the borrower has liquidated debts in bankruptcy court.

Meanwhile, TCF Financial (TCB) in Wayzata, Minn., delayed the release of its third-quarter results a week to give it more time to review the new rules on how to value such loans. Its shares fell more than 4% early on, but gave back value as the day progressed.

It’s not that the issue is a surprise, but the timing – while banks are trying to overcome tight margins and prop up profits – is awkward and accounting methodologies vary.  It probably doesn’t help that a lot of banks don’t believe these loans are as risky as the regulators fear.

“We think it’s an accounting issue,” First Horizon’s chief financial officer, William C. Losch 3rd, said during a conference call with analysts. “Unfortunately, the accounting hurt. As we have said, we think it accretes back to us over the long term.”

The Office of the Comptroller of the Currency ordered banks in June to write down the value of mortgage loans where the borrower has gone through a Chapter 7 bankruptcy. The OCC is requiring banks to move the loans to nonaccrual status because they pose a higher risk of default, regardless of whether they are being repaid.

JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (NYSE: C) charged off a combined $2 billion in the third quarter as a result of the new rules. Others that have taken the chargeoffs include Huntington Bancshares (HBAN), PNC Financial Services Group (PNC) and Bank of America (BAC).

The rub for First Horizon, in the eyes of analysts like Kevin Fitzsimmons of Sandler O’Neill, was that its charge hit the income statement and contributed to it falling short of earnings projections.

First Horizon reported a third-quarter profit of $26 million, or 10 cents per share. The charge cost it 7 cents a share, First Horizon said. Even excluding that charge, the Memphis company would not have met the consensus 19-cent estimate of analysts provided by Bloomberg.

Other banks have avoided such a direct hit because their reserving methodologies more broadly cover loans like many of these that are still performing but could be at risk, Fitzsimmons said.

Yet it’s a dilemma for some banks because many of the loans are performing – 80% of them in First Horizon’s case, it says – and public companies do not want to be accused later of padding reserves to manage earnings.

“Auditors don’t generally let you just ramp that up dramatically without any reason because [they] are concerned about the smoothing of earnings,” Fitzsimmons says.

First Horizon executives told analysts they consciously chose not to increase so-called unallocated, or economic, reserves.

Bryan Jordan, First Horizon’s chief executive, said it had 25% reserves on the assets in question that included some long-established judgment factors.

 “We just felt like it was appropriate not to adjust our qualitative factors at this time, to leave those reserves and to take the charge through” the profit-and-loss statement.  Jordan said.  “Other people can reach different judgments, but we erred on the side of leaving our qualitative reserves where they are given where we are in the cycle.”

Ultimately, the matter comes down to a management team’s call on when to take its lumps. At some future point, if borrowers keep paying the loans, banks might be able to add the money back that they charged off.

First Horizon hopes to recover a lot of the chargeoff over the next several quarters, Losch said. Sixty percent of customers who have been in bankruptcy for more than two years have made at least 24 months of consecutive payments, the company says.

In midafternoon trading, First Horizon shares had fallen 4.2%, to $9.27, and TCF’s were down 0.54%, to $11.02.

“The good news is it’s temporary” Fitzsimmons says of the approach taken by First Horizon. “But the bad news is it creates this headline-number issue because it hits your income statement.”

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