Huntington Bancshares (HBAN), a Columbus, Ohio-based regional lender, saw its shares tumble 5% Monday despite the bank’s plans to pay down the Troubled Asset Relief Program loans it took in November 2008.

“Repurchasing our TARP capital is very important for our investors as it completes the last step in positioning Huntington for growth and improving long-term shareholder returns,” CEO Stephen Steinour said.

The selloff no doubt reflects the fact that investors don’t like to see the value of their holdings inflated away, which Huntington is in a sense doing by issuing such a large number of new shares. At the stock’s recent trading price of $6.50, the bank would have to issue 141 million new shares to raise the $920 million it says it has in mind.

An issue of that size will expand Huntington’s outstanding stock by 19%.

But given the extent of the dilution, a 5% stock selloff suggests people are on balance pretty happy with the news. And of course, Huntington has soared since this time last year (see chart, right) as the recovery has gradually gained a bit of steam, so maybe a bit of backpedaling is unavoidable.

The bank is also raising $300 million in subordinated debt, which bank regulators like because it creates another layer of capital that can cushion the bank against losses without the taxpayer-backed federal deposit insurance fund has to step up in the event of a failure.

Not that Huntington sees any prospect of going down that road. Steinour notes in a statement that the bank, after a long run of quarterly losses, has posted increasing profits three quarters running now. He is not claiming the economy is going gangbusters, but believes the view ahead is clear enough that he can afford to write the government a $1.4 billion check without regretting it.

“Though the economic environment remains fragile, and the period of recovery more prolonged, the possibility of a double dip recession appears unlikely,” he said.

Yet it is clear that the prospect of another housing downturn is weighing heavily on all the regional banks. Unlike their big peers at Bank of America (BAC) and JPMorgan Chase (JPM) have failed to cash in on the trading boom of the past year or so, and they remain uncomfortably exposed to uncertain property price trends.

Huntington’s Ohio-based regional peers KeyCorp (KEY) and Fifth Third (FITB) were each down more than 2% on a day when the KBW banks index, which includes regional lenders as well as giants like BofA, was off half as much.