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We have reaffirmed our Neutral recommendation on Huntington Bancshares Incorporated (HBAN - Analyst Report) based on its fundamentals, the share buyback authorization and the recent acquisition of the Fidelity Bank.

Fourth Quarter Result

Huntingtonreported fourth-quarter 2011 earnings of 14 cents per share, in line with the Zacks Consensus Estimate. Results were slightly down from 16 cents per share earned in the prior quarter but significantly ahead of the prior-year earnings of 5 cents per share.

Earnings were positively influenced by higher net-interest revenues and lower non-interest expenses. Yet, a fall in fee income and a modest rise in provision for loan losses offset the positives.

Fidelity Bank Acquisition

In an effort to expand its footprint in Southeast Michigan, Huntington recently acquired Fidelity Bank in a Federal Deposit Insurance Corporation (FDIC) assisted deal. As part of the transaction, Huntington acquired the 15-branch bank from the FDIC. Fidelity Bank had around $0.8 billion in assets and $0.7 billion of deposits as of March 9, 2012. Besides assuming all the deposits of Fidelity Bank, Huntington also agreed to buy all of the assets.  

Our Take

We believe that Huntington has a solid franchise in the Midwest. The company is focused on capitalizing its growth opportunities. Huntingtoncontinues to move forward by positioning itself for growth and implementing strategic initiatives designed to drive future revenue growth. Its cross-sell and product penetration measures throughout the company are expected to boost its top-line figures.

With the progressing profitability trend and the implementation of a series of capital bolstering initiatives, Huntington continued to improve it capital levels over the past couple of years.

Moreover, in March 2012, the company’s capital plan which included the potential repurchase of up to $182 million shares of common stock and a continuation of its current common dividend through the first quarter of 2013 got the Fed’s approval. Consistent with this capital plan, the company’s Board has authorized a share buyback program. Such actions give a fillip to investors’ confidence in the stock.

Though a smaller one, the recent acquisition of Fidelity Bank would bode well going forward. It strengthens the company’s footprint in Southeast Michigan and is projected to be accretive to its earnings per share and tangible book value. The transaction adds over 18,000 Fidelity Bank customers to Huntington.

Fidelity Bank is the sixteenth bank to fail in the nation this year, and the first in Michigan. In fact, the financial crisis has led to several bank failures and this, in turn, has opened up acquisition prospects in the market.  Notably, Wall Street biggies such as JPMorgan Chase & Co.(JPM - Analyst Report), U.S.Bancorp (USB - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report) has already grabbed such opportunities for increasing their market share.

However, a sluggish economic recovery, low interest rate environment and regulatory issues will likely restrict any robust development in earnings in the upcoming quarters. Though Huntington has implemented cost containment measures and will likely benefit from low credit costs, we anticipate such positive impacts to be offset by continued investments in strategic initiatives and higher regulatory costs.

Hence, the risk-reward profile seems balanced for Huntington and we reaffirm our Neutral recommendation on the stock.

Huntingtonshares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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