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Buy Huntington Bancshares for Solid Rate Play: Merrill Lynch

Huntington Bancshares reported first-quarter net income of $151.8 million, compared to $167.3 million, or 19 cents a share, in the fourth quarter, and $153.3 million, or 17 cents a share, in the first quarter of 2012. The main factor in the earnings decline was lower mortgage banking income, which totaled 45.2 million in the first quarter, compared to $61.7 the previous quarter and $46.4 million a year earlier.

Huntington's first-quarter net interest income was $430.1 million, declining from $439.5 million the previous quarter, but increasing from $421.1 million a year earlier. The sequential decrease in net interest income mainly resulted from a lower number of days in the quarter, although the net interest margin narrowed to 3.42% in the fourth quarter from 3.45% in the fourth quarter. The margin was unchanged from a year earlier.

The year-over-year net interest income growth reflected a 4% increase in in average loans and leases, with commercial and industrial loans growing 14% to $17 billion in the first quarter. Meanwhile, average interest-bearing liabilities were down slightly year-over-year. Average noninterest bearing checking account grew 8% year-over year to $12.2 billion, although they were down 7% from the fourth quarter, because of the bank's "effort to reduce collateralized deposits," and because of "a recent uptick among our business customers of drawing down cash balances to support working capital needs," according to comments by CEO Stephen Steinour in the company's earnings press release.

Speaking at a conference on Thursday, Steinour said Huntington's "net interest margin is down 5 basis points over the last 3 years, while the peer average is down over 20 basis points."

"Our growth in non-interest bearing deposits has helped us re-mix the balance sheet very significantly, providing one of the key factors that allowed us to maintain, generally maintain, our net interest margin, despite pressures from the yield curve," he said.

Looking ahead, Steinour said "I think what we're likely to see is that the asset yield pressures will, frankly, abate," meaning that the market will drive loan rates higher, as securities yields continue to rise. He also expects Huntington to continue to benefit from its focus on building multiple relationships with each customer, to drive a continued increase in noninterest-bearing checking accounts.

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