Updated to include insider buying, closing stock price

NEW YORK (

TheStreet

) --

Huntington Bancshares

(HBAN) - Get Report

surged more than 5% on Monday after Bank of America Merrill Lynch analysts gave the stock a vote of confidence by upgrading it to buy.

Erika Penala, an analyst for BofA Merrill Lynch, raised her rating to buy from "neutral" in a research note to clients on Monday.

Penala believes that while Huntington Bank's shares have underperformed the Keefe, Bruyette & Woods Regional Bank Index, "the weakness has created an attractive entry point to own the most compelling turnaround story in our universe," she writes.

She kept her $7 12-month price target on the stock.

Huntington Bank's underperformance over the past week coincides with its decision to raise up to $1.2 billion in new capital between a $920 common stock offering and a debt offering in order to repurchase preferred shares owned by the government through the Troubled Asset Relief Program (TARP).

Shares have fallen 7.2% since December 10, the last full trading day before it announced its decision to raise capital and repay TARP funds. Investors were taken by surprise over the amount of capital that Huntington Bank decided to raise. The common stock offering comprised 67% of the bank's outstanding $1.4 billion in TARP funds.

Huntington Bank on Tuesday priced the stock offering at $6.30 a share and on Wednesday offered $300 million in subordinated 10-year notes with a 7% coupon.

"Once

Huntington redeems TARP as planned, the company will be free to redistribute excess capital to shareholders," Penala writes. "We now expect that

Huntington Bank will raise its dividend to 5 cents a share (30% payout) by 3Q11. We also anticipate modest share repurchase activity beginning in 3Q11."

Separately, a host of Huntington's senior management and board members bought in on the offering. According to

Securities and Exchange Commission

filings from Friday, Huntington insiders bought close to $1 billion worth of common shares at the offering price of $6.30 a share.

The acquisition of shares by company management and board members further gave the market a vote of confidence.

Calls to Huntington Bank were not immediately returned.

Penala adds that Huntington could also use excess capital towards accretive M&A as the "Midwest is the most under-consolidated geography in the U.S."

Chief executive Stephen Steinour said in a recent interview with

TheStreet

that the common stock offering was oversubscribed in an hour and a half.

Repaying TARP will be "the last step in

positioning Huntington for growth and improving long-term shareholder returns

," Steinour said.

That being said, Penala notes that all regional banks are facing headwinds from credit quality and revenue growth and that the potential hit to revenue as a result of the recently announced guidance on

debit interchange

could be 11% vs. an 8% median for other stocks Penala covers.

"However, unlike the lion's share of its peers, Huntington Bank is proactively defending its fee income stream by introducing new deposit products that should aid in both retaining and gaining market share to offset declining deposit related income," the note says. "Further, Huntington Bank has a differentiated incentive system that encourages higher quality cross selling, which should also defend against the revenue pressures from regulatory reform."

Huntington shares closed up 4.8% to $6.87 on MOnday. More than 40 million shares of the regional bank's stock changed hands -- more than double its daily trading volume average.

-- Written by Laurie Kulikowski in New York.

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Laurie Kulikowski

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