Edgar Filing: HUNTINGTON BANCSHARES INC/MD

10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED March 31, 2016

Commission File Number 1-34073

Huntington Bancshares Incorporated



Maryland	31-0724920
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

There were 796,689,077 shares of Registrant’s common stock ($0.01 par value) outstanding on March 31, 2016

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HUNTINGTON BANCSHARES INCORPORATED

INDEX



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	49
Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015	49
Condensed Consolidated Statements of Income for the three months ended March 31, 2016 and 2015	50
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015	52
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015	53
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	54
Notes to Unaudited Condensed Consolidated Financial Statements	56
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	6
Executive Overview	7
Discussion of Results of Operations	8
Risk Management and Capital:	17
Credit Risk	18
Market Risk	28
Liquidity Risk	29
Operational Risk	33
Compliance Risk	34
Capital	34
Fair Value	38
Business Segment Discussion	39
Additional Disclosures	46
Item 3. Quantitative and Qualitative Disclosures about Market Risk	110
Item 4. Controls and Procedures	110
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	111
Item 1A. Risk Factors	111
Item 6. Exhibits	112
Signatures	114

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Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:



ABL		Asset Based Lending

ABS		Asset-Backed Securities

ACL		Allowance for Credit Losses

AFCRE		Automobile Finance and Commercial Real Estate

AFS		Available-for-Sale

ALCO		Asset-Liability Management Committee

ALLL		Allowance for Loan and Lease Losses

ARM		Adjustable Rate Mortgage

ASC		Accounting Standards Codification

ASU		Accounting Standards Update

ATM		Automated Teller Machine

AULC		Allowance for Unfunded Loan Commitments

Basel III		Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013

C&I		Commercial and Industrial

Camco Financial		Camco Financial Corp.

CCAR		Comprehensive Capital Analysis and Review

CDO		Collateralized Debt Obligations

CDs		Certificate of Deposit

CET1		Common equity tier 1 on a transitional Basel III basis

CFPB		Bureau of Consumer Financial Protection

CFTC		Commodity Futures Trading Commission

CMO		Collateralized Mortgage Obligations

CRE		Commercial Real Estate

Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act

DTA/DTL		Deferred Tax Asset/Deferred Tax Liability

E&P		Exploration and Production

EFT		Electronic Fund Transfer

EPS		Earnings Per Share

EVE		Economic Value of Equity

Fannie Mae		(see FNMA)

FASB		Financial Accounting Standards Board

FDIC		Federal Deposit Insurance Corporation

FDICIA		Federal Deposit Insurance Corporation Improvement Act of 1991

FHA		Federal Housing Administration

FHLB		Federal Home Loan Bank

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FHLMC		Federal Home Loan Mortgage Corporation

FICO		Fair Isaac Corporation

FirstMerit		FirstMerit Corporation

FNMA		Federal National Mortgage Association

FRB		Federal Reserve Bank

Freddie Mac		(see FHLMC)

FTE		Fully-Taxable Equivalent

FTP		Funds Transfer Pricing

GAAP		Generally Accepted Accounting Principles in the United States of America

GNMA		Government National Mortgage Association, or Ginnie Mae

HAA		Huntington Asset Advisors, Inc.

HAMP		Home Affordable Modification Program

HARP		Home Affordable Refinance Program

HASI		Huntington Asset Services, Inc.

HIP		Huntington Investment and Tax Savings Plan

HQLA		High Quality Liquid Asset

HTM		Held-to-Maturity

IRS		Internal Revenue Service

LCR		Liquidity Coverage Ratio

LIBOR		London Interbank Offered Rate

LGD		Loss-Given-Default

LIHTC		Low Income Housing Tax Credit

LTV		Loan to Value

Macquarie		Macquarie Equipment Finance, Inc. (U.S. operations)

MBS		Mortgage-Backed Securities

MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations

MSA		Metropolitan Statistical Area

MSR		Mortgage Servicing Rights

NAICS		North American Industry Classification System

NALs		Nonaccrual Loans

NCO		Net Charge-off

NII		Net Interest Income

NIM		Net Interest Margin

NPA		Nonperforming Asset

N.R.		Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa

OCC		Office of the Comptroller of the Currency

OCI		Other Comprehensive Income (Loss)

OCR		Optimal Customer Relationship

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OLEM		Other Loans Especially Mentioned

OREO		Other Real Estate Owned

OTTI		Other-Than-Temporary Impairment

PD		Probability-Of-Default

Plan		Huntington Bancshares Retirement Plan

Problem Loans		Includes nonaccrual loans and leases (Table 9), troubled debt restructured loans (Table 10), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 4), and Criticized commercial loans (credit quality indicators section of Footnote 4).

RBHPCG		Regional Banking and The Huntington Private Client Group

RCSA		Risk and Control Self-Assessments

REIT		Real Estate Investment Trust

ROC		Risk Oversight Committee

RWA		Risk-Weighted Assets

SAD		Special Assets Division

SBA		Small Business Administration

SEC		Securities and Exchange Commission

SERP		Supplemental Executive Retirement Plan

SRIP		Supplemental Retirement Income Plan

SSFA		Simplified Supervisory Formula Approach

TCE		Tangible Common Equity

TDR		Troubled Debt Restructured Loan

TRUPS		Trust Preferred Securities

U.S. Treasury		U.S. Department of the Treasury

UCS		Uniform Classification System

UDAP		Unfair or Deceptive Acts or Practices

Unified		Unified Financial Securities, Inc.

UPB		Unpaid Principal Balance

USDA		U.S. Department of Agriculture

VIE		Variable Interest Entity

XBRL		eXtensible Business Reporting Language

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PART I. FINANCIAL INFORMATION

When we refer to “we”, “our”, and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 771 branches and private client group offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2015 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2015 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.

Our discussion is divided into key segments:


•	Executive Overview - Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters.


•	Discussion of Results of Operations - Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.

•

Risk Management and Capital - Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.


•	Business Segment Discussion - Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.


•	Additional Disclosures - Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, and recent accounting pronouncements and developments.

A reading of each section is important to understand fully the nature of our financial performance and prospects.

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EXECUTIVE OVERVIEW

Summary of 2016 First Quarter Results Compared to 2015 First Quarter

For the quarter, we reported net income of $171 million, or $0.20 per common share, compared with $166 million, or $0.19 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent net interest income was $512 million, up $37 million, or 8%. The results reflected the benefit from a $5.0 billion, or 8%, increase in average earning assets, partially offset by a 4 basis point reduction in the net interest margin to 3.11%. Average earning asset growth included a $2.8 billion, or 6%, increase in average loans and leases and a $2.1 billion, or 17%, increase in average securities. The net interest margin contraction reflected a 14 basis point increase in funding costs, partially offset by a 6 basis point increase in earning asset yields and a 4 basis point increase in the benefit from the amount of noninterest-bearing funds. The increase in funding costs was primarily the result of the issuance of $4.1 billion of debt over the past five quarters. In the 2016 first quarter, the NIM benefited by approximately 2 basis points as a result of recoveries of previously charged-off loans in the CRE portfolio.

The provision for credit losses was $28 million, up $7 million, or 34%. Overall asset quality remained strong, with modest volatility based on the absolute low level of problem credits. NALs increased $134 million, or 37%, from the year-ago quarter to $499 million, or 0.97% of total loans and leases. The increase was primarily centered in the commercial portfolio and was associated with a small number of energy sector loan relationships. NCOs decreased $16 million, or 65%, to $9 million. NCOs represented an annualized 0.07% of average loans and leases in the current quarter, down from 0.18% in the prior quarter and 0.20% in the year-ago quarter. Commercial charge-offs were positively impacted by one large recovery in the CRE portfolio and broader continued successful workout strategies, while consumer charge-offs remained within our expected range. Overall consumer credit metrics, led by the residential mortgage and home equity portfolios, continue to show an improving trend, while the commercial portfolios continue to experience some quarter-to-quarter volatility based on the absolute low level of problem loans.

Noninterest income was $242 million, up $10 million, or 4%. This reflected an $8 million, or 37%, increase in other income related to equipment operating lease income from Huntington Technology Finance. In addition, service charges on deposit accounts increased $8 million, or 13%, reflecting the benefit of continued new customer acquisition. Also, cards and payment processing income increased $4 million, or 12%, due to higher card related income and underlying customer growth. These increases were partially offset by a $6 million, or 21%, decrease in trust services, primarily related to the sale of HAA, HASI, and Unified, and transition of the money market assets of the Huntington Funds to a third party at the end of the 2015 fourth quarter. Also, mortgage banking income decreased $4 million, or 19%, due to a reduction in mortgage volume and a $2 million impact from net MSR activity.

Noninterest expense was $491 million, up $32 million, or 7%. Personnel costs increased $20 million, or 8%, due to a $16 million increase in salaries and a $4 million increase in benefits expense. In addition, outside data processing and other services expense increased $11 million, or 22%, from ongoing technology investments. These increases were partially offset by a $6 million, or 64%, decrease in amortization of intangibles reflecting the full amortization of the core deposit intangible at the end of the 2015 second quarter from the Sky Financial acquisition.

The tangible common equity to tangible assets ratio was 7.89%, down 6 basis points. The CET1 risk-based capital ratio was 9.73% at March 31, 2016, up from 9.51% a year ago. The regulatory tier 1 risk-based capital ratio was 10.99% compared to 10.22% at March 31, 2015. All capital ratios were impacted by the repurchase of 18.1 million common shares over the last four quarters under the $366 million repurchase authorization included in the 2015 CCAR capital plan. In the announcement of the pending FirstMerit acquisition, we stated our intention to forgo the remaining $166 million of share repurchase capacity under our 2015 CCAR capital plan. As a result, we did not repurchase any common shares during the 2016 first quarter. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of $400 million of preferred equity during the 2016 first quarter.

Business Overview

General

Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary relationships across all business segments, (4) continue to strengthen risk management and (5) maintain capital and liquidity positions consistent with our risk appetite.

We delivered solid performance for the 2016 first quarter with strong year-over-year gains on revenue and EPS, positioning us well for the year ahead. Year-over-year performance benefited from core deposit and fee income growth within

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our disciplined, risk-balanced approach to the business. Small business and middle-market lending in the first quarter reflected ongoing optimism in the continuing strength of our regional economy, despite headwinds within certain sectors and continued global macroeconomic uncertainty and volatility. Progress in our integration efforts toward the proposed acquisition of FirstMerit announced early in the first quarter is on pace. Our goal is to complete the acquisition in the third quarter of 2016.

Economy

The Midwest regional economy where we do business continues to perform well, gradually returning to normal levels. Although we are mindful of headwinds created by market volatility, global macroeconomic uncertainty, and downturns within pockets of the economy, we do not see evidence that these factors have significantly dampened the prospects of our core customers and communities.

Expectations – 2016

Excluding Significant Items, net MSR activity, and the incremental impact of the pending FirstMerit acquisition, our goals for full-year 2016 performance remain consistent with our long-term financial goals of 4-6% revenue growth and annual positive operating leverage gradually returning to normal levels. Overall, asset quality metrics are expected to remain near current levels. Moderate quarterly volatility also is expected, given the quickly evolving macroeconomic conditions, commodities and currency market volatility, and current low level of problem assets and credit costs. We expect credit costs will gradually migrate back toward more normalized levels, particularly as recoveries from previously charged off CRE loans diminish. We anticipate NCOs will remain below our long-term normalized range of 35 to 55 basis points.

DISCUSSION OF RESULTS OF OPERATIONS

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion.”

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Table 1 - Selected Quarterly Income Statement Data (1)
(dollar amounts in thousands, except per share amounts)
	Three months ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2016			2015			2015			2015			2015
Interest income	$	557,251		$	544,153		$	538,477		$	529,795		$	502,096
Interest expense	54,185			47,242			43,022			39,109			34,411
Net interest income	503,066			496,911			495,455			490,686			467,685
Provision for credit losses	27,582			36,468			22,476			20,419			20,591
Net interest income after provision for credit losses	475,484			460,443			472,979			470,267			447,094
Service charges on deposit accounts	70,262			72,854			75,157			70,118			62,220
Cards and payment processing income	36,447			37,594			36,664			35,886			32,571
Mortgage banking income	18,543			31,418			18,956			38,518			22,961
Trust services	22,838			25,272			24,972			26,550			29,039
Insurance income	16,225			15,528			16,204			17,637			15,895
Brokerage income	15,502			14,462			15,059			15,184			15,500
Capital markets fees	13,010			13,778			12,741			13,192			13,905
Bank owned life insurance income	13,513			13,441			12,719			13,215			13,025
Gain on sale of loans	5,395			10,122			5,873			12,453			4,589
Securities gains (losses)	—			474			188			82			—
Other income	30,132			37,272			34,586			38,938			21,918
Total noninterest income	241,867			272,215			253,119			281,773			231,623
Personnel costs	285,397			288,861			286,270			282,135			264,916
Outside data processing and other services	61,878			63,775			58,535			58,508			50,535
Equipment	32,576			31,711			31,303			31,694			30,249
Net occupancy	31,476			32,939			29,061			28,861			31,020
Marketing	12,268			12,035			12,179			15,024			12,975
Professional services	13,538			13,010			11,961			12,593			12,727
Deposit and other insurance expense	11,208			11,105			11,550			11,787			10,167
Amortization of intangibles	3,712			3,788			3,913			9,960			10,206
Other expense	39,027			41,542			81,736			41,215			36,062
Total noninterest expense	491,080			498,766			526,508			491,777			458,857
Income before income taxes	226,271			233,892			199,590			260,263			219,860
Provision for income taxes	54,957			55,583			47,002			64,057			54,006
Net income	171,314			178,309			152,588			196,206			165,854
Dividends on preferred shares	7,998			7,972			7,968			7,968			7,965
Net income applicable to common shares	$	163,316		$	170,337		$	144,620		$	188,238		$	157,889
Average common shares—basic	795,755			796,095			800,883			806,891			809,778
Average common shares—diluted	808,349			810,143			814,326			820,238			823,809
Net income per common share—basic	$	0.21		$	0.21		$	0.18		$	0.23		$	0.19
Net income per common share—diluted	0.20			0.21			0.18			0.23			0.19
Cash dividends declared per common share	0.07			0.07			0.06			0.06			0.06
Return on average total assets	0.96		%	1.00		%	0.87		%	1.16		%	1.02		%
Return on average common shareholders’ equity	10.4			10.8			9.3			12.3			10.6
Return on average tangible common shareholders’ equity (2)	11.9			12.4			10.7			14.4			12.2
Net interest margin (3)	3.11			3.09			3.16			3.20			3.15
Efficiency ratio (4)	64.6			63.7			69.1			61.7			63.5
Effective tax rate	24.3			23.8			23.5			24.6			24.6
Revenue—FTE
Net interest income	$	503,066		$	496,911		$	495,455		$	490,686		$	467,685
FTE adjustment	9,159			8,425			8,168			7,962			7,560

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Net interest income (3)	512,225		505,336		503,623		498,648		475,245
Noninterest income	241,867		272,215		253,119		281,773		231,623
Total revenue (3)	$	754,092	$	777,551	$	756,742	$	780,421	$	706,868


(1)	Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

(2)

Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.


(3)	On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.


(4)	Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains.

Significant Items

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section (See Non-GAAP Financial Measures) that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion.”

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

1.Merger and Acquisition. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, were as follows:


•	During the 2016 first quarter, $6 million of noninterest expense was recorded related to the pending acquisition of FirstMerit. This resulted in a negative impact of $0.01 per common share.


•	During the 2015 fourth quarter, $2 million of noninterest expense was recorded related to the acquisition of Macquarie Equipment Finance, which was rebranded Huntington Technology Finance. Also during the 2015 fourth quarter, $1 million of noninterest expense and $3 million of noninterest income was recorded related to the sale of HAA, HASI, and Unified.


•	During the 2015 first quarter, $3 million of noninterest expense was recorded related to the acquisition of Macquarie Equipment Finance, which was rebranded Huntington Technology Finance.

2.Franchise Repositioning Related Expense. During the 2015 fourth quarter, $8 million of franchise repositioning-related expense was recorded. This resulted in a negative impact of $0.01 per common share.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:



Table 2 - Significant Items Influencing Earnings Performance Comparison
(dollar amounts in thousands, except per share amounts)
	Three Months Ended
	March 31, 2016						December 31, 2015						March 31, 2015
	After-tax			EPS (2)(3)			After-tax			EPS (2)(3)			After-tax			EPS (2)(3)
Net income	$	171,314					$	178,309					$	165,854
Earnings per share, after-tax				$	0.20					$	0.21					$	0.19
Significant Items—favorable (unfavorable) impact:	Earnings (1)			EPS (2)(3)			Earnings (1)			EPS (2)(3)			Earnings (1)			EPS (2)(3)
Mergers and acquisitions, net	$	(6,406	)	$	(0.01	)	$	368		$	—		$	(3,351	)	$	—
Franchise repositioning related expense	—			—			(7,588		)	(0.01		)	—			—


(1)	Pretax unless otherwise noted.

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(2)	Based on average outstanding diluted common shares.


(3)	After-tax.

Net Interest Income / Average Balance Sheet

The following tables detail the change in our average balance sheet and the net interest margin:



Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (3)
(dollar amounts in millions)
	Average Balances
	Three Months Ended															Change
	March 31,			December 31,			September 30,			June 30,			March 31,			1Q16 vs. 1Q15
	2016			2015			2015			2015			2015			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	98		$	89		$	89		$	89		$	94		$	4		4	%
Loans held for sale	433			502			464			1,272			381			52			14
Securities:
Available-for-sale and other securities:
Taxable	6,633			8,099			8,310			7,916			7,664			(1,031		)	(13	)
Tax-exempt	2,358			2,257			2,136			2,028			1,874			484			26
Total available-for-sale and other securities	8,991			10,356			10,446			9,944			9,538			(547		)	(6	)
Trading account securities	40			39			52			41			53			(13		)	(25	)
Held-to-maturity securities—taxable	6,054			4,148			3,226			3,324			3,347			2,707			81
Total securities	15,085			14,543			13,724			13,309			12,938			2,147			17
Loans and leases: (2)
Commercial:
Commercial and industrial	20,649			20,186			19,802			19,819			19,116			1,533			8
Commercial real estate:
Construction	923			1,108			1,101			970			887			36			4
Commercial	4,283			4,158			4,193			4,214			4,275			8			—
Commercial real estate	5,206			5,266			5,294			5,184			5,162			44			1
Total commercial	25,855			25,452			25,096			25,003			24,278			1,577			6
Consumer:
Automobile	9,730			9,286			8,879			8,083			8,783			947			11
Home equity	8,441			8,463			8,526			8,503			8,484			(43		)	(1	)
Residential mortgage	6,018			6,079			6,048			5,859			5,810			208			4
Other consumer	574			547			497			451			425			149			35
Total consumer	24,763			24,375			23,950			22,896			23,502			1,261			5
Total loans and leases	50,618			49,827			49,046			47,899			47,780			2,838			6
Allowance for loan and lease losses	(604		)	(595		)	(609		)	(608		)	(612		)	8			(1	)
Net loans and leases	50,014			49,232			48,437			47,291			47,168			2,846			6
Total earning assets	66,234			64,961			63,323			62,569			61,193			5,041			8
Cash and due from banks	1,013			1,468			1,555			926			935			78			8
Intangible assets	730			734			739			745			593			137			23
All other assets	4,223			4,233			4,273			4,233			4,126			97			2
Total assets	$	71,596		$	70,801		$	69,281		$	67,865		$	66,235		$	5,361		8	%
Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	16,334		$	17,174		$	17,017		$	15,893		$	15,253		$	1,081		7	%
Demand deposits—interest-bearing	7,776			6,923			6,604			6,584			6,173			1,603			26
Total demand deposits	24,110			24,097			23,621			22,477			21,426			2,684			13
Money market deposits	19,682			19,843			19,512			18,803			19,368			314			2
Savings and other domestic deposits	5,306			5,215			5,224			5,273			5,169			137			3
Core certificates of deposit	2,265			2,430			2,534			2,639			2,814			(549		)	(20	)

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Total core deposits	51,363		51,585		50,891		49,192		48,777		2,586			5
Other domestic time deposits of $250,000 or more	455		426		217		184		195		260			133
Brokered deposits and negotiable CDs	2,897		2,929		2,779		2,701		2,600		297			11
Deposits in foreign offices	264		398		492		562		557		(293		)	(53	)
Total deposits	54,979		55,338		54,379		52,639		52,129		2,850			5
Short-term borrowings	1,145		524		844		2,153		1,882		(737		)	(39	)
Long-term debt	7,202		6,788		6,043		5,121		4,358		2,844			65
Total interest-bearing liabilities	46,992		45,476		44,249		44,020		43,116		3,876			9
All other liabilities	1,515		1,515		1,442		1,435		1,450		65			4
Shareholders’ equity	6,755		6,636		6,573		6,517		6,416		339			5
Total liabilities and shareholders’ equity	$	71,596	$	70,801	$	69,281	$	67,865	$	66,235	$	5,361		8	%

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Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued) (3)

	Average Yield Rates (2)
	Three Months Ended
	March 31,		December 31,		September 30,		June 30,		March 31,
Fully-taxable equivalent basis (1)	2016		2015		2015		2015		2015
Assets:
Interest-bearing deposits in banks	0.21	%	0.08	%	0.06	%	0.08	%	0.18	%
Loans held for sale	3.99		4.24		3.81		3.32		3.69
Securities:
Available-for-sale and other securities:
Taxable	2.39		2.50		2.51		2.60		2.50
Tax-exempt	3.40		3.15		3.12		3.13		3.05
Total available-for-sale and other securities	2.65		2.64		2.63		2.71		2.61
Trading account securities	0.50		1.09		0.97		1.00		1.17
Held-to-maturity securities—taxable	2.43		2.45		2.46		2.50		2.47
Total securities	2.56		2.58		2.59		2.65		2.57
Loans and leases: (3)
Commercial:
Commercial and industrial	3.52		3.47		3.58		3.61		3.33
Commercial real estate:
Construction	3.51		3.45		3.52		3.60		3.81
Commercial	3.59		3.31		3.43		3.41		3.57
Commercial real estate	3.57		3.34		3.45		3.45		3.62
Total commercial	3.53		3.45		3.55		3.58		3.39
Consumer:
Automobile	3.17		3.22		3.23		3.20		3.24
Home equity	4.20		4.01		4.01		3.97		4.03
Residential mortgage	3.69		3.67		3.71		3.72		3.75
Other consumer	10.02		9.17		8.88		8.45		8.20
Total consumer	3.81		3.74		3.75		3.73		3.74
Total loans and leases	3.67		3.59		3.65		3.65		3.56
Total earning assets	3.44		3.37		3.42		3.45		3.38
Liabilities:
Deposits:
Demand deposits—noninterest-bearing	—		—		—		—		—
Demand deposits—interest-bearing	0.09		0.08		0.07		0.06		0.05
Total demand deposits	0.03		0.02		0.02		0.02		0.01
Money market deposits	0.24		0.23		0.23		0.22		0.21
Savings and other domestic deposits	0.13		0.14		0.14		0.14		0.15
Core certificates of deposit	0.82		0.83		0.80		0.78		0.76
Total core deposits	0.23		0.23		0.23		0.22		0.22
Other domestic time deposits of $250,000 or more	0.41		0.40		0.43		0.44		0.42
Brokered deposits and negotiable CDs	0.38		0.19		0.17		0.17		0.17
Deposits in foreign offices	0.13		0.13		0.13		0.13		0.13
Total deposits	0.24		0.23		0.22		0.22		0.22
Short-term borrowings	0.32		0.09		0.09		0.14		0.12
Long-term debt	1.68		1.49		1.45		1.45		1.31
Total interest-bearing liabilities	0.46		0.41		0.39		0.36		0.32
Net interest rate spread	2.98		2.96		3.03		3.09		3.06
Impact of noninterest-bearing funds on margin	0.13		0.13		0.13		0.11		0.09
Net interest margin	3.11	%	3.09	%	3.16	%	3.20	%	3.15	%


(1)	FTE yields are calculated assuming a 35% tax rate.


(2)	Loan, lease, and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.

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(3)	For purposes of this analysis, NALs are reflected in the average balances of loans.

2016 First Quarter versus 2015 First Quarter

FTE net interest income for the 2016 first quarter increased $37 million, or 8%, from the 2015 first quarter. This reflected the benefit from the $5.0 billion, or 8%, increase in average earning assets partially offset by a 4 basis point reduction in the FTE net interest margin to 3.11%. Average earning asset growth included a $2.8 billion, or 6%, increase in average loans and leases and a $2.1 billion, or 17%, increase in average securities. The NIM contraction reflected a 14 basis point increase in funding costs, partially offset by a 6 basis point increase in earning asset yields and a 4 basis point increase in the benefit from the amount of noninterest-bearing funds. In the 2016 first quarter, the NIM benefited by approximately 2 basis points as a result of recoveries of previously charged-off loans in the CRE portfolio.

Average earning assets for the 2016 first quarter increased $5.0 billion, or 8%, from the year-ago quarter. The increase was driven by:


•	$2.1 billion, or 17%, increase in average securities, primarily reflecting the reinvestment of cash flows and additional investment in LCR Level 1 qualifying securities and a $0.6 billion increase in direct purchase municipal instruments in our Commercial Banking segment.


•	$1.5 billion, or 8%, increase in average C&I loans and leases, primarily reflecting the $0.8 billion of equipment finance leases acquired in the Huntington Technology Finance transaction at the end of the 2015 first quarter, as well as organic growth in equipment finance leases, automobile dealer floorplan lending, and corporate banking.


•	$0.9 billion, or 11%, increase in average Automobile loans. The 2016 first quarter represented the ninth consecutive quarter of greater than $1.0 billion in automobile loan originations, while maintaining our underwriting consistency and discipline.

Average total deposits for the 2016 first quarter increased $2.9 billion, or 5%, from the year-ago quarter, including a $2.6 billion, or 5%, increase in average total core deposits. Average total interest-bearing liabilities increased $3.9 billion, or 9%, from the year-ago quarter. Year-over-year changes in total liabilities reflected:

•

$2.7 billion, or 13%, increase in average demand deposits, including a $1.6 billion, or 26%, increase in average interest-bearing demand deposits and a $1.1 billion, or 7%, increase in average noninterest-bearing demand deposits. The increase in average total demand deposits was comprised of a $1.7 billion, or 13%, increase in average commercial demand deposits and a $0.9 billion, or 12%, increase in average consumer demand deposits.


•	$2.1 billion, or 34%, increase in average total debt, reflecting the issuance of $4.1 billion of senior debt over the past five quarters, including $1.0 billion issued during the 2016 first quarter, as well as debt assumed in the Huntington Technology Finance acquisition at the end of the 2015 first quarter, partially offset by a $0.7 billion, or 39%, decrease in average short-term borrowings.

Partially offset by:


•	$0.5 billion, or 19%, decrease in average core certificates of deposit due to the continued strategic focus on changing the funding sources to low- and no-cost demand, savings, and money market deposits.

2016 First Quarter versus 2015 Fourth Quarter

Compared to the 2015 fourth quarter, FTE net interest income increased $7 million, or 1%. Average earning assets increased $1.3 billion, or 2%, sequentially, and the NIM increased 2 basis points. The increase in the NIM reflected a 7 basis point increase in earning asset yields, partially offset by a 5 basis point increase in the cost of interest-bearing liabilities, in large part a result of senior debt financing.

Compared to the 2015 fourth quarter, average earning assets increased $1.3 billion, or 2%. This increase reflected a $0.8 billion, or 2%, increase in average loans and leases, primarily comprised of a $0.5 billion, or 2%, increase in average C&I loans and a $0.4 billion, or 5%, increase in average automobile loans, and a $0.5 billion, or 4%, increase in average securities.

Compared to the 2015 fourth quarter, average interest-bearing demand deposits increased $0.9 billion, or 12%, mostly offset by a $0.8 billion, or 5%, decrease in average noninterest-bearing demand deposits. Average total debt increased $1.0 billion, or 14%, reflecting the senior debt issuances in the 2016 first and 2015 fourth quarters, as well as fluctuations in short-term borrowings as part of normal balance sheet management.

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Provision for Credit Losses

(This section should be read in conjunction with the Credit Risk section.)

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision for credit losses for the 2016 first quarter was $28 million compared with $36 million for the 2015 fourth quarter and $21 million for the 2015 first quarter. The provision for credit losses for the 2016 first quarter increased $7 million, or 34%, compared to year-ago period (See Credit Quality discussion). Given the low level of the provision for credit losses and the uneven nature of commercial charge-offs and recoveries, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

The following table reflects noninterest income for each of the past five quarters:



Table 4 - Noninterest Income
(dollar amounts in thousands)
	Three Months Ended										1Q16 vs 1Q15					1Q16 vs 4Q15
	March 31,		December 31,		September 30,		June 30,		March 31,		Change					Change
	2016		2015		2015		2015		2015		Amount			Percent		Amount			Percent
Service charges on deposit accounts	$	70,262	$	72,854	$	75,157	$	70,118	$	62,220	$	8,042		13	%	$	(2,592	)	(4	)%
Cards and payment processing income	36,447		37,594		36,664		35,886		32,571		3,876			12		(1,147		)	(3	)
Mortgage banking income	18,543		31,418		18,956		38,518		22,961		(4,418		)	(19	)	(12,875		)	(41	)
Trust services	22,838		25,272		24,972		26,550		29,039		(6,201		)	(21	)	(2,434		)	(10	)
Insurance income	16,225		15,528		16,204		17,637		15,895		330			2		697			4
Brokerage income	15,502		14,462		15,059		15,184		15,500		2			—		1,040			7
Capital markets fees	13,010		13,778		12,741		13,192		13,905		(895		)	(6	)	(768		)	(6	)
Bank owned life insurance income	13,513		13,441		12,719		13,215		13,025		488			4		72			1
Gain on sale of loans	5,395		10,122		5,873		12,453		4,589		806			18		(4,727		)	(47	)
Securities gains (losses)	—		474		188		82		—		—			—		(474		)	(100	)
Other income	30,132		37,272		34,586		38,938		21,918		8,214			37		(7,140		)	(19	)
Total noninterest income	$	241,867	$	272,215	$	253,119	$	281,773	$	231,623	$	10,244		4	%	$	(30,348	)	(11	)%

2016 First Quarter versus 2015 First Quarter

Noninterest income for the 2016 first quarter increased $10 million, or 4%, from the year-ago quarter. The year-over-year increase primarily reflected:


•	$8 million, or 37%, increase in other income, primarily reflecting equipment operating lease income related to Huntington Technology Finance.


•	$8 million, or 13%, increase in service charges on deposit accounts, reflecting the benefit of continued new customer acquisition including a 4% increase in consumer checking households and a 2% increase in commercial checking relationships.


•	$4 million, or 12%, increase in cards and payment processing income, due to higher card related income and underlying customer growth.

Partially offset by:


•	$6 million, or 21%, decrease in trust services, primarily related to the sale of HAA, HASI, and Unified, and transition of the money market assets of the Huntington Funds to a third party at the end of the 2015 fourth quarter.


•	$4 million, or 19%, decrease in mortgage banking income, primarily as a result of a 5% reduction in mortgage volume and a $2 million impact from net MSR activity.

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2016 First Quarter versus 2015 Fourth Quarter

Compared to the 2015 fourth quarter, total noninterest income decreased $30 million, or 11%. Mortgage banking income decreased $13 million, or 41%, primarily driven by a $7 million decrease in net MSR activity and a $5 million, or 22%, decrease in origination and secondary marketing income. Other income decreased $7 million, or 19%, primarily related to lower loan syndication fees and income related to asset finance. Gain on sale of loans decreased $5 million, or 47%, due to seasonally strong SBA loan sales in the prior quarter.

Noninterest Expense

(This section should be read in conjunction with Significant Item 1 and 2.)

The following table reflects noninterest expense for each of the past five quarters:



Table 5 - Noninterest Expense
(dollar amounts in thousands)
	Three Months Ended										1Q16 vs 1Q15					1Q16 vs 4Q15
	March 31,		December 31,		September 30,		June 30,		March 31,		Change					Change
	2016		2015		2015		2015		2015		Amount			Percent		Amount			Percent
Personnel costs	$	285,397	$	288,861	$	286,270	$	282,135	$	264,916	$	20,481		8	%	$	(3,464	)	(1	)%
Outside data processing and other services	61,878		63,775		58,535		58,508		50,535		11,343			22		(1,897		)	(3	)
Equipment	32,576		31,711		31,303		31,694		30,249		2,327			8		865			3
Net occupancy	31,476		32,939		29,061		28,861		31,020		456			1		(1,463		)	(4	)
Marketing	12,268		12,035		12,179		15,024		12,975		(707		)	(5	)	233			2
Professional services	13,538		13,010		11,961		12,593		12,727		811			6		528			4
Deposit and other insurance expense	11,208		11,105		11,550		11,787		10,167		1,041			10		103			1
Amortization of intangibles	3,712		3,788		3,913		9,960		10,206		(6,494		)	(64	)	(76		)	(2	)
Other expense	39,027		41,542		81,736		41,215		36,062		2,965			8		(2,515		)	(6	)
Total noninterest expense	$	491,080	$	498,766	$	526,508	$	491,777	$	458,857	$	32,223		7	%	$	(7,686	)	(2	)%
Number of employees (average full-time equivalent)	12,386		12,418		12,367		12,274		11,914		472			4	%	(32		)	—	%

Impacts of Significant Items:



	Three Months Ended
	March 31,		December 31,		March 31,
	2016		2015		2015
Personnel costs	$	474	$	2,332	$	—
Outside data processing and other services	363		1,990		51
Equipment	—		110		—
Net occupancy	20		4,587		—
Marketing	13		—		1
Professional services	4,288		1,153		3,287
Other expense	1,248		318		12
Total noninterest expense adjustments	$	6,406	$	10,490	$	3,351