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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 June 30, 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 799,153,996 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 2016
.


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED
INDEX
 
 
 

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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
 
 
 
LGD
  
Loss-Given-Default
 
 
 
LIBOR
  
London Interbank Offered Rate
 
 
 
LIHTC
  
Low Income Housing Tax Credit
 
 
 
LTD
 
Long-Term Debt
 
 
 
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)
 
 
 

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OCR
  
Optimal Customer Relationship
 
 
 
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 772 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 Second Quarter Results Compared to 2015 Second Quarter
For the quarter, we reported net income of $175 million, or $0.19 per common share, compared with $196 million, or $0.23 per common share, in the year-ago quarter (see Table 1).
Fully-taxable equivalent net interest income was $516 million, up $17 million, or 3%. The results reflected the benefit from a $5.3 billion, or 8%, increase in average earning assets, partially offset by a 14 basis point reduction in the net interest margin to 3.06%. Average earning asset growth included a $4.0 billion, or 8%, increase in average loans and leases and a $2.0 billion, or 15%, increase in average securities. The net interest margin contraction reflected a 14 basis point increase in funding costs, primarily associated with the issuance of debt over the past five quarters and a 4 basis point decrease in earning asset yields, partially offset by a 4 basis point increase in the benefit from the amount of noninterest-bearing funds. Core deposit yields were unchanged.
The provision for credit losses was $25 million, up $4 million, or 20%. NALs increased $96 million, or 26%, from the year-ago quarter to $461 million, or 0.88% of total loans and leases. The year-over-year increase was exclusively centered in the Commercial portfolio and was primarily associated with a small number of energy sector loan relationships which were added to NALs during the 2016 first quarter. While the energy sector was a primary driver of the NAL activity over the last two quarters, the oil and gas exploration and production portfolio represented less than 1% of total loans outstanding at quarter end. NCOs decreased $9 million, or 34%, to $17 million. NCOs represented an annualized 0.13% of average loans and leases in the current quarter, down from 0.21% in the year-ago quarter. We continue to be pleased with the net charge-off performance across the entire portfolio. Commercial charge-offs were positively impacted by continued recoveries in the CRE portfolio and broader continued successful workout strategies, while consumer charge-offs declined substantially from the prior quarter and remain 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 $271 million, down $11 million, or 4%. This reflected a $7 million, or 18%, decrease in mortgage banking income, primarily as a result of an $8 million impact from net MSR activity. In addition, trust services decreased $4 million, or 15%, reflecting 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, gain on sale of loans decreased $3 million, or 26%, primarily as a result of the $5 million gain from the automobile loan securitization in the year-ago quarter. These decreases were partially offset by a $5 million, or 8%, 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 3% increase in commercial checking relationships. In addition, cards and payment processing income increased $3 million, or 9%, due to higher card related income and underlying customer growth.
Noninterest expense was $524 million, up $32 million, or 6%. Personnel costs increased $17 million, or 6%, reflecting a $10 million increase in salaries and a $7 million increase in benefits expense. These increases are primarily the result of annual compensation increases coupled with a 1% increase in the number of average full-time equivalent employees, largely related to the build-out of the in-store strategy, as well as higher healthcare expenses.  Personnel costs in the 2016 second quarter included $5 million of Significant Items, primarily comprised of personnel expense related to technology development for systems conversions and fully-dedicated personnel for merger and integration efforts. In addition, professional services increased $9 million, or 71%, primarily reflecting $11 million of legal and consulting expense related to the pending FirstMerit acquisition. Also, other expense increased $6 million, or 14%, primarily impacted by litigation reserve adjustments and included $2 million of Significant Items related to the pending FirstMerit acquisition. Further, outside data processing and other services increased $5 million, or 8%, primarily related to ongoing technology investments and included $3 million of Significant Items related to the pending FirstMerit acquisition. 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 7.96%, up 4 basis points. The CET1 risk-based capital ratio was 9.80% at June 30, 2016, up from 9.65% a year ago. The regulatory tier 1 risk-based capital ratio was 11.37% compared to 10.41% at June 30, 2015. All capital ratios were impacted by the repurchase of 9.3 million common shares during the 2015 third and fourth quarters. As previously announced, we decided to forgo the remaining $166 million of share repurchase capacity under our 2015 CCAR capital plan in order to build capital ratios in preparation for the pending FirstMerit acquisition. As a result, we did not repurchase any common shares during the 2016 first or second quarters. In addition, our 2016 CCAR capital plan did not include any proposed share repurchases over the next four quarters. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of $400 million and $200 million of class D preferred equity during the 2016 first and second quarters, respectively.

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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 continued to deliver solid 2016 performance during the second quarter, in line with our expectations. The quarter demonstrated encouraging growth in business lending and ongoing strong performance in auto loans and residential mortgage. We have continued executing our strategy to balance growth with disciplined risk management.
Progress toward the proposed acquisition of FirstMerit continued to move forward in the second quarter, with very high approval rates obtained from both sets of shareholders, the completion of senior leadership selection for the combined company, and our announcement of the combined company’s five-year community development plan. The integration planning continues to proceed as expected. Our recently announced divestiture of 13 Ohio branches primarily in the Canton and Ashtabula markets to First Commonwealth Bank is another important milestone. On July 29, 2016, we received regulatory approval from the Board of Governors of the Federal Reserve System. We continue to expect that the transaction will be completed in the 2016 third quarter, subject to the satisfaction of customary closing conditions, including OCC approval of the bank merger.
The successful completion of the annual regulatory capital review and the Federal Reserve's non-objection to our planned capital actions, including the proposed increase in the quarterly dividend beginning in the 2016 fourth quarter, validate our consistent performance.
Economy

We continue to expect growth in our regional economy, but recognize the escalation of market volatility year-to-date and its contribution to dampening global outlook. While still presenting a challenging operating environment for us, ongoing flat interest rates should benefit our consumer and business customers. Many of the large MSAs in our footprint were near 15-year lows for unemployment rates at the end of May 2016. Within the current environment, we continue to execute our core strategy in line with our established plans, while simultaneously making substantial progress with our acquisition of FirstMerit.
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. 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 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
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2016
 
2016
 
2015
 
2015
 
2015
Interest income
$
565,658

 
$
557,251

 
$
544,153

 
$
538,477

 
$
529,795

Interest expense
59,777

 
54,185

 
47,242

 
43,022

 
39,109

Net interest income
505,881

 
503,066

 
496,911

 
495,455

 
490,686

Provision for credit losses
24,509

 
27,582

 
36,468

 
22,476

 
20,419

Net interest income after provision for credit losses
481,372

 
475,484

 
460,443

 
472,979

 
470,267

Service charges on deposit accounts
75,613

 
70,262

 
72,854

 
75,157

 
70,118

Cards and payment processing income
39,184

 
36,447

 
37,594

 
36,664

 
35,886

Mortgage banking income
31,591

 
18,543

 
31,418

 
18,956

 
38,518

Trust services
22,497

 
22,838

 
25,272

 
24,972

 
26,550

Insurance income
15,947

 
16,225

 
15,528

 
16,204

 
17,637

Brokerage income
14,599

 
15,502

 
14,462

 
15,059

 
15,184

Capital markets fees
13,037

 
13,010

 
13,778

 
12,741

 
13,192

Bank owned life insurance income
12,536

 
13,513

 
13,441

 
12,719

 
13,215

Gain on sale of loans
9,265

 
5,395

 
10,122

 
5,873

 
12,453

Securities gains (losses)
656

 
—

 
474

 
188

 
82

Other income
36,187

 
30,132

 
37,272

 
34,586

 
38,938

Total noninterest income
271,112

 
241,867

 
272,215

 
253,119

 
281,773

Personnel costs
298,949

 
285,397

 
288,861

 
286,270

 
282,135

Outside data processing and other services
63,037

 
61,878

 
63,775

 
58,535

 
58,508

Equipment
31,805

 
32,576

 
31,711

 
31,303

 
31,694

Net occupancy
30,704

 
31,476

 
32,939

 
29,061

 
28,861

Marketing
14,773

 
12,268

 
12,035

 
12,179

 
15,024

Professional services
21,488

 
13,538

 
13,010

 
11,961

 
12,593

Deposit and other insurance expense
12,187

 
11,208

 
11,105

 
11,550

 
11,787

Amortization of intangibles
3,600

 
3,712

 
3,788

 
3,913

 
9,960

Other expense
47,118

 
39,027

 
41,542

 
81,736

 
41,215

Total noninterest expense
523,661

 
491,080

 
498,766

 
526,508

 
491,777

Income before income taxes
228,823

 
226,271

 
233,892

 
199,590

 
260,263

Provision for income taxes
54,283

 
54,957

 
55,583

 
47,002

 
64,057

Net income
174,540

 
171,314

 
178,309

 
152,588

 
196,206

Dividends on preferred shares
19,874

 
7,998

 
7,972

 
7,968

 
7,968

Net income applicable to common shares
$
154,666

 
$
163,316

 
$
170,337

 
$
144,620

 
$
188,238

Average common shares—basic
798,167

 
795,755

 
796,095

 
800,883

 
806,891

Average common shares—diluted
810,371

 
808,349

 
810,143

 
814,326

 
820,238

Net income per common share—basic
$
0.19

 
$
0.21

 
$
0.21

 
$
0.18

 
$
0.23

Net income per common share—diluted
0.19

 
0.20

 
0.21

 
0.18

 
0.23

Cash dividends declared per common share
0.07

 
0.07

 
0.07

 
0.06

 
0.06

Return on average total assets
0.96
%
 
0.96
%
 
1.00
%
 
0.87
%
 
1.16
%
Return on average common shareholders’ equity
9.6

 
10.4

 
10.8

 
9.3

 
12.3

Return on average tangible common shareholders’ equity (2)
11.0

 
11.9

 
12.4

 
10.7

 
14.4

Net interest margin (3)
3.06

 
3.11

 
3.09

 
3.16

 
3.20

Efficiency ratio (4)
66.1

 
64.6

 
63.7

 
69.1

 
61.7

Effective tax rate
23.7

 
24.3

 
23.8

 
23.5

 
24.6

Revenue—FTE
 
 
 
 
 
 
 
 
 
Net interest income
$
505,881

 
$
503,066

 
$
496,911

 
$
495,455

 
$
490,686

FTE adjustment
10,091

 
9,159

 
8,425

 
8,168

 
7,962


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Net interest income (3)
515,972

 
512,225

 
505,336

 
503,623

 
498,648

Noninterest income
271,112

 
241,867

 
272,215

 
253,119

 
281,773

Total revenue (3)
$
787,084

 
$
754,092

 
$
777,551

 
$
756,742

 
$
780,421

(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.

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Table 2 - Selected Year to Date Income Statement Data (1)
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
Six months ended June 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Interest income
$
1,122,909

 
$
1,031,891

 
$
91,018

 
9
 %
Interest expense
113,962

 
73,520

 
40,442

 
55

Net interest income
1,008,947

 
958,371

 
50,576

 
5

Provision for credit losses
52,091

 
41,010

 
11,081

 
27

Net interest income after provision for credit losses
956,856

 
917,361

 
39,495

 
4

Service charges on deposit accounts
145,875

 
132,338

 
13,537

 
10

Cards and payment processing income
75,631

 
68,457

 
7,174

 
10

Mortgage banking income
50,134

 
61,479

 
(11,345
)
 
(18
)
Trust services
45,335

 
55,589

 
(10,254
)
 
(18
)
Insurance income
32,172

 
33,532

 
(1,360
)
 
(4
)
Brokerage income
30,101

 
30,684

 
(583
)
 
(2
)
Capital markets fees
26,047

 
27,097

 
(1,050
)
 
(4
)
Bank owned life insurance income
26,049

 
26,240

 
(191
)
 
(1
)
Gain on sale of loans
14,660

 
17,042

 
(2,382
)
 
(14
)
Securities gains (losses)
656

 
82

 
574

 
700

Other income
66,319

 
60,856

 
5,463

 
9

Total noninterest income
512,979

 
513,396

 
(417
)
 
—

Personnel costs
584,346

 
547,051

 
37,295

 
7

Outside data processing and other services
124,915

 
109,043

 
15,872

 
15

Equipment
64,381

 
61,943

 
2,438

 
4

Net occupancy
62,180

 
59,881

 
2,299

 
4

Marketing
27,041

 
27,999

 
(958
)
 
(3
)
Professional services
35,026

 
25,320

 
9,706

 
38

Deposit and other insurance expense
23,395

 
21,954

 
1,441

 
7

Amortization of intangibles
7,312

 
20,166

 
(12,854
)
 
(64
)
Other expense
86,145

 
77,277

 
8,868

 
11

Total noninterest expense
1,014,741

 
950,634

 
64,107

 
7

Income before income taxes
455,094

 
480,123

 
(25,029
)
 
(5
)
Provision for income taxes
109,240

 
118,063

 
(8,823
)
 
(7
)
Net income
345,854

 
362,060

 
(16,206
)
 
(4
)
Dividends declared on preferred shares
27,872

 
15,933

 
11,939

 
75

Net income applicable to common shares
$
317,982

 
$
346,127

 
$
(28,145
)
 
(8
)%
Average common shares—basic
796,961

 
808,335

 
(11,374
)
 
(1
)%
Average common shares—diluted
809,360

 
822,023

 
(12,663
)
 
(2
)
Net income per common share—basic
$
0.40

 
$
0.43

 
$
(0.03
)
 
(7
)
Net income per common share—diluted
0.39

 
0.42

 
(0.03
)
 
(7
)
Cash dividends declared per common share
0.14

 
0.12

 
0.02

 
17

Revenue—FTE
 
 
 
 
 
 
 
Net interest income
$
1,008,947

 
$
958,371

 
$
50,576

 
5
 %
FTE adjustment
19,250

 
15,522

 
3,728

 
24

Net interest income (2)
1,028,197

 
973,893

 
54,304

 
6

Noninterest income
512,979

 
513,396

 
(417
)
 
—

Total revenue (2)
$
1,541,176

 
$
1,487,289

 
$
53,887

 
4
 %

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




11
Table of Contents

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

•
During the 2016 second quarter, $21 million of noninterest expense was recorded related to the pending acquisition of FirstMerit. This resulted in a negative impact of $0.02 per common share.

•
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.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:
 
Table 3 - Significant Items Influencing Earnings Performance Comparison
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015 (4)
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
Net income
$
174,540

 
 
 
$
171,314

 
 
 
$
196,206

 
 
Earnings per share, after-tax
 
 
$
0.19

 
 
 
$
0.20

 
 
 
$
0.23

Significant Items—favorable (unfavorable) impact:
Earnings (1)
 
EPS (2)(3)
 
Earnings (1)
 
EPS (2)(3)
 
Earnings (1)
 
EPS (2)(3)
Mergers and acquisitions, net
$
(20,789
)
 
$
(0.02
)
 
$
(6,406
)
 
$
(0.01
)
 
$
—

 
$
—

(1)
Pretax unless otherwise noted.
(2)
Based on average outstanding diluted common shares.
(3)
After-tax.
(4)
The 2015 second quarter included $2 million of merger-related expense that was not considered a Significant Item for the second quarter of 2015, but merger-related expense was determined to be a Significant Item for the 2015 full year.

 
Six Months Ended
 
June 30, 2016
 
June 30, 2015 (4)
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
Net income
$
345,854

 
 
 
$
362,060

 
 
Earnings per share, after-tax
 
 
$
0.39

 
 
 
$
0.42

Significant Items—favorable (unfavorable) impact:
Earnings (1)
 
EPS (2)(3)
 
Earnings (1)
 
EPS (2)(3)
Mergers and acquisitions, net
$
(27,195
)
 
$
(0.03
)
 
$
—

 
$
—

(1)
Pretax unless otherwise noted.
(2)
Based on average outstanding diluted common shares.
(3)
After-tax.
(4)
The 2015 first and second quarter included $3 million and $2 million, respectively of merger-related expense that was not considered a Significant Item for the first six-month period of 2015, but merger-related expense was determined to be a Significant Item for the 2015 full year.

Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin:

12
Table of Contents

 
Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (3)
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances
 
 
 
 
 
Three Months Ended
 
Change
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2Q16 vs. 2Q15
 
2016
 
2016
 
2015
 
2015
 
2015
 
Amount
 
Percent
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
99

 
$
98

 
$
89

 
$
89

 
$
89

 
$
10

 
11
 %
Loans held for sale
571

 
433

 
502

 
464

 
1,272

 
(701
)
 
(55
)
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
6,904

 
6,633

 
8,099

 
8,310

 
7,916

 
(1,012
)
 
(13
)
Tax-exempt
2,510

 
2,358

 
2,257

 
2,136

 
2,028

 
482

 
24

Total available-for-sale and other securities
9,414

 
8,991

 
10,356

 
10,446

 
9,944

 
(530
)
 
(5
)
Trading account securities
41

 
40

 
39

 
52

 
41

 
—

 
—

Held-to-maturity securities—taxable
5,806

 
6,054

 
4,148

 
3,226

 
3,324

 
2,482

 
75

Total securities
15,261

 
15,085

 
14,543

 
13,724

 
13,309

 
1,952

 
15

Loans and leases: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
21,344

 
20,649

 
20,186

 
19,802

 
19,819

 
1,525

 
8

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
881

 
923

 
1,108

 
1,101

 
970

 
(89
)
 
(9
)
Commercial
4,345

 
4,283

 
4,158

 
4,193

 
4,214

 
131

 
3

Commercial real estate
5,226

 
5,206

 
5,266

 
5,294

 
5,184

 
42

 
1

Total commercial
26,570

 
25,855

 
25,452

 
25,096

 
25,003

 
1,567

 
6

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
10,146

 
9,730

 
9,286

 
8,879

 
8,083

 
2,063

 
26

Home equity
8,416

 
8,441

 
8,463

 
8,526

 
8,503

 
(87
)
 
(1
)
Residential mortgage
6,187

 
6,018

 
6,079

 
6,048

 
5,859

 
328

 
6

Other consumer
613

 
574

 
547

 
497

 
451

 
162

 
36

Total consumer
25,362

 
24,763

 
24,375

 
23,950

 
22,896

 
2,466

 
11

Total loans and leases
51,932

 
50,618

 
49,827

 
49,046

 
47,899

 
4,033

 
8

Allowance for loan and lease losses
(616
)
 
(604
)
 
(595
)
 
(609
)
 
(608
)
 
(8
)
 
1

Net loans and leases
51,316

 
50,014

 
49,232

 
48,437

 
47,291

 
4,025

 
9

Total earning assets
67,863

 
66,234

 
64,961

 
63,323

 
62,569

 
5,294

 
8

Cash and due from banks
1,001

 
1,013

 
1,468

 
1,555

 
926

 
75

 
8

Intangible assets
726

 
730

 
734

 
739

 
745

 
(19
)
 
(3
)
All other assets
4,149

 
4,223

 
4,233

 
4,273

 
4,233

 
(84
)
 
(2
)
Total assets
$
73,123

 
$
71,596

 
$
70,801

 
$
69,281

 
$
67,865

 
$
5,258

 
8
 %
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
16,507

 
$
16,334

 
$
17,174

 
$
17,017

 
$
15,893

 
$
614

 
4
 %
Demand deposits—interest-bearing
8,445

 
7,776

 
6,923

 
6,604

 
6,584

 
1,861

 
28

Total demand deposits
24,952

 
24,110

 
24,097

 
23,621

 
22,477

 
2,475

 
11

Money market deposits
19,534

 
19,682

 
19,843

 
19,512

 
18,803

 
731

 
4

Savings and other domestic deposits
5,402

 
5,306

 
5,215

 
5,224

 
5,273

 
129

 
2

Core certificates of deposit
2,007

 
2,265

 
2,430

 
2,534

 
2,639

 
(632
)
 
(24
)
Total core deposits
51,895

 
51,363

 
51,585

 
50,891

 
49,192

 
2,703

 
5

Other domestic time deposits of $250,000 or more
402

 
455

 
426

 
217

 
184

 
218

 
118

Brokered deposits and negotiable CDs
2,909

 
2,897

 
2,929

 
2,779

 
2,701

 
208

 
8

Deposits in foreign offices
208

 
264

 
398

 
492

 
562

 
(354
)
 
(63
)

13
Table of Contents

Total deposits
55,414

 
54,979

 
55,338

 
54,379

 
52,639

 
2,775

 
5

Short-term borrowings
1,032

 
1,145

 
524

 
844

 
2,153

 
(1,121
)
 
(52
)
Long-term debt
7,899

 
7,202

 
6,788

 
6,043

 
5,121

 
2,778

 
54

Total interest-bearing liabilities
47,838

 
46,992

 
45,476

 
44,249

 
44,020

 
3,818

 
9

All other liabilities
1,416

 
1,515

 
1,515

 
1,442

 
1,435

 
(19
)
 
(1
)
Shareholders’ equity
7,362

 
6,755

 
6,636

 
6,573

 
6,517

 
845

 
13

Total liabilities and shareholders’ equity
$
73,123

 
$
71,596

 
$
70,801

 
$
69,281

 
$
67,865

 
$
5,258

 
8
 %

14
Table of Contents

Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued) (3)
 
 
 
 
 
 
 
 
 
 
 
Average Yield Rates (2)
 
Three Months Ended
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
Fully-taxable equivalent basis (1)
2016
 
2016
 
2015
 
2015
 
2015
Assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
0.25
%
 
0.21
%
 
0.08
%
 
0.06
%
 
0.08
%
Loans held for sale
3.89

 
3.99

 
4.24

 
3.81

 
3.32

Securities:
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
Taxable
2.37

 
2.39

 
2.50

 
2.51

 
2.60

Tax-exempt
3.38

 
3.40

 
3.15

 
3.12

 
3.13

Total available-for-sale and other securities
2.64

 
2.65

 
2.64

 
2.63

 
2.71

Trading account securities
0.98

 
0.50

 
1.09

 
0.97

 
1.00

Held-to-maturity securities—taxable
2.44

 
2.43

 
2.45

 
2.46

 
2.50

Total securities
2.56

 
2.56

 
2.58

 
2.59

 
2.65

Loans and leases: (3)
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
3.49

 
3.52

 
3.47

 
3.58

 
3.61

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
3.70

 
3.51

 
3.45

 
3.52

 
3.60

Commercial
3.35

 
3.59

 
3.31

 
3.43

 
3.41

Commercial real estate
3.41

 
3.57

 
3.34

 
3.45

 
3.45

Total commercial
3.47

 
3.53

 
3.45

 
3.55

 
3.58

Consumer:
 
 
 
 
 
 
 
 
 
Automobile
3.15

 
3.17

 
3.22

 
3.23

 
3.20

Home equity
4.17

 
4.20

 
4.01

 
4.01

 
3.97

Residential mortgage
3.65

 
3.69

 
3.67

 
3.71

 
3.72

Other consumer
10.28

 
10.02

 
9.17

 
8.88

 
8.45

Total consumer
3.79

 
3.81

 
3.74

 
3.75

 
3.73

Total loans and leases
3.63

 
3.67

 
3.59

 
3.65

 
3.65

Total earning assets
3.41

 
3.44

 
3.37

 
3.42

 
3.45

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
—

 
—

 
—

 
—

 
—

Demand deposits—interest-bearing
0.09

 
0.09

 
0.08

 
0.07

 
0.06

Total demand deposits
0.03

 
0.03

 
0.02

 
0.02

 
0.02

Money market deposits
0.24

 
0.24

 
0.23

 
0.23

 
0.22

Savings and other domestic deposits
0.11

 
0.13

 
0.14

 
0.14

 
0.14

Core certificates of deposit
0.79

 
0.82

 
0.83

 
0.80

 
0.78

Total core deposits
0.22

 
0.23

 
0.23

 
0.23

 
0.22

Other domestic time deposits of $250,000 or more
0.40

 
0.41

 
0.40

 
0.43

 
0.44

Brokered deposits and negotiable CDs
0.40

 
0.38

 
0.19

 
0.17

 
0.17

Deposits in foreign offices
0.13

 
0.13

 
0.13

 
0.13

 
0.13

Total deposits
0.23

 
0.24

 
0.23

 
0.22

 
0.22

Short-term borrowings
0.36

 
0.32

 
0.09

 
0.09

 
0.14

Long-term debt
1.85

 
1.68

 
1.49

 
1.45

 
1.45

Total interest-bearing liabilities
0.50

 
0.46

 
0.41

 
0.39

 
0.36

Net interest rate spread
2.91

 
2.98

 
2.96

 
3.03

 
3.09

Impact of noninterest-bearing funds on margin
0.15

 
0.13

 
0.13

 
0.13

 
0.11

Net interest margin
3.06
%
 
3.11
%
 
3.09
%
 
3.16
%
 
3.20
%
(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.

15
Table of Contents

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

2016 Second Quarter versus 2015 Second Quarter

FTE net interest income for the 2016 second quarter increased $17 million, or 3%, from the 2015 second quarter. This reflected the benefit from the $5.3 billion, or 8%, increase in average earning assets partially offset by a 14 basis point reduction in the FTE net interest margin to 3.06%. Average earning asset growth included a $4.0 billion, or 8%, increase in average loans and leases and a $2.0 billion, or 15%, increase in average securities. The NIM contraction reflected a 14 basis point increase in funding costs, primarily associated with the issuance of debt over the past five quarters and a 4 basis point decrease in earning asset yields, partially offset by a 4 basis point increase in the benefit from noninterest-bearing funds. Core deposit yields were unchanged.
Average earning assets for the 2016 second quarter increased $5.3 billion, or 8%, from the year-ago quarter. The increase was driven by:
•
$2.1 billion, or 26%, increase in average automobile loans. The 2016 second quarter represented the tenth consecutive quarter of greater than $1.0 billion in automobile loan originations, while maintaining our underwriting consistency and discipline.
•
$2.0 billion, or 15%, increase in average securities, primarily reflecting the reinvestment of cash flows and additional investment in Liquidity Coverage Ratio (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, reflecting growth in equipment finance leases, automobile dealer floorplan lending, and corporate banking.
•
$0.3 billion, or 6%, increase in average residential mortgage loans, reflecting increased demand for mortgage loans across our portfolio.
Partially offset by:
•
$0.7 billion, or 55%, decrease in average loans held-for-sale, primarily related to automobile loans that were securitized and sold late in the year-ago quarter.
Average total deposits for the 2016 second quarter increased $2.8 billion, or 5%, from the year-ago quarter, including a $2.7 billion, or 5%, increase in average total core deposits. Average total interest-bearing liabilities increased $3.8 billion, or 9%, from the year-ago quarter. Year-over-year changes in total liabilities reflected:
•
$2.5 billion, or 11%, increase in average demand deposits, including a $1.9 billion, or 28%, increase in average interest-bearing demand deposits and a $0.6 billion, or 4%, increase in average noninterest-bearing demand deposits. The increase in average total demand deposits was comprised of a $1.6 billion, or 12%, increase in average commercial demand deposits and a $0.8 billion, or 10%, increase in average consumer demand deposits.
•
$1.7 billion, or 23%, increase in average total debt, reflecting the issuance of $3.1 billion of senior debt over the past five quarters, partially offset by a $1.1 billion, or 52%, decrease in average short-term borrowings.
•
$0.7 billion, or 4%, increase in average money market deposits, reflecting improvements in cross-sell and targeted marketing.
Partially offset by:
•
$0.6 billion, or 24%, 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.
•
$0.4 billion, or 63%, decrease in deposits in foreign offices, reflecting targeted sales efforts to move existing sweep account deposit relationships into more efficient domestic, interest-bearing demand deposits.
2016 Second Quarter versus 2016 First Quarter

Compared to the 2016 first quarter, FTE net interest income increased $4 million, or 1%. Average earning assets increased $1.6 billion, or 2%, sequentially, and the NIM decreased 5 basis points. The decrease in the NIM reflected a 3 basis point decrease in earning asset yields, partially reflecting the approximately 2 basis point benefit from recoveries of previously charged-off CRE loans in the 2016 first quarter, and a 4 basis point increase in the cost of interest-bearing liabilities as a result of senior debt financing, partially offset by a 2 basis point increase in the benefit from noninterest-bearing funds.

16
Table of Contents

Compared to the 2016 first quarter, average earning assets increased $1.6 billion, or 2%. This increase reflected a $1.3 billion increase in average loans and leases, primarily comprised of a $0.7 billion in average C&I loans and a $0.4 billion increase in average automobile loans, and a $0.2 billion increase in average securities.
Compared to the 2016 first quarter, average total core deposits increased $0.5 billion, or 1%, primarily reflecting a $0.7 billion, or 9%, increase in average interest-bearing demand deposits. Average total debt increased $0.6 billion, or 7%, reflecting the $1.0 billion senior debt issuance late in the 2016 first quarter, as well as fluctuations in short-term borrowings as part of normal balance sheet management.
 
 
 
 
 
 
 
 
 
 
 
 
Table 5 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
YTD Average Balances
 
YTD Average Rates (2)
 
Six months ended June 30,
 
Change
 
Six months ended June 30,
Fully-taxable equivalent basis (1)
2016
 
2015
 
Amount
 
Percent
 
2016
 
2015
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
98

 
$
91

 
$
7

 
8
 %
 
0.23
%
 
0.13
%
Loans held for sale
502

 
829

 
(327
)
 
(39
)
 
3.93

 
3.39

Securities:
 
 
 
 


 


 
 
 
 
Available-for-sale and other securities:
 
 
 
 


 


 
 
 
 
Taxable
6,768

 
7,791

 
(1,023
)
 
(13
)
 
2.38

 
2.55

Tax-exempt
2,434

 
1,952

 
482

 
25

 
3.39

 
3.09

Total available-for-sale and other securities
9,202

 
9,743

 
(541
)
 
(6
)
 
2.65

 
2.66

Trading account securities
40

 
47

 
(7
)
 
(15
)
 
0.75

 
1.10

Held-to-maturity securities—taxable
5,930

 
3,335

 
2,595

 
78

 
2.44

 
2.48

Total securities
15,172

 
13,125

 
2,047

 
16

 
2.56

 
2.61

Loans and leases: (3)
 
 
 
 


 


 
 
 
 
Commercial:
 
 
 
 


 


 
 
 
 
Commercial and industrial
20,996

 
19,469

 
1,527