Table of Contents


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 September 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 1,084,782,727 shares of Registrant’s common stock ($0.01 par value) outstanding on September 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
 
 
CDI
 
Core Deposit Intangible
 
 
 
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
 
 

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FHLB
  
Federal Home Loan Bank
 
 
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
 
 
 

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OCI
  
Other Comprehensive Income (Loss)
 
 
 
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 14), troubled debt restructured loans (Table 16), 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
 
 
 





5
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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, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 1,129 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. 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

Business Combinations
On August 16, 2016, Huntington completed its acquisition of FirstMerit Corporation in a stock and cash transaction valued at approximately $3.7 billion. FirstMerit Corporation was a diversified financial services company headquartered in Akron, Ohio, with operations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. Post acquisition, Huntington now operates across an eight-state Midwestern footprint. The acquisition resulted in a combined company with a larger market presence and more diversified loan portfolio, as well as a larger core deposit funding base and economics of scale associated with a larger financial institution.

Summary of 2016 Third Quarter Results Compared to 2015 Third Quarter
For the quarter, we reported net income of $127 million, or $0.11 per common share, compared with $153 million, or $0.18 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related expenses totaling $159 million pre-tax, or $0.11 per common share.
Fully-taxable equivalent net interest income was $636 million, up $132 million, or 26%. The results reflected the benefit from a $16.4 billion, or 26%, increase in average earning assets and a 2 basis point improvement in the net interest margin to 3.18%. Average earning asset growth included an $11.7 billion, or 24%, increase in average loans and leases, and a $4.4 billion, or 32%, increase in average securities, both of which were impacted by the mid-quarter FirstMerit acquisition. The net interest margin expansion reflected a 10 basis point increase in earning asset yields and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 10 basis point increase in funding costs. The 2016 third quarter net interest margin included 12 basis points of purchase accounting favorable impact.
The provision for credit losses was $64 million, up $41 million, or 184%. Net charge-offs increased $24 million, or 148%, to $40 million. Net charge-offs represented an annualized 0.26% of average loans and leases in the current quarter, up from 0.13% in the year-ago quarter. The increase was a function of higher commercial recoveries in the year-ago quarter combined with higher automobile and other consumer losses primarily based on portfolio growth.  We continue to be pleased with the net charge-off performance within each portfolio and in total. Commercial net charge-offs were positively impacted by continued recoveries in the CRE portfolio and broader continued successful workout strategies, while consumer charge-offs 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 $302 million, up $49 million, or 19%. Mortgage banking income increased $22 million, or 114%, reflecting a 39% increase in mortgage origination volume and a $10 million impact from net MSR activity. In addition, service charges on deposit accounts increased $12 million, or 16%, reflecting the benefit of new customer acquisition. Also, cards and payment processing income increased $8 million, or 21%, due to higher credit and debit card related income and underlying customer growth.
Noninterest expense was $712 million, up $186 million, or 35%. Reported noninterest expense was impacted by FirstMerit acquisition-related expenses totaling $159 million. Personnel costs increased $119 million, or 41%, primarily reflecting $76 million of acquisition-related personnel expense and an increase in average full-time equivalent employees related to the in-store branch expansion and the addition of colleagues from FirstMerit. In addition, professional services increased $35 million, or 294%, primarily reflecting $34 million of expenses related to the FirstMerit acquisition. Also, outside data processing and other services increased $33 million, or 56%, reflecting $28 million of expenses related to the FirstMerit acquisition, as well as ongoing technology investments. These increases were partially offset by a $33 million, or 41%, decrease in other expense, primarily reflecting litigation reserve adjustments in the year-ago quarter.
The tangible common equity to tangible assets ratio was 7.14%, down 75 basis points. The CET1 risk-based capital ratio was 9.09% at September 30, 2016, down from 9.72% a year ago. The regulatory tier 1 risk-based capital ratio was 10.40% compared to 10.49% at September 30, 2015. All capital ratios were impacted by the $1.3 billion of goodwill created and $2.8 billion of common stock issued as part of the FirstMerit acquisition, as well as to a lesser extent the repurchase of 2.5 million common stock during the 2015 fourth quarter under the repurchase authorization included in the 2015 CCAR capital plan. 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, and the issuance of $100 million of Huntington class C preferred equity in exchange for FirstMerit preferred equity in conjunction with the acquisition during the 2016 third quarter. The total risk-based capital ratio was impacted by the repurchase of $25 million of trust preferred securities during the 2016 third quarter.

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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. Specifically, we are focused on the successful integration of FirstMerit for the remainder of the year and for 2017.
Economy
Guidance from the Federal Reserve makes an interest rate increase appear likely in the near term, which would be incrementally helpful to our bottom line. In addition, according to the Philadelphia FRB coincident economic indicator, economic activity in Michigan, Ohio and Indiana has grown faster than the U.S. in the economic recovery-to-date. Also, economic activity growth is expected to grow on par within the U.S. in most of the Huntington Footprint states; per capita disposable personal income growth has grown faster than the U.S. during the economic recovery in most Huntington footprint states. Further, unemployment rates were at or below the national average in August in Indiana, Kentucky, Ohio, Michigan and Wisconsin; unemployment rates are near 15 year lows in Ohio and Michigan.
Expectations – 2016
Excluding Significant Items, we expect total revenues for the full year 2016 to increase 16-18%, while we expect noninterest expenses to increase 13%-15%. We expect to deliver positive operating leverage for the fourth consecutive year. We expect the effective tax rate for the full year 2016 to be in the 24%-25% range, excluding Significant Items, which are taxed at an approximate 35% rate.
Overall, asset quality metrics are expected to remain near current levels, with moderate quarterly volatility. We anticipate NCOs for the full year 2016 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
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016
 
2016
 
2016
 
2015
 
2015
Interest income
$
694,346

 
$
565,658

 
$
557,251

 
$
544,153

 
$
538,477

Interest expense
68,956

 
59,777

 
54,185

 
47,242

 
43,022

Net interest income
625,390

 
505,881

 
503,066

 
496,911

 
495,455

Provision for credit losses
63,805

 
24,509

 
27,582

 
36,468

 
22,476

Net interest income after provision for credit losses
561,585

 
481,372

 
475,484

 
460,443

 
472,979

Service charges on deposit accounts
86,847

 
75,613

 
70,262

 
72,854

 
75,157

Cards and payment processing income
44,320

 
39,184

 
36,447

 
37,594

 
36,664

Mortgage banking income
40,603

 
31,591

 
18,543

 
31,418

 
18,956

Trust services
28,923

 
22,497

 
22,838

 
25,272

 
24,972

Insurance income
15,865

 
15,947

 
16,225

 
15,528

 
16,204

Brokerage income
14,719

 
14,599

 
15,502

 
14,462

 
15,059

Capital markets fees
14,750

 
13,037

 
13,010

 
13,778

 
12,741

Bank owned life insurance income
14,452

 
12,536

 
13,513

 
13,441

 
12,719

Gain on sale of loans
7,506

 
9,265

 
5,395

 
10,122

 
5,873

Securities gains
1,031

 
656

 
—

 
474

 
188

Other income
33,399

 
36,187

 
30,132

 
37,272

 
34,586

Total noninterest income
302,415

 
271,112

 
241,867

 
272,215

 
253,119

Personnel costs
405,024

 
298,949

 
285,397

 
288,861

 
286,270

Outside data processing and other services
91,133

 
63,037

 
61,878

 
63,775

 
58,535

Equipment
40,792

 
31,805

 
32,576

 
31,711

 
31,303

Net occupancy
41,460

 
30,704

 
31,476

 
32,939

 
29,061

Marketing
14,438

 
14,773

 
12,268

 
12,035

 
12,179

Professional services
47,075

 
21,488

 
13,538

 
13,010

 
11,961

Deposit and other insurance expense
14,940

 
12,187

 
11,208

 
11,105

 
11,550

Amortization of intangibles
9,046

 
3,600

 
3,712

 
3,788

 
3,913

Other expense
48,339

 
47,118

 
39,027

 
41,542

 
81,736

Total noninterest expense
712,247

 
523,661

 
491,080

 
498,766

 
526,508

Income before income taxes
151,753

 
228,823

 
226,271

 
233,892

 
199,590

Provision for income taxes
24,749

 
54,283

 
54,957

 
55,583

 
47,002

Net income
127,004

 
174,540

 
171,314

 
178,309

 
152,588

Dividends on preferred shares
18,537

 
19,874

 
7,998

 
7,972

 
7,968

Net income applicable to common shares
$
108,467

 
$
154,666

 
$
163,316

 
$
170,337

 
$
144,620

Average common shares—basic
938,578

 
798,167

 
795,755

 
796,095

 
800,883

Average common shares—diluted
952,081

 
810,371

 
808,349

 
810,143

 
814,326

Net income per common share—basic
$
0.12

 
$
0.19

 
$
0.21

 
$
0.21

 
$
0.18

Net income per common share—diluted
0.11

 
0.19

 
0.20

 
0.21

 
0.18

Cash dividends declared per common share
0.07

 
0.07

 
0.07

 
0.07

 
0.06

Return on average total assets
0.58
%
 
0.96
%
 
0.96
%
 
1.00
%
 
0.87
%
Return on average common shareholders’ equity
5.4

 
9.6

 
10.4

 
10.8

 
9.3

Return on average tangible common shareholders’ equity (2)
7.0

 
11.0

 
11.9

 
12.4

 
10.7

Net interest margin (3)
3.18

 
3.06

 
3.11

 
3.09

 
3.16

Efficiency ratio (4)
75.0

 
66.1

 
64.6

 
63.7

 
69.1

Effective tax rate
16.3

 
23.7

 
24.3

 
23.8

 
23.5

Revenue—FTE
 
 
 
 
 
 
 
 
 
Net interest income
$
625,390

 
$
505,881

 
$
503,066

 
$
496,911

 
$
495,455

FTE adjustment
10,598

 
10,091

 
9,159

 
8,425

 
8,168

Net interest income (3)
635,988

 
515,972

 
512,225

 
505,336

 
503,623

Noninterest income
302,415

 
271,112

 
241,867

 
272,215

 
253,119

Total revenue (3)
$
938,403

 
$
787,084

 
$
754,092

 
$
777,551

 
$
756,742


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(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)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Interest income
$
1,817,255

 
$
1,570,368

 
$
246,887

 
16
 %
Interest expense
182,918

 
116,542

 
66,376

 
57

Net interest income
1,634,337

 
1,453,826

 
180,511

 
12

Provision for credit losses
115,896

 
63,486

 
52,410

 
83

Net interest income after provision for credit losses
1,518,441

 
1,390,340

 
128,101

 
9

Service charges on deposit accounts
232,722

 
207,495

 
25,227

 
12

Cards and payment processing income
119,951

 
105,121

 
14,830

 
14

Mortgage banking income
90,737

 
80,435

 
10,302

 
13

Trust services
74,258

 
80,561

 
(6,303
)
 
(8
)
Insurance income
48,037

 
49,736

 
(1,699
)
 
(3
)
Brokerage income
44,819

 
45,743

 
(924
)
 
(2
)
Capital markets fees
40,797

 
39,838

 
959

 
2

Bank owned life insurance income
40,500

 
38,959

 
1,541

 
4

Gain on sale of loans
22,166

 
22,915

 
(749
)
 
(3
)
Securities gains
1,687

 
270

 
1,417

 
525

Other income
99,720

 
95,442

 
4,278

 
4

Total noninterest income
815,394

 
766,515

 
48,879

 
6

Personnel costs
989,369

 
833,321

 
156,048

 
19

Outside data processing and other services
216,047

 
167,578

 
48,469

 
29

Equipment
105,173

 
93,246

 
11,927

 
13

Net occupancy
103,640

 
88,942

 
14,698

 
17

Marketing
41,479

 
40,178

 
1,301

 
3

Professional services
82,101

 
37,281

 
44,820

 
120

Deposit and other insurance expense
38,335

 
33,504

 
4,831

 
14

Amortization of intangibles
16,357

 
24,079

 
(7,722
)
 
(32
)
Other expense
134,487

 
159,013

 
(24,526
)
 
(15
)
Total noninterest expense
1,726,988

 
1,477,142

 
249,846

 
17

Income before income taxes
606,847

 
679,713

 
(72,866
)
 
(11
)
Provision for income taxes
133,989

 
165,065

 
(31,076
)
 
(19
)
Net income
472,858

 
514,648

 
(41,790
)
 
(8
)
Dividends declared on preferred shares
46,409

 
23,901

 
22,508

 
94

Net income applicable to common shares
$
426,449

 
$
490,747

 
$
(64,298
)
 
(13
)%
Average common shares—basic
844,167

 
805,851

 
38,316

 
5
 %
Average common shares—diluted
856,934

 
819,458

 
37,476

 
5

Net income per common share—basic
$
0.51

 
$
0.61

 
$
(0.10
)
 
(16
)
Net income per common share—diluted
0.50

 
0.60

 
(0.10
)
 
(17
)
Cash dividends declared per common share
0.21

 
0.18

 
0.03

 
17

Revenue—FTE
 
 
 
 
 
 
 
Net interest income
$
1,634,337

 
$
1,453,826

 
$
180,511

 
12
 %
FTE adjustment
29,848

 
23,690

 
6,158

 
26

Net interest income (2)
1,664,185

 
1,477,516

 
186,669

 
13

Noninterest income
815,394

 
766,515

 
48,879

 
6

Total revenue (2)
$
2,479,579

 
$
2,244,031

 
$
235,548

 
10
 %

(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. 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, net. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, are as follows:

•
The 2016 third, second, and first quarters included $159 million, $21 million, and $6 million, respectively, of noninterest expense related to the acquisition of FirstMerit.

•
During the 2015 third quarter, $5 million of noninterest expense was recorded related to the acquisition of Huntington Technology Finance, the transition of the Huntington Funds and the sale of Huntington Asset Advisors, which were completed during the 2015 fourth quarter.

•
The 2015 second quarter and first quarter included $2 million and $3 million, respectively, of Huntington Technology Finance merger-related noninterest expense that was not originally reported as a Significant Item. As a result of 2015 third quarter activity, merger related expense was identified as a Significant Item for the 2015 full year and, as such, these amounts are now included as Significant Items.

2. Litigation reserves. During the 2015 third quarter, $38 million of additions to litigation reserves were recorded as noninterest expense.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected:
 
Table 3 - Significant Items Influencing Earnings Performance Comparison
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
Net income
$
127,004

 
 
 
$
174,540

 
 
 
$
152,588

 
 
Earnings per share, after-tax
 
 
$
0.11

 
 
 
$
0.19

 
 
 
$
0.18

 
 
 
 
 
 
 
 
 
 
 
 
Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS
 
Earnings
 
EPS
 
Earnings
 
EPS
Mergers and acquisitions:
 
 
 
 
 
 
 
 
 
 
 
Mergers and acquisitions (1)
$
(158,749
)
 
 
 
$
(20,789
)
 
 
 
$
(4,839
)
 
 
Tax impact
52,033

 
 
 
7,213

 
 
 
1,694

 
 
Mergers and acquisitions, after tax (2)(3)
$
(106,716
)
 
$
(0.11
)
 
$
(13,576
)
 
$
(0.02
)
 
$
(3,145
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Litigation reserves:
 
 
 
 
 
 
 
 
 
 
 
Litigation reserves (1)
$
—

 
 
 
$
—

 
 
 
$
(38,186
)
 
 
Tax impact
—

 
 
 
—

 
 
 
13,365

 
 
Litigation reserves, after tax (2)(3)
$
—

 
$
—

 
$
—

 
$
—

 
$
(24,821
)
 
$
(0.03
)
(1)
Pretax unless otherwise noted.
(2)
Based on average outstanding diluted common shares.
(3)
After-tax.


12
Table of Contents

 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
Net income
$
472,858

 
 
 
$
514,648

 
 
Earnings per share, after-tax
 
 
$
0.50

 
 
 
$
0.60

Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS
 
Earnings
 
EPS 
Mergers and acquisitions:
 
 
 
 
 
 
 
Mergers and acquisitions (1)
$
(185,944
)
 
 
 
$
(9,691
)
 
 
Tax impact
61,252

 
 
 
3,392

 
 
Mergers and acquisitions, net of tax (2)(3)
$
(124,692
)
 
$
(0.14
)
 
$
(6,299
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Litigation reserves:
 
 
 
 
 
 
 
Litigation reserves (1)
$
—

 
 
 
$
(38,186
)
 
 
Tax impact
—

 
 
 
13,365

 
 
Litigation reserves, net of tax (2)(3)
$
—

 
$
—

 
$
(24,821
)
 
$
(0.03
)
(1)
Pretax unless otherwise noted.
(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 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (3)
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances
 
 
 
 
 
Three Months Ended
 
Change
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
3Q16 vs. 3Q15
 
2016
 
2016
 
2016
 
2015
 
2015
 
Amount
 
Percent
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
95

 
$
99

 
$
98

 
$
89

 
$
89

 
$
6

 
7
 %
Loans held for sale
695

 
571

 
433

 
502

 
464

 
231

 
50

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
9,785

 
6,904

 
6,633

 
8,099

 
8,310

 
1,475

 
18

Tax-exempt
2,854

 
2,510

 
2,358

 
2,257

 
2,136

 
718

 
34

Total available-for-sale and other securities
12,639

 
9,414

 
8,991

 
10,356

 
10,446

 
2,193

 
21

Trading account securities
49

 
41

 
40

 
39

 
52

 
(3
)
 
(6
)
Held-to-maturity securities—taxable
5,487

 
5,806

 
6,054

 
4,148

 
3,226

 
2,261

 
70

Total securities
18,175

 
15,261

 
15,085

 
14,543

 
13,724

 
4,451

 
32

Loans and leases: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
24,957

 
21,344

 
20,649

 
20,186

 
19,802

 
5,155

 
26

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,132

 
881

 
923

 
1,108

 
1,101

 
31

 
3

Commercial
5,227

 
4,345

 
4,283

 
4,158

 
4,193

 
1,034

 
25

Commercial real estate
6,359

 
5,226

 
5,206

 
5,266

 
5,294

 
1,065

 
20

Total commercial
31,316

 
26,570

 
25,855

 
25,452

 
25,096

 
6,220

 
25

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,402

 
10,146

 
9,730

 
9,286

 
8,879

 
2,523

 
28

Home equity
9,260

 
8,416

 
8,441

 
8,463

 
8,526

 
734

 
9

Residential mortgage
7,008

 
6,187

 
6,018

 
6,079

 
6,048

 
960

 
16


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Table of Contents

RV and marine finance
915

 
—

 
—

 
—

 
—

 
N.R.

 
N.R.

Other consumer
821

 
613

 
574

 
547

 
497

 
324

 
65

Total consumer
29,406

 
25,362

 
24,763

 
24,375

 
23,950

 
5,456

 
23

Total loans and leases
60,722

 
51,932

 
50,618

 
49,827

 
49,046

 
11,676

 
24

Allowance for loan and lease losses
(623
)
 
(616
)
 
(604
)
 
(595
)
 
(609
)
 
(14
)
 
2

Net loans and leases
60,099

 
51,316

 
50,014

 
49,232

 
48,437

 
11,662

 
24

Total earning assets
79,687

 
67,863

 
66,234

 
64,961

 
63,323

 
16,364

 
26

Cash and due from banks
1,325

 
1,001

 
1,013

 
1,468

 
1,555

 
(230
)
 
(15
)
Intangible assets
1,547

 
726

 
730

 
734

 
739

 
808

 
109

All other assets
4,962

 
4,149

 
4,223

 
4,233

 
4,273

 
689

 
16

Total assets
$
86,898

 
$
73,123

 
$
71,596

 
$
70,801

 
$
69,281

 
$
17,617

 
25
 %
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
20,033

 
$
16,507

 
$
16,334

 
$
17,174

 
$
17,017

 
$
3,016

 
18
 %
Demand deposits—interest-bearing
12,362

 
8,445

 
7,776

 
6,923

 
6,604

 
5,758

 
87

Total demand deposits
32,395

 
24,952

 
24,110

 
24,097

 
23,621

 
8,774

 
37

Money market deposits
18,453

 
19,534

 
19,682

 
19,843

 
19,512

 
(1,059
)
 
(5
)
Savings and other domestic deposits
8,889

 
5,402

 
5,306

 
5,215

 
5,224

 
3,665

 
70

Core certificates of deposit
2,285

 
2,007

 
2,265

 
2,430

 
2,534

 
(249
)
 
(10
)
Total core deposits
62,022

 
51,895

 
51,363

 
51,585

 
50,891

 
11,131

 
22

Other domestic time deposits of $250,000 or more
382

 
402

 
455

 
426

 
217

 
165

 
76

Brokered deposits and negotiable CDs
3,904

 
2,909

 
2,897

 
2,929

 
2,779

 
1,125

 
40

Deposits in foreign offices
194

 
208

 
264

 
398

 
492

 
(298
)
 
(61
)
Total deposits
66,502

 
55,414

 
54,979

 
55,338

 
54,379

 
12,123

 
22

Short-term borrowings
1,306

 
1,032

 
1,145

 
524

 
844

 
462

 
55

Long-term debt
8,488

 
7,899

 
7,202

 
6,788

 
6,043

 
2,445

 
40

Total interest-bearing liabilities
56,263

 
47,838

 
46,992

 
45,476

 
44,249

 
12,014

 
27

All other liabilities
1,608

 
1,416

 
1,515

 
1,515

 
1,442

 
166

 
12

Shareholders’ equity
8,994

 
7,362

 
6,755

 
6,636

 
6,573

 
2,421

 
37

Total liabilities and shareholders’ equity
$
86,898

 
$
73,123

 
$
71,596

 
$
70,801

 
$
69,281

 
$
17,617

 
25
 %

14
Table of Contents

Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued) (3)
 
 
 
 
 
 
 
 
 
 
 
Average Yield Rates (2)
 
Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
Fully-taxable equivalent basis (1)
2016
 
2016
 
2016
 
2015
 
2015
Assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
0.64
%
 
0.25
%
 
0.21
%
 
0.08
%
 
0.06
%
Loans held for sale
3.53

 
3.89

 
3.99

 
4.24

 
3.81

Securities:
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
Taxable
2.35

 
2.37

 
2.39

 
2.50

 
2.51

Tax-exempt
3.01

 
3.38

 
3.40

 
3.15

 
3.12

Total available-for-sale and other securities
2.50

 
2.64

 
2.65

 
2.64

 
2.63

Trading account securities
0.58

 
0.98

 
0.50

 
1.09

 
0.97

Held-to-maturity securities—taxable
2.41

 
2.44

 
2.43

 
2.45

 
2.46

Total securities
2.47

 
2.56

 
2.56

 
2.58

 
2.59

Loans and leases: (3)
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
3.68

 
3.49

 
3.52

 
3.47

 
3.58

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
3.76

 
3.70

 
3.51

 
3.45

 
3.52

Commercial
3.54

 
3.35

 
3.59

 
3.31

 
3.43

Commercial real estate
3.58

 
3.41

 
3.57

 
3.34

 
3.45

Total commercial
3.66

 
3.47

 
3.53

 
3.45

 
3.55

Consumer:
 
 
 
 
 
 
 
 
 
Automobile
3.37

 
3.15

 
3.17

 
3.22

 
3.23

Home equity
4.21

 
4.17

 
4.20

 
4.01

 
4.01

Residential mortgage
3.61

 
3.65

 
3.69

 
3.67

 
3.71

RV and marine finance
5.70

 
—

 
—

 
—

 
—

Other consumer
10.89

 
10.28

 
10.02

 
9.17

 
8.88

Total consumer
3.97

 
3.79

 
3.81

 
3.74

 
3.75

Total loans and leases
3.81

 
3.63

 
3.67

 
3.59

 
3.65

Total earning assets
3.52

 
3.41

 
3.44

 
3.37

 
3.42

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
—

 
—

 
—

 
—

 
—

Demand deposits—interest-bearing
0.11

 
0.09

 
0.09

 
0.08

 
0.07

Total demand deposits
0.04

 
0.03

 
0.03

 
0.02

 
0.02

Money market deposits
0.24

 
0.24

 
0.24

 
0.23

 
0.23

Savings and other domestic deposits
0.21

 
0.11

 
0.13

 
0.14

 
0.14

Core certificates of deposit
0.43

 
0.79

 
0.82

 
0.83

 
0.80

Total core deposits
0.20

 
0.22

 
0.23

 
0.23

 
0.23

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

 
0.40

 
0.41

 
0.40

 
0.43

Brokered deposits and negotiable CDs
0.44

 
0.40

 
0.38

 
0.19

 
0.17

Deposits in foreign offices
0.13

 
0.13

 
0.13

 
0.13

 
0.13

Total deposits
0.22

 
0.23

 
0.24

 
0.23

 
0.22

Short-term borrowings
0.29

 
0.36

 
0.32

 
0.09

 
0.09

Long-term debt
1.97

 
1.85

 
1.68

 
1.49

 
1.45

Total interest-bearing liabilities
0.49

 
0.50

 
0.46

 
0.41

 
0.39

Net interest rate spread
3.03

 
2.91

 
2.98

 
2.96

 
3.03

Impact of noninterest-bearing funds on margin
0.15

 
0.15

 
0.13

 
0.13

 
0.13

Net interest margin
3.18
%
 
3.06
%
 
3.11
%
 
3.09
%
 
3.16
%
(1)
FTE yields are calculated assuming a 35% tax rate.

15
Table of Contents

(2)
Loan and lease, and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.
(3)
For purposes of this analysis, NALs are reflected in the average balances of loans.
N.R.—Not relevant.

2016 Third Quarter versus 2015 Third Quarter

FTE net interest income for the 2016 third quarter increased $132 million, or 26%, from the 2015 third quarter. This reflected the benefit from the $16.4 billion, or 26%, increase in average earning assets coupled with a 2 basis point improvement in the FTE net interest margin to 3.18%. Average earning asset growth included an $11.7 billion, or 24%, increase in average loans and leases and a $4.4 billion, or 32%, increase in average securities, both of which were impacted by the mid-quarter FirstMerit acquisition. The NIM expansion reflected a 10 basis point increase in earning asset yields and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 10 basis point increase in funding costs. The 2016 third quarter NIM included 12 basis points of purchase accounting benefit.
Average earning assets for the 2016 third quarter increased $16.4 billion, or 26%, from the year-ago quarter. The increase was driven by:
•
$5.2 billion, or 26%, increase in average C&I loans and leases, impacted by the mid-quarter FirstMerit acquisition. This increase also reflects organic growth in equipment finance leases, automobile dealer floorplan lending, and corporate banking.
•
$4.4 billion, or 32%, increase in average securities, impacted by the mid-quarter FirstMerit acquisition, the reinvestment of cash flows and additional investment in Liquidity Coverage Ratio (LCR) Level 1 qualifying securities, and a $0.8 billion increase in direct purchase municipal instruments in our Commercial Banking segment, offset by sales of certain securities following the closing of the FirstMerit acquisition.
•
$2.5 billion, or 28%, increase in average automobile loans, impacted by the mid-quarter FirstMerit acquisition. The 2016 third quarter represented the eleventh consecutive quarter of greater than $1.0 billion in automobile loan originations, while maintaining our underwriting consistency and discipline.
•
$1.1 billion, or 20%, increase in average CRE loans, impacted by the mid-quarter FirstMerit acquisition.
•
$1.0 billion, or 16%, increase in average residential mortgage loans, impacted by the mid-quarter FirstMerit acquisition as well as increased demand for residential mortgage loans across our footprint.
•
$0.9 billion increase in RV and marine finance loans, reflecting the acquisition of the product offering in the FirstMerit acquisition.
•
$0.7 billion, or 9%, increase in average home equity loans, impacted by the mid-quarter FirstMerit acquisition.
While not affecting quarterly average balances, approximately $2.6 billion of total loans and leases, comprised of $1.5 billion of automobile loans, $1.0 billion of predominantly non-relationship C&I loans and leases, and $0.1 billion of predominantly non-relationship CRE loans were moved to Loans held for sale at the end of the 2016 third quarter as part of a continued balance sheet optimization strategy following the closing of the FirstMerit acquisition.
Average total deposits for the 2016 third quarter increased $12.1 billion, or 22%, from the year-ago quarter, impacted by the mid-quarter FirstMerit acquisition, while average total core deposits increased $11.1 billion, or 22%. Average total interest-bearing liabilities increased $12.0 billion, or 27%, from the year-ago quarter, impacted by the mid-quarter FirstMerit acquisition. Changes in total liabilities from the year-ago quarter reflected:
•
$8.8 billion, or 37%, increase in average demand deposits, impacted by the mid-quarter FirstMerit acquisition. Average interest-bearing demand deposits increased $5.8 billion, or 87%, and average noninterest-bearing demand deposits increased $3.0 billion, or 18%. The increase in average total demand deposits was comprised of a $6.1 billion, or 39%, increase in average commercial demand deposits and a $2.7 billion, or 33%, increase in average consumer demand deposits.
•
$3.7 billion, or 70%, increase in savings and other domestic deposits, impacted by the mid-quarter FirstMerit acquisition.
•
$2.9 billion, or 42%, increase in average total debt, primarily reflecting the issuance of $3.3 billion of senior debt over the past five quarters.
•
$1.1 billion, or 40%, increase in brokered deposits and negotiable CDs, impacted by the mid-quarter FirstMerit acquisition.

16
Table of Contents

Partially offset by:
•
$1.1 billion, or 5%, decrease in average money market deposits. During the 2016 third quarter, changes to commercial accounts resulted in the reclassification of $2.8 billion of deposits from money market into interest-bearing demand deposits. This decrease was partially offset by the impact of the mid-quarter FirstMerit acquisition.

2016 Third Quarter versus 2016 Second Quarter

Compared to the 2016 second quarter, FTE net interest income increased $120 million, or 23%. Average earning assets increased $11.8 billion, or 17%, sequentially, and the NIM increased 12 basis points. The increase in the NIM reflected an 11 basis point increase in earning asset yields and a 1 basis point decrease in the cost of interest-bearing liabilities.
Compared to the 2016 second quarter, average earning assets increased $11.8 billion, or 17%. On a reported basis, average loans and leases increased $8.8 billion, or 17%, primarily reflecting a $3.6 billion increase in average C&I loans, a $1.1 billion increase in average CRE loans, a $1.3 billion increase in average automobile loans, a $0.8 billion increase in home equity loans, and a $0.8 billion increase in residential mortgage loans, as well as the addition of $0.9 billion in RV and marine finance loans. Average securities increased $2.9 billion, or 19%. These increases primarily reflected the FirstMerit acquisition.
Compared to the 2016 second quarter, average total core deposits increased $10.1 billion, or 20%. The increase primarily reflected a $3.9 billion, or 46%, increase in average interest-bearing demand deposits, a $3.5 billion, or 21%, increase</