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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, 2017

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, including area code (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	¨
				Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

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 1,087,119,978 shares of Registrant’s common stock ($0.01 par value) outstanding on March 31, 2017.

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HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	37
Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016	37
Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016	38
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016	40
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2017 and 2016	41
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	42
Notes to Unaudited Condensed Consolidated Financial Statements	44
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	6
Executive Overview	7
Discussion of Results of Operations	7
Risk Management and Capital:	15
Credit Risk	16
Market Risk	23
Liquidity Risk	24
Operational Risk	27
Compliance Risk	27
Capital	27
Fair Value	29
Business Segment Discussion	29
Additional Disclosures	34
Item 3. Quantitative and Qualitative Disclosures about Market Risk	90
Item 4. Controls and Procedures	90
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	91
Item 1A. Risk Factors	91
Item 6. Exhibits	92
Signatures	94

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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:

 

ABS		Asset-Backed Securities
ACL		Allowance for Credit Losses
AFS		Available-for-Sale
ALCO		Asset-Liability Management Committee
ALLL		Allowance for Loan and Lease Losses
ANPR		Advance Notice of Proposed Rulemaking
ASC		Accounting Standards Codification
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
BHC		Bank Holding Companies
BHC Act		Bank Holding Company Act of 1956
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
CISA		Cybersecurity Information Sharing Act
CMO		Collateralized Mortgage Obligations
CRA		Community Reinvestment Act
CRE		Commercial Real Estate
CREVF		Commercial Real Estate and Vehicle Finance
DIF		Deposit Insurance Fund
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
EFT		Electronic Fund Transfer
EPS		Earnings Per Share
EVE		Economic Value of Equity
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
FDICIA		Federal Deposit Insurance Corporation Improvement Act of 1991
FHA		Federal Housing Administration
FHC		Financial Holding Company
FHLB		Federal Home Loan Bank

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FICO		Fair Isaac Corporation
FIRSTMERIT		FirstMerit Corporation
FRB		Federal Reserve Bank
FTE		Fully-Taxable Equivalent
FTP		Funds Transfer Pricing
GAAP		Generally Accepted Accounting Principles in the United States of America
HAA		Huntington Asset Advisors, Inc.
HASI		Huntington Asset Services, Inc.
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
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
NPAs		Nonperforming Assets
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
OLEM		Other Loans Especially Mentioned
OREO		Other Real Estate Owned
OTTI		Other-Than-Temporary Impairment
PD		Probability-Of-Default
Plan		Huntington Bancshares Retirement Plan
RBHPCG		Regional Banking and The Huntington Private Client Group
REIT		Real Estate Investment Trust

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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
TCE		Tangible Common Equity
TDR		Troubled Debt Restructured Loan
U.S. Treasury		U.S. Department of the Treasury
UCS		Uniform Classification System
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”, and "the Company" 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 programs, and other financial products and services. Our 996 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. 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 2016 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2016 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.

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EXECUTIVE OVERVIEW

Summary of 2017 First Quarter Results Compared to 2016 First Quarter

For the quarter, we reported net income of $208 million, or $0.17 per common share, compared with $171 million, or $0.20 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $71 million pre-tax, or $0.04 per common share.

Fully-taxable equivalent net interest income was $742 million, up $230 million, or 45%. The results reflected the benefit from a $24.9 billion, or 38%, increase in average earning assets and a 19 basis point improvement in the net interest margin to 3.30%. Average earning asset growth included a $16.4 billion, or 32%, increase in average loans and leases, and an $8.6 billion, or 57%, increase in average securities, both of which were impacted by the FirstMerit acquisition. The net interest margin expansion reflected a 26 basis point increase in earning asset yields, including the impact of purchase accounting, and a 1 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 8 basis point increase in funding costs.

The provision for credit losses was $68 million, up $40 million, or 145%. NCOs increased $31 million to $39 million, primarily as a result of material CRE recoveries in the year-ago quarter. NCOs represented an annualized 0.24% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

Noninterest income was $312 million, up $71 million, or 29%. The increase was primarily a result of the FirstMerit acquisition. In addition, service charges on deposit accounts increased, reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Also, mortgage banking income increased, reflecting an increase in mortgage origination volume and an increase from net MSR hedging-related activities.

Noninterest expense was $707 million, up $216 million, or 44%, reflecting the impact of the FirstMerit acquisition. Personnel costs increased, reflecting acquisition-related personnel expense and an increase in average full-time equivalent employees. Also, other expense increased, due to an increase in OREO and foreclosure expense. Further, deposit and other insurance expense increased, as a result of the larger assessment base as well as the FDIC Large Institution Surcharge implemented during the 2016 third quarter.

The tangible common equity to tangible assets ratio was 7.28%, down 61 basis points. The CET1 risk-based capital ratio was 9.74% at March 31, 2017, compared to 9.73% a year ago. The regulatory tier 1 risk-based capital ratio was 11.11% compared to 10.99% at March 31, 2016. Capital ratios were impacted by the goodwill created and the issuance of common stock as part of the FirstMerit acquisition. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of Class D preferred equity during the 2016 second quarter and the issuance of Class C preferred equity during the 2016 third quarter in exchange for FirstMerit preferred equity in conjunction with the acquisition. The total risk-based capital ratio was impacted by the repurchase of trust preferred securities during the 2016 third quarter and fourth quarter. In addition, certain trust preferred securities were acquired in the FirstMerit acquisition and subsequently were redeemed. There were no common shares repurchased over the past five quarters.

Business Overview

General

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

Economy

We expect ongoing consumer and business confidence to translate into private sector investment fueling continued economic momentum. We are seeing solid manufacturing and infrastructure growth in the Midwest. Businesses are adding jobs and investing more, and growth in our pipelines has followed.

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,
	2017				2016				2016				2016				2016
Interest income	$	820,360			$	814,858			$	694,346			$	565,658			$	557,251
Interest expense	90,385				79,877				68,956				59,777				54,185
Net interest income	729,975				734,981				625,390				505,881				503,066
Provision for credit losses	67,638				74,906				63,805				24,509				27,582
Net interest income after provision for credit losses	662,337				660,075				561,585				481,372				475,484
Service charges on deposit accounts	83,420				91,577				86,847				75,613				70,262
Cards and payment processing income	47,169				49,113				44,320				39,184				36,447
Mortgage banking income	31,692				37,520				40,603				31,591				18,543
Trust and investment management services	33,869				34,016				28,923				22,497				22,838
Insurance income	15,264				16,486				15,865				15,947				16,225
Brokerage income	15,758				17,014				14,719				14,599				15,502
Capital markets fees	14,200				18,730				14,750				13,037				13,010
Bank owned life insurance income	17,542				17,067				14,452				12,536				13,513
Gain on sale of loans	12,822				24,987				7,506				9,265				5,395
Securities gains (losses)	(8		)		(1,771		)		1,031				656				—
Other income	40,735				29,598				33,399				36,187				30,132
Total noninterest income	312,463				334,337				302,415				271,112				241,867
Personnel costs	382,000				359,755				405,024				298,949				285,397
Outside data processing and other services	87,202				88,695				91,133				63,037				61,878
Equipment	46,700				59,666				40,792				31,805				32,576
Net occupancy	67,700				49,450				41,460				30,704				31,476
Professional services	18,295				23,165				47,075				21,488				13,538
Marketing	13,923				21,478				14,438				14,773				12,268
Deposit and other insurance expense	20,099				15,772				14,940				12,187				11,208
Amortization of intangibles	14,355				14,099				9,046				3,600				3,712
Other expense	57,148				49,417				48,339				47,118				39,027
Total noninterest expense	707,422				681,497				712,247				523,661				491,080
Income before income taxes	267,378				312,915				151,753				228,823				226,271
Provision for income taxes	59,284				73,952				24,749				54,283				54,957
Net income	208,094				238,963				127,004				174,540				171,314
Dividends on preferred shares	18,878				18,865				18,537				19,874				7,998
Net income applicable to common shares	$	189,216			$	220,098			$	108,467			$	154,666			$	163,316
Average common shares—basic	1,086,374				1,085,253				938,578				798,167				795,755
Average common shares—diluted	1,108,617				1,104,358				952,081				810,371				808,349
Net income per common share—basic	$	0.17			$	0.20			$	0.12			$	0.19			$	0.21
Net income per common share—diluted	0.17				0.20				0.11				0.19				0.20
Cash dividends declared per common share	0.08				0.08				0.07				0.07				0.07
Return on average total assets	0.84		%		0.95		%		0.58		%		0.96		%		0.96		%
Return on average common shareholders’ equity	8.2				9.4				5.4				9.6				10.4
Return on average tangible common shareholders’ equity (2)	11.3				12.9				7.0				11.0				11.9
Net interest margin (3)	3.30				3.25				3.18				3.06				3.11
Efficiency ratio (4)	65.7				61.6				75.0				66.1				64.6
Effective tax rate	22.2				23.6				16.3				23.7				24.3
Revenue—FTE
Net interest income	$	729,975			$	734,981			$	625,390			$	505,881			$	503,066
FTE adjustment	12,058				12,560				10,598				10,091				9,159
Net interest income (3)	742,033				747,541				635,988				515,972				512,225
Noninterest income	312,463				334,337				302,415				271,112				241,867
Total revenue (3)	$	1,054,496			$	1,081,878			$	938,403			$	787,084			$	754,092

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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.

Significant Items

Earnings comparisons are 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, are as follows:

•	During the 2017 first quarter, $73 million of noninterest expense and $2 million of noninterest income was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.04 per common share.

•	During the 2016 fourth quarter, $95 million of noninterest expense and a decrease of $1 million of noninterest income was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.06 per common share.

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

2. Litigation reserves. During the 2016 fourth quarter, a $42 million reduction of litigation reserves was recorded as other noninterest expense. This resulted in a positive impact of $0.02 per common share.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected:

 

Table 2 - Significant Items Influencing Earnings Performance Comparison
(dollar amounts in thousands, except per share amounts)
	Three Months Ended
	March 31, 2017								December 31, 2016								March 31, 2016
	Amount				EPS (1)				Amount				EPS (1)				Amount				EPS (1)
Net income	$	208,094							$	238,963							$	171,314
Earnings per share, after-tax					$	0.17							$	0.20							$	0.20
Significant Items—favorable (unfavorable) impact:	Earnings				EPS				Earnings				EPS				Earnings				EPS
Mergers and acquisitions, net expenses	$	(71,145	)						$	(96,142	)						$	(6,406	)
Tax impact	24,901								33,457								2,006
Mergers and acquisitions, after-tax	$	(46,244	)		$	(0.04	)		$	(62,685	)		$	(0.06	)		$	(4,400	)		$	(0.01	)
Litigation reserves	$	—							$	41,587							$	—
Tax impact	—								(14,888		)						—
Litigation reserves, after-tax	$	—			$	—			$	26,699			$	0.02			$	—			$	—

(1)	Based upon the quarterly average outstanding diluted common shares.

Net Interest Income / Average Balance Sheet

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

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Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis
(dollar amounts in millions)
	Average Balances
	Three Months Ended																				Change
	March 31,				December 31,				September 30,				June 30,				March 31,				1Q17 vs. 1Q16
	2017				2016				2016				2016				2016				Amount				Percent
Assets:
Interest-bearing deposits in banks	$	100			$	110			$	95			$	99			$	98			$	2			2	%
Loans held for sale	415				2,507				695				571				433				(18		)		(4	)
Securities:
Available-for-sale and other securities:
Taxable	12,800				13,734				9,785				6,904				6,633				6,167				93
Tax-exempt	3,049				3,136				2,854				2,510				2,358				691				29
Total available-for-sale and other securities	15,849				16,870				12,639				9,414				8,991				6,858				76
Trading account securities	137				139				49				41				40				97				245
Held-to-maturity securities—taxable	7,656				5,432				5,487				5,806				6,054				1,602				26
Total securities	23,643				22,441				18,175				15,261				15,085				8,558				57
Loans and leases: (1)
Commercial:
Commercial and industrial	27,922				27,727				24,957				21,344				20,649				7,273				35
Commercial real estate:
Construction	1,314				1,413				1,132				881				923				391				42
Commercial	6,039				5,805				5,227				4,345				4,283				1,756				41
Commercial real estate	7,353				7,218				6,359				5,226				5,206				2,147				41
Total commercial	35,276				34,945				31,316				26,570				25,855				9,421				36
Consumer:
Automobile	11,063				10,866				11,402				10,146				9,730				1,333				14
Home equity	10,072				10,101				9,260				8,416				8,441				1,631				19
Residential mortgage	7,777				7,690				7,012				6,187				6,018				1,759				29
RV and marine finance	1,874				1,844				915				—				—				N.R.				N.R.
Other consumer	919				959				817				613				574				345				60
Total consumer	31,705				31,460				29,406				25,362				24,763				6,942				28
Total loans and leases	66,981				66,405				60,722				51,932				50,618				16,363				32
Allowance for loan and lease losses	(636		)		(614		)		(623		)		(616		)		(604		)		(32		)		5
Net loans and leases	66,345				65,791				60,099				51,316				50,014				16,331				33
Total earning assets	91,139				91,463				79,687				67,863				66,234				24,905				38
Cash and due from banks	2,011				1,538				1,325				1,001				1,013				998				99
Intangible assets	2,387				2,421				1,547				726				730				1,657				227
All other assets	5,442				5,559				4,962				4,149				4,223				1,219				29
Total assets	$	100,343			$	100,367			$	86,898			$	73,123			$	71,596			$	28,747			40	%
Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	21,730			$	23,250			$	20,033			$	16,507			$	16,334			$	5,396			33	%
Demand deposits—interest-bearing	16,805				15,294				12,362				8,445				7,776				9,029				116
Total demand deposits	38,535				38,544				32,395				24,952				24,110				14,425				60
Money market deposits	18,653				18,618				18,453				19,534				19,682				(1,029		)		(5	)
Savings and other domestic deposits	11,970				12,272				8,889				5,402				5,306				6,664				126
Core certificates of deposit	2,342				2,636				2,285				2,007				2,265				77				3
Total core deposits	71,500				72,070				62,022				51,895				51,363				20,137				39
Other domestic time deposits of $250,000 or more	470				391				382				402				455				15				3
Brokered deposits and negotiable CDs	3,969				4,273				3,904				2,909				2,897				1,072				37
Deposits in foreign offices	—				152				194				208				264				(264		)		—

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Total deposits	75,939				76,886				66,502				55,414				54,979				20,960				38
Short-term borrowings	3,792				2,628				1,306				1,032				1,145				2,647				231
Long-term debt	8,529				8,594				8,488				7,899				7,202				1,327				18
Total interest-bearing liabilities	66,530				64,858				56,263				47,838				46,992				19,538				42
All other liabilities	1,661				1,833				1,608				1,416				1,515				146				10
Shareholders’ equity	10,422				10,426				8,994				7,362				6,755				3,667				54
Total liabilities and shareholders’ equity	$	100,343			$	100,367			$	86,898			$	73,123			$	71,596			$	28,747			40	%

Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)
	Average Yield Rates (2)
	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
Fully-taxable equivalent basis (3)	2017			2016			2016			2016			2016
Assets:
Interest-bearing deposits in banks	1.09	%		0.64	%		0.64	%		0.25	%		0.21	%
Loans held for sale	3.82			2.95			3.53			3.89			3.99
Securities:
Available-for-sale and other securities:
Taxable	2.38			2.43			2.35			2.37			2.39
Tax-exempt	3.79			3.60			3.01			3.38			3.40
Total available-for-sale and other securities	2.65			2.65			2.50			2.64			2.65
Trading account securities	0.11			0.18			0.58			0.98			0.50
Held-to-maturity securities—taxable	2.36			2.43			2.41			2.44			2.43
Total securities	2.54			2.58			2.47			2.56			2.56
Loans and leases: (1)
Commercial:
Commercial and industrial	3.98			3.83			3.68			3.49			3.52
Commercial real estate:
Construction	3.95			3.65			3.76			3.70			3.51
Commercial	3.69			3.54			3.54			3.35			3.59
Commercial real estate	3.74			3.56			3.58			3.41			3.57
Total commercial	3.93			3.78			3.66			3.47			3.53
Consumer:
Automobile	3.55			3.57			3.37			3.15			3.17
Home equity	4.45			4.24			4.21			4.17			4.20
Residential mortgage	3.63			3.58			3.61			3.65			3.69
RV and marine finance	5.63			5.64			5.70			—			—
Other consumer	12.05			10.91			10.93			10.28			10.02
Total consumer	4.23			4.13			3.97			3.79			3.81
Total loans and leases	4.07			3.95			3.81			3.63			3.67
Total earning assets	3.70			3.60			3.52			3.41			3.44
Liabilities:
Deposits:
Demand deposits—noninterest-bearing	—			—			—			—			—
Demand deposits—interest-bearing	0.15			0.11			0.11			0.09			0.09
Total demand deposits	0.07			0.04			0.04			0.03			0.03
Money market deposits	0.26			0.24			0.24			0.24			0.24
Savings and other domestic deposits	0.22			0.25			0.21			0.11			0.13
Core certificates of deposit	0.39			0.29			0.43			0.79			0.82
Total core deposits	0.22			0.20			0.20			0.22			0.23
Other domestic time deposits of $250,000 or more	0.45			0.39			0.40			0.40			0.41
Brokered deposits and negotiable CDs	0.72			0.48			0.44			0.40			0.38

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Deposits in foreign offices	—			0.13			0.13			0.13			0.13
Total deposits	0.26			0.23			0.22			0.23			0.24
Short-term borrowings	0.63			0.36			0.29			0.36			0.32
Long-term debt	2.33			2.19			1.97			1.85			1.68
Total interest-bearing liabilities	0.54			0.48			0.49			0.50			0.46
Net interest rate spread	3.16			3.12			3.03			2.91			2.98
Impact of noninterest-bearing funds on margin	0.14			0.13			0.15			0.15			0.13
Net interest margin	3.30	%		3.25	%		3.18	%		3.06	%		3.11	%

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

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

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

N.R. - Not relevant.

2017 First Quarter versus 2016 First Quarter

FTE net interest income for the 2017 first quarter increased $230 million, or 45%, from the 2016 first quarter. This reflected the benefit from the $24.9 billion, or 38%, increase in average earning assets coupled with a 19 basis point improvement in the FTE net interest margin to 3.30%. The NIM expansion reflected a 26 basis point increase in earning asset yields, including the 16 basis point impact of purchase accounting, and a 1 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 8 basis point increase in funding costs.

Average earning assets for the 2017 first quarter increased $24.9 billion, or 38%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average securities increased $8.6 billion, or 57%, which included $2.8 billion of direct purchase municipal instruments in our commercial banking segment compared to $2.1 billion in the year-ago quarter. Average residential mortgage loans increased $1.8 billion, or 29%, as we continue to see increased demand for residential mortgage loans across our footprint.

Average total deposits for the 2017 first quarter increased $21.0 billion, or 38%, from the year-ago quarter, while average total core deposits increased $20.1 billion, or 39%, primarily reflecting the impact of the FirstMerit acquisition. Average demand deposits increased $14.4 billion, or 60%, comprised of a $10.3 billion, or 67%, increase in average commercial demand deposits and a $4.2 billion, or 47%, increase in average consumer demand deposits. Average short-term borrowings increased $2.6 billion, or 231%, reflecting the maintenance of excess liquidity surrounding the branch conversion. Average long-term debt increased $1.3 billion, or 18%, reflecting the issuance of $3.0 billion and maturity of $1.0 billion of senior debt over the past five quarters.

2017 First Quarter versus 2016 Fourth Quarter

Compared to the 2016 fourth quarter, FTE net interest income decreased $6 million, or 1%. The impact of a $0.3 billion decrease in average earning assets was partially offset by a 5 basis points increase in NIM. The increase in the NIM reflected a 10 basis point increase in earning asset yields and a 1 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 6 basis point increase in funding costs.

Average earning assets decreased $0.3 billion, or less than 1% from the 2016 fourth quarter. Average loans held for sale and other earnings assets decreased $2.1 billion, or 80%, primarily reflecting the $1.5 billion automobile loan securitization and the balance sheet optimization-related loan sales completed during the 2016 fourth quarter. Average securities increased $1.2 billion, or 5%, reflecting the reinvestment of the proceeds from the 2016 fourth quarter automobile loan securitization into securities qualifying as High Quality Liquid Assets for the LCR. Average loans and leases increased $0.6 billion, or 1%, primarily reflecting growth in automobile loans and core middle market and small business C&I lending.

Average total core deposits decreased $0.6 billion, or 1%, primarily reflecting the divestiture of thirteen branches, including $0.6 billion of deposits, in the 2016 fourth quarter. Average demand deposits were flat as a $1.5 billion, or 10%, increase in average interest-bearing demand deposits offset a $1.5 billion, or 7%, decrease in average noninterest-bearing demand deposits. Average total debt increased $1.1 billion, driven by an increase in short-term borrowings of $1.2 billion, or 44%, reflecting the maintenance of excess liquidity surrounding the branch conversion.

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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 (See Credit Quality discussion).

The provision for credit losses was $68 million, up $40 million, or 145%. NCOs increased $31 million to $39 million, primarily as a result of material CRE recoveries in the year-ago quarter. Net charge-offs represented an annualized 0.24% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

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																				1Q17 vs. 1Q16							1Q17 vs. 4Q16
	March 31,				December 31,				September 30,				June 30,				March 31,				Change							Change
	2017				2016				2016				2016				2016				Amount				Percent			Amount				Percent
Service charges on deposit accounts	$	83,420			$	91,577			$	86,847			$	75,613			$	70,262			$	13,158			19	%		$	(8,157	)		(9	)%
Cards and payment processing income	47,169				49,113				44,320				39,184				36,447				10,722				29			(1,944		)		(4	)
Mortgage banking income	31,692				37,520				40,603				31,591				18,543				13,149				71			(5,828		)		(16	)
Trust and investment management services	33,869				34,016				28,923				22,497				22,838				11,031				48			(147		)		—
Insurance income	15,264				16,486				15,865				15,947				16,225				(961		)		(6	)		(1,222		)		(7	)
Brokerage income	15,758				17,014				14,719				14,599				15,502				256				2			(1,256		)		(7	)
Capital markets fees	14,200				18,730				14,750				13,037				13,010				1,190				9			(4,530		)		(24	)
Bank owned life insurance income	17,542				17,067				14,452				12,536				13,513				4,029				30			475				3
Gain on sale of loans	12,822				24,987				7,506				9,265				5,395				7,427				138			(12,165		)		(49	)
Securities gains (losses)	(8		)		(1,771		)		1,031				656				—				(8		)		—			1,763				(100	)
Other income	40,735				29,598				33,399				36,187				30,132				10,603				35			11,137				38
Total noninterest income	$	312,463			$	334,337			$	302,415			$	271,112			$	241,867			$	70,596			29	%		$	(21,874	)		(7	)%

2017 First Quarter versus 2016 First Quarter

Noninterest income for the 2017 first quarter increased $71 million, or 29%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Service charges on deposit accounts increased $13 million, or 19%, reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Of the increase, $8 million was attributable to consumer deposit accounts, and $6 million was attributable to commercial deposit accounts. Mortgage banking income increased $13 million, or 71%, reflecting a 35% increase in mortgage origination volume and an $8 million increase from net mortgage servicing rights hedging-related activities.

2017 First Quarter versus 2016 Fourth Quarter

Compared to the 2016 fourth quarter, total noninterest income decreased $22 million, or 7%. Gain on sale of loans decreased $12 million, or 49%, primarily reflecting the $11 million of gains related to the balance sheet optimization strategy completed in the 2016 fourth quarter. Service charges on deposit accounts decreased $8 million, or 9%, primarily reflecting a $7 million seasonal decline in service charges on consumer accounts. Mortgage banking income decreased $6 million, or 16%, primarily driven by a decline in net MSR activity. These decreases were partially offset by an $11 million, or 38%, increase in other income, primarily reflecting the $8 million unfavorable impact recorded in the prior quarter, related to ineffectiveness of derivatives used to hedge fixed-rate, long-term debt.

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Noninterest Expense

(This section should be read in conjunction with Significant Items 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																				1Q17 vs. 1Q16							1Q17 vs. 4Q16
	March 31,				December 31,				September 30,				June 30,				March 31,				Change							Change
	2017				2016				2016				2016				2016				Amount				Percent			Amount				Percent
Personnel costs	$	382,000			$	359,755			$	405,024			$	298,949			$	285,397			$	96,603			34	%		$	22,245			6	%
Outside data processing and other services	87,202				88,695				91,133				63,037				61,878				25,324				41			(1,493		)		(2	)
Equipment	46,700				59,666				40,792				31,805				32,576				14,124				43			(12,966		)		(22	)
Net occupancy	67,700				49,450				41,460				30,704				31,476				36,224				115			18,250				37
Professional services	18,295				23,165				47,075				21,488				13,538				4,757				35			(4,870		)		(21	)
Marketing	13,923				21,478				14,438				14,773				12,268				1,655				13			(7,555		)		(35	)
Deposit and other insurance expense	20,099				15,772				14,940				12,187				11,208				8,891				79			4,327				27
Amortization of intangibles	14,355				14,099				9,046				3,600				3,712				10,643				287			256				2
Other expense	57,148				49,417				48,339				47,118				39,027				18,121				46			7,731				16
Total noninterest expense	$	707,422			$	681,497			$	712,247			$	523,661			$	491,080			$	216,342			44	%		$	25,925			4	%
Number of employees (average full-time equivalent)	16,331				15,993				14,511				12,363				12,386				3,945				32	%		338				2	%

Impacts of Significant Items:

	Three Months Ended
	March 31,				December 31,				March 31,
(dollar amounts in thousands)	2017				2016				2016
Personnel costs	$	19,555			$	(5,385	)		$	474
Outside data processing and other services	14,475				15,420				363
Equipment	5,763				20,000				—
Net occupancy	23,342				7,146				20
Professional services	4,218				9,141				4,288
Marketing	816				4,340				13
Other expense	5,126				2,742				1,248
Total noninterest expense adjustments	$	73,295			$	53,404			$	6,406

 

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Adjusted Noninterest Expense (See Non-GAAP Financial Measures in the Additional Disclosures section):

Three Months Ended