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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.



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:
 
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
)
 


10

Table of Contents

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


11

Table of Contents

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.
 
 
 
 
 
 
 
 
 
 
 
 
 

12

Table of Contents

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.

13

Table of Contents

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

 

14

Table of Contents

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