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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 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 1,090,016,469 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 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 over 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 Second Quarter Results Compared to 2016 Second Quarter
For the quarter, we reported net income of $272 million, or $0.23 per common share, compared with $175 million, or $0.19 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $50 million pre-tax, or $0.03 per common share.
Fully-taxable equivalent net interest income was $757 million, up $241 million, or 47%. The results reflected the benefit from a $23.9 billion, or 35%, increase in average earning assets and a 25 basis point improvement in the net interest margin to 3.31%. Average earning asset growth included a $15.4 billion, or 30%, increase in average loans and leases, and an $8.5 billion, or 56%, increase in average securities, both of which were impacted by the FirstMerit acquisition. The net interest margin expansion reflected a 34 basis point increase in earning asset yields, including an approximate 15 basis point impact of purchase accounting, and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 11 basis point increase in funding costs.
The provision for credit losses was $25 million consistent with the year-ago quarter. NCOs increased $19 million to $36 million, primarily as a result of Consumer charge-offs on the acquired FirstMerit portfolio. NCOs represented an annualized 0.21% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.
Noninterest income was $325 million, up $54 million, or 20%. The increase was primarily a result of the FirstMerit acquisition. In addition, card and payment processing income increased due to higher credit and debit card related income and underlying customer growth. Also, service charges on deposit accounts increased reflecting continued new customer acquisition.
Noninterest expense was $694 million, up $171 million, or 33%, primarily reflecting the impact of the FirstMerit acquisition. Personnel costs increased primarily reflecting an increase in average full-time equivalent employees and an increase in acquisition-related personnel 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 7.41%, down 55 basis points from a year-ago. The CET1 risk-based capital ratio was 9.88% at June 30, 2017, compared to 9.80% a year ago. The regulatory tier 1 risk-based capital ratio was 11.24% compared to 11.37% at June 30, 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 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 our pipelines have remained steady.

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

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Table 1 - Selected Quarterly Income Statement Data (1)
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2017
 
2017
 
2016
 
2016
 
2016
Interest income
$
846,424

 
$
820,360

 
$
814,858

 
$
694,346

 
$
565,658

Interest expense
101,912

 
90,385

 
79,877

 
68,956

 
59,777

Net interest income
744,512

 
729,975

 
734,981

 
625,390

 
505,881

Provision for credit losses
24,978

 
67,638

 
74,906

 
63,805

 
24,509

Net interest income after provision for credit losses
719,534

 
662,337

 
660,075

 
561,585

 
481,372

Service charges on deposit accounts
87,582

 
83,420

 
91,577

 
86,847

 
75,613

Cards and payment processing income
52,485

 
47,169

 
49,113

 
44,320

 
39,184

Mortgage banking income
32,268

 
31,692

 
37,520

 
40,603

 
31,591

Trust and investment management services
32,232

 
33,869

 
34,016

 
28,923

 
22,497

Insurance income
15,843

 
15,264

 
16,486

 
15,865

 
15,947

Brokerage income
16,294

 
15,758

 
17,014

 
14,719

 
14,599

Capital markets fees
16,836

 
14,200

 
18,730

 
14,750

 
13,037

Bank owned life insurance income
15,322

 
17,542

 
17,067

 
14,452

 
12,536

Gain on sale of loans
12,002

 
12,822

 
24,987

 
7,506

 
9,265

Securities gains (losses)
135

 
(8
)
 
(1,771
)
 
1,031

 
656

Other Income
44,219

 
40,735

 
29,598

 
33,399

 
36,187

Total noninterest income
325,218

 
312,463

 
334,337

 
302,415

 
271,112

Personnel costs
391,997

 
382,000

 
359,755

 
405,024

 
298,949

Outside data processing and other services
75,169

 
87,202

 
88,695

 
91,133

 
63,037

Equipment
42,924

 
46,700

 
59,666

 
40,792

 
31,805

Net occupancy
52,613

 
67,700

 
49,450

 
41,460

 
30,704

Professional services
18,190

 
18,295

 
23,165

 
47,075

 
21,488

Marketing
18,843

 
13,923

 
21,478

 
14,438

 
14,773

Deposit and other insurance expense
20,418

 
20,099

 
15,772

 
14,940

 
12,187

Amortization of intangibles
14,242

 
14,355

 
14,099

 
9,046

 
3,600

Other expense
59,968

 
57,148

 
49,417

 
48,339

 
47,118

Total noninterest expense
694,364

 
707,422

 
681,497

 
712,247

 
523,661

Income before income taxes
350,388

 
267,378

 
312,915

 
151,753

 
228,823

Provision for income taxes
78,647

 
59,284

 
73,952

 
24,749

 
54,283

Net income
271,741

 
208,094

 
238,963

 
127,004

 
174,540

Dividends on preferred shares
18,889

 
18,878

 
18,865

 
18,537

 
19,874

Net income applicable to common shares
$
252,852

 
$
189,216

 
$
220,098

 
$
108,467

 
$
154,666

Average common shares—basic
1,088,934

 
1,086,374

 
1,085,253

 
938,578

 
798,167

Average common shares—diluted
1,108,527

 
1,108,617

 
1,104,358

 
952,081

 
810,371

Net income per common share—basic
$
0.23

 
$
0.17

 
$
0.20

 
$
0.12

 
$
0.19

Net income per common share—diluted
0.23

 
0.17

 
0.20

 
0.11

 
0.19

Cash dividends declared per common share
0.08

 
0.08

 
0.08

 
0.07

 
0.07

Return on average total assets
1.09
%
 
0.84
%
 
0.95
%
 
0.58
%
 
0.96
%
Return on average common shareholders’ equity
10.6

 
8.2

 
9.4

 
5.4

 
9.6

Return on average tangible common shareholders’ equity (2)
14.4

 
11.3

 
12.9

 
7.0

 
11.0

Net interest margin (3)
3.31

 
3.30

 
3.25

 
3.18

 
3.06

Efficiency ratio (4)
62.9

 
65.7

 
61.6

 
75.0

 
66.1

Effective tax rate
22.4

 
22.2

 
23.6

 
16.3

 
23.7

Revenue—FTE
 
 
 
 
 
 
 
 
 
Net interest income
$
744,512

 
$
729,975

 
$
734,981

 
$
625,390

 
$
505,881

FTE adjustment
12,069

 
12,058

 
12,560

 
10,598

 
10,091

Net interest income (3)
756,581

 
742,033

 
747,541

 
635,988

 
515,972

Noninterest income
325,218

 
312,463

 
334,337

 
302,415

 
271,112

Total revenue (3)
$
1,081,799

 
$
1,054,496

 
$
1,081,878

 
$
938,403

 
$
787,084



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Table 2 - Selected Year to Date Income Statements (1)
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Interest income
$
1,666,784

 
$
1,122,909

 
$
543,875

 
48
 %
Interest expense
192,297

 
113,962

 
78,335

 
69

Net interest income
1,474,487

 
1,008,947

 
465,540

 
46

Provision for credit losses
92,616

 
52,091

 
40,525

 
78

Net interest income after provision for credit losses
1,381,871

 
956,856

 
425,015

 
44

Service charges on deposit accounts
171,002

 
145,875

 
25,127

 
17

Cards and payment processing income
99,654

 
75,631

 
24,023

 
32

Mortgage banking income
63,960

 
50,134

 
13,826

 
28

Trust and investment management services
66,101

 
45,335

 
20,766

 
46

Insurance income
31,107

 
32,172

 
(1,065
)
 
(3
)
Brokerage income
32,052

 
30,101

 
1,951

 
6

Capital markets fees
31,036

 
26,047

 
4,989

 
19

Bank owned life insurance income
32,864

 
26,049

 
6,815

 
26

Gain on sale of loans
24,824

 
14,660

 
10,164

 
69

Securities gains
127

 
656

 
(529
)
 
(81
)
Other income
84,954

 
66,319

 
18,635

 
28

Total noninterest income
637,681

 
512,979

 
124,702

 
24

Personnel costs
773,997

 
584,346

 
189,651

 
32

Outside data processing and other services
162,371

 
124,915

 
37,456

 
30

Equipment
89,624

 
64,381

 
25,243

 
39

Net occupancy
120,313

 
62,180

 
58,133

 
93

Professional services
36,485

 
35,026

 
1,459

 
4

Marketing
32,766

 
27,041

 
5,725

 
21

Deposit and other insurance expense
40,517

 
23,395

 
17,122

 
73

Amortization of intangibles
28,597

 
7,312

 
21,285

 
291

Other expense
117,116

 
86,145

 
30,971

 
36

Total noninterest expense
1,401,786

 
1,014,741

 
387,045

 
38

Income before income taxes
617,766

 
455,094

 
162,672

 
36

Provision for income taxes
137,931

 
109,240

 
28,691

 
26

Net income
479,835

 
345,854

 
133,981

 
39

Dividends declared on preferred shares
37,767

 
27,872

 
9,895

 
36

Net income applicable to common shares
$
442,068

 
$
317,982

 
$
124,086

 
39
 %
Average common shares—basic
1,087,654

 
796,961

 
290,693

 
36
 %
Average common shares—diluted
1,108,572

 
809,360

 
299,212

 
37

Net income per common share—basic
$
0.41

 
$
0.40

 
$
0.01

 
3

Net income per common share—diluted
0.40

 
0.39

 
0.01

 
3

Cash dividends declared per common share
0.16

 
0.14

 
0.02

 
14

Revenue—FTE
 
 
 
 
 
 
 
Net interest income
$
1,474,487

 
$
1,008,947

 
$
465,540

 
46
 %
FTE adjustment
24,127

 
19,250

 
4,877

 
25

Net interest income (3)
1,498,614

 
1,028,197

 
470,417

 
46

Noninterest income
637,681

 
512,979

 
124,702

 
24

Total revenue (3)
$
2,136,295

 
$
1,541,176

 
$
595,119

 
39
 %
(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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Significant Items
Earnings comparisons are impacted by the Significant Items summarized below:

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 second quarter, $50 million of noninterest expense was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.03 per common share.

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

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
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
Net income
$
271,741

 
 
 
$
208,094

 
 
 
$
174,540

 
 
Earnings per share, after-tax
 
 
$
0.23

 
 
 
$
0.17

 
 
 
$
0.19

 
 
 
 
 
 
 
 
 
 
 
 
Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS (1)
 
Earnings
 
EPS (1)
 
Earnings
 
EPS (1)
 
 
 
 
 
 
 
 
 
 
 
 
Mergers and acquisitions, net expenses
$
(50,243
)
 
 
 
$
(71,145
)
 
 
 
$
(20,789
)
 
 
Tax impact
17,585

 
 
 
24,901

 
 
 
7,213

 
 
Mergers and acquisitions, after-tax
$
(32,658
)
 
$
(0.03
)
 
$
(46,244
)
 
$
(0.04
)
 
$
(13,576
)
 
$
(0.02
)
(1)
Based upon the quarterly average outstanding diluted common shares.

 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
After-tax
 
EPS (1)
 
After-tax
 
EPS (1)
Net income
$
479,835

 
 
 
$
345,854

 
 
Earnings per share, after-tax
 
 
$
0.40

 
 
 
$
0.39

 
 
 
 
 
 
 
 
Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS (1)
 
Earnings
 
EPS (1)
Mergers and acquisitions, net expenses
$
(121,388
)
 
 
 
$
(27,195
)
 
 
Tax impact
42,486

 
 
 
9,219

 
 
Mergers and acquisitions, after-tax
$
(78,902
)
 
$
(0.07
)
 
$
(17,976
)
 
$
(0.03
)
(1)
Based upon the year to date average outstanding diluted common shares.

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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
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances
 
 
 
 
 
Three Months Ended
 
Change
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2Q17 vs. 2Q16
 
2017
 
2017
 
2016
 
2016
 
2016
 
Amount
 
Percent
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
102

 
$
100

 
$
110

 
$
95

 
$
99

 
$
3

 
4
 %
Loans held for sale
525

 
415

 
2,507

 
695

 
571

 
(46
)
 
(8
)
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
13,135

 
12,801

 
13,734

 
9,785

 
6,904

 
6,231

 
90

Tax-exempt
3,104

 
3,049

 
3,136

 
2,854

 
2,510

 
594

 
24

Total available-for-sale and other securities
16,239

 
15,850

 
16,870

 
12,639

 
9,414

 
6,825

 
72

Trading account securities
91

 
137

 
139

 
49

 
41

 
50

 
121

Held-to-maturity securities—taxable
7,427

 
7,656

 
5,432

 
5,487

 
5,806

 
1,621

 
28

Total securities
23,756

 
23,643

 
22,441

 
18,175

 
15,261

 
8,495

 
56

Loans and leases: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
27,992

 
27,922

 
27,727

 
24,957

 
21,344

 
6,648

 
31

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,130

 
1,314

 
1,413

 
1,132

 
881

 
249

 
28

Commercial
5,940

 
6,039

 
5,805

 
5,227

 
4,345

 
1,595

 
37

Commercial real estate
7,070

 
7,353

 
7,218

 
6,359

 
5,226

 
1,844

 
35

Total commercial
35,062

 
35,276

 
34,945

 
31,316

 
26,570

 
8,492

 
32

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,324

 
11,063

 
10,866

 
11,402

 
10,146

 
1,178

 
12

Home equity
9,958

 
10,072

 
10,101

 
9,260

 
8,416

 
1,542

 
18

Residential mortgage
7,979

 
7,777

 
7,690

 
7,012

 
6,187

 
1,792

 
29

RV and marine finance
2,039

 
1,874

 
1,844

 
915

 

 
N.R.

 
N.R.

Other consumer
983

 
919

 
959

 
817

 
613

 
370

 
60

Total consumer
32,283

 
31,705

 
31,460

 
29,406

 
25,362

 
6,921

 
27

Total loans and leases
67,345

 
66,981

 
66,405

 
60,722

 
51,932

 
15,413

 
30

Allowance for loan and lease losses
(672
)
 
(636
)
 
(614
)
 
(623
)
 
(616
)
 
(56
)
 
9

Net loans and leases
66,673

 
66,345

 
65,791

 
60,099

 
51,316

 
15,357

 
30

Total earning assets
91,728

 
91,139

 
91,463

 
79,687

 
67,863

 
23,865

 
35

Cash and due from banks
1,287

 
2,011

 
1,538

 
1,325

 
1,001

 
286

 
29

Intangible assets
2,373

 
2,387

 
2,421

 
1,547

 
726

 
1,647

 
227

All other assets
5,405

 
5,442

 
5,559

 
4,962

 
4,149

 
1,256

 
30

Total assets
$
100,121

 
$
100,343

 
$
100,367

 
$
86,898

 
$
73,123

 
$
26,998

 
37
 %
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
21,599

 
$
21,730

 
$
23,250

 
$
20,033

 
$
16,507

 
$
5,092

 
31
 %
Demand deposits—interest-bearing
17,445

 
16,805

 
15,294

 
12,362

 
8,445

 
9,000

 
107

Total demand deposits
39,044

 
38,535

 
38,544

 
32,395

 
24,952

 
14,092

 
56

Money market deposits
19,212

 
18,653

 
18,618

 
18,453

 
19,534

 
(322
)
 
(2
)
Savings and other domestic deposits
11,889

 
11,970

 
12,272

 
8,889

 
5,402

 
6,487

 
120

Core certificates of deposit
2,146

 
2,342

 
2,636

 
2,285

 
2,007

 
139

 
7

Total core deposits
72,291

 
71,500

 
72,070

 
62,022

 
51,895

 
20,396

 
39

Other domestic time deposits of $250,000 or more
479

 
470

 
391

 
382

 
402

 
77

 
19

Brokered deposits and negotiable CDs
3,783

 
3,969

 
4,273

 
3,904

 
2,909

 
874

 
30

Deposits in foreign offices

 

 
152

 
194

 
208

 
(208
)
 

Total deposits
76,553

 
75,939

 
76,886

 
66,502

 
55,414

 
21,139

 
38

Short-term borrowings
2,687

 
3,792

 
2,628

 
1,306

 
1,032

 
1,655

 
160

Long-term debt
8,730

 
8,529

 
8,594

 
8,488

 
7,899

 
831

 
11

Total interest-bearing liabilities
66,371

 
66,530

 
64,858

 
56,263

 
47,838

 
18,533

 
39

All other liabilities
1,557

 
1,661

 
1,833

 
1,608

 
1,416

 
141

 
10

Shareholders’ equity
10,594

 
10,422

 
10,426

 
8,994

 
7,362

 
3,232

 
44

Total liabilities and shareholders’ equity
$
100,121

 
$
100,343

 
$
100,367

 
$
86,898

 
$
73,123

 
$
26,998

 
37
 %

11

Table of Contents

Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)
 
 
 
 
 
 
 
 
 
 
 
Average Yield Rates (2)
 
Three Months Ended
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
Fully-taxable equivalent basis (3)
2017
 
2017
 
2016
 
2016
 
2016
Assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
1.53
%
 
1.09
%
 
0.64
%
 
0.64
%
 
0.25
%
Loans held for sale
3.73

 
3.82

 
2.95

 
3.53

 
3.89

Securities:
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
Taxable
2.38

 
2.38

 
2.43

 
2.35

 
2.37

Tax-exempt
3.71

 
3.77

 
3.60

 
3.01

 
3.38

Total available-for-sale and other securities
2.64

 
2.65

 
2.65

 
2.50

 
2.64

Trading account securities
0.25

 
0.11

 
0.18

 
0.58

 
0.98

Held-to-maturity securities—taxable
2.38

 
2.36

 
2.43

 
2.41

 
2.44

Total securities
2.55

 
2.54

 
2.58

 
2.47

 
2.56

Loans and leases: (1)
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
4.04

 
3.98

 
3.83

 
3.68

 
3.49

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
4.26

 
3.95

 
3.65

 
3.76

 
3.70

Commercial
3.97

 
3.69

 
3.54

 
3.54

 
3.35

Commercial real estate
4.02

 
3.74

 
3.56

 
3.58

 
3.41

Total commercial
4.04

 
3.93

 
3.78

 
3.66

 
3.47

Consumer:
 
 
 
 
 
 
 
 
 
Automobile
3.55

 
3.55

 
3.57

 
3.37

 
3.15

Home equity
4.61

 
4.45

 
4.24

 
4.21

 
4.17

Residential mortgage
3.66

 
3.63

 
3.58

 
3.61

 
3.65

RV and marine finance
5.57

 
5.63

 
5.64

 
5.70

 

Other consumer
11.47

 
12.05

 
10.91

 
10.93

 
10.28

Total consumer
4.27

 
4.23

 
4.13

 
3.97

 
3.79

Total loans and leases
4.15

 
4.07

 
3.95

 
3.81

 
3.63

Total earning assets
3.75

 
3.70

 
3.60

 
3.52

 
3.41

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing

 

 

 

 

Demand deposits—interest-bearing
0.20

 
0.15

 
0.11

 
0.11

 
0.09

Total demand deposits
0.09

 
0.07

 
0.04

 
0.04

 
0.03

Money market deposits
0.31

 
0.26

 
0.24

 
0.24

 
0.24

Savings and other domestic deposits
0.21

 
0.22

 
0.25

 
0.21

 
0.11

Core certificates of deposit
0.56

 
0.39

 
0.29

 
0.43

 
0.79

Total core deposits
0.26

 
0.22

 
0.20

 
0.20

 
0.22

Other domestic time deposits of $250,000 or more
0.49

 
0.45

 
0.39

 
0.40

 
0.40

Brokered deposits and negotiable CDs
0.95

 
0.72

 
0.48

 
0.44

 
0.40

Deposits in foreign offices

 

 
0.13

 
0.13

 
0.13

Total deposits
0.31

 
0.26

 
0.23

 
0.22

 
0.23

Short-term borrowings
0.78

 
0.63

 
0.36

 
0.29

 
0.36

Long-term debt
2.49

 
2.33

 
2.19

 
1.97

 
1.85

Total interest-bearing liabilities
0.61

 
0.54

 
0.48

 
0.49

 
0.50

Net interest rate spread
3.14

 
3.16

 
3.12

 
3.03

 
2.91

Impact of noninterest-bearing funds on margin
0.17

 
0.14

 
0.13

 
0.15

 
0.15

Net interest margin
3.31
%
 
3.30
%
 
3.25
%
 
3.18
%
 
3.06
%
(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.

12

Table of Contents

2017 Second Quarter versus 2016 Second Quarter
FTE net interest income for the 2017 second quarter increased $241 million, or 47%, from the 2016 second quarter. This reflected the benefit from the $23.9 billion, or 35%, increase in average earning assets coupled with a 25 basis point improvement in the FTE net interest margin to 3.31%. The NIM expansion reflected a 34 basis point increase related to the mix and yield of earning assets and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 11 basis point increase in funding costs. FTE net interest income during the 2017 second quarter included $34 million, or approximately 15 basis points, of purchase accounting impact.
Average earning assets for the 2017 second quarter increased $23.9 billion, or 35%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average earning asset growth included a $15.4 billion, or 30%, increase in average loans and leases and an $8.5 billion, or 56%, increase in average securities. Average securities included $2.9 billion of direct purchase municipal instruments in our commercial banking segment compared to $2.3 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 second quarter increased $21.1 billion, or 38%, from the year-ago quarter, while average total core deposits increased $20.4 billion, or 39%. Average total interest-bearing liabilities increased $18.5 billion, or 39%, from the year-ago quarter. These increases primarily reflect the impact of the FirstMerit acquisition. Average demand deposits increased $14.1 billion, or 56%, comprised of a $9.9 billion, or 62%, increase in average commercial demand deposits and a $4.2 billion, or 46%, increase in average consumer demand deposits. Average long-term borrowings increased $0.8 billion, or 11%, reflecting the issuance of $2.0 billion and maturity of $1.6 billion of senior debt over the past five quarters.
2017 Second Quarter versus 2017 First Quarter
Compared to the 2017 first quarter, FTE net interest income increased $15 million, or 2%. The increase in the NIM reflected a 5 basis point increase in earning asset yields and a 3 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 7 basis point increase in the cost of interest-bearing liabilities. The purchase accounting impact on the net interest margin was approximately 15 basis points in the 2017 second quarter compared to approximately 16 basis points in the prior quarter.
Average earning assets increased $0.6 billion, or less than 1% from the 2017 first quarter. Average loans and leases increased $0.4 billion, or less than 1%, primarily reflecting growth in residential mortgage, automobile, and RV and marine loans partially offset by a decline in average commercial real estate loans. Total commercial lending was impacted by anticipated FirstMerit-related runoff and lower utilization.
Average total core deposits increased $0.8 billion, or 1%, primarily reflecting a $0.6 billion, or 3%, increase in money market deposits and a $0.5 billion, or 1%, increase in average demand deposits. Average total debt decreased $0.9 billion, or 7%, driven by a $1.1 billion, or 29%, decrease in short-term borrowings, reflecting the maintenance of excess liquidity surrounding the branch conversion during the 2017 first quarter.

13

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
Table 5 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
YTD Average Balances
 
YTD Average Rates (2)
 
Six Months Ended June 30,
 
Change
 
Six Months Ended June 30,
Fully-taxable equivalent basis (1)
2017
 
2016
 
Amount
 
Percent
 
2017
 
2016
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
101

 
$
98

 
$
3

 
3
 %
 
1.31
%
 
0.23
%
Loans held for sale
470

 
502

 
(32
)
 
(6
)
 
3.76

 
3.93

Securities:
 
 
 
 


 


 
 
 
 
Available-for-sale and other securities:
 
 
 
 


 


 
 
 
 
Taxable
12,969

 
6,768

 
6,201

 
92

 
2.38

 
2.38

Tax-exempt
3,076

 
2,434

 
642

 
26

 
3.74

 
3.39

Total available-for-sale and other securities
16,045

 
9,202

 
6,843

 
74

 
2.64

 
2.65

Trading account securities
114

 
40

 
74

 
185

 
0.17

 
0.75

Held-to-maturity securities—taxable
7,541

 
5,930

 
1,611

 
27

 
2.37

 
2.44

Total securities
23,700

 
15,172

 
8,528

 
56

 
2.55

 
2.56

Loans and leases: (3)
 
 
 
 


 


 
 
 
 
Commercial:
 
 
 
 


 


 
 
 
 
Commercial and industrial
27,957

 
20,996

 
6,961

 
33

 
4.01

 
3.51

Commercial real estate:
 
 
 
 


 


 
 
 
 
Construction
1,221

 
902

 
319

 
35

 
4.09

 
3.60

Commercial
5,990

 
4,314

 
1,676

 
39

 
3.83

 
3.47

Commercial real estate
7,211

 
5,216

 
1,995

 
38