Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED June 30, 2015

Commission File Number 1-34073

Huntington Bancshares Incorporated

 

Maryland    31-0724920
(State or other jurisdiction of
incorporation or organization)
   (I.R.S. Employer
Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.      x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ¨   Yes     x   No

There were 803,065,757 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 2015.


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

     66   

Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014

     66   

Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2015 and 2014

     67   

Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2015 and 2014

     68   

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2015 and 2014

     69   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

     70   

Notes to Unaudited Condensed Consolidated Financial Statements

     72   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     6   

Executive Overview

     7   

Discussion of Results of Operations

     9   

Risk Management and Capital:

     24   

Credit Risk

     25   

Market Risk

     38   

Liquidity Risk

     39   

Operational Risk

     44   

Compliance Risk

     46   

Capital

     46   

Fair Value

     50   

Business Segment Discussion

     51   

Additional Disclosures

     64   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     146   

Item 4. Controls and Procedures

     146   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     146   

Item 1A. Risk Factors

     146   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     147   

Item 5. Other Information

  

Item 6. Exhibits

     147   
Signatures      149   

 

2


Table of Contents

Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

 

ABL    Asset Based Lending
ACL    Allowance for Credit Losses
AFCRE    Automobile Finance and Commercial Real Estate
AFS    Available-for-Sale
ALCO    Asset-Liability Management Committee
ALLL    Allowance for Loan and Lease Losses
ARM    Adjustable Rate Mortgage
ASC    Accounting Standards Codification
ASU    Accounting Standards Update
ATM    Automated Teller Machine
AULC    Allowance for Unfunded Loan Commitments
Basel III    Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
C&I    Commercial and Industrial
Camco Financial    Camco Financial Corp.
CCAR    Comprehensive Capital Analysis and Review
CDO    Collateralized Debt Obligations
CDs    Certificate of Deposit
CET1    Common equity tier 1 on a transitional Basel III basis
CFPB    Bureau of Consumer Financial Protection
CFTC    Commodity Futures Trading Commission
CMO    Collateralized Mortgage Obligations
CRE    Commercial Real Estate
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
DTA/DTL    Deferred Tax Asset/Deferred Tax Liability
EFT    Electronic Fund Transfer
EPS    Earnings Per Share
EVE    Economic Value of Equity
FASB    Financial Accounting Standards Board
Fannie Mae    (see FNMA)
FDIC    Federal Deposit Insurance Corporation
FDICIA    Federal Deposit Insurance Corporation Improvement Act of 1991
FHA    Federal Housing Administration
FHLB    Federal Home Loan Bank
FHLMC    Federal Home Loan Mortgage Corporation
FICO    Fair Isaac Corporation
FNMA    Federal National Mortgage Association
FRB    Federal Reserve Bank
Freddie Mac    (see FHLMC)
FTE    Fully-Taxable Equivalent
FTP    Funds Transfer Pricing
GAAP    Generally Accepted Accounting Principles in the United States of America
GNMA    Government National Mortgage Association, or Ginnie Mae
HAMP    Home Affordable Modification Program

 

3


Table of Contents
HARP    Home Affordable Refinance Program
HIP    Huntington Investment and Tax Savings Plan
HQLA    High Quality Liquid Asset
HTM    Held-to-Maturity
HTF    Huntington Technology Finance (formerly Macquarie)
IRS    Internal Revenue Service
LCR    Liquidity Coverage Ratio
LIBOR    London Interbank Offered Rate
LGD    Loss-Given-Default
LIHTC    Low Income Housing Tax Credit
LTV    Loan to Value
Macquarie    Macquarie Equipment Finance, Inc. (U.S. operations)
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
NCO    Net Charge-off
NIM    Net Interest Margin
NPA    Nonperforming Asset
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 15), troubled debt restructured loans (Table 16), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
RBHPCG    Regional Banking and The Huntington Private Client Group
RCSA    Risk and Control Self-Assessments
REIT    Real Estate Investment Trust
ROC    Risk Oversight Committee
RWA    Risk-Weighted Assets
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
SRIP    Supplemental Retirement Income Plan
SSFA    Simplified Supervisory Formula Approach
TCE    Tangible Common Equity
TDR    Troubled Debt Restructured Loan

 

4


Table of Contents
U.S. Treasury    U.S. Department of the Treasury
UCS    Uniform Classification System
UDAP    Unfair or Deceptive Acts or Practices
UPB    Unpaid Principal Balance
USDA    U.S. Department of Agriculture
VIE    Variable Interest Entity
XBRL    eXtensible Business Reporting Language

 

5


Table of Contents

PART I. FINANCIAL INFORMATION

When we refer to “we”, “our”, and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 149 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 735 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. 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 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2014 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.

Our discussion is divided into key segments:

 

   

Executive Overview —Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters.

 

   

Discussion of Results of Operations —Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.

 

   

Risk Management and Capital —Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.

 

   

Business Segment Discussion —Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.

 

   

Additional Disclosures —Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, and recent accounting pronouncements and developments.

A reading of each section is important to understand fully the nature of our financial performance and prospects.

 

6


Table of Contents

EXECUTIVE OVERVIEW

Summary of 2015 Second Quarter Results Compared to 2014 Second Quarter

For the quarter, we reported net income of $196.2 million, or $0.23 per common share, compared with $164.6 million, or $0.19 per common share, in the year-ago quarter ( see Table 1 ).

Fully-taxable equivalent net interest income was $498.6 million, up $32.0 million, or 7%. The results reflected the benefit from a $5.5 billion, or 10%, increase in average earning assets, partially offset by an 8 basis point reduction in the net interest margin to 3.20%. Average earning asset growth included a $2.9 billion, or 6%, increase in average loans and leases, a $1.6 billion, or 14%, increase in average securities, and a $1.0 billion increase in average loans held-for-sale. The NIM contraction reflected an 8 basis point decrease related to the mix and yield of earning assets and a 2 basis point increase in funding costs, partially offset by a 2 basis point increase in the benefit from noninterest-bearing funds. While not affecting average balances, $0.8 billion of bank-level senior debt was issued at the end of the 2015 second quarter.

The provision for credit losses was $20.4 million, down $9.0 million, or 31%. NCOs were $25.4 million, down $3.3 million, or 11%. NCOs represented an annualized 0.21% of average loans and leases in the current quarter down from 0.25%. We remain pleased with the net charge-off performance across the entire portfolio. Consumer credit metrics continue to show an improving trend, while the commercial portfolios continue to experience some quarter-to-quarter volatility.

Noninterest income was $281.8 million, up $31.7 million, or 13%. The increase primarily reflected an increase in mortgage banking income of $15.8 million, or 70%, including an increase in origination and secondary marketing revenues, reflecting a higher gain on sale margin, and a net benefit from MSR hedging activities. In addition, other noninterest income increased $8.6 million, or 24%, primarily reflecting equipment operating lease income related to Macquarie Equipment Finance, which we have re-branded Huntington Technology Finance (HTF). Also, gain on sale of loans increased $8.5 million, or 218%, including the $5.3 million gain from the $0.8 billion automobile loan securitization and sale completed in the 2015 second quarter.

Noninterest expense was $491.8 million, up $33.1 million, or 7%. The increase primarily reflected an increase in personnel costs of $21.5 million, or 8%, reflecting the May implementation of annual merit increases, the addition of HTF employees, and an increase in benefits expense. In addition, other noninterest expense increased $7.8 million, or 23%, primarily reflecting operating lease expense related to HTF.

The tangible common equity to tangible assets ratio was 7.91% at June 30, 2015, down 47 basis points. On a Basel III transitional basis, the regulatory common equity tier 1 (CET1) risk-based capital ratio was 9.65% at June 30, 2015, and the regulatory tier 1 risk-based capital ratio was 10.41%. On a Basel I basis, the tier 1 common risk-based capital ratio was 10.26% at June 30, 2014, and the regulatory tier 1 risk-based capital ratio was 11.56%. All capital ratios were impacted by the repurchase of 22.8 million common shares over the last four 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 relationships across all business segments, (4) continue to strengthen risk management and reduce volatility, and (5) maintain strong capital and liquidity positions.

We reported good quarterly earnings that are increasingly being driven by our differentiated strategy and disciplined execution. Total revenue increased 9% year-over-year with net interest income and fee income contributing meaningfully to revenue performance. We received an immediate benefit to our earnings from HTF, while robust mortgage lending volume drove growth in mortgage banking income. Our capital markets and treasury management businesses, among others, also produced strong results.

The success we are seeing on the revenue front provides us the important opportunity to invest further in our business, though we continue to pace these investments to ensure attainment of full-year positive operating leverage. We also remain pleased with the credit performance of our portfolio.

Economy

Our regional economy has experienced strong growth, generally in line with or exceeding the national average. Economic and employment growth in some of our large metro areas has been well above the national average. Resulting in part from cyclically high vehicle sales and production, economic growth has been especially strong in Michigan and Indiana. Ohio’s diverse economy should benefit from a strong services sector and rising domestic demand for automobiles and other Ohio produced products. The diverse economies of Pennsylvania and Kentucky are fundamentally strong and expected to continue solid growth into next year.

 

7


Table of Contents

Low energy prices are generally a net benefit to the large manufacturing economies of Michigan, Ohio and Indiana, as much of the manufacturing in these areas has high petroleum inputs. However, low energy prices have been more challenging for high energy production areas. These areas are generally concentrated in localities in Eastern Ohio, Western Pennsylvania and especially in West Virginia where low coal prices have had a relatively large macroeconomic impact.

Home purchase prices are rising in our footprint states and the nation. In addition, office vacancy rates in our largest MSAs continue to improve. Further, industrial vacancy rates in most of our largest footprint MSAs have been below the national average, reflecting generally healthy industrial real estate markets.

Legislative and Regulatory

Regulatory reforms continue to be adopted, including the 2015 first quarter implementation of the Basel III regulatory capital requirements.

Basel III Regulatory Capital Requirements —In 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations, which were effective for us beginning January 1, 2015. The final rules establish an integrated regulatory capital framework and implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Consistent with the international Basel framework, the final rule includes a new regulatory minimum ratio of common equity tier 1 capital to risk-weighted assets. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4%. The Basel III capital rules establish two methodologies for calculating risk-weighted assets, the advanced and standardized approaches. We are subject to the standardized approach for calculating risk-weighted assets. The implementation of the Basel III capital requirements is transitional and phases-in through the end of 2018.

Conforming Covered Activities to Implement the Volcker Rule —On December 10, 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, and established July 21, 2015, as the end of the conformance period. The Volcker Rule prohibits an insured depository institution and any company that controls an insured depository institution (such as a bank holding company), and any of their subsidiaries and affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading. Because the Company has over $50 billion in assets, it is subject to Volcker enhanced compliance requirements. As such the company has completed Volcker Rule due diligence, built its compliance program, and implemented training and on-going reporting requirements. Huntington believes it has achieved required conformance on July 21, 2015 and will deliver the required attestation on or before March 31, 2016.

Expectations – 2015

We are bullish about the Midwest economy creating increasing opportunities for us with both our consumer and business customers. We saw momentum build across our businesses as loan and deposit growth accelerated in the back half of the quarter and our pipelines grew. We will continue to grow our loan portfolio prudently while remaining aligned with our aggregate moderate-to-low risk appetite. We also will deliver full-year positive operating leverage as we balance investment in the businesses for the long term, including digital technology, data analytics, and in-store branches, with the near-term revenue outlook.

The commitment to positive operating leverage for full-year 2015, excluding Significant Items and net MSR activity, is both inclusive and exclusive of the impact of HTF. We continue to expect noninterest expense growth of 2-4% for the year, excluding Significant Items and the recurring expense related to HTF. On a reported basis, we expect quarterly noninterest expense will remain near the 2015 second quarter level for the remainder of 2015.

Overall, asset quality metrics are expected to remain near current levels across the portfolio. Moderate quarterly volatility is expected given the absolute low level of problem assets and credit costs. We anticipate NCOs will remain within or below our long-term normalized range of 35 to 55 basis points.

The effective tax rate for the remainder of 2015 is expected to be in the range of 24% to 27%.

 

8


Table of Contents

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.”

Table 1—Selected Quarterly Income Statement Data (1)

 

     2015     2014  

(dollar amounts in thousands, except per share amounts)

   Second     First     Fourth     Third     Second  

Interest income

   $ 529,795      $ 502,096      $ 507,625      $ 501,060      $ 495,322   

Interest expense

     39,109        34,411        34,373        34,725        35,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     490,686        467,685        473,252        466,335        460,048   

Provision for credit losses

     20,419        20,591        2,494        24,480        29,385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     470,267        447,094        470,758        441,855        430,663   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     70,118        62,220        67,408        69,118        72,633   

Trust services

     26,550        29,039        28,781        28,045        29,581   

Electronic banking

     30,259        27,398        27,993        27,275        26,491   

Mortgage banking income

     38,518        22,961        14,030        25,051        22,717   

Brokerage income

     15,184        15,500        16,050        17,155        17,905   

Insurance income

     17,637        15,895        16,252        16,729        15,996   

Bank owned life insurance income

     13,215        13,025        14,988        14,888        13,865   

Capital markets fees

     13,192        13,905        13,791        10,246        10,500   

Gain on sale of loans

     12,453        4,589        5,408        8,199        3,914   

Securities gains (losses)

     82        —          (104     198        490   

Other income

     44,565        27,091        28,681        30,445        35,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     281,773        231,623        233,278        247,349        250,067   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     282,135        264,916        263,289        275,409        260,600   

Outside data processing and other services

     58,508        50,535        53,685        53,073        54,338   

Net occupancy

     28,861        31,020        31,565        34,405        28,673   

Equipment

     31,694        30,249        31,981        30,183        28,749   

Professional services

     12,593        12,727        15,665        13,763        17,896   

Marketing

     15,024        12,975        12,466        12,576        14,832   

Deposit and other insurance expense

     11,787        10,167        13,099        11,628        10,599   

Amortization of intangibles

     9,960        10,206        10,653        9,813        9,520   

Other expense

     41,215        36,062        50,868        39,468        33,429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     491,777        458,857        483,271        480,318        458,636   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     260,263        219,860        220,765        208,886        222,094   

Provision for income taxes

     64,057        54,006        57,151        53,870        57,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 196,206      $ 165,854      $ 163,614      $ 155,016      $ 164,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,968        7,965        7,963        7,964        7,963   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 188,238      $ 157,889      $ 155,651      $ 147,052      $ 156,656   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     806,891        809,778        811,967        816,497        821,546   

Average common shares—diluted

     820,238        823,809        825,338        829,623        834,687   

Net income per common share—basic

   $ 0.23      $ 0.19      $ 0.19      $ 0.18      $ 0.19   

Net income per common share—diluted

     0.23        0.19        0.19        0.18        0.19   

Cash dividends declared per common share

     0.06        0.06        0.06        0.05        0.05   

Return on average total assets

     1.16     1.02     1.00     0.97     1.07

Return on average common shareholders’ equity

     12.3        10.6        10.3        9.9        10.8   

Return on average tangible common shareholders’ equity (2)

     14.4        12.2        11.9        11.4        12.4   

Net interest margin (3)

     3.20        3.15        3.18        3.20        3.28   

Efficiency ratio (4)

     61.7        63.5        66.2        65.3        62.7   

Effective tax rate

     24.6        24.6        25.9        25.8        25.9   

Revenue—FTE

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 490,686      $ 467,685      $ 473,252      $ 466,335      $ 460,048   

FTE adjustment

     7,962        7,560        7,522        7,506        6,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     498,648        475,245        480,774        473,841        466,685   

Noninterest income

     281,773        231,623        233,278        247,349        250,067   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 780,421      $ 706,868      $ 714,052      $ 721,190      $ 716,752   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents
(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.

 

10


Table of Contents

Table 2—Selected Year to Date Income Statement Data (1)

 

     Six Months Ended June 30,      Change  

(dollar amounts in thousands, except per share amounts)

   2015      2014      Amount     Percent  

Interest income

   $ 1,031,891       $ 967,777       $ 64,114        7

Interest expense

     73,520         70,223         3,297        5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     958,371         897,554         60,817        7   

Provision for credit losses

     41,010         54,015         (13,005     (24
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for credit losses

     917,361         843,539         73,822        9   
  

 

 

    

 

 

    

 

 

   

 

 

 

Service charges on deposit accounts

     132,338         137,215         (4,877     (4

Trust services

     55,589         59,146         (3,557     (6

Electronic banking

     57,657         50,133         7,524        15   

Mortgage banking income

     61,479         45,807         15,672        34   

Brokerage income

     30,684         35,072         (4,388     (13

Insurance income

     33,532         32,492         1,040        3   

Bank owned life insurance income

     26,240         27,172         (932     (3

Capital markets fees

     27,097         19,694         7,403        38   

Gain on sale of loans

     17,042         7,484         9,558        128   

Securities gains (losses)

     82         17,460         (17,378     (100

Other income

     71,656         66,877         4,779        7   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

     513,396         498,552         14,844        3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Personnel costs

     547,051         510,077         36,974        7   

Outside data processing and other services

     109,043         105,828         3,215        3   

Net occupancy

     59,881         62,106         (2,225     (4

Equipment

     61,943         57,499         4,444        8   

Professional services

     25,320         30,127         (4,807     (16

Marketing

     27,999         25,518         2,481        10   

Deposit and other insurance expense

     21,954         24,317         (2,363     (10

Amortization of intangibles

     20,166         18,811         1,355        7   

Other expense

     77,277         84,474         (7,197     (9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense

     950,634         918,757         31,877        3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     480,123         423,334         56,789        13   

Provision for income taxes

     118,063         109,572         8,491        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 362,060       $ 313,762       $ 48,298        15
  

 

 

    

 

 

    

 

 

   

 

 

 

Dividends declared on preferred shares

     15,933         15,927         6        —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income applicable to common shares

   $ 346,127       $ 297,835       $ 48,292        16
  

 

 

    

 

 

    

 

 

   

 

 

 

Average common shares—basic

     808,335         825,603         (17,268     (2 )% 

Average common shares—diluted

     822,023         838,546         (16,523     (2

Per common share

          

Net income per common share—basic

   $ 0.43       $ 0.36       $ 0.07        19

Net income per common share—diluted

     0.42         0.36         0.06        17   

Cash dividends declared

     0.12         0.10         0.02        20   

Revenue—FTE

          

Net interest income

   $ 958,371       $ 897,554       $ 60,817        7

FTE adjustment

     15,522         12,522         3,000        24   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income (2)

     973,893         910,076         63,817        7   

Noninterest income

     513,396         498,552         14,844        3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue (2)

   $ 1,487,289       $ 1,408,628       $ 78,661        6
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1)  

Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

(2)  

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

 

11


Table of Contents

Significant Items

Definition of Significant Items

From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and / or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the Company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.

We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.

Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

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

 

   

During the 2014 second quarter, $0.8 million of noninterest expense was recorded related to the acquisition of 24 Bank of America branches.

 

   

During the 2014 first quarter, $12.6 million of noninterest expense and $0.8 million of noninterest income was recorded related to the acquisition of Camco Financial. This net $11.8 million resulted in a negative impact of $0.01 per common share.

 

2. Litigation Reserve. During the 2014 first quarter, $9.0 million of net additions to litigation reserves were recorded as other noninterest expense. This resulted in a negative impact of $0.01 per common share.

 

12


Table of Contents

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:

Table 3—Significant Items Influencing Earnings Performance Comparison

 

     Three Months Ended  
     June 30, 2015 (4)      March 31, 2015 (4)      June 30, 2014  

(dollar amounts in thousands, except per share amounts)

   After-tax      EPS (2)(3)      After-tax      EPS (2)(3)      After-tax     EPS (2)(3)  

Net income

   $ 196,206          $ 165,854          $ 164,619     

Earnings per share, after-tax

      $ 0.23          $ 0.19         $ 0.19   

Significant Items—favorable (unfavorable) impact:

   Earnings (1)      EPS (2)(3)      Earnings (1)      EPS (2)(3)      Earnings (1)     EPS (2)(3)  

Mergers and acquisitions, net

   $ —         $ —         $ —         $ —         $ (775   $ —     

 

(1)

Pretax.

(2)

Based on average outstanding diluted common shares.

(3)

After-tax.

(4)  

The 2015 first and second quarter included $3.4 million and $1.5 million, respectively, of merger-related expense that was not a Significant Item for the first six-month period of 2015, but merger-related expense is expected to be a Significant Item for the 2015 full year.

 

     Six Months Ended  
     June 30, 2015 (4)      June 30, 2014  

(dollar amounts in thousands)

   After-tax      EPS (2)(3)      After-tax     EPS (2)(3)  

Net income

   $ 362,060          $ 313,762     

Earnings per share, after-tax

      $ 0.42         $ 0.36   

Significant Items—favorable (unfavorable) impact:

   Earnings (1)      EPS (2)(3)      Earnings (1)     EPS (2)(3)  

Merger and acquisition, net

   $ —         $ —         $ (12,598   $ (0.01

Net Additions to Litigation Reserve

     —           —           (9,000     (0.01

 

(1)

Pretax unless otherwise noted.

(2)

Based on average outstanding diluted common shares.

(3)

After-tax.

(4)

The 2015 first and second quarter included $3.4 million and $1.5 million, respectively, of merger-related expense that was not a Significant Item for the first six-month period of 2015, but merger-related expense is expected to be a Significant Item for the 2015 full year.

 

13


Table of Contents

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 Quarterly Average Balance Sheets

 

     Average Balances     Change  
     2015     2014     2Q15 vs. 2Q14  

(dollar amounts in millions)

   Second     First     Fourth     Third     Second     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 89      $ 94      $ 85      $ 82      $ 91      $ (2     (2 )% 

Loans held for sale

     1,272        381        374        351        288        984        342   

Securities:

              

Available-for-sale and other securities:

              

Taxable

     7,916        7,664        7,291        6,935        6,662        1,254        19   

Tax-exempt

     2,028        1,874        1,684        1,620        1,290        738        57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     9,944        9,538        8,975        8,555        7,952        1,992        25   

Trading account securities

     41        53        49        50        45        (4     (9

Held-to-maturity securities—taxable

     3,324        3,347        3,435        3,556        3,677        (353     (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     13,309        12,938        12,459        12,161        11,674        1,635        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     19,819        19,116        18,880        18,581        18,262        1,557        9   

Commercial real estate:

              

Construction

     970        887        822        775        702        268        38   

Commercial

     4,214        4,275        4,262        4,188        4,345        (131     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,184        5,162        5,084        4,963        5,047        137        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     25,003        24,278        23,964        23,544        23,309        1,694        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     8,083        8,783        8,512        8,012        7,349        734        10   

Home equity

     8,503        8,484        8,452        8,412        8,376        127        2   

Residential mortgage

     5,859        5,810        5,751        5,747        5,608        251        4   

Other consumer

     451        425        413        398        382        69        18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     22,896        23,502        23,128        22,569        21,715        1,181        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     47,899        47,780        47,092        46,113        45,024        2,875        6   

Allowance for loan and lease losses

     (608     (612     (631     (633     (642     34        (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     47,291        47,168        46,461        45,480        44,382        2,909        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     62,569        61,193        60,010        58,707        57,077        5,492        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     926        935        929        887        872        54        6   

Intangible assets

     745        593        602        583        591        154        26   

All other assets

     4,251        4,142        4,022        3,929        3,932        319        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 67,883      $ 66,251      $ 64,932      $ 63,473      $ 61,830      $ 6,053        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 15,893      $ 15,253      $ 15,179      $ 14,090      $ 13,466      $ 2,427        18

Demand deposits—interest-bearing

     6,584        6,173        5,948        5,913        5,945        639        11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     22,477        21,426        21,127        20,003        19,411        3,066        16   

Money market deposits

     18,803        19,368        18,401        17,929        17,680        1,123        6   

Savings and other domestic deposits

     5,273        5,169        5,052        5,020        5,086        187        4   

Core certificates of deposit

     2,639        2,814        3,058        3,167        3,434        (795     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     49,192        48,777        47,638        46,119        45,611        3,581        8   

Other domestic time deposits of $250,000 or more

     184        195        201        223        262        (78     (30

Brokered deposits and negotiable CDs

     2,701        2,600        2,434        2,262        2,070        631        30   

Deposits in foreign offices

     562        557        479        374        315        247        78   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     52,639        52,129        50,752        48,978        48,258        4,381        9   

Short-term borrowings

     2,153        1,882        2,683        3,193        2,788        (635     (23

Long-term debt

     5,144        4,374        3,956        3,967        3,523        1,621        46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     44,043        43,132        42,212        42,048        41,103        2,940        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,430        1,450        1,167        1,043        1,033        397        38   

Shareholders’ equity

     6,517        6,416        6,374        6,292        6,228        289        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 67,883      $ 66,251      $ 64,932      $ 63,473      $ 61,830      $ 6,053        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

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

 

14


Table of Contents

Table 5—Consolidated Quarterly Net Interest Margin Analysis

 

     Average Yield Rates (2)  
     2015     2014  

Fully-taxable equivalent basis (1)

   Second     First     Fourth     Third     Second  

Assets:

          

Interest-bearing deposits in banks

     0.08     0.18     0.23     0.19     0.04

Loans held for sale

     3.32        3.69        3.82        3.98        4.27   

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.60        2.50        2.61        2.48        2.52   

Tax-exempt

     3.13        3.05        3.26        3.02        3.15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.71        2.61        2.73        2.59        2.63   

Trading account securities

     1.00        1.17        1.05        0.85        0.70   

Held-to-maturity securities—taxable

     2.50        2.47        2.45        2.45        2.46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.65        2.57        2.65        2.54        2.57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.61        3.33        3.35        3.45        3.49   

Commercial real estate:

          

Construction

     3.60        3.81        4.30        4.38        4.29   

Commercial

     3.41        3.57        3.47        3.60        4.16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     3.45        3.62        3.60        3.72        4.17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.58        3.39        3.40        3.51        3.64   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.20        3.24        3.33        3.41        3.47   

Home equity

     3.97        4.03        4.05        4.07        4.12   

Residential mortgage

     3.72        3.75        3.84        3.78        3.77   

Other consumer

     8.45        8.20        7.68        7.31        7.34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     3.73        3.74        3.80        3.82        3.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.65        3.56        3.60        3.66        3.75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.45     3.38     3.41     3.44     3.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Deposits:

          

Demand deposits—noninterest-bearing

     —       —       —       —       —  

Demand deposits—interest-bearing

     0.06        0.05        0.04        0.04        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.02        0.01        0.01        0.01        0.01   

Money market deposits

     0.22        0.21        0.22        0.23        0.24   

Savings and other domestic deposits

     0.14        0.15        0.16        0.16        0.17   

Core certificates of deposit

     0.78        0.76        0.75        0.74        0.81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.22        0.22        0.23        0.23        0.25   

Other domestic time deposits of $250,000 or more

     0.44        0.42        0.43        0.44        0.43   

Brokered deposits and negotiable CDs

     0.17        0.17        0.18        0.20        0.24   

Deposits in foreign offices

     0.13        0.13        0.13        0.13        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.22        0.22        0.23        0.23        0.25   

Short-term borrowings

     0.14        0.12        0.12        0.11        0.10   

Long-term debt

     1.44        1.31        1.35        1.35        1.44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.36     0.32     0.32     0.33     0.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.09     3.06     3.09     3.11     3.19

Impact of noninterest-bearing funds on margin

     0.11        0.09        0.09        0.09        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.20     3.15     3.18     3.20     3.28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

FTE yields are calculated assuming a 35% tax rate.

(2)

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

(3)

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

 

15


Table of Contents

2015 Second Quarter versus 2014 Second Quarter

Fully-taxable equivalent net interest income increased $32.0 million, or 7%, from the 2014 second quarter. This reflected the benefit from the $5.5 billion, or 10%, increase in average earning assets partially offset by an 8 basis point reduction in the fully-taxable equivalent net interest margin to 3.20%. Average earning asset growth included a $2.9 billion, or 6%, increase in average loans and leases, a $1.6 billion, or 14%, increase in average securities, and a $1.0 billion increase in average loans held-for-sale. The NIM contraction reflected an 8 basis point decrease related to the mix and yield of earning assets and 2 basis point increase in funding costs, partially offset by the 2 basis point increase in the benefit from noninterest-bearing funds.

Average earning assets increased $5.5 billion, or 10%, from the year-ago quarter, driven by:

 

   

$1.6 billion, or 9%, increase in average C&I loans and leases, primarily reflecting the $0.8 billion of equipment finance leases acquired in the HTF transaction as well as growth in the international vertical and corporate banking.

 

   

$1.6 billion, or 14%, increase in average securities, reflecting an increase of $1.8 billion of Liquidity Coverage Ratio (LCR) Level 1 qualified securities. The 2015 second quarter’s average balance also included $1.7 billion of direct purchase municipal instruments originated by our Commercial segment, up $0.8 billion from the year-ago quarter.

 

   

$1.0 billion increase in average loans held-for-sale primarily related to automobile loans that were subsequently securitized and sold late in the quarter.

 

   

$0.7 billion, or 10%, increase in average Automobile loans, despite the impact of the previously mentioned automobile loan securitization. The 2015 second quarter represented the sixth consecutive quarter of greater than $1.0 billion in automobile loan originations.

Average total deposits increased $4.4 billion, or 9%, from the year-ago quarter, including a $3.6 billion, or 8%, increase in average total core deposits. The growth in average total core deposits more than fully funded the year-over-year increase in average total loans and leases. The increase in total deposits included $0.7 billion of deposits acquired in the Bank of America branch acquisition. Average total interest-bearing liabilities increased $2.9 billion, or 7%, from the year-ago quarter. Year-over-year changes in total liabilities reflected:

 

   

$2.4 billion, or 18%, increase in noninterest-bearing deposits, reflecting a $2.1 billion, or 19%, increase in commercial noninterest bearing deposits and a $0.4 billion, or 15%, increase in consumer noninterest bearing deposits.

 

   

$1.1 billion, or 6%, increase in money market deposits, reflecting continued banker focus across all segments on obtaining our customers’ full deposit relationship.

 

   

$1.0 billion, or 16%, increase in short-and long-term borrowings, primarily reflecting a cost-effective method of funding LCR-related securities growth. The increase reflected the issuance of $1.0 billion and $0.8 billion of bank-level senior debt during the 2015 first quarter and 2014 second quarter, respectively, as well as $0.5 billion of debt assumed in the HTF acquisition, partially offset by a $0.6 billion reduction in short-term borrowings. While not affecting average balances, $0.8 billion of bank-level senior debt was issued in late June 2015.

 

   

$0.6 billion, or 30%, increase in brokered deposits and negotiable CDs, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds.

Partially offset by:

 

   

$0.8 billion, or 23%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to low-and no-cost demand deposits and money market deposits.

2015 Second Quarter versus 2015 First Quarter

Compared to the 2015 first quarter, FTE net interest income increased $23.4 million, or 5%. Average earning assets increased $1.4 billion, or 2%, sequentially, while the NIM increased 5 basis points. The increase in the NIM primarily reflected the addition of higher yielding assets from the HTF acquisition, which contributed 7 basis points to the NIM expansion, partially offset by continued pricing pressure across all asset classes. During the 2015 second quarter, FTE net interest income and the NIM also benefitted by $3.4 million and 2 basis points, respectively, from prepayment penalties within the securities portfolio.

 

16


Table of Contents

Table 6—Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis

 

     YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)    Six Months Ended June 30,     Change     Six Months Ended June 30,  

(dollar amounts in millions)

   2015     2014     Amount     Percent     2015     2014  

Assets:

            

Interest-bearing deposits in banks

   $ 91      $ 87      $ 4        5     0.13     0.03

Loans held for sale

     829        283        546        193        3.39        4.01   

Securities:

            

Available-for-sale and other securities:

            

Taxable

     7,791        6,452        1,339        21        2.55        2.49   

Tax-exempt

     1,952        1,203        749        62        3.09        3.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     9,743        7,655        2,088        27        2.66        2.59   

Trading account securities

     47        42        5        12        1.10        0.89   

Held-to-maturity securities—taxable

     3,335        3,730        (395     (11     2.48        2.46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     13,125        11,427        1,698        15        2.61        2.54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

            

Commercial:

            

Commercial and industrial

     19,469        17,948        1,521        8        3.47        3.53   

Commercial real estate:

            

Construction

     929        657        272        41        3.70        4.15   

Commercial

     4,244        4,317        (73     (2     3.49        4.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,173        4,974        199        4        3.53        4.02   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     24,642        22,922        1,720        8        3.48        3.63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

            

Automobile

     8,431        7,069        1,362        19        3.22        3.50   

Home equity

     8,494        8,358        136        2        4.00        4.12   

Residential mortgage

     5,835        5,494        341        6        3.73        3.78   

Other consumer

     438        385        53        14        8.33        7.08   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     23,198        21,306        1,892        9        3.73        3.88   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     47,840        44,228        3,612        8        3.61        3.75   
          

 

 

   

 

 

 

Allowance for loan and lease losses

     (610     (645     35        (5    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net loans and leases

     47,230        43,583        3,647        8       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     61,885        56,025        5,860        10        3.41     3.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     930        887        43        5       

Intangible assets

     670        563        107        19       

All other assets

     4,197        3,937        260        7       
  

 

 

   

 

 

   

 

 

   

 

 

     

Total assets

   $ 67,072      $ 60,767      $ 6,305        10    
  

 

 

   

 

 

   

 

 

   

 

 

     

Liabilities and Shareholders’ Equity:

            

Deposits:

            

Demand deposits—noninterest-bearing

   $ 15,575      $ 13,330      $ 2,245        17     —       —  

Demand deposits—interest-bearing

     6,380        5,860        520        9        0.05        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     21,955        19,190        2,765        14        0.02        0.01   

Money market deposits

     19,084        17,664        1,420        8        0.22        0.25   

Savings and other domestic deposits

     5,220        5,027        193        4        0.14        0.19   

Core certificates of deposit

     2,726        3,523        (797     (23     0.77        0.88   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     48,985        45,404        3,581        8        0.22        0.27   

Other domestic time deposits of $250,000 or more

     190        273        (83     (30     0.43        0.42   

Brokered deposits and negotiable CDs

     2,651        1,927        724        38        0.17        0.26   

Deposits in foreign offices

     559        322        237        74        0.13        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     52,385        47,926        4,459        9        0.22        0.27   

Short-term borrowings

     2,018        2,581        (563     (22     0.13        0.10   

Long-term debt

     4,761        3,021        1,740        58        1.38        1.54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     43,589        40,198        3,391        8        0.34        0.35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,441        1,034        407        39       

Shareholders’ equity

     6,467        6,205        262        4       
  

 

 

   

 

 

   

 

 

   

 

 

     

Total liabilities and shareholders’ equity

   $ 67,072      $ 60,767      $ 6,305        10    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net interest rate spread

             3.07        3.18   

Impact of noninterest-bearing funds on margin

             0.10        0.10   
          

 

 

   

 

 

 

Net interest margin

             3.17     3.28
          

 

 

   

 

 

 

 

(1)

FTE yields are calculated assuming a 35% tax rate.

(2)

Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3)

For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

 

17


Table of Contents

2015 First Six Months versus 2014 First Six Months

Fully-taxable equivalent net interest income for the first six-month period of 2015 increased $63.8 million, or 7% reflecting the benefit of a $5.9 billion, or 10%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.17% from 3.28%. The increase in average earning assets reflected:

 

   

$3.6 billion, or 8%, increase in average total loans and leases.

 

   

$1.7 billion, or 15%, increase in average securities reflecting an increase of $1.8 billion of Liquidity Coverage Ratio (LCR) Level 1 qualified securities.

 

   

$0.5 billion, or 193%, increase in average loans held for sale, primarily related to automobile loans that were subsequently securitized and sold during the quarter.

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.

The provision for credit losses for the 2015 second quarter was $20.4 million compared with $20.6 million for the 2015 first quarter and $29.4 million for the 2014 second quarter. On a year-to-date basis, provision for credit losses for the first six-month period of 2015 was $41.0 million, a decrease of $13.0 million, or 24%, compared to year-ago period (See Credit Quality discussion). Given the low level of the provision for credit losses and the uneven nature of commercial charge-offs and recoveries, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

The following table reflects noninterest income for each of the past five quarters:

Table 7—Noninterest Income

 

     2015      2014      2Q15 vs 2Q14     2Q15 vs 1Q15  

(dollar amounts in thousands)

   Second      First      Fourth     Third      Second      Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 70,118       $ 62,220       $ 67,408      $ 69,118       $ 72,633       $ (2,515     (3 )%    $ 7,898        13

Trust services

     26,550         29,039         28,781        28,045         29,581         (3,031     (10     (2,489     (9

Electronic banking

     30,259         27,398         27,993        27,275         26,491         3,768        14        2,861        10   

Mortgage banking income

     38,518         22,961         14,030        25,051         22,717         15,801        70        15,557        68   

Brokerage income

     15,184         15,500         16,050        17,155         17,905         (2,721     (15     (316     (2

Insurance income

     17,637         15,895         16,252        16,729         15,996         1,641        10        1,742        11   

Bank owned life insurance income

     13,215         13,025         14,988        14,888         13,865         (650     (5     190        1   

Capital markets fees

     13,192         13,905         13,791        10,246         10,500         2,692        26        (713     (5

Gain on sale of loans

     12,453         4,589         5,408        8,199         3,914         8,539        218        7,864        171   

Securities gains (losses)

     82         —           (104     198         490         (408     (83     82        100   

Other income

     44,565         27,091         28,681        30,445         35,975         8,590        24        17,474        65   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 281,773       $ 231,623       $ 233,278      $ 247,349       $ 250,067       $ 31,706        13   $ 50,150        22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2015 Second Quarter versus 2014 Second Quarter

Noninterest income increased $31.7 million, or 13%, from the year-ago quarter. HTF contributed $12.3 million of noninterest income during the 2015 second quarter. The year-over-year increase primarily reflected:

 

   

$15.8 million, or 70%, increase in mortgage banking income, including an 84% increase in origination and secondary marketing revenues, reflecting higher gain on sale margin and a $6.7 million net benefit from MSR hedging activities.

 

   

$8.6 million, or 24%, increase in other income, primarily reflecting equipment operating lease income related to HTF.

 

   

$8.5 million, or 218%, increase in gain on sale of loans, including the $5.3 million gain from the automobile loan securitization.

 

18


Table of Contents
   

$3.8 million, or 14%, increase in electronic banking, due to higher card related income and underlying customer growth.

 

   

$2.7 million, or 26%, increase in capital market fees, primarily related to customer foreign exchange and commodities derivatives products.

Partially offset by:

 

   

$3.0 million, or 10%, decrease in trust services, primarily related to our fiduciary trust business moving to a more open architecture platform and a decline in assets under management in proprietary mutual funds following the 2014 second quarter transition of the fixed income Huntington Funds to a third party.

 

   

$2.7 million, or 15%, decrease in brokerage income, primarily reflecting a shift from upfront commission income to trail options and an increase in the sale of new open architecture advisory products.

 

   

$2.5 million, or 3%, decrease in service charges on deposit accounts as growth in commercial deposit service charges coupled with a 7% increase in consumer checking households partially offset the decline from the late July 2014 implementation of changes in consumer products.

2015 Second Quarter versus 2015 First Quarter

Noninterest income increased $50.1 million, or 22%, from the 2015 first quarter, primarily reflecting:

 

   

Other income increased $17.5 million, or 65%, including $12.3 million related to HTF.

 

   

Mortgage banking income increased $15.6 million, or 68%, primarily driven by a $10.5 million increase in net MSR hedging activities as well as a $6.3 million, or 32%, increase in origination and secondary marketing income.

 

   

Service charges on deposit accounts increased $7.9 million, or 13%, as the quarter benefitted from continued growth in consumer households and business relationships, as well as seasonality.

 

   

Gain on sale of loans increased $7.9 million, or 171%, primarily reflecting a $5.3 million automobile loan securitization gain.

Table 8—Noninterest Income—2015 First Six Months vs. 2014 First Six Months

 

     Six Months Ended June 30,      Change  

(dollar amounts in thousands)

   2015      2014      Amount     Percent  

Service charges on deposit accounts

   $ 132,338       $ 137,215       $ (4,877     (4 )% 

Trust services

     55,589         59,146         (3,557     (6

Electronic banking

     57,657         50,133         7,524        15   

Mortgage banking income

     61,479         45,806         15,673        34   

Brokerage income

     30,684         35,072         (4,388     (13

Insurance income

     33,532         32,492         1,040        3   

Bank owned life insurance income

     26,240         27,172         (932     (3

Capital markets fees

     27,097         19,694         7,403        38   

Gain on sale of loans

     17,042         7,484         9,558        128   

Securities gains (losses)

     82         17,460         (17,378     (100

Other income

     71,656         66,878         4,778        7   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 513,396       $ 498,552       $ 14,844        3
  

 

 

    

 

 

    

 

 

   

 

 

 

The $14.8 million, or 3%, increase in total noninterest income reflected:

 

   

$15.7 million, or 34%, increase in mortgage banking income. This primarily reflected a $17.6 million, or 61%, increase in origination and secondary marketing income as originations increased 49%.

 

   

$9.6 million, or 128%, increase in gain on sale of loans, including the $5.3 million automobile loan securitization gain.

 

19


Table of Contents
   

$7.5 million, or 15%, increase in electronic banking income, due to higher card related income and underlying customer growth.

 

   

$7.4 million, or 38%, increase in capital market fees, primarily related to an increase in foreign exchange fees, underwriting fees, commodities revenue, and derivative trading income.

 

   

$4.8 million, or 7%, increase in other income, primarily reflecting equipment operating lease income related to HTF.

Partially offset by:

 

   

$17.4 million, or 100%, decrease in securities gains.

 

   

$4.9 million, or 4%, decrease in service charges on deposit accounts, as growth in commercial deposit service charges coupled with an increase in consumer households partially offset the decline from the late July 2014 implementation of changes in consumer products.

 

   

$4.4 million, or 13%, decrease in brokerage income, primarily reflecting a shift from upfront commission income to trail options and an increase in the sale of new open architecture advisory products.

 

   

$3.6 million, or 6%, decrease in trust services, primarily related to our fiduciary trust businesses moving to a more open architecture platform and a decline in assets under management in proprietary mutual funds following the 2014 second quarter transition of the fixed income Huntington Funds to a third party.

 

20


Table of Contents

Noninterest Expense

(This section should be read in conjunction with Significant Item 1 and 2.)

The following table reflects noninterest expense for each of the past five quarters:

Table 9—Noninterest Expense

 

     2015      2014      2Q15 vs 2Q14     2Q15 vs 1Q15  

(dollar amounts in thousands)

   Second      First      Fourth      Third      Second      Amount     Percent     Amount     Percent  

Personnel costs

   $ 282,135       $ 264,916       $ 263,289       $ 275,409       $ 260,600       $ 21,535        8   $ 17,219        6

Outside data processing and other services

     58,508         50,535         53,685         53,073         54,338         4,170        8        7,973        16   

Net occupancy

     28,861         31,020         31,565         34,405         28,673         188        1        (2,159     (7

Equipment

     31,694         30,249         31,981         30,183         28,749         2,945        10        1,445        5   

Professional services

     12,593         12,727         15,665         13,763         17,896         (5,303     (30     (134     (1

Marketing

     15,024         12,975         12,466         12,576         14,832         192        1        2,049        16   

Deposit and other insurance expense

     11,787         10,167         13,099         11,628         10,599         1,188        11        1,620        16   

Amortization of intangibles

     9,960         10,206         10,653         9,813         9,520         440        5        (246     (2

Other expense

     41,215         36,062         50,868         39,468         33,429         7,786        23        5,153        14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 491,777       $ 458,857       $ 483,271       $ 480,318       $ 458,636       $ 33,141        7   $ 32,920        7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     12,274         11,914         11,875         11,946         12,000         274        2        360        3   

Impacts of Significant Items:

 

     2015      2014  

(dollar amounts in thousands)

   Second (1)      First (1)      Second  

Personnel costs

   $ 319       $ 1       $ —     

Outside data processing and other services

     755         51         618   

Net occupancy

     —           —           59   

Equipment

     —           —           1   

Professional services

     374         3,286         50   

Marketing

     27         1         30   

Other expense

     26         12         17   
  

 

 

    

 

 

    

 

 

 

Total noninterest expense adjustments

   $ 1,501       $ 3,351       $ 775   
  

 

 

    

 

 

    

 

 

 

 

(1) The 2015 first and second quarter included $3.4 million and $1.5 million, respectively, of merger-related expense that was not a Significant Item for the first six-month period of 2015, but merger-related expense is expected to be a Significant Item for the 2015 full year.

Adjusted Noninterest Expense (Non-GAAP):

 

     2015      2014      2Q15 vs 2Q14     2Q15 vs 1Q15  

(dollar amounts in thousands)

   Second      First      Second      Amount     Percent     Amount     Percent  

Personnel costs

   $ 281,816       $ 264,915       $ 260,600       $ 21,216        8   $ 16,901        6

Outside data processing and other services

     57,753         50,484         53,720         4,033        8        7,269        14   

Net occupancy

     28,861         31,020         28,614         247        1        (2,159     (7

Equipment

     31,694         30,249         28,748         2,946        10        1,445        5   

Professional services

     12,219         9,441         17,846         (5,627     (32     2,778        29   

Marketing

     14,997         12,974         14,802         195        1        2,023        16   

Deposit and other insurance expense

     11,787         10,167         10,599         1,188        11        1,620        16   

Amortization of intangibles

     9,960         10,206         9,520         440        5        (246     (2

Other expense

     41,189         36,050         33,412         7,777        23        5,139        14   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted noninterest expense

   $ 490,276       $ 455,506       $ 457,861       $ 32,415        7   $ 34,770        8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

2015 Second Quarter versus 2014 Second Quarter

Reported noninterest expense increased $33.1 million, or 7%, from the year-ago quarter. HTF contributed $15.7 million of noninterest expense during the 2015 second quarter. Changes in reported noninterest expense primarily reflect:

 

   

$21.5 million, or 8%, increase in personnel costs, related to a $17.9 million increase in salaries, reflecting the May implementation of annual merit increases and a 2% increase in the number of average full-time equivalent employees, and a $3.6 million increase in benefits expense. HTF accounted for $7.1 million of incremental personnel expense and 167 of the average full-time equivalent employees.

 

   

$7.8 million, or 23%, increase in other expense, primarily reflecting $6.8 million of equipment operating lease expense from HTF.

 

   

$4.2 million, or 8%, increase in outside data processing and other services expense, primarily related to technology investments.

Partially offset by

 

   

$5.3 million, or 30%, decrease in professional services expense, as the year-ago quarter included $5.0 million of one-time consulting expense related to strategic planning.

 

22


Table of Contents

2015 Second Quarter versus 2015 First Quarter

Reported noninterest expense increased $32.9 million, or 7%, from the 2015 first quarter. On a reported basis, personnel costs increased $17.2 million, or 6%, as a result of annual merit increases implemented in May and a 3% increase in the number of average full-time equivalent employees as well as the incremental $7.1 million of personnel expense related to HTF. Outside data processing and other services expense increased $8.0 million, or 16%, primarily related to ongoing technology investments. Other expense increased $5.2 million, or 14%, from the prior quarter, primarily reflecting equipment operating lease expense related to HTF.

Table 10—Noninterest Expense—2015 First Six Months vs. 2014 First Six Months

 

     Six Months Ended June 30,      Change  

(dollar amounts in thousands)

   2015      2014      Amount     Percent  

Personnel costs

   $ 547,051       $ 510,077       $ 36,974        7

Outside data processing and other services

     109,043         105,828         3,215        3   

Net occupancy

     59,881         62,106         (2,225     (4

Equipment

     61,943         57,499         4,444        8   

Professional services

     25,320         30,127         (4,807     (16

Marketing

     27,999         25,518         2,481        10   

Deposit and other insurance expense

     21,954         24,317         (2,363     (10

Amortization of intangibles

     20,166         18,811         1,355        7   

Other expense

     77,277         84,474         (7,197     (9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 950,634       $ 918,757       $ 31,877        3
  

 

 

    

 

 

    

 

 

   

 

 

 

Impacts of Significant Items:

 

     Six Months Ended June 30,  

(dollar amounts in thousands)

   2015 (1)      2014  

Personnel costs

   $ 320       $ 2,341   

Outside data processing and other services

     806         4,909   

Net occupancy

     —           1,801   

Equipment

     —           135   

Professional services

     3,660         2,222   

Marketing

     28         560   

Other expense

     38         10,410   
  

 

 

    

 

 

 

Total noninterest expense adjustments

   $ 4,852       $ 22,378   
  

 

 

    

 

 

 

 

(1) The first six-month period of 2015 included $4.9 million of merger-related expense that was not a Significant Item, but merger-related expense is expected to be a Significant Item for the 2015 full year.

Adjusted Noninterest Expense (Non-GAAP):

 

     Six Months Ended June 30,      Change  

(dollar amounts in thousands)

   2015      2014      Amount     Percent  

Personnel costs

   $ 546,731       $ 507,736       $ 38,995        8

Outside data processing and other services

     108,237         100,919         7,318        7   

Net occupancy

     59,881         60,305         (424     (1

Equipment

     61,943         57,364         4,579        8   

Professional services

     21,660         27,905         (6,245     (22

Marketing

     27,971         24,958         3,013        12   

Deposit and other insurance expense

     21,954         24,317         (2,363     (10

Amortization of intangibles

     20,166         18,811         1,355        7   

Other expense

     77,239         74,064         3,175        4