Edgar Filing: HUNTINGTON BANCSHARES INC/MD

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10-Q

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):

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.

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

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



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



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

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.

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.

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%.

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

⁽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.

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.

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.

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.

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.

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.

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.

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.

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.

•

$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.

•

$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.

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	%

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.

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

Total noninterest expense adjustments	$	945,782	$	896,379	$	49,403			6	%

Reported noninterest expense increased $31.9 million, or 3%. Excluding the impact of Significant Items, noninterest expense increased $49.4 million, or 6%. Changes in reported noninterest expense primarily reflect:

•

$37.0 million, or 7%, increase in personnel costs. Excluding the impact of significant items, personnel costs increased $39.0 million, or 8%, primarily related to a $25.9 million increase in salaries reflecting the May implementation of annual merit increases and a 1% increase in the number of average full-time equivalent employees, and a $6.6 million increase in benefits expense. HTF accounted for $7.1 million of incremental personnel expense.

•

$4.4 million, or 8%, increase in equipment. Excluding the impact of significant items, equipment increased $4.6 million, or 8%, primarily reflecting an increase in depreciation related to technology investments.

•

$3.2 million, or 3%, increase in outside data processing and other services. Excluding the impact of significant items, outside data processing and other services increased $7.3 million, or 7%, primarily related to technology investments.

Partially offset by

•

$7.2 million, or 9%, decrease in other expense. Excluding the impact of significant items, other expense increased $3.2 million, or 4%, primarily related to equipment operating lease expense from HTF.

•

$4.8 million, or 16%, decrease in professional services. Excluding the impact of significant items, professional services decreased $6.2 million, or 22%, as the year-ago period included $6.5 million of one-time consulting expense related to strategic planning.

Provision for Income Taxes

The provision for income taxes in the 2015 second quarter was $64.1 million. This compared with a provision for income taxes of $57.5 million in the 2014 second quarter and $54.0 million in the 2015 first quarter. The provision for income taxes for the six month periods ended June 30, 2015 and June 30, 2014 was $118.1 million and $109.6 million, respectively. All periods included the benefits from tax-exempt income, tax-advantaged investments, release of capital loss carryforward valuation allowance, general business credits, and investments in qualified affordable housing projects. At June 30, 2015 there is no capital loss carryforward valuation allowance remaining. The net federal deferred tax asset was $30.6 million and the net state deferred tax asset was $42.8 million at June 30, 2015.

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. In the first quarter of 2013, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

RISK MANAGEMENT AND CAPITAL

We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite as aggregate moderate-to-low. Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.

We identify primary risks, and the sources of those risks, across the Company. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee, Risk Oversight Committee, and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are regularly reported to the audit committee and board of directors. In addition, our Credit Review group performs ongoing independent testing of our loan portfolio, the results of which are regularly reviewed with our Risk Oversight Committee.

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2014 Form 10-K and subsequent filings with the SEC. 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 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2014 Form 10-K.

Credit Risk

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our AFS and HTM securities portfolios (see Note 4 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal.

We continue to focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use additional quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and treatment strategies for delinquent or stressed borrowers.

Loan and Lease Credit Exposure Mix

At June 30, 2015, loans and leases totaled $48.8 billion, an increase of $1.1 billion from December 31, 2014. There was continued growth in the C&I portfolio, primarily as a result of an increase in equipment leases of $0.8 billion related to the acquisition of HTF. In addition, residential mortgage increased by $0.2 billion as a result of strong originations. The CRE portfolio remained relatively consistent, as a result of continued runoff offset by new production within the requirements associated with achieving an acceptable return, our internal concentration limits and increased competition for projects sponsored by high quality developers.

At June 30, 2015, commercial loans and leases totaled $25.2 billion and represented 52% of our total loan and lease credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint, and is comprised of the following (see Commercial Credit discussion).

C&I—C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we have expanded our C&I portfolio, we have developed a series of “vertical specialties” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated, experienced credit officers. These specialties are comprised of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc.) and/or lending disciplines (Equipment Finance, ABL, etc.), all of which requires a high degree of expertise and oversight to effectively mitigate and monitor risk. As such, we have dedicated colleagues and teams focused on bringing value added expertise to these specialty clients.

CRE—CRE loans consist of loans to developers and REITs supporting income-producing or for-sale commercial real estate properties. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or refinance of the property.

Construction CRE—Construction CRE loans are loans to developers, companies, or individuals used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, multi family, office, and warehouse project types. Generally, these loans are for construction projects that have been presold or preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate lending group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.

Total consumer loans and leases were $23.5 billion at June 30, 2015, and represented 48% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile loans, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion). The increase from December 31, 2014, primarily relates to growth in residential mortgage and other consumer, partially offset by a slight decrease in the automobile portfolio relating to the $0.8 billion securitization and sale of automobile loans late in the 2015 second quarter.

Automobile—Automobile loans are comprised primarily of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 21% of the total exposure, with no individual state representing more than 6%. Applications are underwritten using an automated underwriting system that applies consistent policies and processes across the portfolio.

Home equity—Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first-lien or junior-lien on the borrower’s residence, allows customers to borrow against the equity in their home or refinance existing mortgage debt. Products include closed-end loans which are generally fixed-rate with principal and interest payments, and variable-rate, interest-only lines-of-credit which do not require payment of principal during the 10-year revolving period. The home equity line of credit may convert to a 20-year amortizing structure at the end of the revolving period. Applications are underwritten centrally in conjunction with an automated underwriting system. The home equity underwriting criteria is based on minimum credit scores, debt-to-income ratios, and LTV ratios, with current collateral valuations. The underwriting for the floating rate lines of credit also incorporate a stress analysis for a rising interest rate.

Residential mortgage—Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Applications are underwritten centrally using consistent credit policies and processes. All residential mortgage loan decisions utilize a full appraisal for collateral valuation. Huntington has not originated or acquired residential mortgages that allow negative amortization or allow the borrower multiple payment options.

Other consumer—Other consumer loans primarily consists of consumer loans not secured by real estate, including personal unsecured loans, overdraft balances, and credit cards.

The table below provides the composition of our total loan and lease portfolio:

Table 11—Loan and Lease Portfolio Composition


	2015								2014
(dollar amounts in millions)	June 30,				March 31,				December 31,				September 30,				June 30,
Commercial:
Commercial and industrial	$	20,003	41	%	$	20,109	42	%	$	19,033	40	%	$	18,791	40	%	$	18,899	41	%
Commercial real estate:
Construction		1,021	2			910	2			875	2			850	2			757	2
Commercial		4,192	9			4,157	9			4,322	9			4,141	9			4,233	9

Total commercial real estate		5,213	11			5,067	11			5,197	11			4,991	11			4,990	11

Total commercial		25,216	52			25,176	53			24,230	51			23,782	51			23,889	52

Consumer:
Automobile		8,549	18			7,803	16			8,690	18			8,322	18			7,686	17

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