Mark Muth - Director of IR Mac McCullough - CFO Steve Steinour - Chairman, President & CEO Dan Neumeyer - Chief Credit Officer

Jon Arfstrom - RBC Capital Markets Ken Usdin - Jefferies Matt O'Connor - Deutsche Bank John Pancari - Evercore ISI Kyle Peterson - FBR Capital Markets Scott Siefers - Sandler O'Neill & Partners Erika Najarian - Bank of America Merrill Lynch David Long - Raymond James & Associates, Inc. Terry McEvoy - Stephens Inc. Kevin Barker - Piper Jaffray Brian Klock - KBW

Welcome to the Huntington Bancshares Fourth Quarter Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mark Muth, Director of Investor Relations.

Thank you, Melissa, and welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on our IR website at www.huntington-ir.com or by following the Investor Relations link on www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO, and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of the call. As noted on slide 2, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on the information and assumptions available at this time, and are subject to changes, risks and uncertainties which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent forms 10-K, 10-Q and 8-K filings. Let's get started by turning to slide 3 and an overview of the financials for 2016. Mac?

Thanks, Mark, and thanks to everyone joining the call today. As always, we appreciate your interest and support. 2016 was a transformational year for Huntington. As you know, we closed the acquisition of FirstMerit in the third quarter, and much of our efforts since close has been focused on ensuring a smooth and seamless integration. We are extremely pleased with the progress we're making in bringing the two companies together as one. As evidenced by fourth-quarter results, we're already seeing significant benefit in our efficiency ratio and return on tangible common equity. And we are looking forward to introducing the distinctive Huntington brand to the Chicago and Wisconsin markets later this quarter, helping to accelerate our long-term growth rate. All of our colleagues are engaged and excited by the opportunities in front of us in 2017 and longer term. Before we move to the detailed financials, I want to provide a few quick comments on the integration. As Steve will discuss later in the call, we are ahead of schedule, as we completed a number of significant milestones in the fourth quarter. Our new colleagues are embracing our fair play philosophy and welcome culture, and they are excited to have access to Huntington's more robust product set and capabilities. We're very pleased with our progress thus far, but we know the work is not yet finished. We are focusing on achieving flawless execution with the conversion, resulting in minimal disruption for our customers and the acceleration of our long-term financial goals. With that in mind, let's move to slide 3 and discuss the full-year 2016 financials. As I mentioned, 2016 was a transformational year for Huntington, and there were acquisition-related significant items which affected bottom-line results. I want to emphasize that legacy Huntington performance, including our net interest margin, operating leverage and balance sheet growth, continued to meet if not exceed our expectations in 2016. We delivered core revenue growth well within the range of our long-term goal, positive operating leverage for the fourth consecutive year and a NIM greater than 3% for each quarter of 2016. As I walk through our results for full year 2016 and the fourth quarter of 2016, please note that comparisons to previous periods are inclusive of FirstMerit. Huntington recorded earnings per common share of $0.67 for full-year 2016. This is inclusive of $0.20 per share of significant items related to the FirstMerit acquisition, which also impacted the financial metrics that I will highlight on this slide. Tangible book value per share decreased 7% from the year-ago quarter to $6.41. Return on tangible common equity was 10.2%, while return on assets was 0.82%. Full-year revenue increased 18%, which included 11% growth in non-interest income. Full-year non-interest expense grew 24%, although after adjusting for FirstMerit's acquisition expense, full-year non-interest expense growth was 13%. Average total loans grew 18% for the full year, while average core deposit growth fully funded loan growth also increasing by 18% year over year. Credit quality remained strong in 2016. Consistent prudent credit underwriting as one of Huntington's core principles, and 2016's financial results continue to reflect that. Net charge-offs were 19 basis points of loans, relatively flat from 2015, while remaining well below our long-term financial goal of 35 to 55 basis points. The NPA ratio decreased 7 basis points from year end 2015. We managed the bank with an aggregate moderate- to low-risk appetite, and our results illustrate this disciplined focus. Finally, our capital ratios declined midyear, as we effectively deployed capital via the acquisition of FirstMerit. Assisted by the balance sheet optimization strategy that we detailed on the third quarter earnings call and that was completed in the fourth quarter, we have strengthened our capital ratios since acquisition close. And as of yearend 2016, our CET1 ratio was 9.53%, well within our 9% to 10% operating guideline. Moving to slide 4, let's take a look at some of the financial metrics for the fourth quarter of 2016 compared with the year-ago quarter. Fourth-quarter earnings per share was $0.18, inclusive of $0.06 per share of significant items related to the FirstMerit acquisition. Also including the impact of significant items, ROA was 0.84% and return on tangible common equity was 11.4%. Compared to the fourth quarter of 2015, revenue grew by 39%, with net interest income up 48% and non-interest income up 23%. Non-interest expense increased 45% from the year-ago quarter. Although adjusted for significant items, non-interest expense growth was 29%. Our reported efficiency ratio for the quarter was 65.4%. However, FirstMerit related acquisition expense added 8.8 percentage points to the efficiency ratio in the quarter. The reconciliation for this number can be found on slide 18. The efficiency ratio also benefited from $7.5 million of net hedging activity on mortgage servicing rights, a $5.6 million gain on our November auto loan securitization. $5 million of gains on the sale of loans resulting from our balance sheet optimization strategy, and a $6.5 million benefit from the extinguishment of trust preferred securities, as well as the impact of normal fourth-quarter seasonality. Moving on to the balance sheet, average total loans for the fourth quarter grew 33% year over year. Average core deposits grew 40% year over year, once again, fully funding loan growth. Fourth-quarter net charge-offs were 26 basis points, up 8 basis points from a year ago. Again, this remains below our long-term financial goal, and is consistent with our outlook of gradual reversion to our long-term range of 35 to 55 basis points. Turning to slide 5, let's take a closer look at the income statement. Fourth-quarter revenue was up 39% from the year-ago quarter. Primarily driven by net interest income, which was up 48%, reflecting the addition of FirstMerit and disciplined organic loan growth. The net interest margin was 3.25% for the fourth quarter, up 16 basis points from a year ago and up 7 basis points on a linked-quarter basis. Purchase accounting had a favorable impact of 18 basis points on the net interest margin in the fourth quarter. For the fourth quarter, net interest income increased 23% year over year. Non-interest expense increased 45%, but adjusted for significant items, non-interest expense in the fourth quarter grew 29% from the year-ago quarter. For a closer look at the details behind these calculations, please refer to the reconciliations contained on pages 16 and 17 of the presentation slides or in the release. While we're on the subject of expenses, I want to reiterate our confidence in achieving the $255 million in total annual expense savings that we communicated when we announced the FirstMerit acquisition. All the cost savings have been identified, and we have already realized roughly 50% of our cost savings goal. We expect to realize the majority of the remainder of the cost savings during the branch and systems conversion over Presidents' Day weekend next month. In total, we plan to consolidate 103 branches at conversion or roughly 9% of the combined post divestiture branch network. Recall that there is a significant amount of overlap in the two branch networks, as 39% of legacy FirstMerit branches are within one mile of Huntington branches. In addition, in connection with our normal periodic review of our distribution network, we will be consolidating nine legacy Huntington branches unrelated to the FirstMerit acquisition during the first quarter. Slide 6 shows the expected pretax net impact of purchase accounting adjustments on an annual forward-looking basis. We introduced this slide at a recent conference, and we think it will be useful in helping you think about purchase accounting accretion going forward. It is important to note that the purchase accounting accretion estimates on this slide are based on current scheduled accretion, and do not include any projected accelerated accretion from early payoffs or renewals. Therefore since in reality we're likely to experience some level of early payoffs and accelerated accretion, just as we already did in 3Q of 2016 and 4Q of 2016, you are likely to see the accretion revenue in the green bars pulled forward as early payoffs occur. Some of the accelerated accretion may be offset by provision expense, as acquired FirstMerit loans renew and we establish a loan-loss reserve in normal course. As a result, we intend to provide regular updates of this schedule going forward until the majority of the purchase accounting accretion has been recognized. Slide 7 illustrates the achievement of positive operating leverage for full-year 2016. Of course we talk about this every quarter, and stress how important annual positive operating leverage is to us as a company. In 2016, we enjoyed our fourth consecutive year of positive operating leverage, realizing adjusted revenue growth of 17.8% which outpaced adjusted expense growth of 13.1%. As you know, annual positive operating leverage is one of our long-term financial goals. We contained our target positive operating leverage on an annual basis, and we have budgeted to meet this goal for the fifth consecutive year in 2017. Turning to slide 8, let's look at balance sheet trends. As you look at the left of the slide, you can see that the addition of FirstMerit has not had a material impact on our earning asset mix. Recall the last quarter, we announced certain actions to optimize the balance sheet in order to improve capital efficiency and flexibility. With that in mind, during the fourth quarter, we completed a $1.5 billion auto securitization and invested the proceeds into 0% risk-weighted securities. We also repositioned approximately $2 billion of higher risk-weighted securities into 0% risk-weighted securities. Finally, we sold almost $1 billion of non-relationship C&I and CRE loans. Completing all announced actions during the fourth quarter, added approximately 41 basis points to CET1 at year end, positioning us well for the 2017 CCAR cycle. Turning back to fourth-quarter performance, average earning assets grew 41% from the year-ago quarter. This increase was driven primarily by a 54% increase in average securities, and a 37% increase in average C&I loans. The increase in average securities reflected the addition of FirstMerit's portfolio, the reinvestment of cash flows and additional investments in liquidity coverage ratio level one qualifying securities. The increase in C&I loans primarily reflected FirstMerit as well as increases in the automobile core plan and corporate banking loans. Average auto loans increased 17% year over year, with the acquired $1.5 billion FirstMerit portfolio essentially offsetting the impact of the $1.5 billion securitization. Average new money yields on our auto originations were 3.25% in the fourth quarter, up 5 basis points from the prior quarter and up almost 35 basis points from the year-ago quarter. Turning to the right side of slide 8, I want to call attention to the trend in funding mix, particularly the increase on low-cost DDA. Average total deposits increased 39% from the year-ago quarter, including a 40% increase in average core deposits. This reflects the addition of FirstMerit's low-cost deposit base. It has been almost two full quarters since the acquisition closed, and we are extremely pleased with customer and deposit retention. Our net interest margin was 3.25% for the fourth quarter, up 16 basis points from the year-ago quarter. The increase reflected a 23 basis point increase in earning asset yields, balanced against the 7 basis point increase in funding costs. On a linked-quarter basis, the net interest margin increased by 7 basis points, driven by an 8 basis point improvement in earning asset yields. Purchase accounting contributed 18 basis points to the net interest margin in the fourth quarter. After adjusting for this impact, the core NIM was 3.07, up 1 basis point from the third quarter of 2016. Also adjusted for the impact of purchase accounting. In addition, similar to what we have seen in recent quarters, the fourth quarter NIM includes 1 basis point favorable impact related to one large interest recovery. Recall our core NIM included two basis points of favorable impact last quarter. Slide 10 illustrates the progress we have made in rebuilding our regulatory capital ratios following the FirstMerit acquisition. CET1 [indiscernible] the quarter at 9.53%, down 26 basis points year over year and up 44 basis points from the previous quarter. We mentioned previously that our operating guideline for CET1 is 9% to 10%. We are very pleased to have reached the mid-point level only one quarter following the close of the FirstMerit acquisition. Tangible common equity ended the quarter at 7.14%, down 68 basis points year over year and flat linked quarter. Moving to slide 11, for the fourth quarter, we booked provision expense of $75 million compared to net charge-offs of $44 million. The higher provision expense was due to several factors, including the migration of FirstMerit loans from the acquired portfolio to the originated portfolio, portfolio growth and transitioning the FirstMerit portfolio to Huntington's reserving methodology. Net charge-offs represented an annualized 26 basis points of average loans and leases consistent with the prior quarter, which remains below our long-term target of 35 to 55 basis points. The ACL as a percentage of loans increased to 1.10% from 1.06% at the end of the third quarter, while the non-accrual loan coverage ratio remained stable at 174%. Asset-quality metrics were largely favorable in the quarter. The NPA ratio remained flat at 72 basis points. The criticized asset ratio increased modestly from 3.54% to 3.62%, driven largely by risk rating calibration within the FirstMerit book which increased our OLEM loans in the quarter. Importantly, substandard loans, the most severe category of problem loans, actually decreased in the quarter due to pay downs and refinancings. Also of note, 58% of our non-performing commercial loans remain current. Other indicators of credit quality include very low 90-day delinquencies at 19 basis points, and lower NPA inflows in the quarter. I will now turn the presentation over to Steve.

Thanks, Mac. Moving to the economy, slide 13 contains what we believe to be some of the more meaningful economic indicators for our footprint. A footprint that has outperformed the rest of the nation during the economic recovery. The bottom left chart illustrates trends in the unemployment rates across our eight core Midwestern states. And as you can see, despite a leveling off of economic growth during recent periods, the majority of our footprint remains at or below the national unemployment rates relative to the national average. The charts on the top and bottom right show coincident and leading economic indicators for the region. I want to call particular pretension to the bottom chart which shows leading indexes for our footprint as of November. This is the chart we look to for insights into expected future growth within our footprint, and as you can see the chart shows that all eight states in our footprint expect positive economic growth over the next six months. Turning to slide 14, it also focuses on trends in unemployment rates, but specifically for our largest Metropolitan markets. In many of the large MSAs, the footprint remained at or near 15-year lows for unemployment as of the end of November. The auto industry remains a major economic contributor within our footprint, housing markets are strong as well. Home price stability and affordability are some of the best in the nation right here in our footprint, and we continue to see broad-based home price growth in all of our footprint states. The labor market in our footprint has proven to be strong in 2016, with several markets such as here in Columbus where we are at structural fullest employment. We are seeing wage inflation in our expense base, and our customers are too. State and local governments continue to operate with surpluses. The election is behind us and many of the businesses in our footprint have expressed optimism about a new business-friendly environment expected from the new administration and regulatory regime. Overall, the underlying trends and fundamentals remain strong. We are confident in our footprint Midwest economy, based on the sustained job growth and economic production. So with that, let's turn to slide 15 for some closing remarks and important messages. We remain focused on delivering consistent through the cycle shareholder returns. This strategy entails reducing short-term volatility, achieving top-tier performance over the long term and maintaining our aggregate moderate to low-risk profile throughout. And as you heard Mac mention earlier, the acquisition and integration of FirstMerit provides an opportunity to achieve significant cost savings and improve our overall efficiency. We are progressing as planned toward realizing our targeted $255 million of annual cost savings from the acquisition, with a significant portion of the planned savings, roughly half of them, already implemented. The majority of the remaining savings will be implemented during the branch conversion this quarter over the Presidents' Day weekend. We continue to win new customers through a strong distinguished brand with differentiated products and superior customer service across all of our businesses. Our new customers provide a deeper pool to deliver our value proposition and to fuel our growth. We are now five months past the close of the FirstMerit acquisition, and we have seen little attrition from the FirstMerit accounts. This is a testament to our emphasis on customer service, and the progress of our combined teams coming together. We have maintained momentum in our core businesses throughout the integration. We have invested and will continue to invest in our businesses, particularly within our customer facing teams and in mobile and digital technologies as well as data analytics. Importantly, we continue to manage our expenses appropriately within our revenue outlook. We always like to include a reminder that there's a high level of alignment between the Board, Management, our employees and our shareholders. The Board and our colleagues are collectively amongst the largest shareholders of Huntington. We have holder retirement requirements on certain shares, and are appropriately focused on driving sustained long-term performance. We're highly focused on our commitment to being good stewards of shareholder's capital. Looking towards 2017, we expect total revenue growth in excess of 20%. This includes an expected benefit from one rate hike around midyear of this year. We continue to target positive operating leverage on an annual basis. We will grow the average balance sheet in excess of 20%. We expect to fully implement all the cost savings from the FirstMerit acquisition by the third quarter of 2017. We believe asset quality metrics will remain near current levels, including net charge-offs remaining below our long-term target of 35 to 55 basis points. Finally, we continue to be extremely pleased with the integration with FirstMerit and with the outstanding colleagues we have dedicated to a seamless conversion. The divestiture of 13 branches, primarily in the Canton, Ohio market, was completed during the fourth quarter of 2016, and we have completed the onboarding and initial training of our new colleagues and fully implemented the organizational changes for the combined entity that we announced last summer. 103 branch consolidations will occur coincident with the branch conversion in February, and our system conversion efforts continue to progress well. As you can see, it was an exciting quarter and indeed an exciting year. We are very focused on the future we're building. We have a lot of momentum across our businesses, and we're ready to build on the hard work that got us to this point. So I'll now turn it back over to Mark so we can get to your questions. Thank you.

We will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up and then if that person has additional questions he or she can add themselves back into the queue. Thank you.

[Operator Instructions]. Our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Sounds like things are going well on the integration from the expense side, and what I was curious about was the revenue synergy piece. I know that you did not include that in the accretion guidance initially from the acquisition, but in your important messages, you are saying you were executing on the revenue synergies. So maybe give us an idea or an update in terms of how that's going so far?

So, Jon, it's actually going very well. We are continuing to make investments into a number of areas, including SBA lending, home equity and home mortgage origination. And the other fact is that we are seeing really good acceptance and interest in capital markets products with the FirstMerit customer base, interest rates, revenues, foreign exchange, those types of things. So really good traction there as well. And then as we take FirstMerit's [indiscernible] portfolio and capabilities and expand that into our markets, and further we think that's a great growth opportunity. So if you add to that just from the performance that we've seen from a customer retention perspective, a deposit retention perspective with FirstMerit, I would tell you that we are really hitting on all cylinders there.

Okay. And the other number that you laid out was a percentage of revenues from non-interest income, and if you raised the FirstMerit average to your average that there's more accretion in the acquisition. Anything that you see right now that would prevent you from hitting that corporate average?

No. We think that there's probably close to $100 million of revenue if you normalize FirstMerit's fee income to total revenue to ours. And we really have that identified in terms of where we think that's coming from, and we've got the incremental expenses and capabilities built into 2017 and 2018. So we feel pretty comfortable with achieving that number.

Our next question comes from the line of Ken Usdin with Jefferies. Please go ahead with your question.

Just a question on costs and efficiency progress to your clear points about getting to the cost saves run rated by the second half and the third quarter. And then also with this planned accretion runoff, just wondering if you can help us understand how you expect the efficiency ratio to traject? You have got that long-term goal 56%, 59%. Just wondering if think you can get inside of that by the end of next year? How are you thinking about exiting 4Q 2017 to your point moving -- you're still committing to positive operating leverage but with a lot of these moving parts back and forth? Thanks.

Thanks, Ken. So we are very comfortable with the range we have put out there the 56% to 59% longer term. And clearly as we start to see increases in interest rates, we do think that's going to help us get towards the bottom end of the range. We do go through system conversion branch closures in the February timeframe, and we will see the expense come out in the second quarter. There might be a little bit that will come out in the third quarter as well. So I would expect that in the fourth quarter of this year, we'll be a run rate that will certainly reflect the range that we've signed up for longer term.

So you think you can get into the range. And I guess you've given the 20% revenue outlook on the top line, and I'm just wondering, I think we're all wondering just what that magnitude of operating leverage is that you were thinking through. Is there any way to help us understand like you did for the fourth quarter just around what you think the rate of expense growth will be versus that 20% plus on the top?

We've come out and told you what we expect the fourth quarter expense number to be at a regional conference in the fourth quarter. So that's $609 million.

Okay. So that's still on track?

That's still on track. That gets us to the $255 million cost takeout we've signed up for growing at 3%, and achieved in the fourth quarter of 2017.

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question. Matt O'Connor: Obviously some moving pieces on the NIM, the purchase accounting accretion was a lot better this quarter, but seems like the core NIM was also better. Wondering if you can help us shape what both components could look like in the first quarter of 2017?

Yes, Matt, there are number of moving parts here. And as we discussed, the core NIM is 3.07, 3.06 if you exclude the interest recovery that we saw in the quarter. We do think the core NIM is going to expand from this point. We are 6% asset sensitive. We're going to continue to see the swap book on the asset side roll off. We have about a little over $3 billion in asset swaps that will come off by the end of the year, that will increase asset sensitivity by probably another 0.7, 0.8 and we did see some impact from the December rate increase. So I would suggest that it's going to be difficult to project the NIM because of the purchase accounting impact and some of the accelerated accretion. That we do expect to happen, that we have seen happen in both the third and fourth quarters. But feel good about the core margin expanding from this point. Matt O'Connor: And can you help size the impact of call it the 25 basis point increase in rates that we saw in December? Obviously the industry is not experiencing a lot of deposit repricing, so I think we are seeing more NIM left than expected from the first couple rate increases. But maybe just size how much benefit you expect to get from December's hike.

We are assuming probably a 40% to 50% beta on that change. And I think as you play that through, it really is going to depend a lot on what happens with competition and how we see pricing change in the environment. So I don't think the impact of this first increase is going to be hugely material, but certainly it will be a positive to the margin going forward.

Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.

On the auto side, wanted to see if you can give us an update on some of the dynamics you are seeing there in the industry just given that we've been seeing some of the auto lenders see some volatility there? So just curious about the competitive dynamic, your appetite for ongoing growth there, maybe your growth outlook as well as credit trends how they are moving along. Thanks.

This is Dan. So I would say in terms of the credit trends, we feel very good as we have stated in the past. What goes on in the market isn't completely relevant to what we are doing since we haven't adjusted our origination strategies in terms of FICO, LTV, term, et cetera. So we are still a prime, super prime lender and our results have been quite consistent. A lot of noise in what's going on in the market, but I think that relates more to those who are in the sub prime rate or near prime space. So we still see good originations, as Matt noted earlier, we actually saw some margin expansion. We think on a risk-adjusted basis, we are in a really -- in a great spot. So trends are good, delinquencies remain well controlled. So on the whole, very solid outlook. We continue to plan for more growth, but very steady origination strategy.

And our expectation, John, is the dealers will continue to have a good year, roughly in line with last year. And we are very well-positioned in that regard, both on the direct side core plan, the indirect and to finance some of the supply base. And all that's broken out for you on the different schedules that we provide.

And just I would add that there are a couple of items this quarter that are worth noting. So we do have the FirstMerit portfolio included. And so when you look at the charge-off numbers on page 46, we provide a table that outlines. They do have a higher charge-off rate, but part of that is impacted by the fact that recoveries do not reduce gross charge-offs. Because it's an acquired book, and therefore the recoveries flow through the income line. And so that's one factor to consider. The other thing is we had securitization. So we had $1.5 billion move out of the denominator, and there are no delinquencies in that pool of loans. So when you really make those adjustments, our originated book continues to be very steady, 1 to 2 basis points higher than last year. Either if you're looking at quarter over quarter, it was 1 basis point, year over year, 2 basis points. So again, very steady performance that we are very pleased with.

And then, Steve, I just would love to get your thoughts on capital deployment here, and how you are thinking about deployment going into 2017 CCAR. Do you see an opportunity to get more aggressive there in returns, and how would you prioritize buybacks versus dividends? Thanks.

Our capital priorities haven't changed from what we've had over the years, organic growth, dividend, and then other actions. The balance sheet optimization activities of the fourth quarter were all successfully completed, and that was with the view of giving us the capacity to come into CCAR with a strong foundation. The Board will make decisions later, we don't even have CCAR scenarios yet so it would be very premature for me to comment at this point.

Our next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed with your question.

This is actually Kyle Peterson on for Bob today. It looks like your tax rate has been a little bit lower here. It looks like even when backing out the merger charges, it's running more in that 24%, 25% range. I just want to see if you guys could give any color moving forward on where we should expect that to run?

That's pretty consistent with where we have been, and the guidance that we provide is in that same range I think 24% to 27% is what we said in the press release, and that excludes significant items. So when you tax back the significant items of 35%, it does make that rate look lower on a GAAP basis, but if you adjust for the significant items, you get to the 25%. And if you actually FTE adjusted that, it would actually be higher. But that's a range we're very comfortable with going forward.

Okay, great. Then I guess just a little bit on margin. I know you guys mentioned your guidance includes a rate hike in the middle of the year. Where do you guys see the core margin going in the event of no additional rate hikes throughout the year?

Higher. We're going to see the core margin continue to expand. Again, it's not going to be hugely significant, but we have talked about probably one to two rate hikes requiring to take place in order for us to start to see margin expansion. And we actually think we're going to get that with the one rate hike now. And again, March will be a bit volatile this year because of what's happening with purchase accounting and accelerated accretion. But we'll be sure to keep you informed in terms what we see there an update it as it rolls through.

Our next question comes from the line of Scott Siefers with Sandler O'Neill and Partners. Please proceed with your question.

Mac, I was hoping you could expand on your comments on the nuance of the purchase accounting pull forward. Just curious specifically on slide 6 if you can walk through the changes and what drove those relative to when you guys had given that slide out at the Goldman conference last month. Just kind of curious, is that just initial behavior of the acquired portfolio or what changed in that time period?

Scott, so the best way to think about it is if a loan pays off and it renews early, then we accelerate the purchase accounting adjustment and that comes into the margin. That happened in the fourth quarter to the tune of about $10 million.

Okay.

Okay. So what you have to also realize the flip side of that, as an acquired loan moves from the acquired portfolio to the originated portfolio we have to establish a reserve for that. So in the fourth quarter, roughly half of the increase or of the reserve build is due to acquired loans from FirstMerit being in the originated portfolio. So we are going to continue to see accelerated accretion in the margin, and we're going to continue to see some higher provision expense as we've reserved for those loans that come into the originated book.

Okay.

That's where it gets a little complex, and we can't actually predict what is going to renew on a forward basis. But we will give you this chart every quarter updated for what's happened, and let you know what the inflows and outflows are.

Scott, if I could just add to try and -- normally, you would expect to see renewal activity first and second quarter on these commercial loans. So we're trying to share with you an expectation that there will be, in addition to scheduled maturities, there will be we think just more economic activity associated with the outlook, the improved outlook. Expansions of working capital lines, maybe more CapEx, things like that, so we could be in a period that's more active than what we've had recently as we go through the first half of 2017.

Okay, that all makes sense. Thank you. And then was just curious as well, I think when you originally gave the guidance for 2017 on that 20% plus revenue growth, that was assuming no rate increases either the one we got in December or anything this year. So would the 20% still hold true even if we got nothing else? And just out of curiosity, you guys have always been so conservative on the rate outlook with basically always assuming none. Just curious why you decided to add even just the one into the outlook?

Scott, I think the guidance still holds true. We just felt that it feels more certain this time, and that it just made more sense from a reality perspective and how we've built out the budget and how we thought about 2017. So we did put the one additional increase in midyear, and that's rolling through our budget for 2017.

Okay.

And, Scott, like prior years, we have contingent expense reduction should we find the environment to be different than we anticipate.

Our next question comes from the line of Erika Najarian with Bank of America. Please proceed with your question.

I wanted to ask a question on how given that rate hikes could potentially be more certain in 2017 and especially beyond, I'm wondering if you could help us think about how your asset sensitivity could have changed with the FirstMerit acquisition now fully in your books for the next rate hike? So in 1Q of 2016, your margin went up 2 basis points. And I'm wondering given the comments on a potentially structurally higher NIM anyway, core NIM in 2017, plus the 25 basis point rate hike, plus the fact your deposit costs haven't moved. Whether the expansion quarter over quarter in core NIM is likely going to be greater than the 2 basis points in 1Q 2016?

So, Erika, the FirstMerit balance sheet actually didn't change our asset sensitivity or interest rate risk significantly. So if anything, FirstMerit might have been a little bit more asset sensitive. So we don't really think that this has had a huge impact on how we are positioned, either before or after the FirstMerit acquisition. And clearly, it's all going to depend on what happens in the marketplace and what happens with the competition. We're in a new environment for liquidity based on new regulations and requirements. And certainly when the first rate hikes come through on an increasing cycle, you typically don't see as much of up pricing on the deposit side as quickly. We might be conservative with the 40% to 50% beta in what we are assuming. But we feel comfortable with those assumptions, and we are going to continue to monitor what's happening in the environment just to make sure that we are competitive from a liquidity perspective.

Our next question comes from the line of David Long with Raymond James. Please proceed with your question.

I just wanted to see if you guys can talk a little bit about your strategy on the retail banking side in your newly-acquired Chicago market here after the FirstMerit deal? In the Chicago market, you guys may not have the critical mass like several of the competent larger banks here. Just want to see how you plan to compete, and then also how you'd look to invest in that market in the future?

David, we have outlined it and I will try and cover this again. Mac may want to add to it. We've outlined that we will continue with the strategy that FirstMerit had, which was a niche approach emphasizing commercial or business lending. We have made a commitment to SBA lending in Chicago, and the team largely is in place now, the same with home lending. With our mortgage capabilities, we've added significantly. We are continuing to add at this point into our Chicago team on the mortgage front. So we like our distribution in terms of the spread. It's not concentrated given the size of that market. It's obviously grossly under scale, and that will cause us to focus on these niches and growing these niches and perhaps growing in some other areas over time. But the emphasis will be to maintain the disciplined that FirstMerit had in terms of growing commercial lending activities in Chicago principally.

Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.

I just wanted to circle back to Ken's question on that 4Q expense target of $609 million. If I remember that presentation last quarter, it did not include some personnel expenses, the FDIC insurance premiums. And I'm wondering if you could help us with the GAAP number, and also just the amortization as well to better understand what 4Q could look like again from a GAAP standpoint?

Yes, Terry. So the $609 million does not include intangible amortization. That's a number excluding that figure. And certainly the $609 million is a quantitative measurement looking at the $255 million growing at 3%. And we're making investments in revenue-producing capabilities, personnel, technology basically for FirstMerit markets where we have additional opportunities. We've talked about SBA, we've talked about home lending. And we will be adding some expense relative to those investments without a doubt, but we will also be adding revenue associated with those investments too. So certainly, the $609 million as we get closer to that we will reconcile in terms of what those investments look like. But feel very comfortable that we're going to get the cost takeouts that we have signed up for, and we're going to make additional investments into revenue opportunities that we think are available to us.

And then earlier you said for the most part, you'd get the full cost saves by the end of 2Q, with a little bit moving into Q3. Could you be a little more specific in terms of what you expect to realize by the middle point of 2017?

It's going to depend a bit on how we move through the conversion and integration process. There's still some expenses that we are working to get out that might be more longer term in nature around real estate and those types of things. To the extent anything bleeds into the third quarter, I don't expect it to be material but there will be some third-quarter impact.

[Operator Instructions]. Our next question comes from the line of Kevin Barker with Piper Jaffrey. Please proceed with your question.

I just wanted to follow up in regards to some of the questions around capital. Your CET1 ratio obviously appears to have very healthy and plenty of excess capital to be deployed over time, but it seems like your TCE ratio is relatively low compared to the peer group. Are you comfortable bringing down the TCE ratio below 7% as long as you have the CET1 ratio well above an 8% ratio?

Kevin, it's Mac. So we are focused on CET1, and we do have an operating range of 9% to 10% for CET1. As you see, the 9.50% which is where we are today calibrates, translates to a 7.2% TCE. We do monitor the tangible common ratio. It is something that we pay close attention to. I'm not sure I see it going below 7%, but it certainly is calibrated to CET1 and that's the ratio that ratio that we're really focused on.

And then you're obviously building the provision given the purchase accounting accretion that's coming off of FirstMerit, and you will probably see that continue to grow. How long -- at what point do you feel like you would be at a more normalized level in a reserve to loan ratio, and how long do you think it will take to get to that point following the FirstMerit acquisition?

Kevin, I would probably refer you to slide 6 in terms of what the accretion around purchase accounting. Basically as the acquired portfolio moves into an originated portfolio as those loans renew, we will see the purchase accounting adjustments decline. And you will see us over that period of time replenishing the reserve, building a reserve, on those loans as they move from acquired to organic. So clearly, what you see on slide 6 would be an elongated view because we're going to see this pull forward as loans renew early. So I would just ask you to think about slide 6 and calibrate around the numbers on that page, understanding that it's going to be accelerated.

Okay. And when you think about the risk profile pro forma on the FirstMerit acquisition, do you feel that your reserve to loan ratio should run higher than it was in the past or do you feel like it could run a little bit lower than what it was in previous quarters prior to the acquisition?

I think as we move towards normalization, you are probably going to be a little bit higher than previously. That's what I would say. Because just our base charge-off level, we still remain below the long-term target but we are definitely moving towards more normalization as recoveries decrease.

Our next question comes from the line of Brian Klock with KBW. Please proceed with your question.

I wanted to follow up just really quickly, Mac, on an earlier question about the deposit beta assumptions. I think you said 40% to 50%, is that what you're expecting from the December hike that just happened in 2016 or is that what your asset sensitivity assumptions are or is that yes to both?

That would be us to both.

Okay.

So the 40% to 50% is average across the entire deposit portfolio, and we have been pretty consistent in talking about a 50% beta over time. And as we think about the December hike, we have modeled something in that range.

Okay. And then I guess a follow-up question. Steve, you mentioned some of the improved commercial sentiment post election. Actually you guys in the fourth quarter your C&I loan growth was pretty solid relative to some others that we've seen softness in middle market. So maybe you can talk about what kind of trends you're seeing in the C&I book? And is there that potential for some enhanced an increase capital expenditures that may actually finally happen in the Midwest?

I think the early read from many of our customers is one of more optimism. And what they are telling us and what are more broadly our various line management and RMs are telling us is much more activity compared to prior periods in terms of potential investments. So we are I think better positioned than we have been for maybe a decade in terms of CapEx and expansion in the different businesses here in the Midwest.

And if I could throw one more in. I don't know, Mac, do you have the growth you did get in loans this quarter from FirstMerit versus HPN?

I don't have that.

[Operator Instructions]. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Steve Steinour for closing remarks.

Thank you all again. 2016 was highlighted by the acquisition of FirstMerit, and our continued strong core financial performance. We are encouraged by the focused activities of our colleagues and the sentiment of our customers. With sound fundamentals in place at the start of the year, we are positioned for solid performance in the coming quarters. Clearly, our strategies are working and our execution of goals continues to drive good results. We expect to continue to gain market share and grow share of wallet. The addition of FirstMerit's solid balance sheet, strong credit performance, valuable customer base and new markets provide opportunities for us to further accelerate achievement of our long-term financial goals. We're already realizing revenue synergies in several areas. And finally, I want to close by reiterating that our Board and this Management Team are all long-term shareholders. Our top priority is integrating FirstMerit and growing our core business. At the same time, we will continue to manage risks and volatility and do so with the intent of driving solid, consistent long-term performance. So thank you for your interest in Huntington. We appreciate you joining us today. Have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.