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HUNTINGTON BANCSHARES INC /MD/ - Quarter Report: 2017 September (Form 10-Q)

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED September 30, 2017
Commission File Number 1-34073
Huntington Bancshares Incorporated
 
Maryland
31-0724920
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant's address: 41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number, including area code: (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website (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. Refer to the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and emerging growth company in Rule 12b-2 of the Securities Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
 
 
 
 
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).     ¨  Yes    x  No
There were 1,080,946,315 shares of the Registrant’s common stock ($0.01 par value) outstanding on September 30, 2017.



Table of Contents

HUNTINGTON BANCSHARES INCORPORATED
INDEX
 
 
 

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Glossary of Acronyms
The following listing provides a comprehensive reference of common acronyms used throughout this document.
 
ABS
  
Asset-Backed Securities
 
 
ACL
  
Allowance for Credit Losses
 
 
AFS
  
Available-for-Sale
 
 
ALCO
  
Asset-Liability Management Committee
 
 
ALLL
  
Allowance for Loan and Lease Losses
 
 
 
ANPR
 
Advance Notice of Proposed Rulemaking
 
 
ASC
  
Accounting Standards Codification
 
 
ATM
  
Automated Teller Machine
 
 
AULC
  
Allowance for Unfunded Loan Commitments
 
 
Basel III
  
Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
 
 
 
BHC
 
Bank Holding Companies
 
 
 
BHC Act
 
Bank Holding Company Act of 1956
 
 
C&I
  
Commercial and Industrial
 
 
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
  
Consumer Financial Protection Bureau
 
 
 
CISA
 
Cybersecurity Information Sharing Act
 
 
CMO
  
Collateralized Mortgage Obligations
 
 
 
CRA
 
Community Reinvestment Act
 
 
CRE
  
Commercial Real Estate
 
 
 
CREVF
 
Commercial Real Estate and Vehicle Finance
 
 
 
DIF
 
Deposit Insurance Fund
 
 
 
Dodd-Frank Act
  
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
 
EFT
  
Electronic Fund Transfer
 
 
EPS
  
Earnings Per Share
 
 
 
EVE
  
Economic Value of Equity
 
 
 
FASB
 
Financial Accounting Standards Board
 
 
FDIC
  
Federal Deposit Insurance Corporation
 
 
FDICIA
  
Federal Deposit Insurance Corporation Improvement Act of 1991
 
 
FHA
  
Federal Housing Administration
 
 
FHC
 
Financial Holding Company
 
 
 
FHLB
  
Federal Home Loan Bank
 
 
FICO
  
Fair Isaac Corporation
 
 
 

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Table of Contents

FirstMerit
  
FirstMerit Corporation
 
 
FRB
  
Federal Reserve Bank
 
 
FTE
  
Fully-Taxable Equivalent
 
 
FTP
  
Funds Transfer Pricing
 
 
GAAP
  
Generally Accepted Accounting Principles in the United States of America
 
 
HIP
 
Huntington Investment and Tax Savings Plan
 
 
 
HQLA
  
High Quality Liquid Asset
 
 
 
HTM
  
Held-to-Maturity
 
 
 
IRS
  
Internal Revenue Service
 
 
 
LCR
  
Liquidity Coverage Ratio
 
 
 
LGD
  
Loss-Given-Default
 
 
 
LIBOR
  
London Interbank Offered Rate
 
 
 
LIHTC
  
Low Income Housing Tax Credit
 
 
 
LTV
  
Loan to Value
 
 
 
MBS
  
Mortgage-Backed Securities
 
 
 
MD&A
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
MSA
  
Metropolitan Statistical Area
 
 
 
MSR
  
Mortgage Servicing Rights
 
 
 
NAICS
  
North American Industry Classification System
 
 
 
NALs
  
Nonaccrual Loans
 
 
 
NCO
  
Net Charge-off
 
 
 
NII
  
Net Interest Income
 
 
 
NIM
  
Net Interest Margin
 
 
 
NPAs
  
Nonperforming Assets
 
 
 
OCC
  
Office of the Comptroller of the Currency
 
 
 
OCI
  
Other Comprehensive Income (Loss)
 
 
 
OCR
  
Optimal Customer Relationship
 
 
 
OLEM
  
Other Loans Especially Mentioned
 
 
 
OREO
  
Other Real Estate Owned
 
 
 
OTTI
  
Other-Than-Temporary Impairment
 
 
 
PD
 
Probability-Of-Default
 
 
 
Plan
  
Huntington Bancshares Retirement Plan
 
 
 
RBHPCG
  
Regional Banking and The Huntington Private Client Group
 
 
 
REIT
  
Real Estate Investment Trust
 
 
 
ROC
 
Risk Oversight Committee
 
 
 
RWA
  
Risk-Weighted Assets
 
 
 
SAD
  
Special Assets Division
 
 
 
SBA
  
Small Business Administration
 
 
 
SEC
  
Securities and Exchange Commission

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SERP
  
Supplemental Executive Retirement Plan
 
 
 
SRIP
  
Supplemental Retirement Income Plan
 
 
 
TCE
  
Tangible Common Equity
 
 
 
TDR
  
Troubled Debt Restructured Loan
 
 
 
U.S. Treasury
  
U.S. Department of the Treasury
 
 
 
UCS
  
Uniform Classification System
 
 
 
UPB
  
Unpaid Principal Balance
 
 
 
USDA
  
U.S. Department of Agriculture
 
 
 
VIE
  
Variable Interest Entity
 
 
 
XBRL
  
eXtensible Business Reporting Language
 
 
 





5

Table of Contents

PART I. FINANCIAL INFORMATION
When we refer to “we”, “our”, and “us”, and "the Company" in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
 
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have over 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. Our 958 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. Our foreign banking activities, in total or with any individual country, are not significant.
This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2016 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2016 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.

EXECUTIVE OVERVIEW
Summary of 2017 Third Quarter Results Compared to 2016 Third Quarter
For the quarter, we reported net income of $275 million, or $0.23 per common share, compared with $127 million, or $0.11 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $31 million pre-tax, or $0.02 per common share.
Fully-taxable equivalent net interest income was $771 million, up $135 million, or 21%. The results reflected the benefit from a $13.2 billion, or 17%, increase in average earning assets and an 11 basis point improvement in the net interest margin to 3.29%. Average earning asset growth included a $7.6 billion, or 12%, increase in average loans and leases, and a $5.6 billion, or 31%, increase in average securities. The net interest margin expansion reflected a 26 basis point increase in earning asset yields, including an approximate 12 basis point impact of purchase accounting, and a 4 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 19 basis point increase in funding costs.
The provision for credit losses decreased $20 million year-over-year to $44 million in the 2017 third quarter. NCOs increased $3 million to $43 million. NCOs represented an annualized 0.25% of average loans and leases, which remains below our long-term expectation of 35 to 55 basis points.
Non-interest income was $330 million, up $28 million, or 9%. The increase was primarily a result of the FirstMerit acquisition. In addition, card and payment processing income increased due to higher credit and debit card related income and underlying customer growth. Capital markets fees increased reflecting our continued strategic focus on expanding the business.
Non-interest expense was $680 million, down $32 million, or 4%, primarily reflecting the impact of the FirstMerit acquisition. Personnel costs decreased primarily related to acquisition-related personnel expense partially offset by an increase in average full-time equivalent employees. Further, professional services, outside data processing and other services decreased primarily reflecting a net decrease in acquisition-related Significant Items, partially offset by higher card and data processing expense from increased usage. Partially offsetting these decreases, other expense increased primarily reflecting an increase in donations and sponsorships and equipment lease residual impairments.

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The tangible common equity to tangible assets ratio was 7.42%, up 28 basis points from a year-ago. The CET1 risk-based capital ratio was 9.94% at September 30, 2017, compared to 9.09% a year ago. The regulatory Tier 1 risk-based capital ratio was 11.30% compared to 10.40% at September 30, 2016. All capital ratios were impacted by the repurchase of $123 million of common stock at an average cost of $12.75 per share during the 2017 third quarter. The total risk-based capital ratio was impacted by the repurchase of trust preferred securities during the 2016 fourth quarter.
Business Overview
General
Our general business objectives are:
1.Grow net interest income and fee income.
2.Deliver positive operating leverage.
3.Increase primary customer relationships across all business segments.
4.Continue to strengthen risk management.
5.Maintain capital and liquidity positions consistent with our risk appetite.
Economy
We expect consumer and business optimism to remain high across our footprint. Labor markets and consumer spending are strong with some inflationary pressures. Throughout 2017, consumer loan growth has remained steady. To date manufacturing has benefited the Midwest. Our pipelines support commercial loan growth, although the commercial lending environment is competitive on both structures and rates.
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion.

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Table 1 - Selected Quarterly Income Statement Data (1)
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2017
 
2017
 
2017
 
2016
 
2016
Interest income
$
872,987

 
$
846,424

 
$
820,360

 
$
814,858

 
$
694,346

Interest expense
114,554

 
101,912

 
90,385

 
79,877

 
68,956

Net interest income
758,433

 
744,512

 
729,975

 
734,981

 
625,390

Provision for credit losses
43,590

 
24,978

 
67,638

 
74,906

 
63,805

Net interest income after provision for credit losses
714,843

 
719,534

 
662,337

 
660,075

 
561,585

Service charges on deposit accounts
90,681

 
87,582

 
83,420

 
91,577

 
86,847

Cards and payment processing income
53,647

 
52,485

 
47,169

 
49,113

 
44,320

Mortgage banking income
33,615

 
32,268

 
31,692

 
37,520

 
40,603

Trust and investment management services
33,531

 
32,232

 
33,869

 
34,016

 
28,923

Insurance income
13,992

 
15,843

 
15,264

 
16,486

 
15,865

Brokerage income
14,458

 
16,294

 
15,758

 
17,014

 
14,719

Capital markets fees
21,719

 
16,836

 
14,200

 
18,730

 
14,750

Bank owned life insurance income
16,453

 
15,322

 
17,542

 
17,067

 
14,452

Gain on sale of loans
13,877

 
12,002

 
12,822

 
24,987

 
7,506

Net securities gains (losses)
(33
)
 
135

 
(8
)
 
(1,771
)
 
1,031

Other noninterest income
38,157

 
44,219

 
40,735

 
29,598

 
33,399

Total noninterest income
330,097

 
325,218

 
312,463

 
334,337

 
302,415

Personnel costs
377,088

 
391,997

 
382,000

 
359,755

 
405,024

Outside data processing and other services
79,586

 
75,169

 
87,202

 
88,695

 
91,133

Equipment
45,458

 
42,924

 
46,700

 
59,666

 
40,792

Net occupancy
55,124

 
52,613

 
67,700

 
49,450

 
41,460

Professional services
15,227

 
18,190

 
18,295

 
23,165

 
47,075

Marketing
16,970

 
18,843

 
13,923

 
21,478

 
14,438

Deposit and other insurance expense
18,514

 
20,418

 
20,099

 
15,772

 
14,940

Amortization of intangibles
14,017

 
14,242

 
14,355

 
14,099

 
9,046

Other noninterest expense
58,444

 
59,968

 
57,148

 
49,417

 
48,339

Total noninterest expense
680,428

 
694,364

 
707,422

 
681,497

 
712,247

Income before income taxes
364,512

 
350,388

 
267,378

 
312,915

 
151,753

Provision for income taxes
89,944

 
78,647

 
59,284

 
73,952

 
24,749

Net income
274,568

 
271,741

 
208,094

 
238,963

 
127,004

Dividends on preferred shares
18,903

 
18,889

 
18,878

 
18,865

 
18,537

Net income applicable to common shares
$
255,665

 
$
252,852

 
$
189,216

 
$
220,098

 
$
108,467

 
 
 
 
 
 
 
 
 
 
Average common shares—basic
1,086,038

 
1,088,934

 
1,086,374

 
1,085,253

 
938,578

Average common shares—diluted
1,106,491

 
1,108,527

 
1,108,617

 
1,104,358

 
952,081

Net income per common share—basic
$
0.24

 
$
0.23

 
$
0.17

 
$
0.20

 
$
0.12

Net income per common share—diluted
0.23

 
0.23

 
0.17

 
0.20

 
0.11

Cash dividends declared per common share
0.08

 
0.08

 
0.08

 
0.08

 
0.07

Return on average total assets
1.08
%
 
1.09
%
 
0.84
%
 
0.95
%
 
0.58
%
Return on average common shareholders’ equity
10.5

 
10.6

 
8.2

 
9.4

 
5.4

Return on average tangible common shareholders’ equity (2)
14.1

 
14.4

 
11.3

 
12.9

 
7.0

Net interest margin (3)
3.29

 
3.31

 
3.30

 
3.25

 
3.18

Efficiency ratio (4)
60.5

 
62.9

 
65.7

 
61.6

 
75.0

Effective tax rate
24.7

 
22.4

 
22.2

 
23.6

 
16.3

 
 
 
 
 
 
 
 
 
 
Revenue—FTE
 
 
 
 
 
 
 
 
 
Net interest income
$
758,433

 
$
744,512

 
$
729,975

 
$
734,981

 
$
625,390

FTE adjustment
12,209

 
12,069

 
12,058

 
12,560

 
10,598

Net interest income (3)
770,642

 
756,581

 
742,033

 
747,541

 
635,988

Noninterest income
330,097

 
325,218

 
312,463

 
334,337

 
302,415

Total revenue (3)
$
1,100,739

 
$
1,081,799

 
$
1,054,496

 
$
1,081,878

 
$
938,403


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Table 2 - Selected Year to Date Income Statements (1)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands, except per share amounts)
2017
 
2016
 
Amount
 
Percent
Interest income
$
2,539,771

 
$
1,817,255

 
$
722,516

 
40
 %
Interest expense
306,851

 
182,918

 
123,933

 
68

Net interest income
2,232,920

 
1,634,337

 
598,583

 
37

Provision for credit losses
136,206

 
115,896

 
20,310

 
18

Net interest income after provision for credit losses
2,096,714

 
1,518,441

 
578,273

 
38

Service charges on deposit accounts
261,683

 
232,722

 
28,961

 
12

Cards and payment processing income
153,301

 
119,951

 
33,350

 
28

Mortgage banking income
97,575

 
90,737

 
6,838

 
8

Trust and investment management services
99,633

 
74,258

 
25,375

 
34

Insurance income
45,099

 
48,037

 
(2,938
)
 
(6
)
Brokerage income
46,510

 
44,819

 
1,691

 
4

Capital markets fees
52,755

 
40,797

 
11,958

 
29

Bank owned life insurance income
49,317

 
40,500

 
8,817

 
22

Gain on sale of loans
38,701

 
22,166

 
16,535

 
75

Net securities gains (losses)

94

 
1,687

 
(1,593
)
 
(94
)
Other noninterest income
123,110

 
99,720

 
23,390

 
23

Total noninterest income
967,778

 
815,394

 
152,384

 
19

Personnel costs
1,151,085

 
989,369

 
161,716

 
16

Outside data processing and other services
241,957

 
216,047

 
25,910

 
12

Equipment
135,082

 
105,173

 
29,909

 
28

Net occupancy
175,437

 
103,640

 
71,797

 
69

Professional services
51,712

 
82,101

 
(30,389
)
 
(37
)
Marketing
49,736

 
41,479

 
8,257

 
20

Deposit and other insurance expense
59,031

 
38,335

 
20,696

 
54

Amortization of intangibles
42,614

 
16,357

 
26,257

 
161

Other noninterest expense
175,560

 
134,487

 
41,073

 
31

Total noninterest expense
2,082,214

 
1,726,988

 
355,226

 
21

Income before income taxes
982,278

 
606,847

 
375,431

 
62

Provision for income taxes
227,875

 
133,989

 
93,886

 
70

Net income
754,403

 
472,858

 
281,545

 
60

Dividends declared on preferred shares
56,670

 
46,409

 
10,261

 
22

Net income applicable to common shares
$
697,733

 
$
426,449

 
$
271,284

 
64
 %
 
 
 
 
 
 
 
 
Average common shares—basic
1,087,115

 
844,167

 
242,948

 
29
 %
Average common shares—diluted
1,107,878

 
856,934

 
250,944

 
29

Net income per common share—basic
$
0.64

 
$
0.51

 
$
0.13

 
25

Net income per common share—diluted
0.63

 
0.50

 
0.13

 
26

Cash dividends declared per common share
0.24

 
0.21

 
0.03

 
14

 
 
 
 
 
 
 
 
Revenue—FTE
 
 
 
 
 
 
 
Net interest income
$
2,232,920

 
$
1,634,337

 
$
598,583

 
37
 %
FTE adjustment
36,336

 
29,848

 
6,488

 
22

Net interest income (3)
2,269,256

 
1,664,185

 
605,071

 
36

Noninterest income
967,778

 
815,394

 
152,384

 
19

Total revenue (3)
$
3,237,034

 
$
2,479,579

 
$
757,455

 
31
 %
(1)
Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.
(2)
Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
(3)
On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
(4)
Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains.





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Significant Items
Earnings comparisons are impacted by the Significant Items summarized below:
Mergers and Acquisitions. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, are as follows:
During the 2017 third quarter, $31 million of noninterest expense was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.02 per common share.

During the 2017 second quarter, $50 million of noninterest expense was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.03 per common share.

During the 2016 third quarter, $159 million of noninterest expense was recorded related to the then pending acquisition of FirstMerit. This resulted in a negative impact of $0.11 per common share.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected:
Table 3 - Significant Items Influencing Earnings Performance Comparison
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 30, 2017
 
June 30, 2017
 
September 30, 2016
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
Net income
$
274,568

 
 
 
$
271,741

 
 
 
$
127,004

 
 
Earnings per share, after-tax
 
 
$
0.23

 
 
 
$
0.23

 
 
 
$
0.11

 
 
 
 
 
 
 
 
 
 
 
 
Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS (1)
 
Earnings
 
EPS (1)
 
Earnings
 
EPS (1)
Mergers and acquisitions, net expenses
$
(30,733
)
 
 
 
$
(50,243
)
 
 
 
$
(158,749
)
 
 
Tax impact
10,757

 
 
 
17,585

 
 
 
52,033

 
 
Mergers and acquisitions, after-tax
$
(19,976
)

$
(0.02
)

$
(32,658
)

$
(0.03
)
 
$
(106,716
)
 
$
(0.11
)

(1)
Based upon the quarterly average outstanding diluted common shares.
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
Net income
$
754,403

 
 
 
$
472,858

 
 
Earnings per share, after-tax
 
 
$
0.63

 
 
 
$
0.50

 
 
 
 
 
 
 
 
Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS (1)
 
Earnings
 
EPS (1)
Mergers and acquisitions, net expenses
$
(152,121
)
 
 
 
$
(185,944
)
 
 
Tax impact
53,243

 
 
 
61,252

 
 
Mergers and acquisitions, after-tax
$
(98,878
)
 
$
(0.09
)
 
$
(124,692
)
 
$
(0.14
)

(1)
Based upon the year to date average outstanding diluted common shares.

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Net Interest Income / Average Balance Sheet    
The following tables detail the change in our average balance sheet and the net interest margin:
Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis
 
 
 
 
 
 
 
Average Balances
 
 
 
 
(dollar amounts in millions)
Three Months Ended
 
Change
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
3Q17 vs. 3Q16
 
2017
 
2017
 
2017
 
2016
 
2016
 
Amount
 
Percent
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
102

 
$
102

 
$
100

 
$
110

 
$
95

 
$
7

 
8
 %
Loans held for sale
678

 
525

 
415

 
2,507

 
695

 
(17
)
 
(2
)
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
12,275

 
13,135

 
12,801

 
13,734

 
9,785

 
2,490

 
25

Tax-exempt
3,161

 
3,104

 
3,049

 
3,136

 
2,854

 
307

 
11

Total available-for-sale and other securities
15,436

 
16,239

 
15,850

 
16,870

 
12,639

 
2,797

 
22

Trading account securities
92

 
91

 
137

 
139

 
49

 
43

 
88

Held-to-maturity securities—taxable
8,264

 
7,427

 
7,656

 
5,432

 
5,487

 
2,777

 
51

Total securities
23,793

 
23,756

 
23,643

 
22,441

 
18,175

 
5,618

 
31

Loans and leases: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
27,643

 
27,992

 
27,922

 
27,727

 
24,957

 
2,686

 
11

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,152

 
1,130

 
1,314

 
1,413

 
1,132

 
20

 
2

Commercial
6,064

 
5,940

 
6,039

 
5,805

 
5,227

 
837

 
16

Commercial real estate
7,216

 
7,070

 
7,353

 
7,218

 
6,359

 
857

 
13

Total commercial
34,859

 
35,062

 
35,276

 
34,945

 
31,316

 
3,543

 
11

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,713

 
11,324

 
11,063

 
10,866

 
11,402

 
311

 
3

Home equity
9,960

 
9,958

 
10,072

 
10,101

 
9,260

 
700

 
8

Residential mortgage
8,402

 
7,979

 
7,777

 
7,690

 
7,012

 
1,390

 
20

RV and marine finance
2,296

 
2,039

 
1,874

 
1,844

 
915

 
1,381

 
151

Other consumer
1,046

 
983

 
919

 
959

 
817

 
229

 
28

Total consumer
33,417

 
32,283

 
31,705

 
31,460

 
29,406

 
4,011

 
14

Total loans and leases
68,276

 
67,345

 
66,981

 
66,405

 
60,722

 
7,554

 
12

Allowance for loan and lease losses
(672
)
 
(672
)
 
(636
)
 
(614
)
 
(623
)
 
(49
)
 
8

Net loans and leases
67,604

 
66,673

 
66,345

 
65,791

 
60,099

 
7,505

 
12

Total earning assets
92,849

 
91,728

 
91,139

 
91,463

 
79,687

 
13,162

 
17

Cash and due from banks
1,299

 
1,287

 
2,011

 
1,538

 
1,325

 
(26
)
 
(2
)
Intangible assets
2,359

 
2,373

 
2,387

 
2,421

 
1,547

 
812

 
52

All other assets
5,455

 
5,405

 
5,442

 
5,559

 
4,962

 
493

 
10

Total assets
$
101,290

 
$
100,121

 
$
100,343

 
$
100,367

 
$
86,898

 
$
14,392

 
17
 %
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
21,723

 
$
21,599

 
$
21,730

 
$
23,250

 
$
20,033

 
$
1,690

 
8
 %
Demand deposits—interest-bearing
17,878

 
17,445

 
16,805

 
15,294

 
12,362

 
5,516

 
45

Total demand deposits
39,601

 
39,044

 
38,535

 
38,544

 
32,395

 
7,206

 
22

Money market deposits
20,314

 
19,212

 
18,653

 
18,618

 
18,453

 
1,861

 
10

Savings and other domestic deposits
11,590

 
11,889

 
11,970

 
12,272

 
8,889

 
2,701

 
30

Core certificates of deposit
2,044

 
2,146

 
2,342

 
2,636

 
2,285

 
(241
)
 
(11
)
Total core deposits
73,549

 
72,291

 
71,500

 
72,070

 
62,022

 
11,527

 
19

Other domestic time deposits of $250,000 or more
432

 
479

 
470

 
391

 
382

 
50

 
13

Brokered deposits and negotiable CDs
3,563

 
3,783

 
3,969

 
4,273

 
3,904

 
(341
)
 
(9
)
Deposits in foreign offices

 

 

 
152

 
194

 
(194
)
 

Total deposits
77,544

 
76,553

 
75,939

 
76,886

 
66,502

 
11,042

 
17

Short-term borrowings
2,391

 
2,687

 
3,792

 
2,628

 
1,306

 
1,085

 
83

Long-term debt
8,949

 
8,730

 
8,529

 
8,594

 
8,488

 
461

 
5

Total interest-bearing liabilities
67,161

 
66,371

 
66,530

 
64,858

 
56,263

 
10,898

 
19

All other liabilities
1,661

 
1,557

 
1,661

 
1,833

 
1,608

 
53

 
3

Shareholders’ equity
10,745

 
10,594

 
10,422

 
10,426

 
8,994

 
1,751

 
19

Total liabilities and shareholders’ equity
$
101,290

 
$
100,121

 
$
100,343

 
$
100,367

 
$
86,898

 
$
14,392

 
17
 %

11

Table of Contents

Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)
 
 
 
 
 
 
 
 
 
 
 
Average Yield Rates (2)
 
Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
Fully-taxable equivalent basis (3)
2017
 
2017
 
2017
 
2016
 
2016
Assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
1.77
%
 
1.53
%
 
1.09
%
 
0.64
%
 
0.64
%
Loans held for sale
3.83

 
3.73

 
3.82

 
2.95

 
3.53

Securities:
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
Taxable
2.42

 
2.38

 
2.38

 
2.43

 
2.35

Tax-exempt
3.62

 
3.71

 
3.77

 
3.60

 
3.01

Total available-for-sale and other securities
2.67

 
2.64

 
2.65

 
2.65

 
2.50

Trading account securities
0.16

 
0.25

 
0.11

 
0.18

 
0.58

Held-to-maturity securities—taxable
2.36

 
2.38

 
2.36

 
2.43

 
2.41

Total securities
2.55

 
2.55

 
2.54

 
2.58

 
2.47

Loans and leases: (1)
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
4.05

 
4.04

 
3.98

 
3.83

 
3.68

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
4.55

 
4.26

 
3.95

 
3.65

 
3.76

Commercial
4.08

 
3.97

 
3.69

 
3.54

 
3.54

Commercial real estate
4.16

 
4.02

 
3.74

 
3.56

 
3.58

Total commercial
4.07

 
4.04

 
3.93

 
3.78

 
3.66

Consumer:
 
 
 
 
 
 
 
 
 
Automobile
3.60

 
3.55

 
3.55

 
3.57

 
3.37

Home equity
4.72

 
4.61

 
4.45

 
4.24

 
4.21

Residential mortgage
3.65

 
3.66

 
3.63

 
3.58

 
3.61

RV and marine finance
5.43

 
5.57

 
5.63

 
5.64

 
5.70

Other consumer
11.59

 
11.47

 
12.05

 
10.91

 
10.93

Total consumer
4.32

 
4.27

 
4.23

 
4.13

 
3.97

Total loans and leases
4.20

 
4.15

 
4.07

 
3.95

 
3.81

Total earning assets
3.78

 
3.75

 
3.70

 
3.60

 
3.52

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing

 

 

 

 

Demand deposits—interest-bearing
0.23

 
0.20

 
0.15

 
0.11

 
0.11

Total demand deposits
0.10

 
0.09

 
0.07

 
0.04

 
0.04

Money market deposits
0.36

 
0.31

 
0.26

 
0.24

 
0.24

Savings and other domestic deposits
0.20

 
0.21

 
0.22

 
0.25

 
0.21

Core certificates of deposit
0.73

 
0.56

 
0.39

 
0.29

 
0.43

Total core deposits
0.30

 
0.26

 
0.22

 
0.20

 
0.20

Other domestic time deposits of $250,000 or more
0.61

 
0.49

 
0.45

 
0.39

 
0.40

Brokered deposits and negotiable CDs
1.16

 
0.95

 
0.72

 
0.48

 
0.44

Deposits in foreign offices

 

 

 
0.13

 
0.13

Total deposits
0.35

 
0.31

 
0.26

 
0.23

 
0.22

Short-term borrowings
0.95

 
0.78

 
0.63

 
0.36

 
0.29

Long-term debt
2.65

 
2.49

 
2.33

 
2.19

 
1.97

Total interest-bearing liabilities
0.68

 
0.61

 
0.54

 
0.48

 
0.49

Net interest rate spread
3.10

 
3.14

 
3.16

 
3.12

 
3.03

Impact of noninterest-bearing funds on margin
0.19

 
0.17

 
0.14

 
0.13

 
0.15

Net interest margin
3.29
%
 
3.31
%
 
3.30
%
 
3.25
%
 
3.18
%

(1)
For purposes of this analysis, NALs are reflected in the average balances of loans.
(2)
Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.
(3)
FTE yields are calculated assuming a 35% tax rate.


12

Table of Contents

2017 Third Quarter versus 2016 Third Quarter
Fully-taxable equivalent (FTE) net interest income for the 2017 third quarter increased $135 million, or 21%, from the 2016 third quarter. This reflected the benefit from the $13.2 billion, or 17%, increase in average earning assets coupled with an 11 basis point improvement in the FTE net interest margin (NIM) to 3.29%. Average earning asset growth included a $7.6 billion, or 12%, increase in average loans and leases and a $5.6 billion, or 31%, increase in average securities. The NIM expansion reflected a 26 basis point increase related to the mix and yield of earning assets and a 4 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 19 basis point increase in funding costs. FTE net interest income during the 2017 third quarter included $27 million, or approximately 12 basis points, of purchase accounting impact.
Average earning assets for the 2017 third quarter increased $13.2 billion, or 17%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average securities increased $5.6 billion, or 31%, which included a $0.3 billion increase in direct purchase municipal instruments in our commercial banking segment. Average residential mortgage loans increased $1.4 billion, or 20%, as we continue to see the benefits associated with the expansion of our home lending business. Average RV and marine finance loans increased $1.4 billion, or 151%, reflecting the expansion of the acquired business into 17 new states over the past year.
Average total deposits for the 2017 third quarter increased $11.0 billion, or 17%, from the year-ago quarter, while average total core deposits increased $11.5 billion, or 19%. Average total interest-bearing liabilities increased $10.9 billion, or 19%, from the year-ago quarter. These increases primarily reflect the impact of the FirstMerit acquisition. Average demand deposits increased $7.2 billion, or 22%, comprised of a $5.1 billion, or 24%, increase in average commercial demand deposits and a $2.1 billion, or 20%, increase in average consumer demand deposits. Average long-term borrowings increased $0.5 billion, or 5%, reflecting the issuance of $2.7 billion and maturity of $1.6 billion of senior debt over the past five quarters.
2017 Third Quarter versus 2017 Second Quarter
Compared to the 2017 second quarter, FTE net interest income increased $14 million, or 2%. Average earning assets increased $1.1 billion, or 1%, sequentially, while the NIM decreased 2 basis points. The decrease in the NIM reflected a 7 basis point increase in the cost of interest-bearing liabilities, partially offset by a 3 basis point increase in earning asset yields and a 2 basis point increase in the benefit from noninterest-bearing funds. The purchase accounting impact on the net interest margin was approximately 12 basis points in the 2017 third quarter compared to approximately 15 basis points in the prior quarter.
Compared to the 2017 second quarter, average earning assets increased $1.1 billion, or 1%. Average loans and leases increased $0.9 billion, or 1%, primarily reflecting growth in residential mortgage, automobile, and RV and marine loans partially offset by a decline in average commercial and industrial loans. Average commercial and industrial loans were negatively impacted by the seasonal decline in automobile floorplan lending, a reduction in mortgage warehouse lending, and continued runoff in corporate banking, partially offset by growth in asset finance.
Compared to the 2017 second quarter, average total core deposits increased $1.3 billion, or 2%, primarily reflecting a $1.1 billion, or 6%, increase in money market deposits and a $0.6 billion, or 1%, increase in average demand deposits.


13

Table of Contents


 
 
 
 
 
 
 
 
 
 
 
 
Table 5 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in millions)
YTD Average Balances
 
YTD Average Rates (2)
 
Nine Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
Fully-taxable equivalent basis (1)
2017
 
2016
 
Amount
 
Percent
 
2017
 
2016
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
102

 
$
97

 
$
5

 
5
 %
 
1.46
%
 
0.37
%
Loans held for sale
540

 
567

 
(27
)
 
(5
)
 
3.79

 
3.76

Securities:
 
 
 
 


 


 
 
 
 
Available-for-sale and other securities:
 
 
 
 


 


 
 
 
 
Taxable
12,735

 
7,781

 
4,954

 
64

 
2.40

 
2.37

Tax-exempt
3,105

 
2,576

 
529

 
21

 
3.70

 
3.25

Total available-for-sale and other securities
15,840

 
10,357

 
5,483

 
53

 
2.65

 
2.59

Trading account securities
107

 
43

 
64

 
149

 
0.17

 
0.68

Held-to-maturity securities—taxable
7,785

 
5,781

 
2,004

 
35

 
2.37

 
2.43

Total securities
23,732

 
16,181

 
7,551

 
47

 
2.55

 
2.53

Loans and leases: (3)
 
 
 
 


 


 
 
 
 
Commercial:
 
 
 
 


 


 
 
 
 
Commercial and industrial
27,852

 
22,326

 
5,526

 
25

 
4.03

 
3.57

Commercial real estate:
 
 
 
 


 


 
 
 
 
Construction
1,198

 
979

 
219

 
22

 
4.24

 
3.66

Commercial
6,014

 
4,621

 
1,393

 
30

 
3.92

 
3.50

Commercial real estate
7,212

 
5,600

 
1,612

 
29

 
3.97

 
3.52

Total commercial
35,064

 
27,926

 
7,138

 
26

 
4.01

 
3.56

Consumer:
 
 
 
 


 


 
 
 
 
Automobile
11,369

 
10,430

 
939

 
9

 
3.57

 
3.24

Home equity
9,983

 
8,708

 
1,275

 
15

 
4.60

 
4.19

Residential mortgage
8,055

 
6,406

 
1,649

 
26

 
3.65

 
3.65

RV and marine finance
2,071

 
307

 
1,764

 
575

 
5.54

 
5.70

Other consumer
997

 
670

 
327

 
49

 
11.53

 
10.46

Total consumer
32,475

 
26,521

 
5,954

 
22

 
4.27

 
3.86

Total loans and leases
67,539

 
54,447

 
13,092

 
24

 
4.14

 
3.71

Allowance for loan and lease losses
(660
)
 
(614
)
 
(46
)
 
7

 
 
 
 
Net loans and leases
66,879

 
53,833

 
13,046

 
24

 
 
 
 
Total earning assets
91,913

 
71,292

 
20,621

 
29

 
3.75
%
 
3.46
%
Cash and due from banks
1,530

 
1,114

 
416

 
37

 
 
 
 
Intangible assets
2,373

 
1,003

 
1,370

 
137

 
 
 
 
All other assets
5,433

 
4,446

 
987

 
22

 
 
 
 
Total assets
$
100,589

 
$
77,241

 
$
23,348

 
30
 %
 
 
 
 
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
21,684

 
$
17,634

 
$
4,050

 
23
 %
 
%
 
%
Demand deposits—interest-bearing
17,380

 
9,538

 
7,842

 
82

 
0.20

 
0.10

Total demand deposits
39,064

 
27,172

 
11,892

 
44

 
0.09

 
0.03

Money market deposits
19,399

 
19,220

 
179

 
1

 
0.31

 
0.24

Savings and other domestic deposits
11,815

 
6,541

 
5,274

 
81

 
0.21

 
0.16

Core certificates of deposit
2,176

 
2,186

 
(10
)
 

 
0.55

 
0.67

Total core deposits
72,454

 
55,119

 
17,335

 
31

 
0.26

 
0.21

Other domestic time deposits of $250,000 or more
460

 
413

 
47

 
11

 
0.51

 
0.40

Brokered deposits and negotiable CDs
3,770

 
3,239

 
531

 
16

 
0.93

 
0.41

Deposits in foreign offices

 
222

 
(222
)
 

 

 
0.13

Total deposits
76,684

 
58,993

 
17,691

 
30

 
0.31

 
0.23

Short-term borrowings
2,952

 
1,161

 
1,791

 
154

 
0.76

 
0.32

Long-term debt
8,738

 
7,866

 
872

 
11

 
2.49

 
1.84

Total interest-bearing liabilities
66,690

 
50,386

 
16,304

 
32

 
0.61

 
0.48

All other liabilities
1,627

 
1,513

 
114

 
8

 
 
 
 
Shareholders’ equity
10,588

 
7,708

 
2,880

 
37

 
 
 
 
Total liabilities and shareholders’ equity
$
100,589

 
$
77,241

 
$
23,348

 
30
 %
 
 
 
 
Net interest rate spread
 
 
 
 
 
 
 
 
3.13

 
2.98

Impact of noninterest-bearing funds on margin
 
 
 
 
 
 
 
 
0.17

 
0.14

Net interest margin
 
 
 
 
 
 
 
 
3.30
%
 
3.12
%

(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.

14

Table of Contents


2017 First Nine Months versus 2016 First Nine Months
FTE net interest income for the first nine-month period of 2017 increased $605 million, or 36%. This reflected the benefit of a $20.6 billion, or 29%, increase in average total earning assets coupled with a FTE net interest margin, which increased to 3.30% from 3.12%. Average securities increased $7.6 billion, or 47%, primarily reflecting the acquisition of FirstMerit and an increase in direct purchase municipal instruments in our commercial banking segment. Average loans and leases increased $13.1 billion, or 24%, primarily reflecting an increase in C&I lending, residential mortgage loans and RV and marine finance resulting from the acquisition of FirstMerit.
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 2017 third quarter was $44 million, which decreased $20 million, or 32%, compared to the third quarter 2016. NCOs increased $3 million to $43 million compared with the same period in the prior year reflecting an increase in consumer net charge-offs, partially offset by a decrease in commercial net charge-offs. Net charge-offs represented an annualized 0.25% of average loans and leases, which remains below our long-term expectation of 35 to 55 basis points.
On a year-to-date basis, provision for credit losses for the first nine-month period of 2017 was $136 million, an increase of $20 million, or 18%, compared to the year-ago period, reflecting increased net charge-offs due to portfolio loan growth.
Noninterest Income
The following table reflects noninterest income for each of the periods presented: 
Table 6 - Noninterest Income
 
Three Months Ended
 
3Q17 vs. 3Q16
 
3Q17 vs. 2Q17
 
September 30,
 
June 30,
 
September 30,
 
Change
 
Change
(dollar amounts in thousands)
2017
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Service charges on deposit accounts
$
90,681

 
$
87,582

 
$
86,847

 
$
3,834

 
4
 %
 
$
3,099

 
4
 %
Cards and payment processing income
53,647

 
52,485

 
44,320

 
9,327

 
21

 
1,162

 
2

Mortgage banking income
33,615

 
32,268

 
40,603

 
(6,988
)
 
(17
)
 
1,347

 
4

Trust and investment management services
33,531

 
32,232

 
28,923

 
4,608

 
16

 
1,299

 
4

Insurance income
13,992

 
15,843

 
15,865

 
(1,873
)
 
(12
)
 
(1,851
)
 
(12
)
Brokerage income
14,458

 
16,294

 
14,719

 
(261
)
 
(2
)
 
(1,836
)
 
(11
)
Capital markets fees
21,719

 
16,836

 
14,750

 
6,969

 
47

 
4,883

 
29

Bank owned life insurance income
16,453

 
15,322

 
14,452

 
2,001

 
14

 
1,131

 
7

Gain on sale of loans
13,877

 
12,002

 
7,506

 
6,371

 
85

 
1,875

 
16

Net securities gains (losses)
(33
)
 
135

 
1,031

 
(1,064
)
 
(103
)
 
(168
)
 
(124
)
Other noninterest income
38,157

 
44,219

 
33,399

 
4,758

 
14

 
(6,062
)
 
(14
)
Total noninterest income
$
330,097

 
$
325,218

 
$
302,415

 
$
27,682

 
9
 %
 
$
4,879

 
2
 %

2017 Third Quarter versus 2016 Third Quarter
Noninterest income for the 2017 third quarter increased $28 million, or 9%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Card and payment processing income increased $9 million, or 21%, due to higher credit and debit card related income and underlying customer growth. Capital markets fees increased $7 million, or 47%, reflecting our ongoing strategic focus on expanding the business. Gain on sale of loans increased $6 million, or 85%, as a result of continued expansion of our SBA lending business. Other income increased $5 million, or 14%, primarily reflecting a $5 million benefit from derivative ineffectiveness and a $3 million increase in servicing income. These increases were partially offset by a $7 million decline in mortgage banking income due to lower spreads on origination volume.

15

Table of Contents

2017 Third Quarter versus 2017 Second Quarter
Compared to the 2017 second quarter, total noninterest income increased $5 million, or 2%. Capital markets fees increased $5 million, or 29%, as a result of the previously-mentioned expansion of the business. Conversely, other income decreased $6 million, or 14%, primarily reflecting a decrease in loan syndication fees.
Table 7 - Noninterest Income—2017 First Nine Months vs. 2016 First Nine Months
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands)
2017
 
2016
 
Amount
 
Percent
Service charges on deposit accounts
$
261,683

 
$
232,722

 
$
28,961

 
12
 %
Cards and payment processing income
153,301

 
119,951

 
33,350

 
28

Mortgage banking income
97,575

 
90,737

 
6,838

 
8

Trust and investment management services
99,633

 
74,258

 
25,375

 
34

Insurance income
45,099

 
48,037

 
(2,938
)
 
(6
)
Brokerage income
46,510

 
44,819

 
1,691

 
4

Capital markets fees
52,755

 
40,797

 
11,958

 
29

Bank owned life insurance income
49,317

 
40,500

 
8,817

 
22

Gain on sale of loans
38,701

 
22,166

 
16,535

 
75

Net securities gains (losses)
94

 
1,687

 
(1,593
)
 
(94
)
Other noninterest income
123,110

 
99,720

 
23,390

 
23

Total noninterest income
$
967,778

 
$
815,394

 
$
152,384

 
19
 %

Noninterest income for the first nine-month period of 2017 increased $152 million, or 19%, from the year-ago period, primarily reflecting the impact of the FirstMerit acquisition. Service charges on deposit accounts increased $29 million, or 12%, reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Cards and payment processing income increased $33 million, or 28%, due to an increase in credit and debit card transactions and underlying customer growth. Trust and investment management services increased $25 million, or 34%, primarily reflecting an increase in assets under management as a result of the FirstMerit acquisition.
Noninterest Expense
(This section should be read in conjunction with Significant Items 1.)
The following table reflects noninterest expense for each of the periods presented: 
Table 8 - Noninterest Expense
 
Three Months Ended
 
3Q17 vs. 3Q16
 
3Q17 vs. 2Q17
 
September 30,
 
June 30,
 
September 30,
 
Change
 
Change
(dollar amounts in thousands)
2017
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Personnel costs
$
377,088

 
$
391,997

 
$
405,024

 
$
(27,936
)
 
(7
)%
 
$
(14,909
)
 
(4
)%
Outside data processing and other services
79,586

 
75,169

 
91,133

 
(11,547
)
 
(13
)
 
4,417

 
6

Equipment
45,458

 
42,924

 
40,792

 
4,666

 
11

 
2,534

 
6

Net occupancy
55,124

 
52,613

 
41,460

 
13,664

 
33

 
2,511

 
5

Professional services
15,227

 
18,190

 
47,075

 
(31,848
)
 
(68
)
 
(2,963
)
 
(16
)
Marketing
16,970

 
18,843

 
14,438

 
2,532

 
18

 
(1,873
)
 
(10
)
Deposit and other insurance expense
18,514

 
20,418

 
14,940

 
3,574

 
24

 
(1,904
)
 
(9
)
Amortization of intangibles
14,017

 
14,242

 
9,046

 
4,971

 
55

 
(225
)
 
(2
)
Other noninterest expense
58,444

 
59,968

 
48,339

 
10,105

 
21

 
(1,524
)
 
(3
)
Total noninterest expense
$
680,428

 
$
694,364

 
$
712,247

 
$
(31,819
)
 
(4
)%
 
$
(13,936
)
 
(2
)%
Number of employees (average full-time equivalent)
15,508

 
15,877

 
14,511

 
997

 
7
 %
 
(369
)
 
(2
)%

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Table of Contents

Impacts of Significant Items:
 
Three Months Ended
 
September 30,
 
June 30,
 
September 30,
(dollar amounts in thousands)
2017
 
2017
 
2016
Personnel costs
$
4,362

 
$
17,934

 
$
76,199

Outside data processing and other services
3,304

 
6,246

 
27,639

Equipment
6,505

 
3,994

 
4,739

Net occupancy
14,255

 
14,415

 
7,116

Professional services
2,038

 
3,804

 
33,679

Marketing
17

 
112

 
926

Other noninterest expense
252

 
3,738

 
8,451

Total noninterest expense adjustments
$
30,733

 
$
50,243

 
$
158,749

Adjusted Noninterest Expense (See Non-GAAP Financial Measures in the Additional Disclosures section):
 
Three Months Ended
 
3Q17 vs. 3Q16
 
3Q17 vs. 2Q17
 
September 30,
 
June 30,
 
September 30,
 
Change
 
Change
(dollar amounts in thousands)
2017
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Personnel costs
$
372,726

 
$
374,063

 
$
328,825

 
$
43,901

 
13
 %
 
$
(1,337
)
 
 %
Outside data processing and other services
76,282

 
68,923

 
63,494

 
12,788

 
20

 
7,359

 
11

Equipment
38,953

 
38,930

 
36,053

 
2,900

 
8

 
23

 

Net occupancy
40,869

 
38,198

 
34,344

 
6,525

 
19

 
2,671

 
7

Professional services
13,189

 
14,386

 
13,396

 
(207
)
 
(2
)
 
(1,197
)
 
(8
)
Marketing
16,953

 
18,731

 
13,512

 
3,441

 
25

 
(1,778
)
 
(9
)
Deposit and other insurance expense
18,514

 
20,418

 
14,940

 
3,574

 
24

 
(1,904
)
 
(9
)
Amortization of intangibles
14,017

 
14,242

 
9,046

 
4,971

 
55

 
(225
)
 
(2
)
Other noninterest expense
58,192

 
56,230

 
39,888

 
18,304

 
46

 
1,962

 
3

Total adjusted noninterest expense (Non-GAAP)
$
649,695

 
$
644,121

 
$
553,498

 
$
96,197

 
17
 %
 
$
5,574

 
1
 %

2017 Third Quarter versus 2016 Third Quarter
Reported noninterest expense for the 2017 third quarter decreased $32 million, or 4%, from the year-ago quarter, primarily reflecting the year-over-year decrease in FirstMerit acquisition-related Significant Items. Personnel costs decreased $28 million, or 7%, primarily reflecting a $72 million net decrease in acquisition-related personnel expense partially offset by a 7% increase in average full-time equivalent employees. Professional services decreased $32 million, or 68%, reflecting the net decrease in Significant Items. Outside data processing and other services decreased $12 million, or 13%, reflecting the $24 million net decrease in Significant Items partially offset by higher card and data processing expense from increased usage. Partially offsetting these decreases, other expense increased $10 million, or 21%, primarily reflecting a $5 million increase in donations and sponsorships and a $3 million impairment of certain equipment lease residuals. The 2017 third quarter noninterest expense also included approximately $12 million of nonrecurring net expense, not included in Significant Items, from personnel, operational, and efficiency improvement efforts, including the previously announced consolidation of 38 full-service branches, 7 drive-through only locations, and 3 corporate offices.
2017 Third Quarter versus 2017 Second Quarter
Reported noninterest expense decreased $14 million, or 2%, from the 2017 second quarter, including a $20 million net decrease in Significant Items. Personnel costs decreased $15 million, or 4%, reflecting a $14 million net decrease in acquisition-related expenses.


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Table 9 - Noninterest Expense—2017 First Nine Months vs. 2016 First Nine Months
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands)
2017
 
2016
 
Amount
 
Percent
Personnel costs
$
1,151,085

 
$
989,369

 
$
161,716

 
16
 %
Outside data processing and other services
241,957

 
216,047

 
25,910

 
12

Equipment
135,082

 
105,173

 
29,909

 
28

Net occupancy
175,437

 
103,640

 
71,797

 
69

Professional services
51,712

 
82,101

 
(30,389
)
 
(37
)
Marketing
49,736

 
41,479

 
8,257

 
20

Deposit and other insurance expense
59,031

 
38,335

 
20,696

 
54

Amortization of intangibles
42,614

 
16,357

 
26,257

 
161

Other noninterest expense
175,560

 
134,487

 
41,073

 
31

Total noninterest expense
$
2,082,214

 
$
1,726,988

 
$
355,226

 
21
 %
Impacts of Significant Items: 
 
Nine Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
Personnel costs
$
41,851

 
$
81,405

Outside data processing and other services
24,025

 
31,047

Equipment
16,262

 
4,743

Net occupancy
52,012

 
7,626

Professional services
10,060

 
48,676

Marketing
945

 
1,180

Other noninterest expense
9,116

 
11,267

Total noninterest expense adjustments
$
154,271

 
$
185,944

Adjusted Noninterest Expense (See Non-GAAP Financial Measures in Additional Disclosures section):
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands)
2017
 
2016
 
Amount
 
Percent
Personnel costs
$
1,109,234

 
$
907,964

 
$
201,270

 
22
%
Outside data processing and other services
217,932

 
185,000

 
32,932

 
18

Equipment
118,820

 
100,430

 
18,390

 
18

Net occupancy
123,425

 
96,014

 
27,411

 
29

Professional services
41,652

 
33,425

 
8,227

 
25

Marketing
48,791

 
40,299

 
8,492

 
21

Deposit and other insurance expense
59,031

 
38,335

 
20,696

 
54

Amortization of intangibles
42,614

 
16,357

 
26,257

 
161

Other noninterest expense
166,444

 
123,220

 
43,224

 
35

Total adjusted noninterest expense (Non-GAAP)
$
1,927,943

 
$
1,541,044

 
$
386,899

 
25
%

Reported noninterest expense increased $355 million, or 21%, from the year-ago period, primarily reflecting the impact of the FirstMerit acquisition, including Significant Items. Personnel costs increased $162 million, or 16%, primarily reflecting a 21% increase in the number of average full-time equivalent employees largely related to the additional colleagues during the integration and conversion of FirstMerit as well as the in-store branch expansion. Net occupancy expense increased $72 million, or 69%, largely due to an increase of $44 million of acquisition-related expense. Outside data processing and other services increased $26 million, or 12%, primarily reflecting higher card and data processing expense from increased usage partially offset by a decline in acquisition-related expenses. Deposit and other insurance expense increased $21 million, or 54%, reflecting the larger assessment based and the FDIC Large Institution Surcharge implemented during the 2016 third quarter. Other noninterest expense increased $41 million, or 31%, reflecting the impact of the acquisition as well as a $5 million

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Table of Contents

increase in donations and sponsorships and a $3 million impairment on certain equipment lease residuals. These increases were partially offset by a decrease of $30 million, or 37%, in professional services reflecting a $39 million decrease in acquisition-related expenses.
Provision for Income Taxes
The provision for income taxes in the 2017 third quarter was $90 million. This compared with a provision for income taxes of $25 million in the 2016 third quarter and $79 million in the 2017 second quarter. The provision for income taxes for the nine month periods ended September 30, 2017 and September 30, 2016 was $228 million and $134 million, respectively. All periods included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, excess tax deductions for stock-based compensation, and capital losses. The effective tax rates for the 2017 third quarter, 2016 third quarter, and 2017 second quarter were 24.7%, 16.3%, and 22.4%, respectively. The effective tax rates for the nine-month periods ended September 30, 2017 and September 30, 2016 were 23.2% and 22.1%, respectively. The variance between the 2017 third quarter compared to the 2016 third quarter and 2017 second quarter and for the nine-month period ended September 30, 2017 compared to the nine-month period ended September 30, 2016 in the provision for income taxes and effective tax rates relates primarily to the Significant Items. The net federal deferred tax asset was $29 million and the net state deferred tax asset was $35 million at September 30, 2017.
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. The IRS is currently examining our 2010 and 2011 consolidated federal income tax returns. While the statute of limitations remains open for tax years 2012-2016, the IRS has advised that tax years 2012-2014 will not be audited, and plans to begin the examination of the 2015 federal income tax return during the 2017 fourth quarter. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, 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 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 2016 Form 10-K and subsequent filings with the SEC. The MD&A included in our 2016 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 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 2016 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 quantitative measurement capabilities utilizing external data sources, enhanced 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 solutions for delinquent or stressed borrowers.
Loan and Lease Credit Exposure Mix
Refer to the “Loan and Lease Credit Exposure Mix” section of our 2016 Form 10-K for a brief description of each portfolio segment.

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The table below provides the composition of our total loan and lease portfolio: 
Table 10 - Loan and Lease Portfolio Composition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in millions)
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
Ending Balances by Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
27,469

 
40
%
 
$
27,969

 
41
%
 
$
28,176

 
42
%
 
$
28,059

 
42
%
 
$
27,668

 
42
%
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,182

 
2

 
1,145

 
2

 
1,107

 
2

 
1,446

 
2

 
1,414

 
2

Commercial
6,024

 
9

 
6,000

 
9

 
5,986

 
9

 
5,855

 
9

 
5,842

 
9

Commercial real estate
7,206

 
11

 
7,145

 
11

 
7,093

 
11

 
7,301

 
11

 
7,256

 
11

Total commercial
34,675

 
51

 
35,114

 
52

 
35,269

 
53

 
35,360

 
53

 
34,924

 
53

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,876

 
17

 
11,555

 
17

 
11,155

 
17

 
10,969

 
16

 
10,791

 
16

Home equity
9,985

 
15

 
9,966

 
15

 
9,974

 
15

 
10,106

 
15

 
10,120

 
15

Residential mortgage
8,616

 
13

 
8,237

 
12

 
7,829

 
12

 
7,725

 
12

 
7,665

 
12

RV and marine finance
2,371

 
3

 
2,178

 
3

 
1,935

 
2

 
1,846

 
3

 
1,840

 
3

Other consumer
1,064

 
1

 
1,009

 
1

 
936

 
1

 
956

 
1

 
964

 
1

Total consumer
33,912

 
49

 
32,945

 
48

 
31,829

 
47

 
31,602

 
47

 
31,380

 
47

Total loans and leases
$
68,587

 
100
%
 
$
68,059

 
100
%
 
$
67,098

 
100
%
 
$
66,962

 
100
%
 
$
66,304

 
100
%

Our loan portfolio is composed of a managed mix of consumer and commercial credits. At the corporate level, we manage the overall credit exposure and portfolio composition in part via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned maximum exposure limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. There are no identified concentrations that exceed the assigned exposure limit. Our concentration management policy is approved by the ROC of the Board and is one of the strategies used to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. Changes to existing concentration limits require the approval of the ROC prior to implementation, incorporating specific information relating to the potential impact on the overall portfolio composition and performance metrics.
Commercial Credit
Refer to the “Commercial Credit” section of our 2016 Form 10-K for our commercial credit underwriting and on-going credit management processes.
Consumer Credit
Refer to the “Consumer Credit” section of our 2016 Form 10-K for our consumer credit underwriting and on-going credit management processes.


20

Table of Contents

The table below provides our total loan and lease portfolio segregated by industry type. The changes in the industry composition from December 31, 2016 are consistent with the portfolio growth.
Table 11 - Loan and Lease Portfolio by Industry Type
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate and rental and leasing
$
7,461

 
11
%
 
$
7,588

 
12
%
 
$
7,482

 
12
%
 
$
7,545

 
11
%
 
$
7,513

 
12
%
Manufacturing
4,874

 
7

 
4,916

 
7

 
5,048

 
8

 
4,937

 
7

 
4,931

 
7

Retail trade (1)
4,643

 
7

 
4,805

 
7

 
4,902

 
7

 
4,758

 
7

 
4,588

 
7

Finance and insurance
2,900

 
4

 
3,051

 
4

 
2,844

 
4

 
2,010

 
3

 
2,289

 
3

Health care and social assistance
2,727

 
4

 
2,699

 
4

 
2,727

 
4

 
2,729

 
4

 
2,638

 
4

Wholesale trade
2,070

 
3

 
2,058

 
3

 
2,181

 
3

 
2,071

 
3

 
2,009

 
3

Accommodation and food services
1,653

 
2

 
1,660

 
2

 
1,652

 
2

 
1,678

 
3

 
1,612

 
2

Other services
1,265

 
2

 
1,261

 
2

 
1,278

 
2

 
1,223

 
2

 
1,205

 
2

Transportation and warehousing
1,255

 
2

 
1,284

 
2

 
1,382

 
2

 
1,366

 
2

 
1,357

 
2

Professional, scientific, and technical services
1,230

 
2

 
1,232

 
2

 
1,240

 
2

 
1,264

 
2

 
1,228

 
2

Construction
913

 
1

 
928

 
1

 
924

 
1

 
875

 
1

 
889

 
1

Mining, quarrying, and oil and gas extraction
619

 
1

 
501

 
1

 
511

 
1

 
668

 
1

 
704

 
1

Arts, entertainment, and recreation
530

 
1

 
469

 
1

 
506

 
1

 
556

 
1

 
437

 
1

Educational services
509

 
1

 
570

 
1

 
544

 
1

 
501

 
1

 
495

 
1

Admin./Support/Waste Mgmt. and Remediation Services
484

 
1

 
444

 
1

 
427

 
1

 
429

 
1

 
409

 
1

Information
468

 
1

 
458

 
1

 
454

 
1

 
473

 
1

 
475

 
1

Utilities
431

 
1

 
433

 
1

 
463

 
1

 
470

 
1

 
480

 
1

Public administration
262

 

 
274

 

 
266

 

 
272

 

 
273

 

Agriculture, forestry, fishing and hunting
176

 

 
203

 

 
170

 

 
151

 

 
161

 

Unclassified/Other
122

 

 
183

 

 
167

 

 
1,288

 
2

 
1,136

 
2

Management of companies and enterprises
86

 

 
97

 

 
101

 

 
96

 

 
95

 

Total commercial loans and leases by industry category
34,675

 
51

 
35,114

 
52

 
35,269

 
53

 
35,360

 
53

 
34,924

 
53

Automobile
11,876

 
17

 
11,555

 
17

 
11,155

 
17

 
10,969

 
16

 
10,791

 
16

Home Equity
9,985

 
15

 
9,966

 
15

 
9,974

 
15

 
10,106

 
15

 
10,120

 
15

Residential mortgage
8,616

 
13

 
8,237

 
12

 
7,829

 
12

 
7,725

 
12

 
7,665

 
12

RV and marine finance
2,371

 
3

 
2,178

 
3

 
1,935

 
2

 
1,846

 
3

 
1,840

 
3

Other consumer loans
1,064

 
1

 
1,009

 
1

 
936

 
1

 
956

 
1

 
964

 
1

Total loans and leases
$
68,587

 
100
%
 
$
68,059

 
100
%
 
$
67,098

 
100
%
 
$
66,962

 
100
%
 
$
66,304

 
100
%
    
(1)
Amounts include $3.0 billion, $3.2 billion, $3.3 billion, $3.2 billion and $3.0 billion of auto dealer services loans at September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016 and September 30, 2016, respectively.

Credit Quality
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.

21

Table of Contents

Credit quality performance in the 2017 third quarter reflected continued overall positive results with stable levels of delinquencies and a 7% decline in NPAs from the prior quarter. Total NCOs were $43 million, or 0.25% annualized, of average total loans and leases.  Net charge-offs increased by $7 million from the prior quarter, due to an increase in the net charge-offs of the consumer portfolios. The ACL to total loans and leases ratio declined by 1 basis point to 1.10%.
NPAs, NALs, AND TDRs
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements and "Credit Quality" section of our 2016 Form 10-K.)
NPAs and NALs
Of the $187 million of CRE and C&I-related NALs at September 30, 2017, $106 million, or 57%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile, RV and marine and other consumer loans are generally charged-off at 120-days past due. TDR recognition at an earlier past due status than summarized above also may result in NAL designation.
The following table reflects period-end NALs and NPAs detail for each of the last five quarters: 
Table 12 - Nonaccrual Loans and Leases and Nonperforming Assets
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
Nonaccrual loans and leases (NALs):
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
169,751

 
$
195,279

 
$
232,171

 
$
234,184

 
$
220,862

Commercial real estate
17,397

 
16,763

 
13,889

 
20,508

 
21,300

Automobile
4,076

 
3,825

 
4,881

 
5,766

 
4,777

Home equity
71,353

 
67,940

 
69,575

 
71,798

 
69,044

Residential mortgage
75,251

 
80,306

 
80,686

 
90,502

 
88,155

RV and marine finance
309

 
341

 
106

 
245

 
96

Other consumer
108

 
2

 
2

 

 

Total nonaccrual loans and leases
338,245

 
364,456

 
401,310

 
423,003

 
404,234

Other real estate:
 
 
 
 
 
 
 
 
 
Residential
26,449

 
26,890

 
31,786

 
30,932

 
34,421

Commercial
15,592

 
16,926

 
18,101

 
19,998

 
36,915

Total other real estate
42,041

 
43,816

 
49,887

 
50,930

 
71,336

Other NPAs (1)
6,677

 
6,906

 
6,910

 
6,968

 

Total nonperforming assets
$
386,963

 
$
415,178

 
$
458,107

 
$
480,901

 
$
475,570

 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases as a % of total loans and leases
0.49
%
 
0.54
%
 
0.60
%
 
0.63
%
 
0.61
%
NPA ratio (2)
0.56

 
0.61

 
0.68

 
0.72

 
0.72

(NPA&90+days past due)/(Loans&OREO)
0.74

 
0.81

 
0.87

 
0.91

 
0.92

 

(1)Other nonperforming assets includes certain impaired investment securities.
(2)
Nonperforming assets divided by the sum of loans and leases, other real estate owned, and other NPAs.

2017 Third Quarter versus 2016 Fourth Quarter.
Total NPAs decreased by $94 million, or 20%, compared with December 31, 2016 primarily as a result of decreases in the C&I and residential portfolios NALs and a 17% decrease in OREO. The C&I decline was a result of significant payoffs and return to accrual of large relationships that were identified as NAL in the fourth quarter of 2016.  The residential mortgage decline was in part due to the efforts by our Home Savers Group actively working with our customers.

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TDR Loans
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements and TDR Loans section of our 2016 Form 10-K.)
Over the past five quarters, the accruing component of the total TDR balance has been between 80% and 84%, as borrowers continue to make their monthly payments in accordance with the modified terms.  From a payment standpoint, over 80% of the $500 million of accruing TDRs secured by residential real estate (Residential Mortgage and Home Equity in Table 13) are current on their required payments.  In addition, over 60% of the accruing pool have had no delinquency at all in the past 12 months. There is limited migration from the accruing to non-accruing components, and virtually all of the charge-offs come from the non-accruing TDR balances.
The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:
Table 13 - Accruing and Nonaccruing Troubled Debt Restructured Loans
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
Troubled debt restructured loans—accruing:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
268,373

 
$
270,372

 
$
222,303

 
$
210,119

 
$
232,740

Commercial real estate
80,272

 
74,429

 
81,202

 
76,844

 
80,553

Automobile
28,973

 
28,140

 
27,968

 
26,382

 
27,843

Home equity
264,410

 
268,731

 
271,258

 
269,709

 
275,601

Residential mortgage
235,191

 
238,087

 
239,175

 
242,901

 
251,529

RV and marine finance
1,211

 
950

 
581

 

 

Other consumer
6,353

 
4,017

 
4,128

 
3,780

 
4,102

Total troubled debt restructured loans—accruing
884,783

 
884,726

 
846,615

 
829,735

 
872,368

Troubled debt restructured loans—nonaccruing:
 
 
 
 
 
 
 
 
 
Commercial and industrial
96,248

 
89,757

 
88,759

 
107,087

 
70,179

Commercial real estate
3,797

 
3,823

 
4,357

 
4,507

 
5,672

Automobile
4,076

 
4,291

 
4,763

 
4,579

 
4,437

Home equity
30,753

 
28,667

 
29,090

 
28,128

 
28,009

Residential mortgage
50,428

 
55,590

 
59,773

 
59,157

 
62,027

RV and marine finance
309

 
381

 
106

 

 

Other consumer
103

 
109

 
117

 
118

 
142

Total troubled debt restructured loans—nonaccruing
185,714

 
182,618

 
186,965

 
203,576

 
170,466

Total troubled debt restructured loans
$
1,070,497

 
$
1,067,344

 
$
1,033,580

 
$
1,033,311

 
$
1,042,834


Accruing TDRs increased by $55 million compared with December 31, 2016, primarily as a result of the addition of C&I loans that meet the well secured definition and have demonstrated a period of satisfactory payment performance.
ACL
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our ACL Methodology Committee is responsible for developing the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for the recognition of loan losses due to new loan originations or funding under existing lines, and  increased risk levels resulting from loan risk-rating downgrades or increasing delinquency migrations.  Reductions reflect charge-offs (net of recoveries), and decreased risk levels resulting from loan risk-rating upgrades, decreasing delinquencies, or the sale / paydown of loans. The AULC is determined by applying the same quantitative reserve determination process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.
Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net

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Table of Contents

deferred loan fees and costs. Acquired loans are those purchased in the FirstMerit acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related ALLL. The difference between acquired contractual balance and estimated fair value at acquisition date was recorded as a purchase premium or discount.
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.
The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters: 
Table 14 - Allocation of Allowance for Credit Losses (1)
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
373,821

 
40
%
 
$
367,956

 
41
%
 
$
380,504

 
42
%
 
$
355,424

 
42
%
 
$
333,101

 
42
%
Commercial real estate
100,301

 
11

 
106,620

 
11

 
99,804

 
11

 
95,667

 
11

 
98,694

 
11

Total commercial
474,122

 
51

 
474,576

 
52

 
480,308

 
53

 
451,091

 
53

 
431,795

 
53

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
50,382

 
17

 
48,322

 
17

 
46,402

 
17

 
47,970

 
16

 
42,584

 
16

Home equity
57,897

 
15

 
62,941

 
15

 
64,900

 
15

 
65,474

 
15

 
69,866

 
15

Residential mortgage
29,236

 
13

 
33,304

 
12

 
35,559

 
12

 
33,398

 
12

 
36,510

 
12

RV and marine finance
13,018

 
3

 
7,665

 
3

 
4,022

 
2

 
5,311

 
3

 
4,289

 
3

Other consumer
50,831

 
1

 
41,188

 
1

 
41,389

 
1

 
35,169

 
1

 
31,854

 
1

Total consumer
201,364

 
49

 
193,420

 
48

 
192,272

 
47

 
187,322

 
47

 
185,103

 
47

Total allowance for loan and lease losses
675,486

 
100
%
 
667,996

 
100
%
 
672,580

 
100
%
 
638,413

 
100
%
 
616,898

 
100
%
Allowance for unfunded loan commitments
78,566

 
 
 
85,359

 
 
 
91,838

 
 
 
97,879

 
 
 
88,433

 
 
Total allowance for credit losses
$
754,052

 
 
 
$
753,355

 
 
 
$
764,418

 
 
 
$
736,292

 
 
 
$
705,331

 
 
Total allowance for loan and leases losses as % of:
Total loans and leases
 
 
0.98
%
 
 
 
0.98
%
 
 
 
1.00
%
 
 
 
0.95
%
 
 
 
0.93
%
Nonaccrual loans and leases
 
 
200

 
 
 
183

 
 
 
168

 
 
 
151

 
 
 
153

Nonperforming assets
 
 
175

 
 
 
161

 
 
 
147

 
 
 
133

 
 
 
130

Total allowance for credit losses as % of:
Total loans and leases
 
 
1.10
%
 
 
 
1.11
%
 
 
 
1.14
%
 
 
 
1.10
%
 
 
 
1.06
%
Nonaccrual loans and leases
 
 
223

 
 
 
207

 
 
 
190

 
 
 
174

 
 
 
174

Nonperforming assets
 
 
195

 
 
 
181

 
 
 
167

 
 
 
153

 
 
 
148


(1)
Percentages represent the percentage of each loan and lease category to total loans and leases.

2017 Third Quarter versus 2016 Fourth Quarter
At September 30, 2017, the ALLL was $675 million, compared to $638 million at December 31, 2016. The $37 million, or 6%, increase in the ALLL relates to an increase in Criticized/Classified assets in the C&I portfolio as well as growth in reserve levels for the Other Consumer portfolio related to growth and seasoning of the portfolio.
The ACL to total loans ratio was 1.10% at September 30, 2017 and December 31, 2016. Management believes the ratio is appropriate given the overall moderate-to-low risk profile of our loan portfolio. We continue to focus on early identification of loans with changes in credit metrics and proactive action plans for these loans. We believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.


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Table of Contents

NCOs
A loan in any portfolio may be charged-off if a loss confirming event has occurred or in accordance with the policies described below, whichever is earlier. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency where that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.
C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due with the exception of Huntington Technology Finance administrative lease delinquencies. Automobile loans, RV and marine finance and other consumer loans are generally charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.
Table 15 - Quarterly Net Charge-off Analysis
 
Three Months Ended
 
September 30,
 
June 30,
 
September 30,
(dollar amounts in thousands)
2017
 
2017
 
2016
Net charge-offs (recoveries) by loan and lease type:
Commercial:
 
 
 
 
 
Commercial and industrial
$
13,317

 
$
12,870

 
$
19,225

Commercial real estate:
 
 
 
 
 
Construction
(870
)
 
83

 
(271
)
Commercial
(3,184
)
 
(3,638
)
 
(2,427
)
Commercial real estate
(4,054
)
 
(3,555
)
 
(2,698
)
Total commercial
9,263

 
9,315

 
16,527

Consumer:
 
 
 
 
 
Automobile
9,619

 
8,318

 
7,769

Home equity
1,532

 
1,218

 
2,624

Residential mortgage
2,057

 
1,052

 
1,728

RV and marine finance
3,390

 
1,875

 
106

Other consumer
17,031

 
14,262

 
11,311

Total consumer
33,629

 
26,725

 
23,538

Total net charge-offs
$
42,892

 
$
36,040

 
$
40,065

 
 
 
 
 
 
 
Three Months Ended
 
September 30,
 
June 30,
 
September 30,
 
2017
 
2017
 
2016
Net charge-offs (recoveries)—annualized percentages:
Commercial:
 
 
 
 
 
Commercial and industrial
0.19
 %
 
0.18
 %
 
0.31
 %
Commercial real estate:
 
 
 
 
 
Construction
(0.30
)
 
0.03

 
(0.10
)
Commercial
(0.21
)
 
(0.24
)
 
(0.19
)
Commercial real estate
(0.22
)
 
(0.20
)
 
(0.17
)
Total commercial
0.11

 
0.11

 
0.21

Consumer:
 
 
 
 
 
Automobile
0.33

 
0.29

 
0.27

Home equity
0.06

 
0.05

 
0.11

Residential mortgage
0.10

 
0.05

 
0.10

RV and marine finance
0.59

 
0.37

 
0.05

Other consumer
6.51

 
5.81

 
5.54

Total consumer
0.40

 
0.33

 
0.32

Net charge-offs as a % of average loans
0.25
 %
 
0.21
 %
 
0.26
 %

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Table of Contents

In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time. The ALLL is established consistent with the level of risk associated with the commercial portfolio's original underwriting. As a part of our normal portfolio management process for commercial loans, loans within the portfolio are periodically reviewed and the ALLL is increased or decreased based on the updated risk ratings. For TDRs and individually assessed impaired loans, a specific reserve is established based on the discounted projected cash flows or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL is established. Consumer loans are treated in much the same manner as commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are not identified for consumer loans, except for TDRs. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.
2017 Third Quarter versus 2017 Second Quarter
NCOs were an annualized 0.25% of average loans and leases in the current quarter, an increase from 0.21% in the 2017 second quarter, still below our long-term expectation of 0.35% - 0.55%. Commercial - C&I charge-offs were slightly higher for the quarter, but well within our expected performance range. Consumer charge-offs were higher for the quarter, primarily driven by seasonality trends across the consumer portfolio, consistent with our expectations. Given the low level of C&I and CRE NCO’s, we have experienced and continue to expect some volatility on a quarter-to-quarter comparison basis.

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Table of Contents


The table below reflects NCO detail for the nine-month periods ended September 30, 2017 and 2016:
Table 16 - Year to Date Net Charge-off Analysis
 
Nine Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
Net charge-offs by loan and lease type:
 
 
 
Commercial:
 
 
 
Commercial and industrial
$
34,283

 
$
29,441

Commercial real estate:
 
 
 
Construction
(3,924
)
 
(752
)
Commercial
(5,927
)
 
(20,095
)
Commercial real estate
(9,851
)
 
(20,847
)
Total commercial
24,432

 
8,594

Consumer:
 
 
 
Automobile
30,344

 
18,859

Home equity
4,412

 
7,383

Residential mortgage
5,704

 
4,151

RV and marine finance
7,628

 
106

Other consumer
45,850

 
26,279

Total consumer
93,938

 
56,778

Total net charge-offs
$
118,370

 
$
65,372

 
 
 
 
 
Nine Months Ended September 30,
 
2017
 
2016
Net charge-offs - annualized percentages:
 
 
 
Commercial:
 
 
 
Commercial and industrial
0.16
 %
 
0.18
 %
Commercial real estate:
 
 
 
Construction
(0.44
)
 
(0.10
)
Commercial
(0.13
)
 
(0.58
)
Commercial real estate
(0.18
)
 
(0.50
)
Total commercial
0.09

 
0.04

Consumer:
 
 
 
Automobile
0.36

 
0.24

Home equity
0.06

 
0.11

Residential mortgage
0.09

 
0.09

RV and marine finance
0.49

 
0.05

Other consumer
6.13

 
5.23

Total consumer
0.39

 
0.29

Net charge-offs as a % of average loans
0.23
 %
 
0.16
 %

2017 First Nine Months versus 2016 First Nine Months
NCOs were $118 million, a $53 million increase from the same period in the prior year. The increase primarily relates to portfolio growth as a result of the FirstMerit acquisition as well as one large commercial recovery in the prior year period. Given the low level of C&I and CRE NCO’s, there will continue to be some volatility on a period-to-period comparison basis.



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Table of Contents

Market Risk
(This section should be read in conjunction with the “Market Risk” section of our 2016 Form 10-K for our on-going market risk management processes.)
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from trading securities, securities owned by our broker-dealer subsidiary, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans.
Interest Rate Risk
Table 17 - Net Interest Income at Risk
 
 
 
 
 
 
 
Net Interest Income at Risk (%)
Basis point change scenario
-25

 
+100

 
+200

Board policy limits
N/A

 
-2.0
 %
 
-4.0
 %
September 30, 2017
-0.5
 %
 
2.5
 %
 
5.0
 %
December 31, 2016
-1.0
 %
 
2.7
 %
 
5.6
 %
The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual -25, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.
Our NII at Risk is within our board of director's policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The NII at Risk shows that the balance sheet is asset sensitive at both September 30, 2017, and December 31, 2016.
Table 18 - Economic Value of Equity at Risk
 
 
 
 
 
 
 
Economic Value of Equity at Risk (%)
Basis point change scenario
-25

 
+100

 
+200

Board policy limits
N/A

 
-5.0
 %
 
-12.0
 %
September 30, 2017
-1.2
 %
 
3.4
 %
 
4.9
 %
December 31, 2016
-0.6
 %
 
0.9
 %
 
0.2
 %
The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -25, +100 and +200 basis point parallel shifts in market interest rates. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which deposit costs reach zero percent.
We are within our board of director's policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The EVE depicts a moderate level of long-term interest rate risk, which indicates the balance sheet is positioned favorably for rising interest rates. The EVE increase at September 30, 2017 from December 31, 2016 is primarily the result of a change in the average life assumptions for certain loans, deposits and securities.
MSRs
(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)
At September 30, 2017, we had a total of $195 million of capitalized MSRs representing the right to service $19.6 billion in mortgage loans. Of this $195 million, $12 million was recorded using the fair value method and $183 million was recorded using the amortization method.
MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed hedging strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report changes in the MSR value net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in the recorded value of the MSR between reporting dates are recognized as an increase or a decrease in mortgage banking income.

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Table of Contents

MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in servicing rights in the Unaudited Condensed Consolidated Financial Statements.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiary, foreign exchange positions and equity investments. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held.
Liquidity Risk
(This section should be read in conjunction with the “Liquidity Risk” section of our 2016 Form 10-K for our on-going liquidity risk management processes.)
Our primary source of liquidity is our core deposit base. Core deposits comprised approximately 95% of total deposits at September 30, 2017. We also have available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets, and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $13.9 billion as of September 30, 2017.
Bank Liquidity and Sources of Funding
Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2017, these core deposits funded 73% of total assets (109% of total loans). Other sources of liquidity include non-core deposits, FHLB advances, wholesale debt instruments, and securitizations. Demand deposit overdrafts that have been reclassified as loan balances were $24 million and $23 million at September 30, 2017 and December 31, 2016, respectively.
The following table reflects deposit composition detail for each of the last five quarters:
Table 19 - Deposit Composition
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2017
 
2017
 
2017
 
2016
 
2016
By Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
22,225

 
28
%
 
$
21,420

 
28
%
 
$
21,489

 
28
%
 
$
22,836

 
30
%
 
$
23,426

 
30
%
Demand deposits—interest-bearing
18,343

 
23

 
17,113

 
23

 
18,618

 
24

 
15,676

 
21

 
15,730

 
20

Money market deposits
20,553

 
26

 
19,423

 
26

 
18,664

 
24

 
18,407

 
24

 
18,604

 
24

Savings and other domestic deposits
11,441

 
15

 
11,758

 
15

 
12,043

 
16

 
11,975

 
16

 
12,418

 
16

Core certificates of deposit
2,009

 
3

 
2,088

 
3

 
2,188

 
3

 
2,535

 
3

 
2,724

 
4

Total core deposits:
74,571

 
95

 
71,802

 
95

 
73,002

 
95

 
71,429

 
94

 
72,902

 
94

Other domestic deposits of $250,000 or more
418

 
1

 
441

 
1

 
524

 
1

 
394

 
1

 
391

 
1

Brokered deposits and negotiable CDs
3,456

 
4

 
3,690

 
4

 
3,897

 
4

 
3,785

 
5

 
3,972

 
5

Deposits in foreign offices

 

 

 

 

 

 

 

 
140

 

Total deposits
$
78,445

 
100
%
 
$
75,933

 
100
%
 
$
77,423

 
100
%
 
$
75,608

 
100
%
 
$
77,405

 
100
%
Total core deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
35,516

 
48
%
 
$
32,201

 
45
%
 
$
32,963

 
45
%
 
$
31,887

 
45
%
 
$
32,936

 
45
%
Consumer
39,055

 
52

 
39,601

 
55

 
40,039

 
55

 
39,542

 
55

 
39,966

 
55

Total core deposits
$
74,571

 
100
%
 
$
71,802

 
100
%
 
$
73,002

 
100
%
 
$
71,429

 
100
%
 
$
72,902

 
100
%

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The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans pledged to the Federal Reserve Discount Window and the FHLB are $32.0 billion and $19.7 billion at September 30, 2017 and December 31, 2016, respectively.
To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding, asset securitization, or sale. Sources of wholesale funding include other domestic deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, and long-term debt. At September 30, 2017, total wholesale funding was $14.9 billion, a decrease from $16.2 billion at December 31, 2016. The decrease from year-end primarily relates to a decrease in short-term borrowings.
Liquidity Coverage Ratio
On September 3, 2014, the U.S. banking regulators adopted a final LCR for internationally active banking organizations, generally those with $250 billion or more in total assets, and a Modified LCR rule for banking organizations, similar to Huntington, with $50 billion or more in total assets that are not internationally active banking organizations. The LCR is designed to promote the short-term resilience of the liquidity risk profile of banks to which it applies. The Modified LCR requires Huntington to maintain HQLA to meet its net cash outflows over a prospective 30 calendar-day period, which takes into account the potential impact of idiosyncratic and market-wide shocks. The Modified LCR transition period began on January 1, 2016, with Huntington required to maintain HQLA equal to 90 percent of the stated requirement. The ratio increased to 100 percent on January 1, 2017. At September 30, 2017, Huntington was in compliance with the Modified LCR requirement.
Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends and interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
At September 30, 2017, the parent company had $1.9 billion in cash and cash equivalents, slightly up from December 31, 2016.
On October 18, 2017, the board of directors declared a quarterly common stock cash dividend of $0.11 per common share. The dividend is payable on January 2, 2018, to shareholders of record on December 18, 2017. Based on the current quarterly dividend of $0.11 per common share, cash demands required for common stock dividends are estimated to be approximately $119 million per quarter. On October 18, 2017, the board of directors declared a quarterly Series A, Series B, Series C, and Series D Preferred Stock dividend payable on January 15, 2018 to shareholders of record on January 1, 2018. Based on the current dividend, cash demands required for Series A, Series B, Series C, and Series D Preferred Stock are estimated to be approximately $8 million, $0.3 million, $1.5 million, and $9 million per quarter, respectively.
During the first nine months of 2017, the Bank returned capital totaling $426 million. Additionally, the Bank paid a preferred dividend of $34 million and common stock dividend of $100 million to the holding company during the first nine months of 2017. To meet any additional liquidity needs, the parent company may issue debt or equity securities from time to time.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include commitments to extend credit (See Note 14), financial guarantees contained in standby letters-of-credit issued by the Bank (See Note 14), and commitments by the Bank to sell mortgage loans (See Note 14).
Operational Risk
Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We actively and continuously monitor cyber-attacks such as attempts related to online deception and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber attacks and, to date, have not experienced any material losses.

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Our objective for managing cyber security risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate our systems. We work to achieve this objective by hardening networks and systems against attack, and by diligently managing visibility and monitoring controls within our data and communications environment to recognize events and respond before the attacker has the opportunity to plan and execute on its own goals. To this end we employ a set of defense in-depth strategies, which include efforts to make us less attractive as a target and less vulnerable to threats, while investing in threat analytic capabilities for rapid detection and response. Potential concerns related to cyber security may be escalated to our board-level Technology Committee, as appropriate. As a complement to the overall cyber security risk management, we use a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. We also use third-party services to test the effectiveness of our cyber security risk management framework, and any such third parties are required to comply with our policies regarding information security and confidentiality.
To mitigate operational risks, we have a senior management Operational Risk Committee and a senior management Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. In addition, we have a senior management Model Risk Oversight Committee that is responsible for policies and procedures describing how model risk is evaluated and managed and the application of the governance process to implement these practices throughout the enterprise. These committees report any significant findings and recommendations to the Risk Management Committee. Potential concerns may be escalated to our ROC, as appropriate.
The FirstMerit integration was inherently large and complex. Our objective for managing execution risk was to minimize impacts to daily operations. We established an Integration Management Office led by senior management. Responsibilities included central management, reporting, and escalation of key integration deliverables. In addition, a board level Integration Governance Committee was established to assist in the oversight of the integration of people, systems, and processes of FirstMerit with Huntington. While the systems' conversion is now largely completed, continued oversight occurred until all converted systems were fully decommissioned.
The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational fraud, and legal losses; minimize the impact of inadequately designed models and enhance our overall performance.
Compliance Risk
Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. These broad-based laws, rules, and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. Additionally, the volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti-money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and/or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.


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Capital
Both regulatory capital and shareholders’ equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Company’s overall capital adequacy. We believe our current levels of both regulatory capital and shareholders’ equity are adequate.
The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the periods presented: 
Table 20 - Regulatory Capital Data
 
 
 
 
 
 
 
 
 
 
Basel III
(dollar amounts in millions)
 
 
September 30,
2017
 
June 30,
2017
 
December 31,
2016
Total risk-weighted assets
Consolidated
 
$
78,631

 
$
78,366

 
$
78,263

 
Bank
 
78,848

 
78,489

 
78,242

Common equity tier I risk-based capital
Consolidated
 
7,817

 
7,740

 
7,486

 
Bank
 
8,491

 
8,367

 
8,153

Tier 1 risk-based capital
Consolidated
 
8,886

 
8,809

 
8,547

 
Bank
 
9,362

 
9,238

 
9,086

Tier 2 risk-based capital
Consolidated
 
1,638

 
1,640

 
1,668

 
Bank
 
1,706

 
1,706

 
1,732

Total risk-based capital
Consolidated
 
10,524

 
10,449

 
10,215

 
Bank
 
11,068

 
10,944

 
10,818

Tier 1 leverage ratio
Consolidated
 
8.96
%
 
8.98
%
 
8.70
%
 
Bank
 
9.44

 
9.43

 
9.29

Common equity tier I risk-based capital ratio
Consolidated
 
9.94

 
9.88

 
9.56

 
Bank
 
10.77

 
10.66

 
10.42

Tier 1 risk-based capital ratio
Consolidated
 
11.30

 
11.24

 
10.92

 
Bank
 
11.87

 
11.77

 
11.61

Total risk-based capital ratio
Consolidated
 
13.39

 
13.33

 
13.05

 
Bank
 
14.04

 
13.94

 
13.83


At September 30, 2017, we maintained Basel III transitional capital ratios in excess of the well-capitalized standards established by the FRB.
Common Equity Tier 1 (CET1) risk-based capital ratio was 9.94% at September 30, 2017, up from 9.56% at December 31, 2016. The regulatory Tier 1 risk-based capital ratio was 11.30% compared to 10.92% at December 31, 2016. All capital ratios were impacted by the repurchase of $123 million of common stock at an average cost of $12.75 per share during the 2017 third quarter.
Shareholders’ Equity
We generate shareholders’ equity primarily through the retention of earnings, net of dividends and share repurchases. Other potential sources of shareholders’ equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities.
Shareholders’ equity totaled $10.7 billion at September 30, 2017, an increase of $0.4 billion when compared with December 31, 2016.
On June 28, 2017, Huntington was notified by the Federal Reserve that it had no objection to Huntington's proposed capital actions included in Huntington's capital plan submitted in the 2017 Comprehensive Capital Analysis and Review (CCAR). These actions included a 38% increase in the quarterly dividend per common share to $0.11, starting in the fourth quarter of 2017, the repurchase of up to $308 million of common stock over the next four quarters (July 1, 2017 through June 30, 2018), subject to authorization by the Board of Directors, and maintaining dividends on the outstanding classes of preferred stock and trust preferred securities.
On July 19, 2017, the Board authorized the repurchase of up to $308 million of common shares over the four quarters through the 2018 second quarter. During the 2017 third quarter, Huntington purchased $123 million of common stock at an

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average cost of $12.75 per share. Purchases of common stock under the authorization may include open market purchases, privately negotiated transactions, and accelerated repurchase programs.
Dividends
We consider disciplined capital management as a key objective, with dividends representing one component. Our strong capital ratios and expectations for continued earnings growth positions us to continue to actively explore additional capital management opportunities.
Fair Value
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. As necessary, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs at the measurement date. The fair values measured at each level of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs, can be found in Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements.
BUSINESS SEGMENT DISCUSSION
Overview
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have four major business segments: Consumer and Business Banking, Commercial Banking, Commercial Real Estate and Vehicle Finance (CREVF), and Regional Banking and The Huntington Private Client Group (RBHPCG). A Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon our management accounting practices, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.
We announced a change within our executive leadership team, which became effective during the 2017 second quarter. As a result, the previously reported Home Lending segment is now included as an operating unit within the Consumer and Business Banking segment. Additionally, the Insurance operating unit previously included in Commercial Banking was realigned to RBHPCG during second quarter. Prior period results have been reclassified to conform to the current period presentation.
Revenue Sharing
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations.
Expense Allocation
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all four business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the four business segments.

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Funds Transfer Pricing (FTP)
We use an active and centralized FTP methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).
Net Income by Business Segment
Net income by business segment for the nine-month periods ending September 30, 2017 and September 30, 2016 is presented in the following table:
Table 21 - Net Income (Loss) by Business Segment
 
Nine Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
Consumer and Business Banking
$
314,366

 
$
234,356

Commercial Banking
239,685

 
133,470

CREVF
162,676

 
129,802

RBHPCG
66,962

 
46,529

Treasury / Other
(29,286
)
 
(71,299
)
Net income
$
754,403

 
$
472,858

Treasury / Other
The Treasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the four business segments. Other assets include investment securities and bank owned life insurance. The financial impact associated with our FTP methodology, as described above, is also included.
Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and securities and trading asset gains or losses. Noninterest expense includes FirstMerit acquisition-related expenses in 2017 first nine-month period, certain corporate administrative, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury / Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the business segments.
Consumer and Business Banking
 
 
 
 
 
 
 
 
Table 22 - Key Performance Indicators for Consumer and Business Banking
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands unless otherwise noted)
2017
 
2016
 
Amount
 
Percent
Net interest income
$
1,255,617

 
$
911,706

 
$
343,911

 
38
%
Provision for credit losses
74,270

 
43,474

 
30,796

 
71

Noninterest income
544,445

 
459,732

 
84,713

 
18

Noninterest expense
1,242,152

 
967,417

 
274,735

 
28

Provision for income taxes
169,274

 
126,191

 
43,083

 
34

Net income
$
314,366

 
$
234,356

 
$
80,010

 
34
%
Number of employees (average full-time equivalent)
8,696

 
6,997

 
1,699

 
24
%
Total average assets (in millions)
$
25,461

 
$
19,921

 
$
5,540

 
28

Total average loans/leases (in millions)
20,577

 
16,967

 
3,610

 
21

Total average deposits (in millions)
45,478

 
33,759

 
11,719

 
35

Net interest margin
3.79
%
 
3.69
%
 
0.10
%
 
3

NCOs
$
75,064

 
$
49,873

 
$
25,191

 
51

NCOs as a % of average loans and leases
0.48
%
 
0.39
%
 
0.09
%
 
23


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2017 First Nine Months versus 2016 First Nine Months
Consumer and Business Banking, including Home Lending, reported net income of $314 million in the first nine-month period of 2017, an increase of $80 million, or 34%, compared to the year-ago period. Results were predominantly impacted by the FirstMerit acquisition. Segment net interest income increased $344 million, or 38%, primarily due to an increase in total average loans and deposits. The provision for credit losses increased $31 million, or 71%, driven by increased NCOs as well as an increase in the allowance. Noninterest income increased $85 million, or 18%, due to an increase in card and payment processing income and service charges on deposit accounts, which were driven by higher debit card-related transaction volumes and an increase in the number of households. In addition, SBA loan sales gains contributed to improved noninterest income. Noninterest expense increased $275 million, or 28%, due to an increase in personnel and occupancy expense related to the addition of FirstMerit branches and colleagues. Higher processing costs related to transaction volumes, along with allocated expenses, also contributed to the increase in noninterest expense.
Home Lending, an operating unit of Consumer and Business Banking, reflects the result of the origination and servicing of mortgage loans less referral fees and net interest income for mortgage banking products distributed by the retail branch network and other business segments. Home Lending reported net income of $6 million in the first nine-month period of 2017, a decrease of $11 million, or 64%, compared to the year-ago period. While total revenues increased $9 million, or 8%, largely due to higher residential loan balances, this increase was offset by an increase in noninterest expenses of $22 million, or 27%, as a result of higher personnel costs related to the FirstMerit acquisition and higher origination volume. Income from lower origination spreads offset higher origination volume.
Commercial Banking
 
 
 
 
 
 
 
 
Table 23 - Key Performance Indicators for Commercial Banking
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands unless otherwise noted)
2017
 
2016
 
Amount
 
Percent
Net interest income
$
514,900

 
$
355,263

 
$
159,637

 
45
 %
Provision for credit losses
21,378

 
53,212

 
(31,834
)
 
(60
)
Noninterest income
176,609

 
150,228

 
26,381

 
18

Noninterest expense
301,385

 
246,941

 
54,444

 
22

Provision for income taxes
129,061

 
71,868

 
57,193

 
80

Net income
$
239,685

 
$
133,470

 
$
106,215

 
80
 %
Number of employees (average full-time equivalent)
1,078

 
894

 
184

 
21
 %
Total average assets (in millions)
$
24,026

 
$
19,012

 
$
5,014

 
26

Total average loans/leases (in millions)
19,051

 
14,951

 
4,100

 
27

Total average deposits (in millions)
19,206

 
14,976

 
4,230

 
28

Net interest margin
3.33
%
 
2.95
%
 
0.38
 %
 
13

NCOs
$
13,420

 
$
19,951

 
$
(6,531
)
 
(33
)
NCOs as a % of average loans and leases
0.09
%
 
0.18
%
 
(0.09
)%
 
(50
)

2017 First Nine Months versus 2016 First Nine Months
Commercial Banking reported net income of $240 million in the first nine-month period of 2017, an increase of $106 million, or 80%, compared to the year-ago period. Results were predominantly impacted by the FirstMerit acquisition. Segment net interest income increased $160 million, or 45%, primarily due to an increase in both average loans and deposits combined with a 38 basis point increase in net interest margin. The provision for credit losses decreased $32 million, or 60%, driven by an improvement in energy related credits and a reduction in NCOs. Noninterest income increased $26 million, or 18%, largely driven by an increase in loan commitment and other fees, capital markets related revenues, and deposit service charges and other treasury management related income partially offset by a reduction in operating lease income. Noninterest expense increased $54 million, or 22%, primarily due to an increase in personnel expense, allocated expenses, and amortization of intangibles, partially offset by a decrease in operating lease expense.  

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Commercial Real Estate and Vehicle Finance
 
 
 
 
 
 
 
 
Table 24 - Commercial Real Estate and Vehicle Finance
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands unless otherwise noted)
2017
 
2016
 
Amount
 
Percent
Net interest income
$
419,556

 
$
317,704

 
$
101,852

 
32
 %
Provision for credit losses
40,047

 
18,706

 
21,341

 
114

Noninterest income
34,750

 
25,951

 
8,799

 
34

Noninterest expense
163,989

 
125,254

 
38,735

 
31

Provision for income taxes
87,594

 
69,893

 
17,701

 
25

Net income
$
162,676

 
$
129,802

 
$
32,874

 
25
 %
Number of employees (average full-time equivalent)
406

 
330

 
76

 
23
 %
Total average assets (in millions)
$
24,121

 
$
19,520

 
$
4,601

 
24

Total average loans/leases (in millions)
23,025

 
18,433

 
4,592

 
25

Total average deposits (in millions)
1,878

 
1,669

 
209

 
13

Net interest margin
2.42
%
 
2.25
 %
 
0.17
%
 
8

NCOs (Recoveries)
$
28,007

 
$
(2,146
)
 
$
30,153

 
(1,405
)
NCOs as a % of average loans and leases
0.16
%
 
(0.02
)%
 
0.18
%
 
(900
)

2017 First Nine Months versus 2016 First Nine Months
CREVF reported net income of $163 million in the first nine-month period of 2017, an increase of $33 million, or 25%, compared to the year-ago period. Results were positively impacted by the FirstMerit acquisition, offset in part by a higher provision for credit losses reflecting significant commercial real estate recoveries benefiting the year ago period. Segment net interest income increased $102 million or 32%, due to both higher loan balances and a 17 basis point increase in the net interest margin primarily reflecting the purchase accounting impact of the acquired loan portfolios. Noninterest income increased $9 million, or 34%, primarily due to an increase in gains on various equity investments associated with mezzanine lending related activities and an increase in net servicing income on securitized automobile loans. Noninterest expense increased $39 million, or 31%, primarily due to an increase in personnel costs and other allocated costs attributed to higher production and portfolio balance levels.
Regional Banking and The Huntington Private Client Group
 
 
 
 
 
 
 
 
Table 25 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group
 
Nine Months Ended September 30,
 
Change
(dollar amounts in thousands unless otherwise noted)
2017
 
2016
 
Amount
 
Percent
Net interest income
$
145,089

 
$
112,473

 
$
32,616

 
29
 %
Provision for credit losses
510

 
490

 
20

 
4

Noninterest income
140,610

 
126,245

 
14,365

 
11

Noninterest expense
182,171

 
166,645

 
15,526

 
9

Provision for income taxes
36,056

 
25,054

 
11,002

 
44

Net income
$
66,962

 
$
46,529

 
$
20,433

 
44
 %
Number of employees (average full-time equivalent)
1,027

 
953

 
74

 
8
 %
Total average assets (in millions)
$
5,473

 
$
4,424

 
$
1,049

 
24

Total average loans/leases (in millions)
4,779

 
3,997

 
782

 
20

Total average deposits (in millions)
5,893

 
5,002

 
891

 
18

Net interest margin
3.38
%
 
3.01
 %
 
0.37
%
 
12

NCOs (Recoveries)
$
1,879

 
$
(2,392
)
 
$
4,271

 
(179
)
NCOs as a % of average loans and leases
0.05
%
 
(0.08
)%
 
0.13
%
 
(163
)
Total assets under management (in billions)—eop
$
18.0

 
$
17.3

 
$
0.7

 
4

Total trust assets (in billions)—eop
106.3

 
98.8

 
7.5

 
8

eop - End of Period.

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2017 First Nine Months versus 2016 First Nine Months
RBHPCG reported net income of $67 million in the first nine-month period of 2017, an increase of $20 million, or 44%, compared to the year-ago period. Results were predominantly impacted by the FirstMerit acquisition. Net interest income increased $33 million, or 29%, due to an increase in average total deposits and loans combined with a 37 basis point increase in net interest margin. The increase in average total loans was due to growth in commercial and portfolio mortgage loans, while the increase in average total deposits was due to growth in interest checking balances. The provision for credit losses was essentially unchanged. Noninterest income increased $14 million, or 11%, primarily reflecting increased trust and investment management revenue as a result of an increase in trust assets and assets under management, largely from the FirstMerit acquisition. Noninterest expense increased $16 million, or 9%, as a result of increased personnel expenses and amortization of intangibles resulting from the FirstMerit acquisition.
ADDITIONAL DISCLOSURES
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements, which are not historical facts and are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our “Fair Play” banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the possibility that the anticipated benefits of the merger with FirstMerit Corporation are not realized completely or when expected, including as a result of the impact of, or problems arising from, the strength of the economy and competitive factors in the areas where we do business; and other factors that may affect our future results. Additional factors that could cause results to differ materially from those described above can be found in our Annual Report on Form 10-K for the year ended December 31, 2016, and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, which are on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, http://www.huntington.com, under the heading “Publications and Filings” and in other documents we file with the SEC.
All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not assume any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Non-GAAP Financial Measures
This document contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding Huntington’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein where applicable.
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

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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.
Fully-Taxable Equivalent Basis
Interest income, yields, and ratios on a FTE basis are considered non-GAAP financial measures.  Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes.  The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources.  The FTE basis assumes a federal statutory tax rate of 35 percent. We encourage readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.
Non-Regulatory Capital Ratios
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
Tangible common equity to tangible assets, and
Tangible common equity to risk-weighted assets using Basel III definitions.
These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Company’s capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities, the nature and extent of which varies among different financial services companies. These ratios are not defined in GAAP or federal banking regulations. As a result, these non-regulatory capital ratios disclosed by the Company are considered non-GAAP financial measures.
Because there are no standardized definitions for these non-regulatory capital ratios, the Company’s calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.
Risk Factors
Information on risk is discussed in the Risk Factors section included in Item 1A of our 2016 Form 10-K. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of Notes to Consolidated Financial Statements included in our December 31, 2016 Form 10-K, as supplemented by this report, lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that significantly differ from when those estimates were made.

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Our most significant accounting estimates relate to our ACL, valuation of financial instruments, contingent liabilities, income taxes, and deferred tax assets. These significant accounting estimates and their related application are discussed in our December 31, 2016 Form 10-K.
Recent Accounting Pronouncements and Developments
Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2017 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Unaudited Condensed Consolidated Financial Statements.



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Item 1: Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
(dollar amounts in thousands, except number of shares)
September 30,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Cash and due from banks
$
1,193,738

 
$
1,384,770

Interest-bearing deposits in banks
50,090

 
58,267

Trading account securities
88,488

 
133,295

Loans held for sale (includes $584,829 and $438,224 respectively, measured at fair value)(1)
651,734

 
512,951

Available-for-sale and other securities
15,453,061

 
15,562,837

Held-to-maturity securities
8,688,399

 
7,806,939

Loans and leases (includes $99,191 and $82,319 respectively, measured at fair value)(1)
68,587,296

 
66,961,996

Allowance for loan and lease losses
(675,486
)
 
(638,413
)
Net loans and leases
67,911,810

 
66,323,583

Bank owned life insurance
2,459,807

 
2,432,086

Premises and equipment
853,290

 
815,508

Goodwill
1,992,849

 
1,992,849

Other intangible assets
359,844

 
402,458

Servicing rights
229,746

 
225,578

Accrued income and other assets
2,055,270

 
2,062,976

Total assets
$
101,988,126

 
$
99,714,097

Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Deposits
$
78,445,113

 
$
75,607,717

Short-term borrowings
1,829,549

 
3,692,654

Long-term debt
9,200,707

 
8,309,159

Accrued expenses and other liabilities
1,813,908

 
1,796,421

Total liabilities
91,289,277

 
89,405,951

Commitments and contingencies (Note 14)
 
 
 
Shareholders’ equity
 
 
 
Preferred stock
1,071,286

 
1,071,227

Common stock
10,844

 
10,886

Capital surplus
9,820,600

 
9,881,277

Less treasury shares, at cost
(35,133
)
 
(27,384
)
Accumulated other comprehensive loss
(369,963
)
 
(401,016
)
Retained earnings (deficit)
201,215

 
(226,844
)
Total shareholders’ equity
10,698,849

 
10,308,146

Total liabilities and shareholders’ equity
$
101,988,126

 
$
99,714,097

Common shares authorized (par value of $0.01)
1,500,000,000

 
1,500,000,000

Common shares issued
1,084,366,589

 
1,088,641,251

Common shares outstanding
1,080,946,315

 
1,085,688,538

Treasury shares outstanding
3,420,274

 
2,952,713

Preferred stock, authorized shares
6,617,808

 
6,617,808

Preferred shares issued
2,702,571

 
2,702,571

Preferred shares outstanding
1,098,006

 
1,098,006


(1)
Amounts represent loans for which Huntington has elected the fair value option. See Note 11.
See Notes to Unaudited Condensed Consolidated Financial Statements


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Huntington Bancshares Incorporated
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income
 
 
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
(dollar amounts in thousands, except per share amounts)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Interest and fee income:
 
 
 
 
 
 
 
Loans and leases
$
724,284

 
$
583,653

 
$
2,100,056

 
$
1,516,849

Available-for-sale and other securities
 
 
 
 
 
 
 
Taxable
74,409

 
57,572

 
228,986

 
138,178

Tax-exempt
18,579

 
13,687

 
55,961

 
40,499

Held-to-maturity securities—taxable
48,743

 
33,098

 
138,214

 
105,307

Other
6,972

 
6,336

 
16,554

 
16,422

Total interest income
872,987

 
694,346

 
2,539,771

 
1,817,255

Interest expense:
 
 
 
 
 
 
 
Deposits
49,611

 
26,233

 
126,688

 
71,575

Short-term borrowings
5,713

 
959

 
16,782

 
2,770

Federal Home Loan Bank advances
65

 
66

 
197

 
207

Subordinated notes and other long-term debt
59,165

 
41,698

 
163,184

 
108,366

Total interest expense
114,554

 
68,956

 
306,851

 
182,918

Net interest income
758,433

 
625,390

 
2,232,920

 
1,634,337

Provision for credit losses
43,590

 
63,805

 
136,206

 
115,896

Net interest income after provision for credit losses
714,843

 
561,585

 
2,096,714

 
1,518,441

Service charges on deposit accounts
90,681

 
86,847

 
261,683

 
232,722

Cards and payment processing income
53,647

 
44,320

 
153,301

 
119,951

Mortgage banking income
33,615

 
40,603

 
97,575

 
90,737

Trust and investment management services
33,531

 
28,923

 
99,633

 
74,258

Insurance income
13,992

 
15,865

 
45,099

 
48,037

Brokerage income
14,458

 
14,719

 
46,510

 
44,819

Capital markets fees
21,719

 
14,750

 
52,755

 
40,797

Bank owned life insurance income
16,453

 
14,452

 
49,317

 
40,500

Gain on sale of loans
13,877

 
7,506

 
38,701

 
22,166

Net gains on sales of securities
71

 
1,031

 
3,781

 
1,763

Impairment losses on available-for-sale securities
(104
)
 

 
(3,687
)
 
(76
)
Other noninterest income
38,157

 
33,399

 
123,110

 
99,720

Total noninterest income
330,097

 
302,415

 
967,778

 
815,394

Personnel costs
377,088

 
405,024

 
1,151,085

 
989,369

Outside data processing and other services
79,586

 
91,133

 
241,957

 
216,047

Equipment
45,458

 
40,792

 
135,082

 
105,173

Net occupancy
55,124

 
41,460

 
175,437

 
103,640

Professional services
15,227

 
47,075

 
51,712

 
82,101

Marketing
16,970

 
14,438

 
49,736

 
41,479

Deposit and other insurance expense
18,514

 
14,940

 
59,031

 
38,335

Amortization of intangibles
14,017

 
9,046

 
42,614

 
16,357

Other noninterest expense
58,444

 
48,339

 
175,560

 
134,487

Total noninterest expense
680,428

 
712,247

 
2,082,214

 
1,726,988

Income before income taxes
364,512

 
151,753

 
982,278

 
606,847

Provision for income taxes
89,944

 
24,749

 
227,875

 
133,989

Net income
274,568

 
127,004

 
754,403

 
472,858

Dividends on preferred shares
18,903

 
18,537

 
56,670

 
46,409

Net income applicable to common shares
$
255,665

 
$
108,467

 
$
697,733

 
$
426,449

 
 
 
 
 
 
 
 

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Average common shares—basic
1,086,038

 
938,578

 
1,087,115

 
844,167

Average common shares—diluted
1,106,491

 
952,081

 
1,107,878

 
856,934

Per common share:
 
 
 
 
 
 
 
Net income—basic
$
0.24

 
$
0.12

 
$
0.64

 
$
0.51

Net income—diluted
0.23

 
0.11

 
0.63

 
0.50

Cash dividends declared
0.08

 
0.07

 
0.24

 
0.21

OTTI losses for the periods presented:
 
 
 
 
 
 
 
Total OTTI losses
$
(104
)
 
$

 
$
(3,693
)
 
$
(3,809
)
Noncredit-related portion of loss recognized in OCI

 

 
6

 
3,733

Impairment losses recognized in earnings on available-for-sale securities
$
(104
)
 
$

 
$
(3,687
)
 
$
(76
)
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements



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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Net income
$
274,568

 
$
127,004

 
$
754,403

 
$
472,858

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale and other securities:
 
 
 
 
 
 
 
Non-credit-related impairment recoveries (losses) on debt securities not expected to be sold
265

 
1,294

 
2,391

 
(388
)
Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains and losses
(21,968
)
 
(35,036
)
 
25,081

 
47,118

Total unrealized gains (losses) on available-for-sale and other securities
(21,703
)
 
(33,742
)
 
27,472

 
46,730

Unrealized gains (losses) on cash flow hedging derivatives, net of reclassifications to income
1,318

 
(5,232
)
 
1,563

 
4,731

Change in accumulated unrealized losses for pension and other post-retirement obligations
779

 
841

 
2,018

 
2,522

Other comprehensive income (loss), net of tax
(19,606
)
 
(38,133
)
 
31,053

 
53,983

Comprehensive income
$
254,962

 
$
88,871

 
$
785,456

 
$
526,841

See Notes to Unaudited Condensed Consolidated Financial Statements


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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Gain (Loss)
 
Retained Earnings (Deficit)
 
 
(dollar amounts in thousands, except per share amounts)
Preferred Stock
 
Common Stock
 
Capital Surplus
 
Treasury Stock
 
 
 
 
Amount
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
386,291

 
796,970

 
$
7,970

 
$
7,038,502

 
(2,041
)
 
$
(17,932
)
 
$
(226,158
)
 
$
(594,067
)
 
$
6,594,606

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
472,858

 
472,858

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
53,983

 
 
 
53,983

FirstMerit Acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock
 
 
285,425

 
2,854

 
2,764,044

 
 
 
 
 
 
 
 
 
2,766,898

Issuance of Series C preferred stock
100,000

 
 
 
 
 
4,320

 
 
 
 
 
 
 
 
 
104,320

Net proceeds from issuance of Series D preferred stock
584,936

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
584,936

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.21 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(187,710
)
 
(187,710
)
Preferred Series A ($63.75 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(23,110
)
 
(23,110
)
Preferred Series B ($25.08 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(890
)
 
(890
)
Preferred Series C ($11.59 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,159
)
 
(1,159
)
Preferred Series D ($35.42 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(21,250
)
 
(21,250
)
Recognition of the fair value of share-based compensation
 
 
 
 
 
 
48,568

 
 
 
 
 
 
 
 
 
48,568

Other share-based compensation activity
 
 
5,014

 
50

 
4,389

 
 
 
 
 
 
 
(3,823
)
 
616

Shares sold to HIP
 
 
322

 
3

 
3,207

 
 
 
 
 
 
 
 
 
3,210

Other
 
 


 


 
119

 
(908
)
 
(9,001
)
 
 
 
(229
)
 
(9,111
)
Balance, end of period
$
1,071,227

 
1,087,731

 
$
10,877

 
$
9,863,149

 
(2,949
)
 
$
(26,933
)
 
$
(172,175
)
 
$
(359,380
)
 
$
10,386,765

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
1,071,227

 
1,088,641

 
$
10,886

 
$
9,881,277

 
(2,953
)
 
$
(27,384
)
 
$
(401,016
)
 
$
(226,844
)
 
$
10,308,146

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
754,403

 
754,403

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
31,053

 
 
 
31,053

Repurchases of common stock
 
 
(9,645
)
 
(96
)
 
(123,108
)
 
 
 
 
 
 
 
 
 
(123,204
)
Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.24 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(260,919
)
 
(260,919
)
Preferred Series A ($63.75 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(23,110
)
 
(23,110
)
Preferred Series B ($28.96 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,028
)
 
(1,028
)
Preferred Series C ($44.07 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,407
)
 
(4,407
)
Preferred Series D ($46.88 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(28,125
)
 
(28,125
)
Recognition of the fair value of share-based compensation
 
 
 
 
 
 
72,747

 
 
 
 
 
 
 
 
 
72,747

Other share-based compensation activity
 
 
5,361

 
53

 
(11,928
)
 
 
 
 
 
 
 
(8,499
)
 
(20,374
)
Other
59

 
10

 
1

 
1,612

 
(468
)
 
(7,749
)
 
 
 
(256
)
 
(6,333
)
Balance, end of period
$
1,071,286

 
1,084,367

 
$
10,844

 
$
9,820,600

 
(3,421
)
 
$
(35,133
)
 
$
(369,963
)
 
$
201,215

 
$
10,698,849

See Notes to Unaudited Condensed Consolidated Financial Statements

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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
Operating activities
 
Net income
$
754,403

 
$
472,858

Adjustments to reconcile net income to net cash provided by operating activities:
 
Provision for credit losses
136,206

 
115,896

Depreciation and amortization
307,063

 
299,444

Share-based compensation expense
72,747

 
48,568

Deferred income tax expense (benefit)
36,244

 
(18,094
)
Net gains on sales of securities
(3,781
)
 
(1,763
)
Impairment losses recognized in earnings on available-for-sale securities
3,687

 
76

Net change in:
 
 
 
Trading account securities
44,807

 
926

Loans held for sale
(164,405
)
 
(194,735
)
Accrued income and other assets
(136,485
)
 
(169,453
)
Accrued expense and other liabilities
42,162

 
144,496

Other, net
13,647

 
(12,413
)
Net cash provided by (used for) operating activities
1,106,295

 
685,806

Investing activities
 
Change in interest bearing deposits in banks
20,688

 
33,221

Cash paid for acquisition of a business, net of cash received

 
(133,218
)
Proceeds from:
 
 
 
Maturities and calls of available-for-sale and other securities
1,081,091

 
1,266,031

Maturities of held-to-maturity securities
792,996

 
850,170

Sales of available-for-sale and other securities
1,255,152

 
3,893,482

Purchases of available-for-sale and other securities
(3,208,608
)
 
(5,434,332
)
Purchases of held-to-maturity securities
(689,670
)
 

Net proceeds from sales of portfolio loans
427,142

 
352,277

Net loan and lease activity, excluding sales and purchases
(2,159,966
)
 
(3,286,238
)
Purchases of premises and equipment
(144,637
)
 
(63,688
)
Proceeds from sales of other real estate
25,156

 
21,765

Purchases of loans and leases
(112,859
)
 
(359,208
)
Other, net
11,556

 
(249
)
Net cash provided by (used for) investing activities
(2,701,959
)
 
(2,859,987
)
Financing activities
 
 
 
Increase (decrease) in deposits
2,837,396

 
853,806

Increase (decrease) in short-term borrowings
(1,865,157
)
 
363,518

Net proceeds from issuance of long-term debt
1,773,096

 
2,081,643

Maturity/redemption of long-term debt
(882,977
)
 
(684,746
)
Dividends paid on preferred stock
(56,632
)
 
(46,409
)
Dividends paid on common stock
(261,593
)
 
(168,656
)
Repurchases of common stock
(123,204
)
 

Proceeds from stock options exercised
9,316

 
6,084

Net proceeds from issuance of preferred stock

 
584,936

Payments related to tax-withholding for share based compensation awards
(25,613
)
 

Other, net

 
(1,212
)
Net cash provided by (used for) financing activities
1,404,632

 
2,988,964

Increase (decrease) in cash and cash equivalents
(191,032
)
 
814,783

Cash and cash equivalents at beginning of period
1,384,770

 
847,156

Cash and cash equivalents at end of period
$
1,193,738

 
$
1,661,939


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Table of Contents

 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
Supplemental disclosures:
 
Interest paid
$
307,493

 
$
159,357

Income taxes paid
71,165

 
3,869

Non-cash activities
 
Loans transferred to held-for-sale from portfolio
446,152

 
3,204,732

Loans transferred to portfolio from held-for-sale
4,751

 
92,585

Transfer of loans to OREO
23,691

 
18,678

Transfer of securities to held-to-maturity from available-for-sale

992,760

 

See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

Huntington Bancshares Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying Unaudited Condensed Consolidated Financial Statements of Huntington reflect all adjustments consisting of normal recurring accruals which are, in the opinion of Management, necessary for a fair statement of the consolidated financial position, the results of operations, and cash flows for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These Unaudited Condensed Consolidated Financial Statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s 2016 Form 10-K, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.
For statement of cash flow purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” which includes amounts on deposit with the Federal Reserve and “Federal funds sold and securities purchased under resale agreements.”
In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Consolidated Financial Statements or disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts reported in prior periods have been reclassified to conform to the current period presentation.
2. ACCOUNTING STANDARDS UPDATE
Standard
Summary of guidance
Effects on financial statements
ASU 2014-09 - Revenue from Contracts with Customers (Topic 606):
Issued May 2014
- Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance.

- Requires an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

- Also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers

- Guidance sets forth a five step approach for revenue recognition.
- Effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Management intends to adopt the new guidance on January 1, 2018 using the modified retrospective approach.

- Management's analysis includes:
(a) Identification of all revenue streams included in the financial statements;
(b) Determination of scope exclusions to identify ‘in-scope’ revenue streams;
(c) Determination of size, timing, and amount of revenue recognition for in-scope items;
(d) Identification of contracts for further analysis; and
(e) Completion of review of certain contracts to evaluate the potential impact of the new guidance.

- Key revenue streams identified include service charges, credit card and payment processing fees, trust services fees, insurance income, brokerage services, and mortgage banking income.

- The new guidance is not expected to have a significant impact on Huntington’s Unaudited Consolidated Financial Statements.

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Table of Contents

Standard
Summary of guidance
Effects on financial statements
ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities.
Issued January 2016

- Improvements to GAAP disclosures including requiring an entity to:
(a) Measure its equity investments with changes in the fair value recognized in the income statement.
(b) Present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (i.e., FVO liability).
(c) Use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
(d) Assess deferred tax assets related to a net unrealized loss on AFS securities in combination with the entity’s other deferred tax assets.
- Effective for the fiscal period beginning after December 15, 2017, including interim periods within those fiscal years.

- Amendments are applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.

- The amendment is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.
ASU 2016-02 - Leases.
Issued February 2016

- New lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease.

- Accounting applied by a lessor is largely unchanged from that applied under the existing guidance.

- Requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
- Effective for the fiscal period beginning after December 15, 2018, with early application permitted.

- Management intends to adopt the guidance on January 1, 2019, and has formed a working group comprised of associates from different disciplines, including Procurement, Real Estate, and Credit Administration, to evaluate the impact of the standard where Huntington is a lessee or lessor, as well as any impact to borrower’s financial statements.

- Management is currently assessing the impact of the new guidance on Huntington's Unaudited Consolidated Financial Statements, including working with associates engaged in the procurement of goods and services used in the entity’s operations, and reviewing contractual arrangements for embedded leases in an effort to identify Huntington’s full lease population.

- Huntington will recognize right-of-use assets and lease liabilities for virtually all of its operating lease commitments.

ASU 2016-13 - Financial Instruments - Credit Losses.
Issued June 2016
- Eliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost.

- Requires those financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses).

- Measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
- Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018.

- Applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

- Management intends to adopt the guidance on January 1, 2020 and has formed a working group comprised of teams from different disciplines including credit and finance to evaluate the requirements of the new standard and the impact it will have on our processes.

- The early stages of this evaluation include a review of existing credit models to identify areas where existing credit models used to comply with other regulatory requirements may be leveraged and areas where new impairment models may be required.
ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments.
Issued August 2016
- Clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows.

- Provides consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows to reduce diversity in practice with respect to several types of cash flows.
- Effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.

- If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

- This Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

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Table of Contents

Standard
Summary of guidance
Effects on financial statements
ASU 2017-04 - Simplifying the Test for Goodwill Impairment.
Issued January 2017
- Simplifies the goodwill impairment test by eliminating Step 2 of the goodwill impairment process, which requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities.

- Entities will instead recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.

- Entities will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
- Effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted.

- The amendment is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.
ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Periodic Postretirement Benefit Cost.
Issued March 2017
- Requires that an employer report the service cost component of the pension cost and postretirement benefit cost in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period.

- Other components of the net benefit cost should be presented in the income statement separately from the service cost component.
- Effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance.

- This Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.
ASU 2017-09 - Stock Compensation Modification Accounting.
Issued May 2017
- Reduces the current diversity in practice and provides explicit guidance pertaining to the provisions of modification accounting.

- Clarifies that an entity should account for effects of modification unless the fair value, vesting conditions and the classification of the modified award are the same as the original awards immediately before the original award is modified.
- Effective prospectively for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Earlier application is permitted.

- The Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.
ASU 2017-12 - Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities. 
Issued August 2017
- Aligns the entity’s risk management activities and financial reporting for hedging relationships.

- Requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.

- Refines measurement techniques for hedges of benchmark interest rate risk.

- Eliminates the separate measurement and reporting of hedge ineffectiveness.

- Allows stated amount of assets in a closed portfolio to be fair value hedged by excluding proportion of hedged item related to prepayments, defaults and other events.

- Eases hedge effectiveness testing including an option to perform qualitative testing.
- Effective for annual periods and interim periods within those annual periods, beginning after December 15, 2018. For cash flow and net investment hedges, cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness should be recognized in AOCI with a corresponding adjustment to retained earnings. Earlier application is permitted.

- Huntington is considering adopting the new guidance on January 1, 2018. The Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

3. LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES
Loans and leases which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Unaudited Condensed Consolidated Balance Sheets as loans and leases. Except for loans which are accounted for at fair value, loans are carried at the principal amount outstanding, net of unamortized premiums and discounts and deferred loan fees and costs and purchase accounting adjustments, which resulted in a net premium of $295 million and $120 million at September 30, 2017 and December 31, 2016, respectively.

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Table of Contents

Loan and Lease Portfolio Composition
The following table provides a detailed listing of Huntington’s loan and lease portfolio at September 30, 2017 and December 31, 2016.
(dollar amounts in thousands)
September 30,
2017
 
December 31,
2016
Loans and leases:
 
 
 
Commercial and industrial
$
27,469,344

 
$
28,058,712

Commercial real estate
7,206,096

 
7,300,901

Automobile
11,876,033

 
10,968,782

Home equity
9,984,728

 
10,105,774

Residential mortgage
8,616,059

 
7,724,961

RV and marine finance
2,371,065

 
1,846,447

Other consumer
1,063,971

 
956,419

Loans and leases
68,587,296

 
66,961,996

Allowance for loan and lease losses
(675,486
)
 
(638,413
)
Net loans and leases
$
67,911,810

 
$
66,323,583


FirstMerit Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for purchased credit impaired loans for the three-month and nine-month period ended September 30, 2017.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
 
2017
 
2017
Balance, beginning of period
 
$
36,509

 
$
36,669

Accretion
 
(4,343
)
 
(13,833
)
Reclassification (to) from nonaccretable difference
 
3,044

 
12,374

Balance, end of period
 
$
35,210

 
$
35,210

The following table reflects the ending and unpaid balances of the purchase credit impaired loans at September 30, 2017 and December 31, 2016.
 
 
September 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
 
Ending
Balance
 
Unpaid Principal
Balance
 
Ending
Balance
 
Unpaid Principal
Balance
Commercial and industrial
 
$
48,606

 
$
72,117

 
$
68,338

 
$
100,031

Commercial real estate
 
16,383

 
29,689

 
34,042

 
56,320

Total
 
$
64,989

 
$
101,806

 
$
102,380

 
$
156,351

There was no allowance for loan losses recorded on the purchased credit-impaired loan portfolio at September 30, 2017 and December 31, 2016.
Nonaccrual and Past Due Loans
Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. See Note 1 “Significant Accounting Policies” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the accounting policies related to the NALs.

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Table of Contents

The following table presents nonaccrual loans (NALs) by loan class at September 30, 2017 and December 31, 2016.
(dollar amounts in thousands)
September 30,
2017
 
December 31,
2016
Commercial and industrial
$
169,751

 
$
234,184

Commercial real estate
17,397

 
20,508

Automobile
4,076

 
5,766

Home equity
71,353

 
71,798

Residential mortgage
75,251

 
90,502

RV and marine finance
309

 
245

Other consumer
108

 

Total nonaccrual loans
$
338,245

 
$
423,003


The following table presents an aging analysis of loans and leases, including past due loans, by loan class at September 30, 2017 and December 31, 2016. (1)
 
September 30, 2017
 
Past Due
 
 
 
 
 
 Loans Accounted for Under the Fair Value Option
 
Total Loans
and Leases
 
90 or
more days
past due
and accruing
 
(dollar amounts in thousands)
30-59
Days
 
60-89
 Days
 
90 or 
more days
Total
 
Current
 
Purchased Credit
Impaired
 
 
 
 
Commercial and industrial
$
36,505

 
$
10,654

 
$
77,835

 
$
124,994

 
$
27,295,744

 
$
48,606

 
$

 
$
27,469,344

 
$
14,083

(2)
Commercial real estate
35,444

 
2,586

 
20,010

 
58,040

 
7,131,673

 
16,383

 

 
7,206,096

 
9,550

 
Automobile
79,457

 
17,167

 
10,449

 
107,073

 
11,767,782

 

 
1,178

 
11,876,033

 
10,239

 
Home equity
41,748

 
19,601

 
63,747

 
125,096

 
9,857,359

 

 
2,273

 
9,984,728

 
16,150

 
Residential mortgage
111,722

 
45,041

 
104,167

 
260,930

 
8,260,742

 

 
94,387

 
8,616,059

 
62,832

(3)
RV and marine finance
10,303

 
2,184

 
2,134

 
14,621

 
2,355,309

 

 
1,135

 
2,371,065

 
2,063

 
Other consumer
10,180

 
4,394

 
3,752

 
18,326

 
1,045,427

 

 
218

 
1,063,971

 
3,752

 
Total loans and leases
$
325,359

 
$
101,627

 
$
282,094

 
$
709,080

 
$
67,714,036

 
$
64,989

 
$
99,191

 
$
68,587,296

 
$
118,669

 
 
December 31, 2016
 
Past Due
 
 
 
 
 
Loans Accounted for Under the Fair Value Option
 
Total Loans
and Leases
 
90 or
more days
past due
and accruing
 
(dollar amounts in thousands)
30-59
Days
 
60-89
 Days
 
90 or 
more days
Total
 
Current
 
Purchased
Credit Impaired
 
 
 
 
Commercial and industrial
42,052

 
20,136

 
74,174

 
136,362

 
27,854,012

 
68,338

 

 
28,058,712

 
18,148

(2)
Commercial real estate
21,187

 
3,202

 
29,659

 
54,048

 
7,212,811

 
34,042

 

 
7,300,901

 
17,215

 
Automobile
76,283

 
17,188

 
10,442

 
103,913

 
10,862,715

 

 
2,154

 
10,968,782

 
10,182

 
Home equity
38,899

 
23,903

 
53,002

 
115,804

 
9,986,697

 

 
3,273

 
10,105,774

 
11,508

 
Residential mortgage
122,469

 
37,460

 
116,682

 
276,611

 
7,373,414

 

 
74,936

 
7,724,961

 
66,952

(3)
RV and marine finance
10,009

 
2,230

 
1,566

 
13,805

 
1,831,123

 

 
1,519

 
1,846,447

 
1,462

 
Other consumer
9,442

 
4,324

 
3,894

 
17,660

 
938,322

 

 
437

 
956,419

 
3,895

 
Total loans and leases
$
320,341

 
$
108,443

 
$
289,419

 
$
718,203

 
$
66,059,094

 
$
102,380

 
$
82,319

 
$
66,961,996

 
$
129,362

 

(1)
NALs are included in this aging analysis based on their past due status.
(2)
Amounts include Huntington Technology Finance administrative lease delinquencies.
(3)
Amounts include loans guaranteed by government organizations.


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Table of Contents

Allowance for Credit Losses
Huntington maintains two reserves, both of which reflect Management’s judgment regarding the appropriate level necessary to absorb probable and estimable credit losses inherent in our loan and lease portfolio as of the balance sheet date: the ALLL and the AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change. See Note 1 “Significant Accounting Policies” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the accounting policies related to the ACL.
The ACL is increased through a provision for credit losses that is charged to earnings, based on Management’s quarterly evaluation and is reduced by charge-offs, net of recoveries, and the ACL associated with loans sold or transferred to held-for-sale.
The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2017 and 2016.
(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
Three-month period ended September 30, 2017:
 
 
 
 
 
 
ALLL balance, beginning of period
 
$
474,576

 
$
193,420

 
$
667,996

Loan charge-offs
 
(19,278
)
 
(45,494
)
 
(64,772
)
Recoveries of loans previously charged-off
 
10,015

 
11,865

 
21,880

Provision for (reduction in allowance) loan and lease losses
 
8,810

 
41,573

 
50,383

Allowance for loans sold or transferred to loans held for sale
 
(1
)
 

 
(1
)
ALLL balance, end of period
 
$
474,122

 
$
201,364

 
$
675,486

AULC balance, beginning of period
 
$
82,827

 
$
2,532

 
$
85,359

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
(6,528
)
 
(265
)
 
(6,793
)
AULC balance, end of period
 
$
76,299

 
$
2,267

 
$
78,566

ACL balance, end of period
 
$
550,421

 
$
203,631

 
$
754,052

Nine-month period ended September 30, 2017:
 
 
 
 
 
 
ALLL balance, beginning of period
 
$
451,091

 
$
187,322

 
$
638,413

Loan charge-offs
 
(58,051
)
 
(133,884
)
 
(191,935
)
Recoveries of loans previously charged-off
 
33,619

 
39,946

 
73,565

Provision for (reduction in allowance) loan and lease losses
 
47,539

 
107,980

 
155,519

Allowance for loans sold or transferred to loans held for sale
 
(76
)
 

 
(76
)
ALLL balance, end of period
 
$
474,122

 
$
201,364

 
$
675,486

AULC balance, beginning of period
 
$
86,543

 
$
11,336

 
$
97,879

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
(10,244
)
 
(9,069
)
 
(19,313
)
AULC balance, end of period
 
$
76,299

 
$
2,267

 
$
78,566

ACL balance, end of period
 
$
550,421

 
$
203,631

 
$
754,052


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Table of Contents


(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
Three-month period ended September 30, 2016:
ALLL balance, beginning of period
 
$
424,507

 
$
198,557

 
$
623,064

Loan charge-offs
 
(24,839
)
 
(34,429
)
 
(59,268
)
Recoveries of loans previously charged-off
 
8,312

 
10,891

 
19,203

Provision for (reduction in allowance) loan and lease losses
 
36,689

 
16,834

 
53,523

Allowance for loans sold or transferred to loans held for sale
 
(12,874
)
 
(6,750
)
 
(19,624
)
ALLL balance, end of period
 
$
431,795

 
$
185,103

 
$
616,898

AULC balance, beginning of period
 
$
63,717

 
$
10,031

 
$
73,748

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
9,739

 
543

 
10,282

AULC recorded at acquisition
 
4,403

 

 
4,403

AULC balance, end of period
 
$
77,859

 
$
10,574

 
$
88,433

ACL balance, end of period
 
$
509,654

 
$
195,677

 
$
705,331

Nine-month period ended September 30, 2016:
ALLL balance, beginning of period
 
$
398,753

 
$
199,090

 
$
597,843

Loan charge-offs
 
(70,721
)
 
(91,784
)
 
(162,505
)
Recoveries of loans previously charged-off
 
62,127

 
35,006

 
97,133

Provision for (reduction in allowance) loan and lease losses
 
54,510

 
49,437

 
103,947

Allowance for loans sold or transferred to loans held for sale
 
(12,874
)
 
(6,646
)
 
(19,520
)
ALLL balance, end of period
 
$
431,795

 
$
185,103

 
$
616,898

AULC balance, beginning of period
 
$
63,448

 
$
8,633

 
$
72,081

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
10,008

 
1,941

 
11,949

AULC recorded at acquisition
 
4,403

 

 
4,403

AULC balance, end of period
 
$
77,859

 
$
10,574

 
$
88,433

ACL balance, end of period
 
$
509,654

 
$
195,677

 
$
705,331


Credit Quality Indicators
See Note 4 “Loans / Leases and Allowance for Credit Losses” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the credit quality indicators Huntington utilizes for monitoring credit quality and for determining an appropriate ACL level.

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Table of Contents

The following table presents each loan and lease class by credit quality indicator at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
Credit Risk Profile by UCS Classification
(dollar amounts in thousands)
Pass
 
OLEM
 
Substandard
 
Doubtful
 
Total
Commercial
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
25,447,805

 
$
803,540

 
$
1,189,789

 
$
28,210

 
$
27,469,344

Commercial real estate
6,934,670

 
144,122

 
126,352

 
952

 
7,206,096

 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by FICO Score (1), (2)
 
750+
 
650-749
 
<650
 
Other (3)
 
Total
Consumer
 
 
 
 
 
 
 
 
 
Automobile
$
5,939,409

 
$
4,278,062

 
$
1,371,574

 
$
285,810

 
$
11,874,855

Home equity
6,359,778

 
2,985,933

 
621,817

 
14,927

 
9,982,455

Residential mortgage
5,311,993

 
2,479,820

 
599,055

 
130,804

 
8,521,672

RV and marine finance
1,385,176

 
853,545

 
91,302

 
39,907

 
2,369,930

Other consumer
404,047

 
510,804

 
136,346

 
12,556

 
1,063,753

 
December 31, 2016
 
Credit Risk Profile by UCS Classification
(dollar amounts in thousands)
Pass
 
OLEM
 
Substandard
 
Doubtful
 
Total
Commercial
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
26,211,885

 
$
810,287

 
$
1,028,819

 
$
7,721

 
$
28,058,712

Commercial real estate
7,042,304

 
96,975

 
159,098

 
2,524

 
7,300,901

 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by FICO Score (1), (2)
 
750+
 
650-749
 
<650
 
Other (3)
 
Total
Consumer
 
 
 
 
 
 
 
 
 
Automobile
$
5,369,085

 
$
4,043,611

 
$
1,298,460

 
$
255,472

 
$
10,966,628

Home equity
6,280,328

 
2,891,330

 
637,560

 
293,283

 
10,102,501

Residential mortgage
4,662,777

 
2,285,121

 
615,067

 
87,060

 
7,650,025

RV and marine finance
1,064,143

 
644,039

 
72,995

 
63,751

 
1,844,928

Other consumer
346,867

 
455,959

 
133,243

 
19,913

 
955,982


(1)
Excludes loans accounted for under the fair value option.
(2)
Reflects most recent customer credit scores.
(3)
Reflects deferred fees and costs, loans in process, loans to legal entities, etc.


54

Table of Contents

Impaired Loans
See Note 1 “Significant Accounting Policies” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of accounting policies related to impaired loans.
The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance at September 30, 2017 and December 31, 2016.
(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
ALLL at September 30, 2017:
 
 
 
 
 
 
Portion of ALLL balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$

 
$

 
$

Attributable to loans individually evaluated for impairment
 
22,838

 
13,874

 
36,712

Attributable to loans collectively evaluated for impairment
 
451,284

 
187,490

 
638,774

Total ALLL balance
 
$
474,122

 
$
201,364

 
$
675,486

Loan and Lease Ending Balances at September 30, 2017: (1)
 
 
 
 
 
 
Portion of loan and lease ending balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
64,989

 
$

 
$
64,989

Individually evaluated for impairment
 
566,340

 
621,808

 
1,188,148

Collectively evaluated for impairment
 
34,044,110

 
33,190,856

 
67,234,966

Total loans and leases evaluated for impairment
 
$
34,675,439

 
$
33,812,664

 
$
68,488,103

(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
ALLL at December 31, 2016
 
 
 
 
 
 
Portion of ALLL balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$

 
$

 
$

Attributable to loans individually evaluated for impairment
 
$
10,525

 
$
11,021

 
$
21,546

Attributable to loans collectively evaluated for impairment
 
440,566

 
176,301

 
616,867

Total ALLL balance:
 
$
451,091

 
$
187,322

 
$
638,413

Loan and Lease Ending Balances at December 31, 2016 (1)
 
 
 
 
 
 
Portion of loan and lease ending balances:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
102,380

 
$

 
$
102,380

Individually evaluated for impairment
 
415,624

 
457,890

 
873,514

Collectively evaluated for impairment
 
34,841,609

 
31,062,174

 
65,903,783

Total loans and leases evaluated for impairment
 
$
35,359,613

 
$
31,520,064

 
$
66,879,677


(1)
Excludes loans accounted for under the fair value option.

55

Table of Contents

The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for impaired loans and leases and purchased credit-impaired loans: (1), (2)
 
September 30, 2017
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Principal
Balance (6)
 
Related
Allowance
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
299,349

 
$
324,474

 
$

 
$
294,513

 
$
4,969

 
$
227,611

 
$
7,467

Commercial real estate
65,382

 
92,215

 

 
71,277

 
1,825

 
80,388

 
5,762

Automobile

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

RV and marine finance

 

 

 

 

 

 

Other consumer

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
213,520

 
245,328

 
19,958

 
222,745

 
1,950

 
334,297

 
12,712

Commercial real estate
53,078

 
60,366

 
2,880

 
40,672

 
468

 
54,352

 
1,388

Automobile
33,049

 
33,049

 
1,683

 
32,740

 
496

 
32,293

 
1,576

Home equity
335,763

 
367,870

 
14,486

 
330,784

 
3,713

 
326,932

 
11,639

Residential mortgage
310,440

 
341,724

 
8,060

 
319,745

 
2,837

 
329,193

 
8,851

RV and marine finance
1,520

 
1,520

 
88

 
1,425

 
23

 
884

 
58

Other consumer
6,456

 
6,456

 
1,288

 
6,944

 
47

 
7,117

 
184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial (3)
512,869

 
569,802

 
19,958

 
517,258

 
6,919

 
561,908

 
20,179

Commercial real estate (4)
118,460

 
152,581

 
2,880

 
111,949

 
2,293

 
134,740

 
7,150

Automobile (2)
33,049

 
33,049

 
1,683

 
32,740

 
496

 
32,293

 
1,576

Home equity (5)
335,763

 
367,870

 
14,486

 
330,784

 
3,713

 
326,932

 
11,639

Residential mortgage (5)
310,440

 
341,724

 
8,060

 
319,745

 
2,837

 
329,193

 
8,851

RV and marine finance (2)
1,520

 
1,520

 
88

 
1,425

 
23

 
884

 
58

Other consumer (2)
6,456

 
6,456

 
1,288

 
6,944

 
47

 
7,117

 
184


56

Table of Contents


 
December 31, 2016
 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2016
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Principal
Balance (6)
 
Related
Allowance
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
299,606


$
358,712


$


$
305,956


$
2,235


$
290,163


$
4,858

Commercial real estate
88,817


126,152




80,000


907


58,666


2,257

Automobile

 

 

 

 

 

 

Home equity













Residential mortgage













RV and marine finance

 

 

 

 

 

 

Other consumer













 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
406,243

 
448,121

 
22,259

 
281,934

 
1,631

 
274,262

 
5,460

Commercial real estate
97,238

 
107,512

 
3,434

 
49,140

 
521

 
49,587

 
1,895

Automobile
30,961

 
31,298

 
1,850

 
31,540

 
541

 
31,912

 
1,643

Home equity
319,404

 
352,722

 
15,032

 
284,512

 
3,453

 
267,264

 
9,382

Residential mortgage
327,753

 
363,099

 
12,849

 
344,237

 
2,978

 
353,259

 
9,041

RV and marine finance

 

 

 

 

 

 

Other consumer
3,897

 
3,897

 
260

 
4,454

 
58

 
4,627

 
178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial (3)
705,849

 
806,833

 
22,259

 
587,890

 
3,866

 
564,425

 
10,318

Commercial real estate (4)
186,055

 
233,664

 
3,434

 
129,140

 
1,428

 
108,253

 
4,152

Automobile (2)
30,961

 
31,298

 
1,850

 
31,540

 
541

 
31,912

 
1,643

Home equity (5)
319,404

 
352,722

 
15,032

 
284,512

 
3,453

 
267,264

 
9,382

Residential mortgage (5)
327,753

 
363,099

 
12,849

 
344,237

 
2,978

 
353,259

 
9,041

RV and marine finance (2)

 

 

 

 

 

 

Other consumer (2)
3,897

 
3,897

 
260

 
4,454

 
58

 
4,627

 
178

(1)
These tables do not include loans fully charged-off.
(2)
All automobile, RV and marine finance and other consumer impaired loans included in these tables are considered impaired due to their status as a TDR.
(3)
At September 30, 2017 and December 31, 2016, commercial and industrial loans of $365 million and $317 million, respectively, were considered impaired due to their status as a TDR.
(4)
At September 30, 2017 and December 31, 2016, commercial real estate loans of $84 million and $81 million, respectively, were considered impaired due to their status as a TDR.
(5)
Includes home equity and residential mortgages considered to be collateral dependent due to their non-accrual status as well as home equity and mortgage loans considered impaired due to their status as a TDR.
(6)
The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.

TDR Loans
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs. Acquired, non-purchased credit impaired loans are only considered for TDR reporting for modifications made subsequent to acquisition. See Note 4 “Loans / Leases and Allowance for Credit Losses” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for an additional discussion of TDRs.

57

Table of Contents

The following table presents, by class and modification type, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
 
 
 
 
 
 
 
 
 
 
 
 
New Troubled Debt Restructurings During The Three-Month Period Ended (1)
 
September 30, 2017
 
September 30, 2016
(dollar amounts in thousands)
Number of
Contracts
 
Post-modification
Outstanding
Ending Balance
 
Financial effects
of modification (2)
 
Number of
Contracts
 
Post-modification
Outstanding
Ending Balance
 
Financial effects
of modification (2)
Commercial and industrial:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
6

 
$
817

 
$

 
2

 
$
122

 
$
6

Amortization or maturity date change
271

 
138,381

 
(837
)
 
246

 
89,100

 
(1,450
)
Other

 

 

 
6

 
711

 
(2
)
Total Commercial and industrial
277

 
139,198

 
(837
)
 
254

 
89,933

 
(1,446
)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change
28

 
17,811

 
133

 
30

 
11,183

 
(546
)
Other

 

 

 

 

 

Total commercial real estate:
28

 
17,811

 
133

 
30

 
11,183

 
(546
)
Automobile:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
5

 
72

 
3

 
4

 
26

 
3

Amortization or maturity date change
487

 
3,943

 
124

 
452

 
4,438

 
559

Chapter 7 bankruptcy
305

 
2,562

 
69

 
236

 
1,840

 
157

Other

 

 

 

 

 

Total Automobile
797

 
6,577

 
196

 
692

 
6,304

 
719

Home equity:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
8

 
376

 
11

 
14

 
352

 
10

Amortization or maturity date change
160

 
11,676

 
(1,131
)
 
110

 
6,740

 
(574
)
Chapter 7 bankruptcy
79

 
2,728

 
647

 
70

 
2,395

 
1,327

Other

 

 

 

 

 

Total Home equity
247

 
14,780

 
(473
)
 
194

 
9,487

 
763

Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
2

 
134

 
(2
)
Amortization or maturity date change
102

 
11,282

 
(272
)
 
77

 
7,988

 
(220
)
Chapter 7 bankruptcy
20

 
1,656

 
(2
)
 
17

 
1,105

 
(63
)
Other
1

 
64

 
2

 
3

 
260

 

Total Residential mortgage
123

 
13,002

 
(272
)
 
99

 
9,487

 
(285
)
RV and marine finance:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change
10

 
84

 
3

 

 

 

Chapter 7 bankruptcy
22

 
492

 
15

 

 

 

Other

 

 

 

 

 

Total RV and marine finance
32

 
576

 
18

 

 

 

Other consumer:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
18

 
52

 

 

 

 

Amortization or maturity date change
677

 
3,106

 
1

 
1

 
16

 

Chapter 7 bankruptcy
4

 
24

 
1

 
1

 
6

 

Other

 

 

 

 

 

Total Other consumer
699

 
3,182

 
2

 
2

 
22

 

Total new troubled debt restructurings
2,203

 
$
195,126

 
$
(1,233
)
 
1,271

 
$
126,416

 
$
(795
)

58

Table of Contents


 
New Troubled Debt Restructurings During The Nine-Month Period Ended (1)
 
September 30, 2017
 
September 30, 2016
(dollar amounts in thousands)
Number of
Contracts
 
Post-modification
Outstanding
Ending Balance
 
Financial effects
of modification (2)
 
Number of
Contracts
 
Post-modification
Outstanding
Ending Balance
 
Financial effects
of modification (2)
Commercial and industrial:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
8

 
$
854

 
$
6

 
4

 
$
161

 
$
5

Amortization or maturity date change
735

 
418,924

 
(8,695
)
 
629

 
345,691

 
(4,368
)
Other
4

 
380

 
(27
)
 
16

 
1,801

 
(4
)
Total Commercial and industrial
747

 
420,158

 
(8,716
)
 
649

 
347,653

 
(4,367
)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
1

 
84

 

Amortization or maturity date change
71

 
74,101

 
(682
)
 
90

 
60,995

 
(1,828
)
Other

 

 

 
4

 
315

 
16

Total commercial real estate:
71

 
74,101

 
(682
)
 
95

 
61,394

 
(1,812
)
Automobile:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
24

 
308

 
9

 
11

 
132

 
10

Amortization or maturity date change
1,298

 
11,097

 
302

 
1,159

 
11,002

 
981

Chapter 7 bankruptcy
743

 
5,878

 
116

 
797

 
6,384

 
386

Other

 

 

 

 

 

Total Automobile
2,065

 
17,283

 
427

 
1,967

 
17,518

 
1,377

Home equity:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
25

 
1,444

 
24

 
43

 
2,363

 
103

Amortization or maturity date change
401

 
25,544

 
(2,559
)
 
466

 
25,031

 
(2,592
)
Chapter 7 bankruptcy
243

 
8,764

 
2,049

 
215

 
8,106

 
2,327

Other
70

 
4,241

 
(326
)
 

 

 

Total Home equity
739

 
39,993

 
(812
)
 
724

 
35,500

 
(162
)
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
2

 
110

 
(9
)
 
12

 
1,195

 
(17
)
Amortization or maturity date change
282

 
30,649

 
(761
)
 
277

 
29,388

 
(1,217
)
Chapter 7 bankruptcy
69

 
6,328

 
(139
)
 
40

 
3,788

 
(42
)
Other
22

 
2,448

 
19

 
4

 
424

 

Total Residential mortgage
375

 
39,535

 
(890
)
 
333

 
34,795

 
(1,276
)
RV and marine finance:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change
34

 
710

 
19

 

 

 

Chapter 7 bankruptcy
71

 
1,246

 
25

 

 

 

Other

 

 

 

 

 

Total RV and marine finance
105

 
1,956

 
44

 

 

 

Other consumer:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
19

 
130

 
2

 

 

 

Amortization or maturity date change
681

 
3,394

 
8

 
6

 
575

 
24

Chapter 7 bankruptcy
7

 
36

 
1

 
8

 
72

 
7

Other

 

 

 

 

 

Total Other consumer
707

 
3,560

 
11

 
14

 
647

 
31

Total new troubled debt restructurings
4,809

 
$
596,586

 
$
(10,618
)
 
3,782

 
$
497,507

 
$
(6,209
)
 
 
 
 
 
 
 
 
(1)
TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.
(2)
Amount represents the financial impact via provision for loan and lease losses as a result of the modification.

Pledged Loans and Leases
At September 30, 2017, the Bank has access to the Federal Reserve’s discount window and advances from the FHLB – Cincinnati. As of September 30, 2017, these borrowings and advances are secured by $32.0 billion of loans and securities.


59

Table of Contents

4. AVAILABLE-FOR-SALE AND OTHER SECURITIES
Listed below are the contractual maturities of available-for-sale and other securities at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
U.S. Treasury and Federal agency securities:
 
 
 
 
 
 
 
U.S. Treasury:
 
 
 
 
 
 
 
1 year or less
$
11,256

 
$
11,260

 
$
4,978

 
$
4,988

After 1 year through 5 years

 

 
502

 
509

After 5 years through 10 years

 

 

 

After 10 years

 

 

 

Total U.S. Treasury
11,256

 
11,260

 
5,480

 
5,497

Federal agencies: mortgage-backed securities:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years
32,749

 
32,515

 
46,591

 
46,762

After 5 years through 10 years
257,032

 
255,488

 
173,941

 
176,404

After 10 years
10,496,277

 
10,351,747

 
10,630,929

 
10,450,176

Total Federal agencies: mortgage-backed securities
10,786,058

 
10,639,750

 
10,851,461

 
10,673,342

Other agencies:
 
 
 
 
 
 
 
1 year or less
4,201

 
4,223

 
4,302

 
4,367

After 1 year through 5 years
8,892

 
9,034

 
5,092

 
5,247

After 5 years through 10 years
82,692

 
83,194

 
63,618

 
63,928

After 10 years

 

 

 

Total other agencies
95,785

 
96,451

 
73,012

 
73,542

Total U.S. Treasury and Federal agency securities
10,893,099

 
10,747,461

 
10,929,953

 
10,752,381

Municipal securities:
 
 
 
 
 
 
 
1 year or less
163,747

 
160,032

 
169,636

 
166,887

After 1 year through 5 years
905,872

 
905,075

 
933,893

 
933,903

After 5 years through 10 years
1,656,860

 
1,655,384

 
1,463,459

 
1,464,583

After 10 years
703,350

 
705,618

 
693,440

 
684,684

Total municipal securities
3,429,829

 
3,426,109

 
3,260,428

 
3,250,057

Asset-backed securities:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years
80,003

 
80,330

 
80,700

 
80,560

After 5 years through 10 years
162,079

 
163,439

 
223,352

 
224,565

After 10 years
326,724

 
311,422

 
520,072

 
488,356

Total asset-backed securities
568,806

 
555,191

 
824,124

 
793,481

Corporate debt:
 
 
 
 
 
 
 
1 year or less
3,143

 
3,157

 
43,223

 
43,603

After 1 year through 5 years
66,878

 
68,450

 
78,430

 
80,196

After 5 years through 10 years
38,471

 
39,902

 
32,523

 
32,865

After 10 years
13,211

 
14,120

 
40,361

 
42,019

Total corporate debt
121,703

 
125,629

 
194,537

 
198,683

Other:
 
 
 
 
 
 
 
1 year or less
3,150

 
3,144

 
1,650

 
1,650

After 1 year through 5 years
800

 
791

 
2,302

 
2,283

After 5 years through 10 years

 

 

 

After 10 years

 

 
10

 
10

Nonmarketable equity securities
583,019

 
583,019

 
547,704

 
547,704

Mutual funds
10,416

 
10,416

 
15,286

 
15,286

Marketable equity securities
861

 
1,301

 
861

 
1,302

Total other
598,246

 
598,671

 
567,813

 
568,235

Total available-for-sale and other securities
$
15,611,683

 
$
15,453,061

 
$
15,776,855

 
$
15,562,837


60

Table of Contents

Other securities at September 30, 2017 and December 31, 2016 include non-marketable equity securities of $287 million and $249 million of stock issued by the FHLB and $296 million and $299 million of Federal Reserve Bank stock, respectively. Non-marketable equity securities are recorded at amortized cost.
The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at September 30, 2017 and December 31, 2016:
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
U.S. Treasury
$
11,256

 
$
4

 
$

 
$
11,260

Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
10,786,058

 
5,851

 
(152,159
)
 
10,639,750

Other agencies
95,785

 
722

 
(56
)
 
96,451

Total U.S. Treasury, Federal agency securities
10,893,099

 
6,577

 
(152,215
)
 
10,747,461

Municipal securities
3,429,829

 
31,043

 
(34,763
)
 
3,426,109

Asset-backed securities
568,806

 
2,409

 
(16,024
)
 
555,191

Corporate debt
121,703

 
3,927

 
(1
)
 
125,629

Other securities
598,246

 
439

 
(14
)
 
598,671

Total available-for-sale and other securities
$
15,611,683

 
$
44,395

 
$
(203,017
)
 
$
15,453,061

 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury
$
5,480

 
$
17

 
$

 
$
5,497

Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
10,851,461

 
12,548

 
(190,667
)
 
10,673,342

Other agencies
73,012

 
536

 
(6
)
 
73,542

Total U.S. Treasury, Federal agency securities
10,929,953

 
13,101

 
(190,673
)
 
10,752,381

Municipal securities
3,260,428

 
28,431

 
(38,802
)
 
3,250,057

Asset-backed securities
824,124

 
1,492

 
(32,135
)
 
793,481

Corporate debt
194,537

 
4,161

 
(15
)
 
198,683

Other securities
567,813

 
441

 
(19
)
 
568,235

Total available-for-sale and other securities
$
15,776,855

 
$
47,626

 
$
(261,644
)
 
$
15,562,837


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The following tables provide detail on investment securities with unrealized gross losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position as of September 30, 2017 and December 31, 2016.
 
Less than 12 Months
 
Over 12 Months
 
Total
(dollar amounts in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,283,266

 
$
(125,950
)
 
$
1,003,097

 
$
(26,209
)
 
$
9,286,363

 
$
(152,159
)
Other agencies
11,607

 
(56
)
 

 

 
11,607

 
(56
)
Total Federal agency securities
8,294,873

 
(126,006
)
 
1,003,097

 
(26,209
)
 
9,297,970

 
(152,215
)
Municipal securities
1,293,344

 
(23,995
)
 
277,157

 
(10,768
)
 
1,570,501

 
(34,763
)
Asset-backed securities
199,109

 
(1,471
)
 
122,568

 
(14,553
)
 
321,677

 
(16,024
)
Corporate debt
200

 
(1
)
 

 

 
200

 
(1
)
Other securities
791

 
(8
)
 
1,494

 
(6
)
 
2,285

 
(14
)
Total temporarily impaired securities
$
9,788,317

 
$
(151,481
)
 
$
1,404,316

 
$
(51,536
)
 
$
11,192,633

 
$
(203,017
)
 
Less than 12 Months
 
Over 12 Months
 
Total
(dollar amounts in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,908,470

 
$
(189,318
)
 
$
41,706

 
$
(1,349
)
 
$
8,950,176

 
$
(190,667
)
Other agencies
924

 
(6
)
 

 

 
924

 
(6
)
Total Federal agency securities
8,909,394

 
(189,324
)
 
41,706

 
(1,349
)
 
8,951,100

 
(190,673
)
Municipal securities
1,412,152

 
(29,175
)
 
272,292

 
(9,627
)
 
1,684,444

 
(38,802
)
Asset-backed securities
361,185

 
(3,043
)
 
178,924

 
(29,092
)
 
540,109

 
(32,135
)
Corporate debt
3,567

 
(15
)
 
200

 

 
3,767

 
(15
)
Other securities
790

 
(11
)
 
1,492

 
(8
)
 
2,282

 
(19
)
Total temporarily impaired securities
$
10,687,088

 
$
(221,568
)
 
$
494,614

 
$
(40,076
)
 
$
11,181,702

 
$
(261,644
)

At September 30, 2017 and December 31, 2016, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $6.2 billion and $5.0 billion, respectively. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at either September 30, 2017 or December 31, 2016.

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The following table is a summary of realized securities gains and losses for the three-month and nine-month periods ended September 30, 2017 and 2016, respectively.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Gross gains on sales of securities
$
4,201

 
$
3,770

 
$
8,311

 
$
7,161

Gross (losses) on sales of securities
(4,130
)
 
(2,739
)
 
(4,530
)
 
(5,398
)
Net gain on sales of securities
$
71

 
$
1,031

 
$
3,781

 
$
1,763

OTTI recognized in earnings
(104
)
 

 
(3,687
)
 
(76
)
Net securities gains (losses)
$
(33
)
 
$
1,031

 
$
94

 
$
1,687


Security Impairment
Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment and conducts a comprehensive security-level assessment on all available-for-sale securities. Impairment exists when the present value of the expected cash flows are not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any credit impairment would be recognized in earnings. At the end of the second quarter of 2017, Huntington changed its intent from able and willing to hold to sell sometime in the near future prior to final maturity for the two Reg Diversified CDO securities. Related to this change in intent, Huntington estimated the fair value of these bonds by obtaining bids. As a result of this analysis, Huntington recognized $3.6 million of OTTI on these two securities. In addition, Huntington recognized an additional $0.1 million of OTTI in the 2017 third quarter relating an investment in the Municipal Securities portfolio. For all other securities, Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be at maturity.
The highest risk investments in the portfolio are the trust-preferred CDO securities which are in the asset-backed securities portfolio. This portfolio is in runoff, and the Company has not purchased these types of securities since 2005. The fair values of the CDO assets have been impacted by various market conditions. The unrealized losses are primarily the result of wider liquidity spreads on asset-backed securities and the longer expected average lives of the trust-preferred CDO securities, due to changes in the expectations of when the underlying securities will be repaid.
Collateralized Debt Obligations are backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. Many collateral issuers have the option of deferring interest payments on their debt for up to five years. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third-party pricing specialist with direct industry experience in pooled-trust-preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security and terms of the security’s structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current / near-term operating conditions, and the impact of macroeconomic and regulatory changes.  Using the results of the analysis, the Company estimates appropriate default and recovery probabilities for each piece of collateral, then estimates the expected cash flows for each security. The fair value of each security is obtained by discounting the expected cash flows at a market discount rate. The market discount rate is determined by reference to yields observed in the market for similarly rated collateralized debt obligations, specifically high-yield collateralized loan obligations. The relatively high market discount rate is reflective of the uncertainty of the cash flows and illiquid nature of these securities. The large differential between the fair value and amortized cost of some of the securities reflects the high market discount rate and the expectation that the majority of the cash flows will not be received until near the final maturity of the security (the final maturities range from 2032 to 2035).

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The following table summarizes the relevant characteristics of the Company's CDO securities portfolio, which are included in asset-backed securities, at September 30, 2017. Each security is part of a pool of issuers and supports a more senior tranche of securities except for the MM Comm III securities, which are the most senior class.
Collateralized Debt Obligation Securities
(dollar amounts in thousands)
 
 
 
 
 
 
 
Lowest
Credit
Rating
(2)
 
# of Issuers
Currently
Performing/
Remaining (3)
 
Actual
Deferrals
and
Defaults
as a % of
Original
Collateral
 
Expected
Defaults
as a % of
Remaining
Performing
Collateral
 
Excess
Subordination
(4)
Deal Name
Par Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Loss (1)
 
 
 
 
 
MM Comm III
4,509

 
4,308

 
3,641

 
(667
)
 
BB+
 
5/8
 
5
 
7
 
34
Reg Diversified
25,500

 
100

 
510

 
410

 
D
 

 
 
 
Tropic III
31,000

 
30,989

 
19,976

 
(11,013
)
 
BB
 
27/36
 
16
 
6
 
41
Total at September 30, 2017
$
61,009

 
$
35,397

 
$
24,127

 
$
(11,270
)
 
 
 
 
 
 
 
 
 
 
Total at December 31, 2016
$
137,197

 
$
101,210

 
$
76,003

 
$
(25,207
)
 
 
 
 
 
 
 
 
 
 

(1)
The majority of securities have been in a continuous loss position for 12 months or longer.
(2)
For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency.
(3)
Includes both banks and/or insurance companies.
(4)
Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.


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For the three-month and nine-month periods ended September 30, 2017 and 2016, the following table summarizes by security type the total OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Available-for-sale and other securities:
 
 
 
 
 
 
 
Collateralized Debt Obligations
$

 
$

 
$
3,559

 
$

Municipal Securities
104

 

 
128

 
76

Total available-for-sale and other securities
$
104

 
$

 
$
3,687

 
$
76


The following table presents the OTTI recognized in earnings on debt securities held by Huntington for the three-month and nine-month periods ended September 30, 2017 and 2016, respectively.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
 
$
10,821

 
$
9,831

 
$
11,796

 
$
18,368

Reductions from sales
 
(5,373
)
 
(76
)
 
(9,931
)
 
(8,689
)
Additional credit losses
 
104

 

 
3,687

 
76

Balance, end of period
 
$
5,552

 
$
9,755

 
$
5,552

 
$
9,755


5. HELD-TO-MATURITY SECURITIES
Held-to-maturity securities are debt securities that Huntington has the intent and ability to hold until maturity. The debt securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method.
During the second quarter of 2017, Huntington transferred $1.0 billion of mortgage-backed and other agency securities from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The securities were reclassified at fair value at the date of transfer. At the time of the transfer, $13.5 million of unrealized net losses were recognized in OCI. The amounts in OCI will be recognized in earnings over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of the premium on the same transferred securities, resulting in an immaterial impact on net income.

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Listed below are the contractual maturities of held-to-maturity securities at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Federal agencies mortgage-backed securities:
 
 
 
 
 
 
 
1 year or less
$

 
$

 
$

 
$

After 1 year through 5 years

 

 

 

After 5 years through 10 years
68,668

 
68,478

 
41,261

 
40,791

After 10 years
8,067,957

 
8,035,777

 
7,157,083

 
7,139,943

Total Federal agencies mortgage-backed securities
8,136,625

 
8,104,255

 
7,198,344

 
7,180,734

Other agencies:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years

 

 

 

After 5 years through 10 years
375,580

 
376,393

 
398,341

 
399,452

After 10 years
170,628

 
169,741

 
204,083

 
201,180

Total other agencies
546,208

 
546,134

 
602,424

 
600,632

Total Federal agencies
8,682,833

 
8,650,389

 
7,800,768

 
7,781,366

Municipal securities:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years

 

 

 

After 5 years through 10 years

 

 

 

After 10 years
5,566

 
5,416

 
6,171

 
5,902

Total municipal securities
5,566

 
5,416

 
6,171

 
5,902

Total held-to-maturity securities
$
8,688,399

 
$
8,655,805

 
$
7,806,939

 
$
7,787,268


The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at September 30, 2017 and December 31, 2016.
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,136,625

 
$
14,868

 
$
(47,238
)
 
$
8,104,255

Other agencies
546,208

 
1,697

 
(1,771
)
 
546,134

Total Federal agencies
8,682,833

 
16,565

 
(49,009
)
 
8,650,389

Municipal securities
5,566

 

 
(150
)
 
5,416

Total held-to-maturity securities
$
8,688,399

 
$
16,565

 
$
(49,159
)
 
$
8,655,805

 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
$
7,198,344

 
$
20,883

 
$
(38,493
)
 
$
7,180,734

Other agencies
602,424

 
1,690

 
(3,482
)
 
600,632

Total Federal agencies
7,800,768

 
22,573

 
(41,975
)
 
7,781,366

Municipal securities
6,171

 

 
(269
)
 
5,902

Total held-to-maturity securities
$
7,806,939

 
$
22,573

 
$
(42,244
)
 
$
7,787,268


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The following tables provide detail on held-to-maturity securities with unrealized gross losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at September 30, 2017 and December 31, 2016.
 
Less than 12 Months
 
Over 12 Months
 
Total
(dollar amounts in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
5,729,896

 
$
(38,204
)
 
$
301,637

 
$
(9,034
)
 
$
6,031,533

 
$
(47,238
)
Other agencies
248,109

 
(1,771
)
 

 

 
248,109

 
(1,771
)
Total Federal agencies
5,978,005

 
(39,975
)
 
301,637

 
(9,034
)
 
6,279,642

 
(49,009
)
Municipal securities

 

 
5,416

 
(150
)
 
5,416

 
(150
)
Total temporarily impaired securities
$
5,978,005

 
$
(39,975
)
 
$
307,053

 
$
(9,184
)
 
$
6,285,058

 
$
(49,159
)
 
Less than 12 Months
 
Over 12 Months
 
Total
(dollar amounts in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
2,855,360

 
$
(31,470
)
 
$
186,226

 
$
(7,023
)
 
$
3,041,586

 
$
(38,493
)
Other agencies
413,207

 
(3,482
)
 

 

 
413,207

 
(3,482
)
Total Federal agencies
3,268,567

 
(34,952
)
 
186,226

 
(7,023
)
 
3,454,793

 
(41,975
)
Municipal securities
5,902

 
(269
)
 

 

 
5,902

 
(269
)
Total temporarily impaired securities
$
3,274,469

 
$
(35,221
)
 
$
186,226

 
$
(7,023
)
 
$
3,460,695

 
$
(42,244
)

Security Impairment
Huntington evaluates the held-to-maturity securities portfolio on a quarterly basis for impairment. Impairment exists when the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings. As of September 30, 2017, Management has evaluated held-to-maturity securities with unrealized losses for impairment and concluded no OTTI is required.
6. LOAN SALES AND SECURITIZATIONS
Residential Mortgage Loans
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Residential mortgage loans sold with servicing retained
$
1,178,955

 
$
1,204,547

 
$
2,824,707

 
$
2,552,602

Pretax gains resulting from above loan sales (1)
26,880

 
32,073

 
66,014

 
64,804


(1)
Recorded in mortgage banking income.

A mortgage servicing right (MSR) is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At initial recognition, the MSR asset is established at its fair value using assumptions consistent with assumptions used to estimate the fair value of existing MSRs. Subsequent to the initial recognition, MSRs may be measured using either the fair value method or the amortization method. The election of the fair value method or amortization method is made at the time each servicing class is established. Subsequently, servicing rights are accounted for based on the methodology chosen for each respective servicing class. Any

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increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, during the period is recorded as an increase or decrease in mortgage banking income, which is reflected in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month and nine-month periods ended September 30, 2017 and 2016.
Fair Value Method:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Fair value, beginning of period
$
12,528

 
$
13,105

 
$
13,747

 
$
17,585

Change in fair value during the period due to:
 
 
 
 
 
 
 
Time decay (1)
(202
)
 
(217
)
 
(649
)
 
(734
)
Payoffs (2)
(295
)
 
(423
)
 
(876
)
 
(1,392
)
Changes in valuation inputs or assumptions (3)
(278
)
 
(37
)
 
(469
)
 
(3,031
)
Fair value, end of period:
$
11,753

 
$
12,428

 
$
11,753

 
$
12,428

Weighted-average life (years)
5.5

 
5.1

 
5.5

 
5.1


(1)
Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2)
Represents decrease in value associated with loans that paid off during the period.
(3)
Represents change in value resulting primarily from market-driven changes in interest rates and prepayment speeds.
Amortization Method:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Carrying value, beginning of period
$
176,491

 
$
121,292

 
$
172,466

 
$
143,133

New servicing assets created
12,841

 
12,434

 
30,694

 
25,820

Servicing assets acquired

 
15,317

 

 
15,317

Impairment (charge) / recovery
688

 
2,543

 
(318
)
 
(21,093
)
Amortization and other
(6,995
)
 
(7,194
)
 
(19,817
)
 
(18,785
)
Carrying value, end of period
$
183,025

 
$
144,392

 
$
183,025

 
$
144,392

Fair value, end of period
$
183,583

 
$
144,623

 
$
183,583

 
$
144,623

Weighted-average life (years)
7.0

 
6.1

 
7.0

 
6.1


MSRs do not trade in an active, open market with readily-observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually-specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
MSR values are sensitive to movements in interest rates, as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington hedges the value of the MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.

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For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2017 and December 31, 2016, to changes in these assumptions is shown in the table below.
 
September 30, 2017
 
December 31, 2016
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
12.10
%
 
$
(472
)
 
$
(910
)
 
10.90
%
 
$
(501
)
 
$
(970
)
Spread over forward interest rate swap rates
813
 bps
 
(436
)
 
(823
)
 
536
 bps
 
(454
)
 
(879
)

For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2017 and December 31, 2016, to changes in these assumptions is shown in the table below.
 
September 30, 2017
 
December 31, 2016
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
8.40
%
 
$
(5,172
)
 
$
(10,038
)
 
7.80
%
 
$
(4,510
)
 
$
(8,763
)
Spread over forward interest rate swap rates
1,041
 bps
 
(6,866
)
 
(12,934
)
 
1,173
 bps
 
(5,259
)
 
(10,195
)

Total servicing, late and other ancillary fees included in mortgage banking income amounted to $14 million and $13 million for the three-month periods ended September 30, 2017 and 2016. For the nine-month periods ended September 30, 2017 and 2016, total net servicing fees included in mortgage banking income were $42 million and $36 million. The unpaid principal balance of residential mortgage loans serviced for third parties was $19.3 billion and $18.9 billion at September 30, 2017 and December 31, 2016, respectively.
Automobile Loans
Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired
Changes in the carrying value of automobile loan servicing rights for the three-month and nine-month periods ended September 30, 2017 and 2016, and the fair value at the end of each period were as shown in the table below.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Carrying value, beginning of period
$
12,524

 
$
5,458

 
$
18,285

 
$
8,771

Amortization and other
(2,338
)
 
(1,087
)
 
(8,099
)
 
(4,400
)
Carrying value, end of period
$
10,186

 
$
4,371

 
$
10,186

 
$
4,371

Fair value, end of period
$
10,398

 
$
4,366

 
$
10,398

 
$
4,366

Weighted-average contractual life (years)
3.7

 
3.2

 
3.7

 
3.2


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A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at September 30, 2017 and December 31, 2016 is shown in the table below.
 
September 30, 2017
 
December 31, 2016
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
23.66
%
 
$
(586
)
 
$
(1,112
)
 
19.98
%
 
$
(1,047
)
 
$
(2,026
)
Spread over forward interest rate swap rates
500
 bps
 
(14
)
 
(27
)
 
500
 bps
 
(26
)
 
(53
)

Servicing income amounted to $4 million and $2 million for the three-month periods ending September 30, 2017, and 2016. For the nine-month periods ended September 30, 2017 and 2016, total servicing income was $14 million and $6 million, respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.2 billion and $1.7 billion at September 30, 2017 and December 31, 2016, respectively.
Small Business Administration (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
SBA loans sold with servicing retained
$
107,259

 
$
62,803

 
$
272,635

 
$
167,321

Pretax gains resulting from above loan sales (1)
8,508

 
4,679

 
21,435

 
12,862


(1)
Recorded in gain on sale of loans.

Huntington has retained servicing responsibilities on sold SBA loans and receives annual servicing fees on the outstanding loan balances. SBA loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale using a discounted future cash flow model. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows.
The following tables summarize the changes in the carrying value of the servicing asset for the three-month and nine-month periods ended September 30, 2017 and 2016. The fair value at the end of each period is shown in the table below.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Carrying value, beginning of period
$
23,113

 
$
19,612

 
$
21,080

 
$
19,747

New servicing assets created
3,591

 
1,879

 
9,187

 
5,259

Amortization and other
(1,923
)
 
(1,745
)
 
(5,486
)
 
(5,260
)
Carrying value, end of period
$
24,781

 
$
19,746

 
$
24,781

 
$
19,746

Fair value, end of period
$
28,822

 
$
24,065

 
$
28,822

 
$
24,065

Weighted-average life (years)
3.3

 
3.3

 
3.3

 
3.3



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A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at September 30, 2017 and December 31, 2016 is shown in the table below.
 
September 30, 2017
 
December 31, 2016
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
7.50
%
 
$
(385
)
 
$
(764
)
 
7.40
%
 
$
(324
)
 
$
(644
)
Discount rate
15.00

 
(774
)
 
(1,516
)
 
15.00

 
(1,270
)
 
(1,870
)
Servicing income amounted to $3 million and $2 million for the three-month periods ending September 30, 2017, and 2016, respectively. For the nine-month periods ended September 30, 2017 and 2016, total servicing income was $8 million and $7 million, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.3 billion and $1.1 billion at September 30, 2017 and December 31, 2016, respectively.
7. LONG-TERM DEBT
In March 2017, the Bank issued $0.7 billion of senior notes at 99.994% of face value. The senior notes mature on March 10, 2020 and have a fixed coupon rate of 2.375%. The senior notes may be redeemed one month prior to the maturity date at 100% of principal plus accrued and unpaid interest. Also, in March 2017, the Bank issued $0.3 billion of senior notes at 100% of face value. The senior notes mature on March 10, 2020 and have a variable coupon rate of three month LIBOR + 51 basis points.
In August 2017, the Bank issued $0.7 billion of senior notes at 99.762% of face value. The senior notes mature on August 7, 2022 and have a fixed coupon rate of 2.50%. The senior notes may be redeemed one month prior to the maturity date at 100% of principal plus accrued and unpaid interest.
8. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016, were as shown in the following table.
 
Three Months Ended
September 30, 2017
 
 
 
Tax (Expense)
 
 
(dollar amounts in thousands)
Pretax
 
Benefit
 
After-tax
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold
$
410

 
$
(145
)
 
$
265

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
(42,429
)
 
14,828

 
(27,601
)
Less: Reclassification adjustment for net losses (gains) included in net income
8,715

 
(3,082
)
 
5,633

Net change in unrealized holding gains (losses) on available-for-sale debt securities
(33,304
)
 
11,601

 
(21,703
)
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
1,885

 
(660
)
 
1,225

Less: Reclassification adjustment for net (gains) losses included in net income
144

 
(51
)
 
93

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
2,029

 
(711
)
 
1,318

Net change in pension and other post-retirement obligations
1,198

 
(419
)
 
779

Total other comprehensive income (loss)
$
(30,077
)
 
$
10,471

 
$
(19,606
)

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Three Months Ended
September 30, 2016
 
Tax (Expense)
(dollar amounts in thousands)
Pretax
 
Benefit
 
After-tax
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold
$
2,002

 
$
(708
)
 
$
1,294

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
(54,109
)
 
18,604

 
(35,505
)
Less: Reclassification adjustment for net losses (gains) included in net income
726

 
(257
)
 
469

Net change in unrealized holding gains (losses) on available-for-sale debt securities
(51,381
)
 
17,639

 
(33,742
)
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
(8,171
)
 
2,860

 
(5,311
)
Less: Reclassification adjustment for net (gains) losses included in net income
123

 
(44
)
 
79

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
(8,048
)
 
2,816

 
(5,232
)
Net change in pension and other post-retirement obligations
1,293

 
(452
)
 
841

Total other comprehensive income (loss)
$
(58,136
)
 
$
20,003

 
$
(38,133
)

 
Nine Months Ended
September 30, 2017
 
 
 
Tax (expense)
 
 
(dollar amounts in thousands)
Pretax
 
Benefit
 
After-tax
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold
$
3,698

 
$
(1,307
)
 
$
2,391

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
19,853

 
(6,779
)
 
13,074

Less: Reclassification adjustment for net losses (gains) included in net income
18,577

 
(6,570
)
 
12,007

Net change in unrealized holding gains (losses) on available-for-sale debt securities
42,128

 
(14,656
)
 
27,472

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
1,274

 
(446
)
 
828

Less: Reclassification adjustment for net (gains) losses included in net income
1,131

 
(396
)
 
735

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
2,405

 
(842
)
 
1,563

Net change in pension and other post-retirement obligations
3,104

 
(1,086
)
 
2,018

Total other comprehensive income (loss)
$
47,637

 
$
(16,584
)
 
$
31,053


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Nine Months Ended
September 30, 2016
 
Tax (expense)
(dollar amounts in thousands)
Pretax
 
Benefit
 
After-tax
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold
$
(600
)
 
$
212

 
$
(388
)
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
76,637

 
(28,315
)
 
48,322

Less: Reclassification adjustment for net losses (gains) included in net income
(2,032
)
 
718

 
(1,314
)
Net change in unrealized holding gains (losses) on available-for-sale debt securities
74,005

 
(27,385
)
 
46,620

Net change in unrealized holding gains (losses) on available-for-sale equity securities
170

 
(60
)
 
110

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
8,047

 
(2,816
)
 
5,231

Less: Reclassification adjustment for net (gains) losses included in net income
(769
)
 
269

 
(500
)
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
7,278

 
(2,547
)
 
4,731

Net change in pension and other post-retirement obligations
3,879

 
(1,357
)
 
2,522

Total other comprehensive income (loss)
$
85,332

 
$
(31,349
)
 
$
53,983


The following table presents activity in accumulated other comprehensive income (loss), net of tax, for the nine-month periods ended September 30, 2017 and 2016.
(dollar amounts in thousands)
Unrealized gains
and (losses) on
debt securities
(1)
 
Unrealized
gains and
(losses) on
equity
securities
 
Unrealized
gains and
(losses) on
cash flow
hedging
derivatives
 
Unrealized gains
(losses) for
pension and
other post-
retirement
obligations
 
Total
December 31, 2015
$
8,361

 
$
176

 
$
(3,948
)
 
$
(230,747
)
 
$
(226,158
)
Other comprehensive income before reclassifications
47,934

 
110

 
5,231

 

 
53,275

Amounts reclassified from accumulated OCI to earnings
(1,314
)
 

 
(500
)
 
2,522

 
708

Period change
46,620

 
110

 
4,731

 
2,522

 
53,983

September 30, 2016
$
54,981

 
$
286

 
$
783

 
$
(228,225
)
 
$
(172,175
)
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
(192,764
)
 
$
287

 
$
(2,634
)
 
$
(205,905
)
 
$
(401,016
)
Other comprehensive income before reclassifications
15,465

 

 
828

 

 
16,293

Amounts reclassified from accumulated OCI to earnings
12,007

 

 
735

 
2,018

 
14,760

Period change
27,472

 

 
1,563

 
2,018

 
31,053

September 30, 2017
$
(165,292
)
 
$
287

 
$
(1,071
)
 
$
(203,887
)
 
$
(369,963
)

(1)
Amounts at September 30, 2017 and December 31, 2016 include $97 million and $82 million, respectively, of net unrealized gains on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized gains will be recognized in earnings over the remaining life of the security using the effective interest method.


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Table of Contents

The following table presents the reclassification adjustments out of accumulated OCI included in net income and the impacted line items as listed on the Unaudited Condensed Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Reclassifications out of accumulated OCI
Accumulated OCI components
Amounts reclassified from accumulated OCI
 
Location of net gain (loss) reclassified from accumulated OCI into earnings
 
Three Months Ended
 
 
(dollar amounts in thousands)
September 30, 2017
 
September 30, 2016
 
 
Gains (losses) on debt securities:
 
 
 
 
 
Amortization of unrealized gains (losses)
$
(1,498
)
 
$
(726
)
 
Interest income - held-to-maturity securities - taxable
Realized gain (loss) on sale of securities
(7,113
)
 

 
Noninterest income - net gains (losses) on sale of securities
OTTI recorded
(104
)
 

 
Noninterest income - net gains (losses) on sale of securities
 
(8,715
)
 
(726
)
 
Total before tax
 
3,082

 
257

 
Tax (expense) benefit
 
$
(5,633
)
 
$
(469
)
 
Net of tax
Gains (losses) on cash flow hedging relationships:
 
 
 
 
 
Interest rate contracts
$
(144
)
 
$
(123
)
 
Interest income - loans and leases
Interest rate contracts

 

 
Noninterest income - other income
 
(144
)
 
(123
)
 
Total before tax
 
51

 
44

 
Tax (expense) benefit
 
$
(93
)
 
$
(79
)
 
Net of tax
Amortization of defined benefit pension and post-retirement items:
 
 
 
 
 
Actuarial gains (losses)
$
(1,690
)
 
$
(1,785
)
 
Noninterest expense - personnel costs
Prior service credit
492

 
492

 
Noninterest expense - personnel costs
 
(1,198
)
 
(1,293
)
 
Total before tax
 
419

 
452

 
Tax (expense) benefit
 
$
(779
)
 
$
(841
)
 
Net of tax

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Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassifications out of accumulated OCI
Accumulated OCI components
Amounts reclassified from accumulated OCI
 
Location of net gain (loss) reclassified from accumulated OCI into earnings
 
Nine Months Ended
 
 
(dollar amounts in thousands)
September 30, 2017
 
September 30, 2016
 
 
Gains (losses) on debt securities:
 
 
 
 
 
Amortization of unrealized gains (losses)
$
(7,388
)
 
$
478

 
Interest income - held-to-maturity securities - taxable
Realized gain (loss) on sale of securities
(7,502
)
 
1,630

 
Noninterest income - net gains (losses) on sale of securities
OTTI recorded
(3,687
)
 
(76
)
 
Noninterest income - net gains (losses) on sale of securities
 
(18,577
)
 
2,032

 
Total before tax
 
6,570

 
(718
)
 
Tax (expense) benefit
 
$
(12,007
)
 
$
1,314

 
Net of tax
Gains (losses) on cash flow hedging relationships:
 
 
 
 
 
Interest rate contracts
$
(1,131
)
 
$
770

 
Interest income - loans and leases
Interest rate contracts

 
(1
)
 
Noninterest income - other income
 
(1,131
)
 
769

 
Total before tax
 
396

 
(269
)
 
Tax (expense) benefit
 
$
(735
)
 
$
500

 
Net of tax
Amortization of defined benefit pension and post-retirement items:
 
 
 
 
 
Actuarial gains (losses)
$
(4,580
)
 
$
(5,355
)
 
Noninterest expense - personnel costs
Prior service credit
1,476

 
1,476

 
Noninterest expense - personnel costs
 
(3,104
)
 
(3,879
)
 
Total before tax
 
1,086

 
1,357

 
Tax (expense) benefit
 
$
(2,018
)
 
$
(2,522
)
 
Net of tax

9. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of the Company’s convertible preferred stock. Potentially dilutive common shares are excluded from the computation of diluted earnings per share during periods in which the effect would be antidilutive. For diluted earnings per share, net income available to common shares can be affected by the conversion of the Company’s convertible preferred stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the associated preferred dividends and deemed dividend.

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Table of Contents

The calculation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 2017 and 2016, was as shown in the table.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
Basic earnings per common share:
 
 
 
 
 
 
 
Net income
$
274,568

 
$
127,004

 
$
754,403

 
$
472,858

Preferred stock dividends
(18,903
)
 
(18,537
)
 
(56,670
)
 
(46,409
)
Net income available to common shareholders
$
255,665

 
$
108,467

 
$
697,733

 
$
426,449

Average common shares issued and outstanding
1,086,038

 
938,578

 
1,087,115

 
844,167

Basic earnings per common share
$
0.24

 
$
0.12

 
$
0.64

 
$
0.51

Diluted earnings per common share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
255,665

 
$
108,467

 
$
697,733

 
$
426,449

Effect of assumed preferred stock conversion

 

 

 

Net income applicable to diluted earnings per share
$
255,665

 
$
108,467

 
$
697,733

 
$
426,449

Average common shares issued and outstanding
1,086,038

 
938,578

 
1,087,115

 
844,167

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options and restricted stock units and awards
17,079

 
10,714

 
17,515

 
10,295

Shares held in deferred compensation plans
3,228

 
2,654

 
3,096

 
2,337

Other
146

 
135

 
152

 
135

Dilutive potential common shares
20,453

 
13,503

 
20,763

 
12,767

Total diluted average common shares issued and outstanding
1,106,491

 
952,081

 
1,107,878

 
856,934

Diluted earnings per common share
$
0.23

 
$
0.11

 
$
0.63

 
$
0.50


For the three-month periods ended September 30, 2017 and 2016, approximately 1.5 million and 3.5 million, respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the nine-month periods ended September 30, 2017 and 2016, approximately 0.9 million and 3.3 million, respectively, were not included.
10. BENEFIT PLANS
Huntington sponsors a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The plan, which was modified in 2013 and no longer accrues service benefits to participants, provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than the amount deductible under the Internal Revenue Code. There is no required minimum contribution for 2017.
In addition, Huntington has a defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan.
As part of the FirstMerit acquisition, Huntington agreed to assume and honor all FirstMerit benefit plans. The FirstMerit Pension Plan was frozen for nonvested employees and closed to new entrants after December 31, 2006. Effective December 31, 2012, the FirstMerit Pension Plan was frozen for vested employees. Additionally, FirstMerit had a post-retirement benefit plan which provided medical and life insurance for retired employees.
For additional information on benefit plans, see the Benefit Plan footnote in our 2016 Form 10-K.

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Table of Contents

The following table shows the components of net periodic (benefit) cost for all plans.
 
Pension Benefits
 
Post-Retirement Benefits
 
Three Months Ended September 30,
 
Three Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Service cost
$
640

 
$
1,425

 
$
22

 
$
16

Interest cost
7,478

 
7,978

 
98

 
79

Expected return on plan assets
(13,803
)
 
(12,086
)
 

 

Amortization of prior service cost

 

 
(492
)
 
(492
)
Amortization of (gain) loss
1,747

 
1,865

 
(55
)
 
(72
)
Settlements
5,049

 
3,400

 

 

Net periodic (benefit) cost
$
1,111

 
$
2,582

 
$
(427
)
 
$
(469
)
 
Pension Benefits
 
Post-Retirement Benefits
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Service cost
$
1,920

 
$
3,475

 
$
65

 
$
16

Interest cost
22,433

 
21,474

 
296

 
188

Expected return on plan assets
(41,409
)
 
(32,533
)
 

 

Amortization of prior service cost

 

 
(1,476
)
 
(1,476
)
Amortization of (gain) loss
5,241

 
5,594

 
(164
)
 
(216
)
Settlements
10,049

 
10,200

 

 

Net periodic (benefit) cost
$
(1,766
)
 
$
8,210

 
$
(1,279
)
 
$
(1,488
)

Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions, up to the first 4% of base pay that is contributed to the defined contribution plan. For 2016, a discretionary profit-sharing contribution equal to 1% of eligible participants’ 2016 base pay was awarded during the 2017 first quarter. Huntington's expense related to the defined contribution plans during the third quarter 2017 and 2016 was $5 million and $9 million, respectively. For the nine-month periods ended September 30, 2017 and 2016, expense related to the defined contribution plans was $26 million and $26 million, respectively.

11. FAIR VALUES OF ASSETS AND LIABILITIES
See Note 18 “Fair Value of Assets and Liabilities” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of additional valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. There were no such transfers during the three-month and nine-month periods ended September 30, 2017 and 2016.

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Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016 are summarized in the table below.
 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
September 30, 2017
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
584,829

 
$

 
$

 
$
584,829

Loans held for investment

 
58,708

 
40,483

 

 
99,191

Trading account securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
25

 

 

 

 
25

Municipal securities

 
1,481

 

 

 
1,481

Other securities
86,982

 

 

 

 
86,982

 
87,007

 
1,481

 

 

 
88,488

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
11,260

 

 

 

 
11,260

Federal agencies: Mortgage-backed

 
10,639,750

 

 

 
10,639,750

Federal agencies: Other agencies

 
96,451

 

 

 
96,451

Municipal securities

 
468,082

 
2,958,027

 

 
3,426,109

Asset-backed securities

 
531,064

 
24,127

 

 
555,191

Corporate debt

 
125,629

 

 

 
125,629

Other securities
11,717

 
3,935

 

 

 
15,652

 
22,977

 
11,864,911

 
2,982,154

 

 
14,870,042

MSRs

 

 
11,753

 

 
11,753

Derivative assets

 
312,401

 
8,425

 
(154,562
)
 
166,264

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
288,191

 
5,459

 
(234,526
)
 
59,124

Short-term borrowings
4

 

 

 

 
4

 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2016
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
438,224

 
$

 
$

 
$
438,224

Loans held for investment

 
34,439

 
47,880

 

 
82,319

Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities

 
1,148

 

 

 
1,148

Other securities
132,147

 

 

 

 
132,147

 
132,147

 
1,148

 

 

 
133,295

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
5,497

 

 

 

 
5,497

Federal agencies: Mortgage-backed

 
10,673,342

 

 

 
10,673,342

Federal agencies: Other agencies

 
73,542

 

 

 
73,542

Municipal securities

 
452,013

 
2,798,044

 

 
3,250,057

Asset-backed securities

 
717,478

 
76,003

 

 
793,481

Corporate debt

 
198,683

 

 

 
198,683

Other securities
16,588

 
3,943

 

 

 
20,531

 
22,085

 
12,119,001

 
2,874,047

 

 
15,015,133

MSRs

 

 
13,747

 

 
13,747

Derivative assets

 
414,412

 
5,747

 
(181,940
)
 
238,219

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
362,777

 
7,870

 
(272,361
)
 
98,286

Short-term borrowings
474

 

 

 

 
474


(1)
Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties.


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The tables below present a rollforward of the balance sheet amounts for the three-month and nine-month periods ended September 30, 2017 and 2016, for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.
 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Opening balance
$
12,528

 
$
3,178

 
$
2,872,007

 
$
42,575

 
$
43,855

Transfers out of Level 3 (1)

 
(1,376
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(775
)
 
1,164

 
(637
)
 
(1,569
)
 
187

Included in OCI

 

 
(33,781
)
 
5,166

 

Purchases/originations

 

 
166,514

 

 

Sales

 

 
(90
)
 
(21,625
)
 

Repayments

 

 

 

 
(3,559
)
Settlements

 

 
(45,986
)
 
(420
)
 

Closing balance
$
11,753

 
$
2,966

 
$
2,958,027

 
$
24,127

 
$
40,483

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$
(775
)
 
$
1,164

 
$
(104
)
 
$

 
$

 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Opening balance
$
13,105

 
$
12,751

 
$
2,237,975

 
$
71,379

 
$
925

Transfers out of Level 3 (1)

 
(1,692
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(677
)
 
(2,459
)
 
4,166

 

 
(249
)
Included in OCI

 

 
(28,272
)
 
2,875

 

Purchases/originations

 

 
953,639

 
10

 
56,469

Sales

 

 


 

 

Repayments

 

 

 

 
(3,860
)
Settlements

 

 
(262,235
)
 
(445
)
 

Closing balance
$
12,428

 
$
8,600

 
$
2,905,273

 
$
73,819

 
$
53,285

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$
(677
)
 
$
(2,459
)
 
$

 
$

 
$


(1)
Transfers out of Level 3 represent the settlement value of the derivative instruments (i.e. interest rate lock agreements) that were transferred to loans held for sale, which are classified as Level 2.

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Level 3 Fair Value Measurements
Nine Months Ended September 30, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Opening balance
$
13,747

 
$
(2,123
)
 
$
2,798,044

 
$
76,003

 
$
47,880

Transfers out of Level 3 (1)

 
(3,833
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(1,994
)
 
8,922

 
(3,612
)
 
(5,097
)
 
1,617

Included in OCI

 

 
(887
)
 
13,936

 

Purchases/originations

 

 
414,123

 

 

Sales

 

 
(90
)
 
(59,353
)
 

Repayments

 

 

 

 
(9,014
)
Settlements

 

 
(249,551
)
 
(1,362
)
 

Closing balance
$
11,753

 
$
2,966

 
$
2,958,027

 
$
24,127

 
$
40,483

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$
(1,994
)
 
$
8,922

 
$
(128
)
 
$
(3,559
)
 
$

 
Level 3 Fair Value Measurements
Nine Months Ended September 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Loans held for investment
Opening balance
$
17,585

 
$
6,056

 
$
2,095,551

 
$
100,337

 
$
1,748

Transfers out of Level 3 (1)

 
(5,115
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(5,157
)
 
7,659

 
4,166

 
2

 
(249
)
Included in OCI

 

 
(8,946
)
 
3,549

 

Purchases/originations

 

 
1,237,546

 
10

 
56,469

Sales

 

 
(36,657
)
 
(27,794
)
 

Repayments

 

 

 

 
(4,683
)
Settlements

 

 
(386,387
)
 
(2,285
)
 

Closing balance
$
12,428

 
$
8,600

 
$
2,905,273

 
$
73,819

 
$
53,285

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$
(5,157
)
 
$
7,759

 
$

 
$
2

 
$


(1)
Transfers out of Level 3 represent the settlement value of the derivative instruments (i.e. interest rate lock agreements) that were transferred to loans held for sale, which are classified as Level 2.

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The tables below summarize the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(775
)
 
$
1,164

 
$

 
$

 
$

Securities gains (losses)

 

 
(104
)
 
(1,569
)
 

Interest and fee income

 

 
(533
)
 

 

Noninterest income

 

 

 

 
187

Total
$
(775
)
 
$
1,164

 
$
(637
)
 
$
(1,569
)
 
$
187

 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(677
)
 
$
(2,459
)
 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

Interest and fee income

 

 

 

 

Noninterest income

 

 
4,166

 

 
(249
)
Total
$
(677
)
 
$
(2,459
)
 
$
4,166

 
$

 
$
(249
)
 
Level 3 Fair Value Measurements
Nine Months Ended September 30, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(1,994
)
 
$
8,922

 
$

 
$

 
$

Securities gains (losses)

 

 
(128
)
 
(5,100
)
 

Interest and fee income

 

 
(3,484
)
 
3

 

Noninterest income

 

 

 

 
1,617

Total
$
(1,994
)
 
$
8,922

 
$
(3,612
)
 
$
(5,097
)
 
$
1,617

 
Level 3 Fair Value Measurements
Nine Months Ended September 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(5,157
)
 
$
7,659

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

Interest and fee income

 

 

 

 

Noninterest income

 

 
4,166

 
2

 
(249
)
Total
$
(5,157
)
 
$
7,659

 
$
4,166

 
$
2

 
$
(249
)

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Assets and liabilities under the fair value option
The following table presents the fair value and aggregate principal balance of certain assets and liabilities under the fair value option.
 
September 30, 2017
 
Total Loans
 
Loans that are 90 or more days past due
(dollar amounts in thousands)
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
584,829

 
$
564,106

 
$
20,723

 
$
602

 
$
608

 
$
(6
)
Loans held for investment
99,191

 
107,997

 
(8,806
)
 
10,086

 
11,781

 
(1,695
)
 
December 31, 2016
 
Total Loans
 
Loans that are 90 or more days past due
(dollar amounts in thousands)
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
438,224

 
$
433,760

 
$
4,464

 
$

 
$

 
$

Loans held for investment
82,319

 
91,998

 
(9,679
)
 
8,408

 
11,082

 
(2,674
)

The following tables present the net gains (losses) from fair value changes for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
 
Net gains (losses) from fair value changes
 
Net gains (losses) from fair value changes
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
 
2017
 
2016
 
2017
 
2016
Assets
 
 
 
 
 
 
 
 
Loans held for sale
 
$
(1,897
)
 
$
(4,439
)
 
$
11,719

 
$
9,080

Loans held for investment
 
187

 

 
1,617

 


Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. For the nine months ended September 30, 2017, assets measured at fair value on a nonrecurring basis were as shown in the table below.
 
 
 
Fair Value Measurements Using
 
 
(dollar amounts in thousands)
Fair Value
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Gains/(Losses)
Nine Months Ended
September 30, 2017
MSRs
$
182,043

 
$

 
$

 
$
182,043

 
$
(318
)
Impaired loans
68,159

 

 

 
68,159

 
(3,976
)
Other real estate owned
42,041

 

 

 
42,041

 
(1,759
)

MSRs accounted for under the amortization method are subject to nonrecurring fair value measurement when the fair value is lower than the carrying amount.
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices

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for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.
Other real estate-owned properties are included in accrued income and other assets and valued based on appraisals and third-party price opinions, less estimated selling costs.
Significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis
The table below presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at September 30, 2017 and December 31, 2016:
 
Quantitative Information about Level 3 Fair Value Measurements at September 30, 2017
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
Measured at fair value on a recurring basis:
MSRs
$
11,753

 
Discounted cash flow
 
Constant prepayment rate
 
9.0% - 31.0% (12%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
8.0% - 10.0% (8.1%)
Derivative assets
8,425

 
Consensus Pricing
 
Net market price
 
-4.0% - 21.4% (1.8%)
Derivative liabilities
5,459

 
 
 
Estimated Pull through %
 
11.0% - 99.0% (79.0%)
Municipal securities
2,958,027

 
Discounted cash flow
 
Discount rate
 
0.0% - 10.3% (4.0%)
 
 
 
 
 
Cumulative default
 
0.0% - 42.0% (4.9%)
 
 
 
 
 
Loss given default
 
5.0% - 80.0% (23.7%)
Asset-backed securities
24,127

 
Discounted cash flow
 
Discount rate
 
1.3% - 6.8% (6.5%)
 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 72% (7.3%)
 
 
 
 
 
Cumulative default
 
2.9% - 100% (8.6%)
 
 
 
 
 
Loss given default
 
90% - 100% (97.8%)
Loans held for investment
40,483

 
Discounted cash flow
 
Discount rate
 
7.0% - 17.7% (8.2%)
Measured at fair value on a nonrecurring basis:
MSRs
182,043

 
Discounted cash flow
 
Constant prepayment rate
 
6.0% - 21.0% (8%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
1.8% - 20.0% (10.4%)
Impaired loans
68,159

 
Appraisal value
 
NA
 
NA
Other real estate owned
42,041

 
Appraisal value
 
NA
 
NA

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Quantitative Information about Level 3 Fair Value Measurements at December 31, 2016
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
Measured at fair value on a recurring basis:
MSRs
$
13,747

 
Discounted cash flow
 
Constant prepayment rate
 
5.63% - 34.4% (10.9%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.0% - 9.2% (5.4%)
Derivative assets
5,747

 
Consensus Pricing
 
Net market price
 
-7.1% - 25.4% (1.1%)
Derivative liabilities
7,870

 
 
 
Estimated Pull through %
 
8.1% - 99.8% (76.9%)
Municipal securities
2,798,044

 
Discounted cash flow
 
Discount rate
 
0.0% - 10.0% (3.6%)
 
 
 
 
 
Cumulative default
 
0.3% - 37.8% (4.0%)
 
 
 
 
 
Loss given default
 
5.0% - 80.0% (24.1%)
Asset-backed securities
76,003

 
Discounted cash flow
 
Discount rate
 
5.0% - 12.0% (6.3%)
 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 73% (6.5%)
 
 
 
 
 
Cumulative default
 
1.1% - 100% (11.2%)
 
 
 
 
 
Loss given default
 
85% - 100% (96.3%)
 
 
 
 
 
Cure given deferral
 
0.0% - 75.0% (36.2%)
Loans held for investment
47,880

 
Discounted cash flow
 
Discount rate
 
5.4% - 16.2% (5.6%)
Measured at fair value on a nonrecurring basis:
MSRs
171,309

 
Discounted cash flow
 
Constant prepayment rate
 
5.57% - 30.4% (7.8%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
4.2% - 20.0% (11.7%)
Impaired loans
53,818

 
Appraisal value
 
NA
 
NA
Other real estate owned
50,930

 
Appraisal value
 
NA
 
NA

The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship between unobservable inputs, where relevant/significant. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below.
A significant change in the unobservable inputs may result in a significant change in the ending fair value measurement of Level 3 instruments. In general, prepayment rates increase when market interest rates decline and decrease when market interest rates rise and higher prepayment rates generally result in lower fair values for MSR assets and Asset-backed securities.
Credit loss estimates, such as probability of default, constant default, cumulative default, loss given default, cure given deferral, and loss severity, are driven by the ability of the borrowers to pay their loans and the value of the underlying collateral and are impacted by changes in macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Higher credit loss estimates generally result in lower fair values. Credit spreads generally increase when liquidity risks and market volatility increase and decrease when liquidity conditions and market volatility improve.
Discount rates and spread over forward interest rate swap rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve. Higher discount rates and credit spreads generally result in lower fair market values.
Net market price and pull through percentages generally increase when market interest rates increase and decline when market interest rates decline. Higher net market price and pull through percentages generally result in higher fair values.

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Fair values of financial instruments
The following table provides the carrying amounts and estimated fair values of Huntington’s financial instruments that are carried either at fair value or cost at September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash and short-term assets
$
1,243,828

 
$
1,243,828

 
$
1,443,037

 
$
1,443,037

Trading account securities
88,488

 
88,488

 
133,295

 
133,295

Loans held for sale
651,734

 
657,270

 
512,951

 
515,640

Available-for-sale and other securities
15,453,061

 
15,453,061

 
15,562,837

 
15,562,837

Held-to-maturity securities
8,688,399

 
8,655,805

 
7,806,939

 
7,787,268

Net loans and direct financing leases
67,911,810

 
67,698,855

 
66,323,583

 
66,294,639

Derivatives
166,264

 
166,264

 
238,219

 
238,219

Financial Liabilities
 
 
 
 
 
 
 
Deposits
78,445,113

 
78,422,971

 
75,607,717

 
76,161,091

Short-term borrowings
1,829,549

 
1,829,549

 
3,692,654

 
3,692,654

Long-term debt
9,200,707

 
9,402,926

 
8,309,159

 
8,387,444

Derivatives
59,124

 
59,124

 
98,286

 
98,286


The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntington’s financial instruments that are not already on the Unaudited Condensed Consolidated Balance Sheets at fair value at September 30, 2017 and December 31, 2016:
 
Estimated Fair Value Measurements at Reporting Date Using
 
September 30, 2017
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
8,655,805

 
$

 
$
8,655,805

Net loans and direct financing leases

 

 
67,698,855

 
67,698,855

Financial Liabilities
 
 
 
 
 
 
 
Deposits

 
75,230,127

 
3,192,844

 
78,422,971

Short-term borrowings
4

 

 
1,829,545

 
1,829,549

Long-term debt

 
8,992,820

 
410,106

 
9,402,926

 
Estimated Fair Value Measurements at Reporting Date Using
 
December 31, 2016
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
7,787,268

 
$

 
$
7,787,268

Net loans and direct financing leases

 

 
66,294,639

 
66,294,639

Financial Liabilities

 

 

 
 
Deposits

 
72,319,328

 
3,841,763

 
76,161,091

Short-term borrowings
474

 

 
3,692,180

 
3,692,654

Long-term debt

 
7,980,176

 
407,268

 
8,387,444


The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality.

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Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.
Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:
Held-to-maturity securities
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans and Direct Financing Leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of expected losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Long-term debt is based upon quoted market prices, which are inclusive of Huntington’s credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded in the Unaudited Condensed Consolidated Balance Sheets as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.
The following table presents the fair values of all derivative instruments included in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016. Amounts in the table below are presented gross without the impact of any net collateral arrangements.
 
September 30, 2017
December 31, 2016
(dollar amounts in thousands)
Asset
 
Liability
 
Asset
 
Liability
Derivatives designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
$
32,837

 
$
93,224

 
$
46,440

 
$
99,996

Derivatives not designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts (1)
198,471

 
112,534

 
232,653

 
140,475

Foreign exchange contracts
22,354

 
21,020

 
23,265

 
19,576

Commodities contracts
66,133

 
61,695

 
108,026

 
104,328

Equity contracts
1,031

 
5,177

 
9,775

 
6,272

Total Contracts
$
320,826

 
$
293,650

 
$
420,159

 
$
370,647


(1)
Includes derivative assets and liabilities used in mortgage banking activities.

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Derivatives used in asset and liability management activities
Huntington engages in balance sheet hedging activity, principally for asset and liability management purposes, to convert fixed rate assets or liabilities into floating rate, or vice versa. Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans into fixed rate loans.
The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at September 30, 2017 and December 31, 2016, identified by the underlying interest rate-sensitive instruments.
 
September 30, 2017
(dollar amounts in thousands)
Fair Value Hedges
 
Cash Flow Hedges
 
Total
Instruments associated with:
 
 
 
 
 
Loans
$

 
$
1,325,000

 
$
1,325,000

Subordinated notes
950,000

 

 
950,000

Long-term debt
7,425,000

 

 
7,425,000

Total notional value at September 30, 2017
$
8,375,000

 
$
1,325,000

 
$
9,700,000

 
 
 
 
 
 
 
December 31, 2016
(dollar amounts in thousands)
Fair Value Hedges
 
Cash Flow Hedges
 
Total
Instruments associated with:
 
 
 
 
 
Loans
$

 
$
3,325,000

 
$
3,325,000

Subordinated notes
950,000

 

 
950,000

Long-term debt
6,525,000

 

 
6,525,000

Total notional value at December 31, 2016
$
7,475,000

 
$
3,325,000

 
$
10,800,000


The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
 
 
 
 
 
 
Weighted-Average Rate
(dollar amounts in thousands)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
1,325,000

 
0.1
 
$
(1,239
)
 
0.72
%
 
1.23
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
8,375,000

 
2.8
 
(59,148
)
 
1.56

 
1.29

Total swap portfolio at September 30, 2017
$
9,700,000

 
2.3
 
$
(60,387
)
 


 


 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Weighted-Average Rate
(dollar amounts in thousands)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
3,325,000

 
0.6
 
$
(2,060
)
 
1.04
%
 
0.91
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
7,475,000

 
3.1
 
(51,496
)
 
1.49

 
0.88

Total swap portfolio at December 31, 2016
$
10,800,000

 
2.3
 
$
(53,556
)
 
 
 
 


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These derivative financial instruments are entered into to manage the interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest-earning assets or interest-bearing liabilities are an adjustment to either interest income or interest expense. The net amounts resulted in an increase to net interest income of $3 million and $18 million for the three-month periods ended September 30, 2017, and 2016, respectively. For the nine-month periods ended September 30, 2017, and 2016, the net amounts resulted in an increase to net interest income of $20 million and $58 million, respectively.
Fair Value Hedges
The changes in fair value of the fair value hedges are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item.
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
Change in fair value of interest rate swaps hedging deposits (1)
$

 
$

 
$

 
$
(82
)
Change in fair value of hedged deposits (1)

 

 

 
72

Change in fair value of interest rate swaps hedging subordinated notes (2)
(2,234
)
 
(9,688
)
 
(4,665
)
 
(2,880
)
Change in fair value of hedged subordinated notes (2)
3,615

 
10,400

 
6,782

 
3,591

Change in fair value of interest rate swaps hedging other long-term debt (2)
(6,431
)
 
(45,870
)
 
(880
)
 
37,179

Change in fair value of hedged other long-term debt (2)
7,152

 
42,647

 
(1,226
)
 
(38,187
)

(1)
Effective portion of the hedging relationship is recognized in Interest expense—deposits in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
(2)
Effective portion of the hedging relationship is recognized in Interest expense—subordinated notes and other long-term debt in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.

Cash Flow Hedges
To the extent derivatives designated as cash flow hedges are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.
The following table presents the gains and (losses) recognized in OCI and the location in the Unaudited Condensed Consolidated Statements of Income of gains and (losses) reclassified from OCI into earnings for derivatives designated as effective cash flow hedges for the three-month and nine-month periods ended September 30, 2017 and 2016.
Derivatives in cash flow hedging relationships
Amount of gain or (loss) recognized in OCI on derivatives
(effective portion)
(after-tax)
 
Location of gain or (loss) reclassified from
accumulated OCI into earnings (effective portion)
 
Amount of (gain) or loss
reclassified from
accumulated OCI into earnings
(effective portion)
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
1,225

 
$
(5,311
)
 
Interest and fee income - loans and leases
 
$
144

 
$
123

Investment Securities

 

 
Noninterest income - other income
 

 

Total
$
1,225

 
$
(5,311
)
 
 
 
$
144

 
$
123


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Derivatives in cash flow hedging relationships
Amount of gain or (loss) recognized in OCI on derivatives
(effective portion)
(after-tax)
 
Location of gain or (loss) reclassified from
accumulated OCI into earnings (effective portion)
 
Amount of (gain) or loss
reclassified from
accumulated OCI into earnings
(effective portion)
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
(dollar amounts in thousands)
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
828

 
$
5,231

 
Interest and fee income - loans and leases
 
$
1,131

 
$
(770
)
Investment Securities

 

 
Noninterest income - other income
 

 
1


$
828

 
$
5,231

 
 
 
$
1,131

 
$
(769
)

Gains and losses on swaps related to loans and investment securities are recorded in interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings approximately $(1) million after-tax of unrealized gains (losses) on cash flow hedging derivatives currently in OCI.
The following table presents the gains and (losses) recognized in noninterest income for the ineffective portion of interest rate contracts for derivatives designated as cash flow hedges for the three and nine-month periods ended September 30, 2017 and 2016.
Derivatives in cash flow hedging relationships
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
Loans
$
359

 
$
(371
)
 
$
225

 
$
6


Derivatives used in mortgage banking activities
Mortgage loan origination hedging activity
Huntington’s mortgage origination hedging activity is related to the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. The value of a newly originated mortgage is not firm until the interest rate is committed or locked. The interest rate lock commitments are derivative positions offset by forward commitments to sell loans.
Huntington uses two types of mortgage-backed securities in its forward commitments to sell loans. The first type of forward commitment is a “To Be Announced” (or TBA), the second is a “Specified Pool” mortgage-backed security. Huntington uses these derivatives to hedge the value of mortgage-backed securities until they are sold.
The following table summarizes the derivative assets and liabilities used in mortgage banking activities:
Derivatives used in mortgage banking activities
September 30, 2017
December 31, 2016
(dollar amounts in thousands)
Asset
 
Liability
 
Asset
 
Liability
Interest rate lock agreements
$
8,425

 
$
282

 
$
5,747

 
$
1,598

Forward trades and options
1,562

 
1,782

 
13,319

 
1,173

Total derivatives used in mortgage banking activities
$
9,987

 
$
2,064

 
$
19,066

 
$
2,771

MSR hedging activity
Huntington’s MSR economic hedging activity uses securities and derivatives to manage the value of the MSR asset and to mitigate the various types of risk inherent in the MSR asset, including risks related to duration, basis, convexity, volatility, and yield curve. The hedging instruments include forward commitments, interest rate swaps, and options on interest rate swaps.
The total notional value of these derivative financial instruments at September 30, 2017 and December 31, 2016, was $188 million and $300 million, respectively. The total notional amount at September 30, 2017 corresponds to trading assets with a fair value of $1 million and trading liabilities with a fair value of $2 million. Net trading gains and (losses) related to MSR hedging for the three-month periods ended September 30, 2017 and 2016, were less than $1 million and $(1) million and $1 million and $17 million for the nine-month periods ended September 30, 2017 and 2016, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements of Income.

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Derivatives used in customer related activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consist of commodity, interest rate, and foreign exchange contracts. Huntington may enter into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies in order to economically hedge significant exposure related to derivatives used in trading activities.
The interest rate risk of customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value. Foreign currency derivatives help the customer hedge risk and reduce exposure to fluctuations in exchange rates. Transactions are primarily in liquid currencies with Canadian dollars and Euros comprising a majority of all transactions. Commodity derivatives help the customer hedge risk and reduce exposure to fluctuations in the price of various commodities. Hedging of energy-related products and base metals comprise the majority of all transactions.
The net fair values of these derivative financial instruments, for which the gross amounts are included in accrued income and other assets or accrued expenses and other liabilities at both September 30, 2017 and December 31, 2016, were $84 million and $80 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $21.4 billion and $20.6 billion at both September 30, 2017 and December 31, 2016, respectively. Huntington’s credit risk from interest rate swaps used for trading purposes was $156 million and $196 million at the same dates, respectively.
Share Swap Economic Hedge
Huntington acquires and holds shares of Huntington common stock in a Rabbi Trust for the Executive Deferred Compensation Plan. Huntington common stock held in the Rabbi Trust is recorded at cost and the corresponding deferred compensation liability is recorded at fair value using Huntington's share price as a significant input.
During the second quarter of 2017, Huntington entered into an economic hedge with a notional value of $8 million to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. During the third quarter 2017, the previous economic hedge entered into during the second quarter of 2016 of $20 million expired. Also during the third quarter of 2017, Huntington entered into an economic hedge with notional value of $31 million for a total of $39 million at September 30, 2017 to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. The economic hedges are recorded at fair value in other assets or liabilities. Changes in the fair value are recorded directly through other noninterest expense in the Unaudited Condensed Consolidated Statements of Income. At September 30, 2017, the fair value of the share swaps was $1 million.
Visa®-related Swap
In connection with the sale of Huntington’s Class B Visa® shares, Huntington entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B shares resulting from the Visa® litigation. In connection with the FirstMerit acquisition, Huntington acquired an additional Visa® related swap agreement. At September 30, 2017, the combined fair value of the swap liabilities of $5 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses and timing of the litigation settlement.
Financial assets and liabilities that are offset in the Unaudited Condensed Consolidated Balance Sheets
Huntington records derivatives at fair value as further described in Note 11.
Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. Additionally, collateral exchanged with counterparties is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups: broker-dealers and banks, and Huntington’s customers. Different methods are utilized for managing counterparty credit exposure and credit risk for each of these groups.
Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high-dollar volume. Huntington enters into bilateral collateral and master netting agreements with these counterparties, and routinely exchanges cash and high quality securities collateral. Huntington enters into transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions generally are low-dollar volume. Huntington enters into master netting agreements with customer counterparties; however, collateral is generally not exchanged.
At September 30, 2017 and December 31, 2016, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $30 million and $26 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements with broker-dealers and banks.

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At September 30, 2017, Huntington pledged $144 million of investment securities and cash collateral to counterparties, while other counterparties pledged $78 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.
The following tables present the gross amounts of these assets and liabilities with any offsets to arrive at the net amounts recognized in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016.
Offsetting of Financial Liabilities and Derivative Assets
 
 
 
 
Gross amounts
offset in the
condensed
consolidated
balance sheets
 
Net amounts of
assets
presented in
the condensed
consolidated
balance sheets
 
Gross amounts not offset in
the condensed consolidated
balance sheets
 
 
(dollar amounts in thousands)
 
Gross amounts
of recognized
assets
 
 
 
Financial
instruments
 
Cash collateral
received
 
Net amount
September 30, 2017
Derivatives
$
320,826

 
$
(154,562
)
 
$
166,264

 
$
(23,350
)
 
$
(16,895
)
 
$
126,019

December 31, 2016
Derivatives
420,159

 
(181,940
)
 
238,219

 
(34,328
)
 
(5,428
)
 
198,463

Offsetting of Financial Liabilities and Derivative Liabilities
 
 
 
 
Gross amounts
offset in the
condensed
consolidated
balance sheets
 
Net amounts of
liabilities
presented in
the condensed
consolidated
balance sheets
 
Gross amounts not offset in
the condensed consolidated
balance sheets
 
 
(dollar amounts in thousands)
 
Gross amounts
of recognized
liabilities
 
 
 
Financial
instruments
 
Cash collateral
delivered
 
Net amount
September 30, 2017
Derivatives
$
293,650

 
$
(234,526
)
 
$
59,124

 
$

 
$
(26,766
)
 
$
32,358

December 31, 2016
Derivatives
370,647

 
(272,361
)
 
98,286

 
(7,550
)
 
(23,943
)
 
66,793

13. VIEs
Consolidated VIEs
Consolidated VIEs at September 30, 2017, consisted of certain loan and lease securitization trusts. Huntington has determined that the trusts are VIEs. Huntington has concluded that it is the primary beneficiary of these trusts because it has the power to direct the activities of the entity that most significantly affect the entity’s economic performance and it has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
The following tables present the carrying amount and classification of the consolidated trusts’ assets and liabilities that were included in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016.
 
 
September 30, 2017
 
 
Huntington Technology Funding Trust
 
Other Consolidated VIEs
 
Total
(dollar amounts in thousands)
 
Series 2014A
 
 
Assets:
 
 
 
 
 
 
Cash
 
$
1,569

 
$

 
$
1,569

Net loans and leases
 
33,148

 

 
33,148

Accrued income and other assets
 

 
269

 
269

Total assets
 
$
34,717

 
$
269

 
$
34,986

Liabilities:
 
 
 
 
 
 
Other long-term debt
 
$
28,120

 
$

 
$
28,120

Accrued interest and other liabilities
 

 
269

 
269

Total liabilities
 
28,120

 
269

 
28,389

Equity:
 
 
 
 
 
 
Beneficial Interest owned by third party
 
6,597

 

 
6,597

Total liabilities and equity
 
$
34,717

 
$
269

 
$
34,986


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December 31, 2016
 
 
Huntington Technology
Funding Trust
 
Other Consolidated VIEs
 
Total
(dollar amounts in thousands)
 
Series 2014A
 
 
Assets:
 
 
 
 
 
 
Cash
 
$
1,564

 
$

 
$
1,564

Net loans and leases
 
69,825

 

 
69,825

Accrued income and other assets
 

 
281

 
281

Total assets
 
$
71,389

 
$
281

 
$
71,670

Liabilities:
 
 
 
 
 
 
Other long-term debt
 
$
57,494

 
$

 
$
57,494

Accrued interest and other liabilities
 

 
281

 
281

Total liabilities
 
57,494

 
281

 
57,775

Equity:
 
 
 
 
 
 
Beneficial Interest owned by third party
 
13,895

 

 
13,895

Total liabilities and equity
 
$
71,389

 
$
281

 
$
71,670


The loans and leases were designated to repay the securitized notes. Huntington services the loans and leases and uses the proceeds from principal and interest payments to pay the securitized notes during the amortization period. Huntington has not provided financial or other support that was not previously contractually required.
Unconsolidated VIEs
The following tables provide a summary of the assets and liabilities included in Huntington’s Unaudited Condensed Consolidated Financial Statements, as well as the maximum exposure to losses, associated with its interests related to unconsolidated VIEs for which Huntington holds an interest, but is not the primary beneficiary to the VIE at September 30, 2017, and December 31, 2016.

September 30, 2017
(dollar amounts in thousands)
Total Assets

Total Liabilities

Maximum Exposure to Loss
2016-1 Automobile Trust
$
8,674

 
$

 
$
8,674

2015-1 Automobile Trust
1,506




1,506

Trust Preferred Securities
13,919


252,577



Low Income Housing Tax Credit Partnerships
638,171


348,733


638,171

Other Investments
108,556


48,339


108,556

Total
$
770,826


$
649,649


$
756,907

 
December 31, 2016
(dollar amounts in thousands)
Total Assets
 
Total Liabilities
 
Maximum Exposure to Loss
2016-1 Automobile Trust
$
14,770

 
$

 
$
14,770

2015-1 Automobile Trust
2,227

 

 
2,227

Trust Preferred Securities
13,919

 
252,552

 

Low Income Housing Tax Credit Partnerships
576,880

 
292,721

 
576,880

Other Investments
79,195

 
42,316

 
79,195

Total
$
686,991


$
587,589


$
673,072



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The following table provides a summary of automobile transfers to trusts in separate securitization transactions.
(dollar amounts in millions)
 
Year
 
Amount Transferred
2016-1 Automobile Trust
 
2016
 
$
1,500

2015-1 Automobile Trust
 
2015
 
750

The securitizations and the resulting sale of all underlying securities qualified for sale accounting. Huntington has concluded that it is not the primary beneficiary of these trusts because it has neither the obligation to absorb losses of the entities that could potentially be significant to the VIEs nor the right to receive benefits from the entities that could potentially be significant to the VIEs. Huntington is not required and does not currently intend to provide any additional financial support to the trusts. Investors and creditors only have recourse to the assets held by the trusts. The interest Huntington holds in the VIEs relates to servicing rights which are included in servicing rights of Huntington’s Unaudited Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the servicing asset. See Note 6 for more information.
Trust Preferred Securities
Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included in Huntington’s Unaudited Condensed Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing trust-preferred securities, from which the proceeds are then invested in Huntington junior subordinated debentures, which are reflected in Huntington’s Unaudited Condensed Consolidated Balance Sheets as subordinated notes. The trust securities are the obligations of the trusts, and as such, are not consolidated in Huntington’s Unaudited Condensed Consolidated Financial Statements. A list of trust preferred securities outstanding at September 30, 2017 follows.
(dollar amounts in thousands)
Rate
 
Principal amount of
subordinated note/
debenture issued to trust (1)
 
Investment in
unconsolidated
subsidiary
Huntington Capital I
2.01
%
(2)
$
69,730

 
$
6,186

Huntington Capital II
1.95

(3)
32,093

 
3,093

Sky Financial Capital Trust III
2.74

(4)
72,165

 
2,165

Sky Financial Capital Trust IV
2.70

(4)
74,320

 
2,320

Camco Financial Trust
3.76

(5)
4,269

 
155

Total
 
 
$
252,577

 
$
13,919


(1)
Represents the principal amount of debentures issued to each trust, including unamortized original issue discount.
(2)
Variable effective rate at September 30, 2017, based on three-month LIBOR +0.70%.
(3)
Variable effective rate at September 30, 2017, based on three-month LIBOR +0.625%.
(4)
Variable effective rate at September 30, 2017, based on three-month LIBOR +1.40%.
(5)
Variable effective rate at September 30, 2017, based on three-month LIBOR +1.33%.

Each issue of the junior subordinated debentures has an interest rate equal to the corresponding trust securities distribution rate. Huntington has the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the trust securities will also be deferred and Huntington’s ability to pay dividends on its common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to trust securities are guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all indebtedness of the Company to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by Huntington.
Low Income Housing Tax Credit Partnerships
Huntington makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
Huntington uses the proportional amortization method to account for all qualified investments in these entities. These investments are included in accrued income and other assets. Investments that do not meet the requirements of the proportional

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amortization method are recognized using the equity method. Investment gains/losses related to these investments are included in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
The following table presents the balances of Huntington’s affordable housing tax credit investments and related unfunded commitments at September 30, 2017 and December 31, 2016.
(dollar amounts in thousands)
September 30,
2017
 
December 31,
2016
Affordable housing tax credit investments
$
980,984

 
$
877,237

Less: amortization
(342,813
)
 
(300,357
)
Net affordable housing tax credit investments
$
638,171

 
$
576,880

Unfunded commitments
$
348,733

 
$
292,721

The following table presents other information related to Huntington’s affordable housing tax credit investments for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Tax credits and other tax benefits recognized
$
22,471

 
$
21,200

 
$
68,426

 
$
57,634

Proportional amortization method
 
 
 
 
 
 
 
Tax credit amortization expense included in provision for income taxes
17,292

 
13,608

 
51,474

 
38,513

Equity method
 
 
 
 
 
 
 
Tax credit investment (gains) losses included in noninterest income

 
132

 

 
396


Huntington recognized immaterial impairment losses on tax credit investments during the three-month and nine-month periods ended September 30, 2017 and 2016. The impairment losses recognized related to the fair value of the tax credit investments that were less than carrying value.
Other Investments
Other investments determined to be VIEs include investments in New Market Tax Credit Investments, Historic Tax Credit Investments, Small Business Investment Companies, Rural Business Investment Companies, certain equity method investments and other miscellaneous investments.
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to extend credit
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the Unaudited Condensed Consolidated Financial Statements. The contract amounts of these financial agreements at September 30, 2017 and December 31, 2016, were as listed in the following table.
(dollar amounts in thousands)
September 30,
2017

December 31,
2016
Contract amount representing credit risk:
 
 
 
Commitments to extend credit
 
 
 
Commercial
$
16,056,609


$
15,190,056

Consumer
12,977,175


12,235,943

Commercial real estate
1,373,127


1,697,671

Standby letters-of-credit
547,689


637,182

Commercial letters-of-credit
16,815


4,610


Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.

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The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $5 million and $8 million at September 30, 2017 and December 31, 2016, respectively.
Commercial letters-of-credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The goods or cargo being traded normally secures these instruments.
Commitments to sell loans
Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. At September 30, 2017 and December 31, 2016, Huntington had commitments to sell residential real estate loans of $1.0 billion and $0.8 billion, respectively. These contracts mature in less than one year.
Litigation
The nature of Huntington’s business ordinarily results in a certain amount of pending as well as threatened claims, litigation, investigations, regulatory and legal and administrative cases, matters and proceedings, all of which are considered incidental to the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company considers settlement of cases when, in Management’s judgment, it is in the best interests of both the Company and its shareholders to do so.
On at least a quarterly basis, Huntington assesses its liabilities and contingencies in connection with threatened and outstanding legal cases, matters and proceedings, utilizing the latest information available. For cases, matters and proceedings where it is both probable the Company will incur a loss and the amount can be reasonably estimated, Huntington establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For cases, matters or proceedings where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
In certain cases, matters and proceedings, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate range of reasonably possible losses, in excess of amounts accrued, for current legal proceedings is up to $65 million at September 30, 2017. For certain other cases, and matters, Management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, Management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.
While the final outcome of legal cases, matters, and proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Company’s legal cases, matters, or proceedings will not have a material negative adverse effect on the Company’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters, and proceedings, if unfavorable, may be material to the Company’s consolidated financial position in a particular period.
Meoli v. The Huntington National Bank (Cyberco Litigation). The Bank has been named a defendant in a lawsuit arising from the Bank’s commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), Cyberco allegedly defrauded equipment lessors and financial institutions, including Huntington, in financing the purchase of computer equipment from Teleservices Group, Inc. (Teleservices), which itself later proved to be a shell corporation. Bankruptcy proceedings for both Cyberco and Teleservices ensued.
In an adversary proceeding brought by the bankruptcy trustee for Teleservices in the U.S. District Court for the Western District of Michigan, judgment was rendered against Huntington in the amount of $72 million plus costs and pre- and post-judgment interest. Huntington appealed the judgment to the U.S. Sixth Circuit Court of Appeals, which reversed the judgment in part and remanded the case for further proceedings. The case is currently before the bankruptcy court again. The parties have completed briefing on liability and the appropriate calculation of damages, and await the scheduling of a hearing on the issue.
Powell v. Huntington National Bank.  Huntington is a defendant in a class action filed on October 15, 2013 alleging Huntington charged late fees on mortgage loans in a method that violated West Virginia law and the loan documents. Plaintiffs seek statutory civil penalties, compensatory damages and attorney’s fees. Huntington filed a motion for summary judgment on

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the plaintiffs’ claims, which was granted by the U.S. District Court on December 28, 2016.  Plaintiffs have appealed to the U.S. Fourth Circuit Court of Appeals. Oral arguments were held on October 24, 2017.
FirstMerit Overdraft Litigation. Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against FirstMerit. The complaints were brought as class actions on behalf of Ohio residents who maintained a checking account at FirstMerit and who incurred one or more overdraft fees as a result of the alleged re-sequencing of debit transactions. The parties have reached a global settlement for approximately $9 million cash to a common fund plus an additional $7 million in debt forgiveness. Attorneys' fees will be paid from the fund, with any remaining funds going to charity. FirstMerit’s insurer has reimbursed Huntington 49% of the approximately $9 million, which totals approximately $4.4 million. The court preliminarily approved the settlement on December 5, 2016 and the cash portion of the settlement was funded on December 12, 2016. The settlement received final approval on June 2, 2017 and there has been no appeal, so the settlement is final. Huntington is in the process of issuing settlement checks, forgiving the agreed-upon debt, and taking other actions as agreed upon in the settlement agreement. Because the settlement is in the process of being concluded, we anticipate no further reporting on this matter.
15. SEGMENT REPORTING
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have four major business segments: Consumer and Business Banking, Commercial Banking, Commercial Real Estate and Vehicle Finance (CREVF), Regional Banking and The Huntington Private Client Group (RBHPCG). The Treasury / Other function includes our technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to customers. Results of operations for the business segments reflect these fee-sharing allocations.
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit (activity-based) costs to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all four business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the four business segments.
The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures result in changes in reported segment
financial data. Accordingly, certain amounts have been reclassified to conform to the current period presentation.
We use an active and centralized Funds Transfer Pricing (FTP) methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result centralizes the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).
We announced a change in our executive leadership team, which became effective during the second quarter of 2017. As a result, the previously-reported Home Lending segment is now included as an operating unit in the Consumer and Business Banking segment. Additionally, the Insurance operating unit previously included in Commercial Banking was realigned to RBHPCG during second quarter. Prior period results have been reclassified to conform to the current period presentation.

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Consumer and Business Banking - The Consumer and Business Banking segment, including Home Lending, provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, mortgage loans, consumer loans, credit cards, and small business loans and investment products. Other financial services available to consumer and small business customers include insurance, interest rate risk protection, foreign exchange, and treasury management. Business Banking is defined as serving companies with revenues up to $20 million and consists of approximately 254,000 businesses. Home Lending supports origination and servicing of consumer loans and mortgages for customers who are generally located in our primary banking markets across all segments.
Commercial Banking - Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, and government public sector customers located primarily within our geographic footprint. The segment is divided into six business units: Middle Market, Large Corporate, Specialty Banking, Asset Finance, Capital Markets and Treasury Management.
Commercial Real Estate and Vehicle Finance - This segment provides lending and other banking products and services to customers outside of our traditional retail and commercial banking segments. Our products and services include providing financing for the purchase of automobiles, light-duty trucks, recreational vehicles and marine craft at franchised dealerships, financing the acquisition of new and used vehicle inventory of franchised automotive dealerships, and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. Products and services are delivered through highly specialized relationship-focused bankers and product partners.
Regional Banking and The Huntington Private Client Group - The core business of The Huntington Private Client Group is The Huntington Private Bank, which consists of Private Banking, Wealth & Investment Management, and Retirement Plan Services. The Huntington Private Bank provides high net-worth customers with deposit, lending (including specialized lending options), and banking services. The Huntington Private Bank delivers wealth management and legacy planning through investment and portfolio management, fiduciary administration, and trust services. This group also provides retirement plan services to corporate businesses. The Huntington Private Client Group provides corporate trust services and institutional and mutual fund custody services and insurance services.
Listed in the table below is certain operating basis financial information reconciled to Huntington’s September 30, 2017, December 31, 2016, and September 30, 2016, reported results by business segment.
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
Income Statements
Consumer & Business Banking
 
Commercial Banking
 
CREVF
 
RBHPCG
 
Treasury / Other
 
Huntington Consolidated
(dollar amounts in thousands)
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
426,752

 
$
171,448

 
$
139,870

 
$
49,596

 
$
(29,233
)
 
$
758,433

Provision for (reduction in allowance) credit losses
24,089

 
9,580

 
9,705

 
216

 

 
43,590

Noninterest income
189,378

 
59,121

 
10,969

 
46,215

 
24,414

 
330,097

Noninterest expense
415,874

 
100,003

 
55,354

 
58,237

 
50,960

 
680,428

Income taxes
61,658

 
42,345

 
30,022

 
13,076

 
(57,157
)
 
89,944

Net income
$
114,509

 
$
78,641

 
$
55,758

 
$
24,282

 
$
1,378

 
$
274,568

2016
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
349,283

 
$
143,023

 
$
126,489

 
$
41,971

 
$
(35,376
)
 
$
625,390

Provision for (reduction in allowance) credit losses
12,724

 
23,788

 
25,615

 
1,663

 
15

 
63,805

Noninterest income
177,234

 
54,744

 
8,001

 
45,339

 
17,097

 
302,415

Noninterest expense
349,470

 
87,892

 
44,331

 
57,473

 
173,081

 
712,247

Income taxes
57,513

 
30,130

 
22,590

 
9,861

 
(95,345
)
 
24,749

Net income
$
106,810

 
$
55,957

 
$
41,954

 
$
18,313

 
$
(96,030
)
 
$
127,004


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Nine Months Ended September 30,
Income Statements
Consumer & Business Banking
 
Commercial Banking
 
CREVF
 
RBHPCG
 
Treasury / Other
 
Huntington Consolidated
(dollar amounts in thousands)
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
1,255,617

 
$
514,900

 
$
419,556

 
$
145,089

 
$
(102,242
)
 
$
2,232,920

Provision for credit losses
74,270

 
21,378

 
40,047

 
510

 
1

 
136,206

Noninterest income
544,445

 
176,609

 
34,750

 
140,610

 
71,364

 
967,778

Noninterest expense
1,242,152

 
301,385

 
163,989

 
182,171

 
192,517

 
2,082,214

Income taxes
169,274

 
129,061

 
87,594

 
36,056

 
(194,110
)
 
227,875

Net income
$
314,366

 
$
239,685

 
$
162,676

 
$
66,962

 
$
(29,286
)
 
$
754,403

2016
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
911,706

 
$
355,263

 
$
317,704

 
$
112,473

 
$
(62,809
)
 
$
1,634,337

Provision for credit losses
43,474

 
53,212

 
18,706

 
490

 
14

 
115,896

Noninterest income
459,732

 
150,228

 
25,951

 
126,245

 
53,238

 
815,394

Noninterest expense
967,417

 
246,941

 
125,254

 
166,645

 
220,731

 
1,726,988

Income taxes
126,191

 
71,868

 
69,893

 
25,054

 
(159,017
)
 
133,989

Net income
$
234,356

 
$
133,470

 
$
129,802

 
$
46,529

 
$
(71,299
)
 
$
472,858

 
Assets at
 
Deposits at
(dollar amounts in thousands)
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
Consumer & Business Banking
$
25,989,043

 
$
25,332,635

 
$
45,694,477

 
$
45,355,745

Commercial Banking
24,199,091

 
24,121,689

 
20,795,143

 
18,053,208

CREVF
24,723,324

 
23,576,832

 
2,052,274

 
1,893,072

RBHPCG
5,695,880

 
5,327,622

 
5,944,240

 
6,214,250

Treasury / Other
21,380,788

 
21,355,319

 
3,958,979

 
4,091,442

Total
$
101,988,126

 
$
99,714,097

 
$
78,445,113

 
$
75,607,717




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Item 3: Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in Huntington’s 2016 Form 10-K.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
Huntington maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files (or submits) under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntington’s Management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Huntington’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntington’s disclosure controls and procedures were effective.
There have not been any changes in Huntington’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Huntington’s internal control over financial reporting.

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PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported.
Item 1: Legal Proceedings
Information required by this item is set forth in Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this report and incorporated herein by reference.
Item 1A: Risk Factors
Information required by this item is set forth in Part 1 Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) and (b)
Not Applicable
 
(c)

Period
Total
Number of
Shares
Purchased (1)
 
Average
Price Paid
Per Share
 
Maximum Number of Shares (or
Approximate Dollar Value) that
May Yet Be Purchased Under
the Plans or Programs (2)
July 1, 2017 to July 31, 2017
1,122,116

 
$
13.20

 
$
293,164,850

August 1, 2017 to August 31, 2017
6,046,079

 
12.81

 
215,621,231

September 1, 2017 to September 30, 2017
2,476,746

 
12.43

 
184,795,094

Total
9,644,941

 
$
12.75

 
$
184,795,094

 
(1)
The reported shares were repurchased pursuant to Huntington’s publicly-announced stock repurchase authorizations.
(2)
The number shown represents, as of the end of each period, the maximum number of shares (or approximate dollar value) of Common Stock that may yet be purchased under publicly-announced stock repurchase authorizations. The shares may be purchased, from time-to-time, depending on market conditions.
On June 28, 2017, Huntington was notified by the Federal Reserve that it had no objection to Huntington's proposed capital actions included in Huntington's capital plan submitted in the 2017 Comprehensive Capital Analysis and Review (CCAR). These actions included a 38% increase in the quarterly dividend per common share to $0.11, starting in the fourth quarter of 2017, the repurchase of up to $308 million of common stock over the next four quarters (July 1, 2017 through June 30, 2018), subject to authorization by the Board of Directors, and maintaining dividends on the outstanding classes of preferred stock and trust preferred securities.
On July 19, 2017, the Board authorized the repurchase of up to $308 million of common shares over the four quarters through the second quarter of 2018. Purchases of common stock under the authorization may include open market purchases, privately-negotiated transactions, and accelerated repurchase programs.
Item 6. Exhibits
Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains an Internet website that contains reports, proxy statements, and other information about issuers like us who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by us with the SEC are also available at our Internet web site. The address of the site is http://www.huntington.com. Except as specifically incorporated by reference into this Quarterly Report on Form 10-Q, information on those websites is not part of this report. Reports, proxy statements, and other information about us can also be inspected at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.

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Exhibit
Number
 
Document Description
 
Report or Registration Statement
 
SEC File or
Registration
Number
 
Exhibit
Reference
 
3.1 (P)
 
Articles of Restatement of Charter.
 
Annual Report on Form 10-K for the year ended December 31, 1993
 
000-02525
 
3

(i) 
 
 
 
 
 
 
 
 
 
 
3.2
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
3.3
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
3.4
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
3.5
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
3.6
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
3.7
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
3.8
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
3.9
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
3.10
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
3.11
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
3.12
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
3.13
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
4.1(P)
 
Instruments defining the Rights of Security Holders—reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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*The following material from Huntington’s Form 10-Q Report for the quarterly period ended September 30, 2017, formatted in XBRL: (1) Unaudited Condensed Consolidated Balance Sheets, (2) Unaudited Condensed Consolidated Statements of Income, (3) Unaudited Condensed Consolidated Statements of Comprehensive Income (4) Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
*
Filed herewith
**
Furnished herewith

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Huntington Bancshares Incorporated
(Registrant)
 
 
 
 
 
Date:
October 30, 2017
 
/s/ Stephen D. Steinour
 
 
 
Stephen D. Steinour
 
 
 
Chairman, Chief Executive Officer and President
 
 
 
Date:
October 30, 2017
 
/s/ Howell D. McCullough III
 
 
 
Howell D. McCullough III
 
 
 
Chief Financial Officer


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