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HUNTINGTON BANCSHARES INC /MD/ - Quarter Report: 2017 June (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 June 30, 2017
Commission File Number 1-34073
Huntington Bancshares Incorporated
 
Maryland
31-0724920
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number, including area code (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
 
 
 
 
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    x  No
There were 1,090,016,469 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 2017.



Table of Contents

HUNTINGTON BANCSHARES INCORPORATED
INDEX
 
 
 

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Table of Contents

Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
 
ABS
  
Asset-Backed Securities
 
 
ACL
  
Allowance for Credit Losses
 
 
AFS
  
Available-for-Sale
 
 
ALCO
  
Asset-Liability Management Committee
 
 
ALLL
  
Allowance for Loan and Lease Losses
 
 
 
ANPR
 
Advance Notice of Proposed Rulemaking
 
 
ASC
  
Accounting Standards Codification
 
 
ATM
  
Automated Teller Machine
 
 
AULC
  
Allowance for Unfunded Loan Commitments
 
 
Basel III
  
Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
 
 
 
BHC
 
Bank Holding Companies
 
 
 
BHC Act
 
Bank Holding Company Act of 1956
 
 
C&I
  
Commercial and Industrial
 
 
Camco Financial
  
Camco Financial Corp.
 
 
CCAR
  
Comprehensive Capital Analysis and Review
 
 
CDO
  
Collateralized Debt Obligations
 
 
CDs
  
Certificate of Deposit
 
 
CET1
  
Common equity tier 1 on a transitional Basel III basis
 
 
CFPB
  
Bureau of Consumer Financial Protection
 
 
 
CISA
 
Cybersecurity Information Sharing Act
 
 
CMO
  
Collateralized Mortgage Obligations
 
 
 
CRA
 
Community Reinvestment Act
 
 
CRE
  
Commercial Real Estate
 
 
 
CREVF
 
Commercial Real Estate and Vehicle Finance
 
 
 
DIF
 
Deposit Insurance Fund
 
 
 
Dodd-Frank Act
  
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
 
EFT
  
Electronic Fund Transfer
 
 
EPS
  
Earnings Per Share
 
 
 
EVE
  
Economic Value of Equity
 
 
 
FASB
 
Financial Accounting Standards Board
 
 
FDIC
  
Federal Deposit Insurance Corporation
 
 
FDICIA
  
Federal Deposit Insurance Corporation Improvement Act of 1991
 
 
FHA
  
Federal Housing Administration
 
 
FHC
 
Financial Holding Company
 
 
 
FHLB
  
Federal Home Loan Bank

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FICO
  
Fair Isaac Corporation
 
 
 
FirstMerit
  
FirstMerit Corporation
 
 
FRB
  
Federal Reserve Bank
 
 
FTE
  
Fully-Taxable Equivalent
 
 
FTP
  
Funds Transfer Pricing
 
 
GAAP
  
Generally Accepted Accounting Principles in the United States of America
 
 
HAA
 
Huntington Asset Advisors, Inc.
 
 
 
HASI
 
Huntington Asset Services, Inc.
 
 
 
HQLA
  
High Quality Liquid Asset
 
 
 
HTM
  
Held-to-Maturity
 
 
 
IRS
  
Internal Revenue Service
 
 
 
LCR
  
Liquidity Coverage Ratio
 
 
 
LGD
  
Loss-Given-Default
 
 
 
LIBOR
  
London Interbank Offered Rate
 
 
 
LIHTC
  
Low Income Housing Tax Credit
 
 
 
LTV
  
Loan to Value
 
 
 
Macquarie
  
Macquarie Equipment Finance, Inc. (U.S. operations)
 
 
 
MBS
  
Mortgage-Backed Securities
 
 
 
MD&A
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
MSA
  
Metropolitan Statistical Area
 
 
 
MSR
  
Mortgage Servicing Rights
 
 
 
NAICS
  
North American Industry Classification System
 
 
 
NALs
  
Nonaccrual Loans
 
 
 
NCO
  
Net Charge-off
 
 
 
NII
  
Net Interest Income
 
 
 
NIM
  
Net Interest Margin
 
 
 
NPAs
  
Nonperforming Assets
 
 
 
N.R.
  
Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa
 
 
 
OCC
  
Office of the Comptroller of the Currency
 
 
 
OCI
  
Other Comprehensive Income (Loss)
 
 
 
OCR
  
Optimal Customer Relationship
 
 
 
OLEM
  
Other Loans Especially Mentioned
 
 
 
OREO
  
Other Real Estate Owned
 
 
 
OTTI
  
Other-Than-Temporary Impairment
 
 
 
PD
 
Probability-Of-Default
 
 
 
Plan
  
Huntington Bancshares Retirement Plan
 
 
 
RBHPCG
  
Regional Banking and The Huntington Private Client Group
 
 
 
REIT
  
Real Estate Investment Trust
 
 
 

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ROC
 
Risk Oversight Committee
 
 
 
RWA
  
Risk-Weighted Assets
 
 
 
SAD
  
Special Assets Division
 
 
 
SBA
  
Small Business Administration
 
 
 
SEC
  
Securities and Exchange Commission
 
 
 
SERP
  
Supplemental Executive Retirement Plan
 
 
 
SRIP
  
Supplemental Retirement Income Plan
 
 
 
TCE
  
Tangible Common Equity
 
 
 
TDR
  
Troubled Debt Restructured Loan
 
 
 
U.S. Treasury
  
U.S. Department of the Treasury
 
 
 
UCS
  
Uniform Classification System
 
 
 
Unified
 
Unified Financial Securities, Inc.
 
 
 
UPB
  
Unpaid Principal Balance
 
 
 
USDA
  
U.S. Department of Agriculture
 
 
 
VIE
  
Variable Interest Entity
 
 
 
XBRL
  
eXtensible Business Reporting Language
 
 
 





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PART I. FINANCIAL INFORMATION
When we refer to “we”, “our”, and “us”, and "the Company" in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
 
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have over 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. Our 996 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. Our foreign banking activities, in total or with any individual country, are not significant.
This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2016 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2016 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.




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EXECUTIVE OVERVIEW
Summary of 2017 Second Quarter Results Compared to 2016 Second Quarter
For the quarter, we reported net income of $272 million, or $0.23 per common share, compared with $175 million, or $0.19 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $50 million pre-tax, or $0.03 per common share.
Fully-taxable equivalent net interest income was $757 million, up $241 million, or 47%. The results reflected the benefit from a $23.9 billion, or 35%, increase in average earning assets and a 25 basis point improvement in the net interest margin to 3.31%. Average earning asset growth included a $15.4 billion, or 30%, increase in average loans and leases, and an $8.5 billion, or 56%, increase in average securities, both of which were impacted by the FirstMerit acquisition. The net interest margin expansion reflected a 34 basis point increase in earning asset yields, including an approximate 15 basis point impact of purchase accounting, and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 11 basis point increase in funding costs.
The provision for credit losses was $25 million consistent with the year-ago quarter. NCOs increased $19 million to $36 million, primarily as a result of Consumer charge-offs on the acquired FirstMerit portfolio. NCOs represented an annualized 0.21% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.
Noninterest income was $325 million, up $54 million, or 20%. The increase was primarily a result of the FirstMerit acquisition. In addition, card and payment processing income increased due to higher credit and debit card related income and underlying customer growth. Also, service charges on deposit accounts increased reflecting continued new customer acquisition.
Noninterest expense was $694 million, up $171 million, or 33%, primarily reflecting the impact of the FirstMerit acquisition. Personnel costs increased primarily reflecting an increase in average full-time equivalent employees and an increase in acquisition-related personnel expense. Further, deposit and other insurance expense increased, as a result of the larger assessment base as well as the FDIC Large Institution Surcharge implemented during the 2016 third quarter.
The tangible common equity to tangible assets ratio was 7.41%, down 55 basis points from a year-ago. The CET1 risk-based capital ratio was 9.88% at June 30, 2017, compared to 9.80% a year ago. The regulatory tier 1 risk-based capital ratio was 11.24% compared to 11.37% at June 30, 2016. Capital ratios were impacted by the goodwill created and the issuance of common stock as part of the FirstMerit acquisition. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of Class C preferred equity during the 2016 third quarter in exchange for FirstMerit preferred equity in conjunction with the acquisition. The total risk-based capital ratio was impacted by the repurchase of trust preferred securities during the 2016 third quarter and fourth quarter. In addition, certain trust preferred securities were acquired in the FirstMerit acquisition and subsequently were redeemed. There were no common shares repurchased over the past five quarters.
Business Overview
General
Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary customer relationships across all business segments, (4) continue to strengthen risk management and (5) maintain capital and liquidity positions consistent with our risk appetite.
Economy
We expect ongoing consumer and business confidence to translate into private sector investment fueling continued economic momentum. We are seeing solid manufacturing and infrastructure growth in the Midwest. Businesses are adding jobs and investing more, and our pipelines have remained steady.

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

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

 
$
820,360

 
$
814,858

 
$
694,346

 
$
565,658

Interest expense
101,912

 
90,385

 
79,877

 
68,956

 
59,777

Net interest income
744,512

 
729,975

 
734,981

 
625,390

 
505,881

Provision for credit losses
24,978

 
67,638

 
74,906

 
63,805

 
24,509

Net interest income after provision for credit losses
719,534

 
662,337

 
660,075

 
561,585

 
481,372

Service charges on deposit accounts
87,582

 
83,420

 
91,577

 
86,847

 
75,613

Cards and payment processing income
52,485

 
47,169

 
49,113

 
44,320

 
39,184

Mortgage banking income
32,268

 
31,692

 
37,520

 
40,603

 
31,591

Trust and investment management services
32,232

 
33,869

 
34,016

 
28,923

 
22,497

Insurance income
15,843

 
15,264

 
16,486

 
15,865

 
15,947

Brokerage income
16,294

 
15,758

 
17,014

 
14,719

 
14,599

Capital markets fees
16,836

 
14,200

 
18,730

 
14,750

 
13,037

Bank owned life insurance income
15,322

 
17,542

 
17,067

 
14,452

 
12,536

Gain on sale of loans
12,002

 
12,822

 
24,987

 
7,506

 
9,265

Securities gains (losses)
135

 
(8
)
 
(1,771
)
 
1,031

 
656

Other Income
44,219

 
40,735

 
29,598

 
33,399

 
36,187

Total noninterest income
325,218

 
312,463

 
334,337

 
302,415

 
271,112

Personnel costs
391,997

 
382,000

 
359,755

 
405,024

 
298,949

Outside data processing and other services
75,169

 
87,202

 
88,695

 
91,133

 
63,037

Equipment
42,924

 
46,700

 
59,666

 
40,792

 
31,805

Net occupancy
52,613

 
67,700

 
49,450

 
41,460

 
30,704

Professional services
18,190

 
18,295

 
23,165

 
47,075

 
21,488

Marketing
18,843

 
13,923

 
21,478

 
14,438

 
14,773

Deposit and other insurance expense
20,418

 
20,099

 
15,772

 
14,940

 
12,187

Amortization of intangibles
14,242

 
14,355

 
14,099

 
9,046

 
3,600

Other expense
59,968

 
57,148

 
49,417

 
48,339

 
47,118

Total noninterest expense
694,364

 
707,422

 
681,497

 
712,247

 
523,661

Income before income taxes
350,388

 
267,378

 
312,915

 
151,753

 
228,823

Provision for income taxes
78,647

 
59,284

 
73,952

 
24,749

 
54,283

Net income
271,741

 
208,094

 
238,963

 
127,004

 
174,540

Dividends on preferred shares
18,889

 
18,878

 
18,865

 
18,537

 
19,874

Net income applicable to common shares
$
252,852

 
$
189,216

 
$
220,098

 
$
108,467

 
$
154,666

Average common shares—basic
1,088,934

 
1,086,374

 
1,085,253

 
938,578

 
798,167

Average common shares—diluted
1,108,527

 
1,108,617

 
1,104,358

 
952,081

 
810,371

Net income per common share—basic
$
0.23

 
$
0.17

 
$
0.20

 
$
0.12

 
$
0.19

Net income per common share—diluted
0.23

 
0.17

 
0.20

 
0.11

 
0.19

Cash dividends declared per common share
0.08

 
0.08

 
0.08

 
0.07

 
0.07

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

 
8.2

 
9.4

 
5.4

 
9.6

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

 
11.3

 
12.9

 
7.0

 
11.0

Net interest margin (3)
3.31

 
3.30

 
3.25

 
3.18

 
3.06

Efficiency ratio (4)
62.9

 
65.7

 
61.6

 
75.0

 
66.1

Effective tax rate
22.4

 
22.2

 
23.6

 
16.3

 
23.7

Revenue—FTE
 
 
 
 
 
 
 
 
 
Net interest income
$
744,512

 
$
729,975

 
$
734,981

 
$
625,390

 
$
505,881

FTE adjustment
12,069

 
12,058

 
12,560

 
10,598

 
10,091

Net interest income (3)
756,581

 
742,033

 
747,541

 
635,988

 
515,972

Noninterest income
325,218

 
312,463

 
334,337

 
302,415

 
271,112

Total revenue (3)
$
1,081,799

 
$
1,054,496

 
$
1,081,878

 
$
938,403

 
$
787,084



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

 
$
1,122,909

 
$
543,875

 
48
 %
Interest expense
192,297

 
113,962

 
78,335

 
69

Net interest income
1,474,487

 
1,008,947

 
465,540

 
46

Provision for credit losses
92,616

 
52,091

 
40,525

 
78

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

 
956,856

 
425,015

 
44

Service charges on deposit accounts
171,002

 
145,875

 
25,127

 
17

Cards and payment processing income
99,654

 
75,631

 
24,023

 
32

Mortgage banking income
63,960

 
50,134

 
13,826

 
28

Trust and investment management services
66,101

 
45,335

 
20,766

 
46

Insurance income
31,107

 
32,172

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

 
30,101

 
1,951

 
6

Capital markets fees
31,036

 
26,047

 
4,989

 
19

Bank owned life insurance income
32,864

 
26,049

 
6,815

 
26

Gain on sale of loans
24,824

 
14,660

 
10,164

 
69

Securities gains
127

 
656

 
(529
)
 
(81
)
Other income
84,954

 
66,319

 
18,635

 
28

Total noninterest income
637,681

 
512,979

 
124,702

 
24

Personnel costs
773,997

 
584,346

 
189,651

 
32

Outside data processing and other services
162,371

 
124,915

 
37,456

 
30

Equipment
89,624

 
64,381

 
25,243

 
39

Net occupancy
120,313

 
62,180

 
58,133

 
93

Professional services
36,485

 
35,026

 
1,459

 
4

Marketing
32,766

 
27,041

 
5,725

 
21

Deposit and other insurance expense
40,517

 
23,395

 
17,122

 
73

Amortization of intangibles
28,597

 
7,312

 
21,285

 
291

Other expense
117,116

 
86,145

 
30,971

 
36

Total noninterest expense
1,401,786

 
1,014,741

 
387,045

 
38

Income before income taxes
617,766

 
455,094

 
162,672

 
36

Provision for income taxes
137,931

 
109,240

 
28,691

 
26

Net income
479,835

 
345,854

 
133,981

 
39

Dividends declared on preferred shares
37,767

 
27,872

 
9,895

 
36

Net income applicable to common shares
$
442,068

 
$
317,982

 
$
124,086

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

 
796,961

 
290,693

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

 
809,360

 
299,212

 
37

Net income per common share—basic
$
0.41

 
$
0.40

 
$
0.01

 
3

Net income per common share—diluted
0.40

 
0.39

 
0.01

 
3

Cash dividends declared per common share
0.16

 
0.14

 
0.02

 
14

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

 
$
1,008,947

 
$
465,540

 
46
 %
FTE adjustment
24,127

 
19,250

 
4,877

 
25

Net interest income (3)
1,498,614

 
1,028,197

 
470,417

 
46

Noninterest income
637,681

 
512,979

 
124,702

 
24

Total revenue (3)
$
2,136,295

 
$
1,541,176

 
$
595,119

 
39
 %
(1)
Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.
(2)
Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
(3)
On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
(4)
Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains.





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Significant Items
Earnings comparisons are impacted by the Significant Items summarized below:

Mergers and Acquisitions. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, are as follows:

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

During the 2017 first quarter, $73 million of noninterest expense and $2 million of noninterest income was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.04 per common share.

During the 2016 second quarter, $21 million of noninterest expense was recorded related to the then pending acquisition of FirstMerit. This resulted in a negative impact of $0.02 per common share.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected:
 
Table 3 - Significant Items Influencing Earnings Performance Comparison
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
 
Amount
 
EPS (1)
Net income
$
271,741

 
 
 
$
208,094

 
 
 
$
174,540

 
 
Earnings per share, after-tax
 
 
$
0.23

 
 
 
$
0.17

 
 
 
$
0.19

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

 
 
 
24,901

 
 
 
7,213

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

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

 
 
 
$
345,854

 
 
Earnings per share, after-tax
 
 
$
0.40

 
 
 
$
0.39

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

 
 
 
9,219

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

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Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin: 
Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances
 
 
 
 
 
Three Months Ended
 
Change
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2Q17 vs. 2Q16
 
2017
 
2017
 
2016
 
2016
 
2016
 
Amount
 
Percent
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
102

 
$
100

 
$
110

 
$
95

 
$
99

 
$
3

 
4
 %
Loans held for sale
525

 
415

 
2,507

 
695

 
571

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

 
12,801

 
13,734

 
9,785

 
6,904

 
6,231

 
90

Tax-exempt
3,104

 
3,049

 
3,136

 
2,854

 
2,510

 
594

 
24

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

 
15,850

 
16,870

 
12,639

 
9,414

 
6,825

 
72

Trading account securities
91

 
137

 
139

 
49

 
41

 
50

 
121

Held-to-maturity securities—taxable
7,427

 
7,656

 
5,432

 
5,487

 
5,806

 
1,621

 
28

Total securities
23,756

 
23,643

 
22,441

 
18,175

 
15,261

 
8,495

 
56

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

 
27,922

 
27,727

 
24,957

 
21,344

 
6,648

 
31

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,130

 
1,314

 
1,413

 
1,132

 
881

 
249

 
28

Commercial
5,940

 
6,039

 
5,805

 
5,227

 
4,345

 
1,595

 
37

Commercial real estate
7,070

 
7,353

 
7,218

 
6,359

 
5,226

 
1,844

 
35

Total commercial
35,062

 
35,276

 
34,945

 
31,316

 
26,570

 
8,492

 
32

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,324

 
11,063

 
10,866

 
11,402

 
10,146

 
1,178

 
12

Home equity
9,958

 
10,072

 
10,101

 
9,260

 
8,416

 
1,542

 
18

Residential mortgage
7,979

 
7,777

 
7,690

 
7,012

 
6,187

 
1,792

 
29

RV and marine finance
2,039

 
1,874

 
1,844

 
915

 

 
N.R.

 
N.R.

Other consumer
983

 
919

 
959

 
817

 
613

 
370

 
60

Total consumer
32,283

 
31,705

 
31,460

 
29,406

 
25,362

 
6,921

 
27

Total loans and leases
67,345

 
66,981

 
66,405

 
60,722

 
51,932

 
15,413

 
30

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

Net loans and leases
66,673

 
66,345

 
65,791

 
60,099

 
51,316

 
15,357

 
30

Total earning assets
91,728

 
91,139

 
91,463

 
79,687

 
67,863

 
23,865

 
35

Cash and due from banks
1,287

 
2,011

 
1,538

 
1,325

 
1,001

 
286

 
29

Intangible assets
2,373

 
2,387

 
2,421

 
1,547

 
726

 
1,647

 
227

All other assets
5,405

 
5,442

 
5,559

 
4,962

 
4,149

 
1,256

 
30

Total assets
$
100,121

 
$
100,343

 
$
100,367

 
$
86,898

 
$
73,123

 
$
26,998

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

 
$
21,730

 
$
23,250

 
$
20,033

 
$
16,507

 
$
5,092

 
31
 %
Demand deposits—interest-bearing
17,445

 
16,805

 
15,294

 
12,362

 
8,445

 
9,000

 
107

Total demand deposits
39,044

 
38,535

 
38,544

 
32,395

 
24,952

 
14,092

 
56

Money market deposits
19,212

 
18,653

 
18,618

 
18,453

 
19,534

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

 
11,970

 
12,272

 
8,889

 
5,402

 
6,487

 
120

Core certificates of deposit
2,146

 
2,342

 
2,636

 
2,285

 
2,007

 
139

 
7

Total core deposits
72,291

 
71,500

 
72,070

 
62,022

 
51,895

 
20,396

 
39

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

 
470

 
391

 
382

 
402

 
77

 
19

Brokered deposits and negotiable CDs
3,783

 
3,969

 
4,273

 
3,904

 
2,909

 
874

 
30

Deposits in foreign offices

 

 
152

 
194

 
208

 
(208
)
 

Total deposits
76,553

 
75,939

 
76,886

 
66,502

 
55,414

 
21,139

 
38

Short-term borrowings
2,687

 
3,792

 
2,628

 
1,306

 
1,032

 
1,655

 
160

Long-term debt
8,730

 
8,529

 
8,594

 
8,488

 
7,899

 
831

 
11

Total interest-bearing liabilities
66,371

 
66,530

 
64,858

 
56,263

 
47,838

 
18,533

 
39

All other liabilities
1,557

 
1,661

 
1,833

 
1,608

 
1,416

 
141

 
10

Shareholders’ equity
10,594

 
10,422

 
10,426

 
8,994

 
7,362

 
3,232

 
44

Total liabilities and shareholders’ equity
$
100,121

 
$
100,343

 
$
100,367

 
$
86,898

 
$
73,123

 
$
26,998

 
37
 %

11

Table of Contents

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

 
3.82

 
2.95

 
3.53

 
3.89

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

 
2.38

 
2.43

 
2.35

 
2.37

Tax-exempt
3.71

 
3.77

 
3.60

 
3.01

 
3.38

Total available-for-sale and other securities
2.64

 
2.65

 
2.65

 
2.50

 
2.64

Trading account securities
0.25

 
0.11

 
0.18

 
0.58

 
0.98

Held-to-maturity securities—taxable
2.38

 
2.36

 
2.43

 
2.41

 
2.44

Total securities
2.55

 
2.54

 
2.58

 
2.47

 
2.56

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

 
3.98

 
3.83

 
3.68

 
3.49

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
4.26

 
3.95

 
3.65

 
3.76

 
3.70

Commercial
3.97

 
3.69

 
3.54

 
3.54

 
3.35

Commercial real estate
4.02

 
3.74

 
3.56

 
3.58

 
3.41

Total commercial
4.04

 
3.93

 
3.78

 
3.66

 
3.47

Consumer:
 
 
 
 
 
 
 
 
 
Automobile
3.55

 
3.55

 
3.57

 
3.37

 
3.15

Home equity
4.61

 
4.45

 
4.24

 
4.21

 
4.17

Residential mortgage
3.66

 
3.63

 
3.58

 
3.61

 
3.65

RV and marine finance
5.57

 
5.63

 
5.64

 
5.70

 

Other consumer
11.47

 
12.05

 
10.91

 
10.93

 
10.28

Total consumer
4.27

 
4.23

 
4.13

 
3.97

 
3.79

Total loans and leases
4.15

 
4.07

 
3.95

 
3.81

 
3.63

Total earning assets
3.75

 
3.70

 
3.60

 
3.52

 
3.41

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing

 

 

 

 

Demand deposits—interest-bearing
0.20

 
0.15

 
0.11

 
0.11

 
0.09

Total demand deposits
0.09

 
0.07

 
0.04

 
0.04

 
0.03

Money market deposits
0.31

 
0.26

 
0.24

 
0.24

 
0.24

Savings and other domestic deposits
0.21

 
0.22

 
0.25

 
0.21

 
0.11

Core certificates of deposit
0.56

 
0.39

 
0.29

 
0.43

 
0.79

Total core deposits
0.26

 
0.22

 
0.20

 
0.20

 
0.22

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

 
0.45

 
0.39

 
0.40

 
0.40

Brokered deposits and negotiable CDs
0.95

 
0.72

 
0.48

 
0.44

 
0.40

Deposits in foreign offices

 

 
0.13

 
0.13

 
0.13

Total deposits
0.31

 
0.26

 
0.23

 
0.22

 
0.23

Short-term borrowings
0.78

 
0.63

 
0.36

 
0.29

 
0.36

Long-term debt
2.49

 
2.33

 
2.19

 
1.97

 
1.85

Total interest-bearing liabilities
0.61

 
0.54

 
0.48

 
0.49

 
0.50

Net interest rate spread
3.14

 
3.16

 
3.12

 
3.03

 
2.91

Impact of noninterest-bearing funds on margin
0.17

 
0.14

 
0.13

 
0.15

 
0.15

Net interest margin
3.31
%
 
3.30
%
 
3.25
%
 
3.18
%
 
3.06
%
(1)
For purposes of this analysis, NALs are reflected in the average balances of loans.
(2)
Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.
(3)
FTE yields are calculated assuming a 35% tax rate.
N.R. - Not relevant.

12

Table of Contents

2017 Second Quarter versus 2016 Second Quarter
FTE net interest income for the 2017 second quarter increased $241 million, or 47%, from the 2016 second quarter. This reflected the benefit from the $23.9 billion, or 35%, increase in average earning assets coupled with a 25 basis point improvement in the FTE net interest margin to 3.31%. The NIM expansion reflected a 34 basis point increase related to the mix and yield of earning assets and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 11 basis point increase in funding costs. FTE net interest income during the 2017 second quarter included $34 million, or approximately 15 basis points, of purchase accounting impact.
Average earning assets for the 2017 second quarter increased $23.9 billion, or 35%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average earning asset growth included a $15.4 billion, or 30%, increase in average loans and leases and an $8.5 billion, or 56%, increase in average securities. Average securities included $2.9 billion of direct purchase municipal instruments in our commercial banking segment compared to $2.3 billion in the year-ago quarter. Average residential mortgage loans increased $1.8 billion, or 29%, as we continue to see increased demand for residential mortgage loans across our footprint.
Average total deposits for the 2017 second quarter increased $21.1 billion, or 38%, from the year-ago quarter, while average total core deposits increased $20.4 billion, or 39%. Average total interest-bearing liabilities increased $18.5 billion, or 39%, from the year-ago quarter. These increases primarily reflect the impact of the FirstMerit acquisition. Average demand deposits increased $14.1 billion, or 56%, comprised of a $9.9 billion, or 62%, increase in average commercial demand deposits and a $4.2 billion, or 46%, increase in average consumer demand deposits. Average long-term borrowings increased $0.8 billion, or 11%, reflecting the issuance of $2.0 billion and maturity of $1.6 billion of senior debt over the past five quarters.
2017 Second Quarter versus 2017 First Quarter
Compared to the 2017 first quarter, FTE net interest income increased $15 million, or 2%. The increase in the NIM reflected a 5 basis point increase in earning asset yields and a 3 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 7 basis point increase in the cost of interest-bearing liabilities. The purchase accounting impact on the net interest margin was approximately 15 basis points in the 2017 second quarter compared to approximately 16 basis points in the prior quarter.
Average earning assets increased $0.6 billion, or less than 1% from the 2017 first quarter. Average loans and leases increased $0.4 billion, or less than 1%, primarily reflecting growth in residential mortgage, automobile, and RV and marine loans partially offset by a decline in average commercial real estate loans. Total commercial lending was impacted by anticipated FirstMerit-related runoff and lower utilization.
Average total core deposits increased $0.8 billion, or 1%, primarily reflecting a $0.6 billion, or 3%, increase in money market deposits and a $0.5 billion, or 1%, increase in average demand deposits. Average total debt decreased $0.9 billion, or 7%, driven by a $1.1 billion, or 29%, decrease in short-term borrowings, reflecting the maintenance of excess liquidity surrounding the branch conversion during the 2017 first quarter.

13

Table of Contents

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

 
$
98

 
$
3

 
3
 %
 
1.31
%
 
0.23
%
Loans held for sale
470

 
502

 
(32
)
 
(6
)
 
3.76

 
3.93

Securities:
 
 
 
 


 


 
 
 
 
Available-for-sale and other securities:
 
 
 
 


 


 
 
 
 
Taxable
12,969

 
6,768

 
6,201

 
92

 
2.38

 
2.38

Tax-exempt
3,076

 
2,434

 
642

 
26

 
3.74

 
3.39

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

 
9,202

 
6,843

 
74

 
2.64

 
2.65

Trading account securities
114

 
40

 
74

 
185

 
0.17

 
0.75

Held-to-maturity securities—taxable
7,541

 
5,930

 
1,611

 
27

 
2.37

 
2.44

Total securities
23,700

 
15,172

 
8,528

 
56

 
2.55

 
2.56

Loans and leases: (3)
 
 
 
 


 


 
 
 
 
Commercial:
 
 
 
 


 


 
 
 
 
Commercial and industrial
27,957

 
20,996

 
6,961

 
33

 
4.01

 
3.51

Commercial real estate:
 
 
 
 


 


 
 
 
 
Construction
1,221

 
902

 
319

 
35

 
4.09

 
3.60

Commercial
5,990

 
4,314

 
1,676

 
39

 
3.83

 
3.47

Commercial real estate
7,211

 
5,216

 
1,995

 
38

 
3.88

 
3.49

Total commercial
35,168

 
26,212

 
8,956

 
34

 
3.98

 
3.50

Consumer:
 
 
 
 


 


 
 
 
 
Automobile
11,194

 
9,938

 
1,256

 
13

 
3.55

 
3.16

Home equity
9,994

 
8,429

 
1,565

 
19

 
4.54

 
4.18

Residential mortgage
7,879

 
6,102

 
1,777

 
29

 
3.65

 
3.67

RV and marine finance
1,957

 

 
1,957

 
N.R.

 
5.60

 

Other consumer
972

 
594

 
378

 
64

 
11.49

 
10.16

Total consumer
31,996

 
25,063

 
6,933

 
28

 
4.25

 
3.80

Total loans and leases
67,164

 
51,275

 
15,889

 
31

 
4.11

 
3.65

Allowance for loan and lease losses
(654
)
 
(610
)
 
(44
)
 
7

 
 
 
 
Net loans and leases
66,510

 
50,665

 
15,845

 
31

 
 
 
 
Total earning assets
91,435

 
67,047

 
24,388

 
36

 
3.73
%
 
3.43
%
Cash and due from banks
1,647

 
1,007

 
640

 
64

 
 
 
 
Intangible assets
2,380

 
728

 
1,652

 
227

 
 
 
 
All other assets
5,424

 
4,187

 
1,237

 
30

 
 
 
 
Total assets
$
100,232

 
$
72,359

 
$
27,873

 
39
 %
 
 
 
 
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
21,664

 
$
16,421

 
$
5,243

 
32
 %
 
%
 
%
Demand deposits—interest-bearing
17,127

 
8,111

 
9,016

 
111

 
0.18

 
0.09

Total demand deposits
38,791

 
24,532

 
14,259

 
58

 
0.08

 
0.03

Money market deposits
18,934

 
19,608

 
(674
)
 
(3
)
 
0.29

 
0.24

Savings and other domestic deposits
11,930

 
5,354

 
6,576

 
123

 
0.21

 
0.12

Core certificates of deposit
2,243

 
2,136

 
107

 
5

 
0.47

 
0.81

Total core deposits
71,898

 
51,630

 
20,268

 
39

 
0.24

 
0.22

Other domestic time deposits of $250,000 or more
474

 
429

 
45

 
10

 
0.47

 
0.40

Brokered deposits and negotiable CDs
3,876

 
2,903

 
973

 
34

 
0.83

 
0.39

Deposits in foreign offices

 
236

 
(236
)
 

 

 
0.13

Total deposits
76,248

 
55,198

 
21,050

 
38

 
0.28

 
0.24

Short-term borrowings
3,236

 
1,089

 
2,147

 
197

 
0.69

 
0.33

Long-term debt
8,630

 
7,549

 
1,081

 
14

 
2.41

 
1.77

Total interest-bearing liabilities
66,450

 
47,415

 
19,035

 
40

 
0.58

 
0.48

All other liabilities
1,609

 
1,465

 
144

 
10

 
 
 
 
Shareholders’ equity
10,509

 
7,058

 
3,451

 
49

 
 
 
 
Total liabilities and shareholders’ equity
$
100,232

 
$
72,359

 
$
27,873

 
39
 %
 
 
 
 
Net interest rate spread
 
 
 
 
 
 
 
 
3.15

 
2.94

Impact of noninterest-bearing funds on margin
 
 
 
 
 
 
 
 
0.16

 
0.14

Net interest margin
 
 
 
 
 
 
 
 
3.31
%
 
3.08
%

(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.
N.R.—Not relevant.


14

Table of Contents

2017 First Six Months versus 2016 First Six Months

FTE net interest income for the first six-month period of 2017 increased $470 million, or 46%. This reflected the benefit of a $24.4 billion, or 36%, increase in average total earning assets coupled with a FTE net interest margin increased to 3.31% from 3.08%. Average securities increased $8.5 billion, or 56%, primarily reflecting the acquisition of FirstMerit and an increase in direct purchase municipal instruments in our commercial banking segment. Average loans and leases increased $15.9 billion, or 31%, 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 second quarter was $25 million, which remained relatively unchanged compared to the second quarter 2016. NCOs increased $19 million to $36 million compared with the same period in the prior year. Net charge-offs represented an annualized 0.21% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.
On a year-to-date basis, provision for credit losses for the first six-month period of 2017 was $93 million, an increase of $41 million, or 78%, compared to year-ago period. The increase primarily relates to the FirstMerit acquisition as well as one large commercial recovery in the prior year period.
Noninterest Income
The following table reflects noninterest income for each of the periods presented: 
Table 6 - Noninterest Income
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
2Q17 vs. 2Q16
 
2Q17 vs. 1Q17
 
June 30,
 
March 31,
 
June 30,
 
Change
 
Change
 
2017
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Service charges on deposit accounts
$
87,582

 
$
83,420

 
$
75,613

 
$
11,969

 
16
 %
 
$
4,162

 
5
 %
Cards and payment processing income
52,485

 
47,169

 
39,184

 
13,301

 
34

 
5,316

 
11

Mortgage banking income
32,268

 
31,692

 
31,591

 
677

 
2

 
576

 
2

Trust and investment management services
32,232

 
33,869

 
22,497

 
9,735

 
43

 
(1,637
)
 
(5
)
Insurance income
15,843

 
15,264

 
15,947

 
(104
)
 
(1
)
 
579

 
4

Brokerage income
16,294

 
15,758

 
14,599

 
1,695

 
12

 
536

 
3

Capital markets fees
16,836

 
14,200

 
13,037

 
3,799

 
29

 
2,636

 
19

Bank owned life insurance income
15,322

 
17,542

 
12,536

 
2,786

 
22

 
(2,220
)
 
(13
)
Gain on sale of loans
12,002

 
12,822

 
9,265

 
2,737

 
30

 
(820
)
 
(6
)
Securities gains (losses)
135

 
(8
)
 
656

 
(521
)
 
(79
)
 
143

 
(1,788
)
Other Income
44,219

 
40,735

 
36,187

 
8,032

 
22

 
3,484

 
9

Total noninterest income
$
325,218

 
$
312,463

 
$
271,112

 
$
54,106

 
20
 %
 
$
12,755

 
4
 %
2017 Second Quarter versus 2016 Second Quarter
Noninterest income for the 2017 second quarter increased $54 million, or 20%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Card and payment processing income increased $13 million, or 34%, due to higher credit and debit card related income and underlying customer growth. Service charges on deposit accounts increased $12 million, or 16%, reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Of the increase, $6 million was attributable to consumer deposit accounts, and $6 million was attributable to commercial deposit accounts.

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2017 Second Quarter versus 2017 First Quarter
Compared to the 2017 first quarter, total noninterest income increased $13 million, or 4%. Card and payment processing income increased $5 million, or 11%, reflecting seasonally higher credit and debit card related income and underlying customer growth.

Table 7 - Noninterest Income—2017 First Six Months vs. 2016 First Six Months
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Service charges on deposit accounts
$
171,002

 
$
145,875

 
$
25,127

 
17
 %
Cards and payment processing income
99,654

 
75,631

 
24,023

 
32

Mortgage banking income
63,960

 
50,134

 
13,826

 
28

Trust and investment management services
66,101

 
45,335

 
20,766

 
46

Insurance income
31,107

 
32,172

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

 
30,101

 
1,951

 
6

Capital markets fees
31,036

 
26,047

 
4,989

 
19

Bank owned life insurance income
32,864

 
26,049

 
6,815

 
26

Gain on sale of loans
24,824

 
14,660

 
10,164

 
69

Securities gains (losses)
127

 
656

 
(529
)
 
(81
)
Other Income
84,954

 
66,319

 
18,635

 
28

Total noninterest income
$
637,681

 
$
512,979

 
$
124,702

 
24
 %
Noninterest income for the first six-month period of 2017 increased $125 million, or 24%, from the year-ago period, primarily reflecting the impact of the FirstMerit acquisition. Service charges on deposit accounts increased $25 million, or 17%, reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Cards and payment processing income increased $24 million, or 32%, due to higher credit and debit card related income and underlying customer growth. Trust and investment management services increased $21 million, or 46%, primarily reflecting an increase in personal trust services reflecting the benefit 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
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
2Q17 vs. 2Q16
 
2Q17 vs. 1Q17
 
June 30,
 
March 31,
 
June 30,
 
Change
 
Change
 
2017
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Personnel costs
$
391,997

 
$
382,000

 
$
298,949

 
$
93,048

 
31
 %
 
$
9,997

 
3
 %
Outside data processing and other services
75,169

 
87,202

 
63,037

 
12,132

 
19

 
(12,033
)
 
(14
)
Equipment
42,924

 
46,700

 
31,805

 
11,119

 
35

 
(3,776
)
 
(8
)
Net occupancy
52,613

 
67,700

 
30,704

 
21,909

 
71

 
(15,087
)
 
(22
)
Professional services
18,190

 
18,295

 
21,488

 
(3,298
)
 
(15
)
 
(105
)
 
(1
)
Marketing
18,843

 
13,923

 
14,773

 
4,070

 
28

 
4,920

 
35

Deposit and other insurance expense
20,418

 
20,099

 
12,187

 
8,231

 
68

 
319

 
2

Amortization of intangibles
14,242

 
14,355

 
3,600

 
10,642

 
296

 
(113
)
 
(1
)
Other expense
59,968

 
57,148

 
47,118

 
12,850

 
27

 
2,820

 
5

Total noninterest expense
$
694,364

 
$
707,422

 
$
523,661

 
$
170,703

 
33
 %
 
$
(13,058
)
 
(2
)%
Number of employees (average full-time equivalent)
16,103

 
16,331

 
12,363

 
3,740

 
30
 %
 
(228
)
 
(1
)%

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Impacts of Significant Items:
 
Three Months Ended
 
June 30,
 
March 31,
 
June 30,
(dollar amounts in thousands)
2017
 
2017
 
2016
Personnel costs
$
17,934

 
$
19,555

 
$
4,732

Outside data processing and other services
6,246

 
14,475

 
3,045

Equipment
3,994

 
5,763

 
3

Net occupancy
14,415

 
23,342

 
490

Professional services
3,804

 
4,218

 
10,709

Marketing
112

 
816

 
241

Other expense
3,738

 
5,126

 
1,569

Total noninterest expense adjustments
$
50,243

 
$
73,295

 
$
20,789

 
Adjusted Noninterest Expense (See Non-GAAP Financial Measures in the Additional Disclosures section):
 
Three Months Ended
 
2Q17 vs. 2Q16
 
2Q17 vs. 1Q17
 
June 30,
 
March 31,
 
June 30,
 
Change
 
Change
(dollar amounts in thousands)
2017
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Personnel costs
$
374,063

 
$
362,445

 
$
294,217

 
$
79,846

 
27
%
 
$
11,618

 
3
 %
Outside data processing and other services
68,923

 
72,727

 
59,992

 
8,931

 
15

 
(3,804
)
 
(5
)
Equipment
38,930

 
40,937

 
31,802

 
7,128

 
22

 
(2,007
)
 
(5
)
Net occupancy
38,198

 
44,358

 
30,214

 
7,984

 
26

 
(6,160
)
 
(14
)
Professional services
14,386

 
14,077

 
10,779

 
3,607

 
33

 
309

 
2

Marketing
18,731

 
13,107

 
14,532

 
4,199

 
29

 
5,624

 
43

Deposit and other insurance expense
20,418

 
20,099

 
12,187

 
8,231

 
68

 
319

 
2

Amortization of intangibles
14,242

 
14,355

 
3,600

 
10,642

 
296

 
(113
)
 
(1
)
Other expense
56,230

 
52,022

 
45,549

 
10,681

 
23

 
4,208

 
8

Total adjusted noninterest expense (Non-GAAP)
$
644,121

 
$
634,127

 
$
502,872

 
$
141,249

 
28
%
 
$
9,994

 
2
 %

2017 Second Quarter versus 2016 Second Quarter
Reported noninterest expense for the 2017 second quarter increased $171 million, or 33%, from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition, including Significant Items. Personnel costs increased $93 million, or 31%, primarily reflecting a 30% increase in average full-time equivalent employees and a $13 million net increase in acquisition-related personnel expense. Deposit and other insurance expense increased $8 million, or 68%, reflecting the larger assessment base and the FDIC Large Institution Surcharge implemented during the 2016 third quarter.
2017 Second Quarter versus 2017 First Quarter
Reported noninterest expense decreased $13 million, or 2%, from the 2017 first quarter, including a $23 million net decrease in Significant Items. Net occupancy costs decreased $15 million, or 22%, reflecting a $9 million net decrease in acquisition-related expenses and the branch consolidations completed during the 2017 first quarter. Partially offsetting those decreases, personnel costs increased $10 million, or 3%, reflecting the implementation of annual merit increases and grant of annual long-term equity incentive compensation, both in May, partially offset by a $2 million net decrease in acquisition-related expenses.


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Table 9 - Noninterest Expense—2017 First Six Months vs. 2016 First Six Months
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Personnel costs
$
773,997

 
$
584,346

 
$
189,651

 
32
%
Outside data processing and other services
162,371

 
124,915

 
37,456

 
30

Equipment
89,624

 
64,381

 
25,243

 
39

Net occupancy
120,313

 
62,180

 
58,133

 
93

Professional services
36,485

 
35,026

 
1,459

 
4

Marketing
32,766

 
27,041

 
5,725

 
21

Deposit and other insurance expense
40,517

 
23,395

 
17,122

 
73

Amortization of intangibles
28,597

 
7,312

 
21,285

 
291

Other expense
117,116

 
86,145

 
30,971

 
36

Total noninterest expense
$
1,401,786

 
$
1,014,741

 
$
387,045

 
38
%
Impacts of Significant Items: 
 
Six Months Ended June 30,
 
2017
 
2016
Personnel costs
$
37,489

 
$
5,206

Outside data processing and other services
20,721

 
3,408

Equipment
9,757

 
3

Net occupancy
37,757

 
510

Professional services
8,022

 
14,997

Marketing
928

 
254

Other expense
8,864

 
2,817

Total noninterest expense adjustments
$
123,538

 
$
27,195

Adjusted Noninterest Expense (See Non-GAAP Financial Measures in Additional Disclosures section):
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Personnel costs
$
736,508

 
$
579,140

 
$
157,368

 
27
%
Outside data processing and other services
141,650

 
121,507

 
20,143

 
17

Equipment
79,867

 
64,378

 
15,489

 
24

Net occupancy
82,556

 
61,670

 
20,886

 
34

Professional services
28,463

 
20,029

 
8,434

 
42

Marketing
31,838

 
26,787

 
5,051

 
19

Deposit and other insurance expense
40,517

 
23,395

 
17,122

 
73

Amortization of intangibles
28,597

 
7,312

 
21,285

 
291

Other expense
108,252

 
83,328

 
24,924

 
30

Total adjusted noninterest expense (Non-GAAP)
$
1,278,248

 
$
987,546

 
$
290,702

 
29
%

Reported noninterest expense increased $387 million, or 38%, from the year-ago period, primarily reflecting the impact of the FirstMerit acquisition, including Significant Items. Personnel costs increased $190 million, or 32%, primarily reflecting a 30% increase in the number of average full-time equivalent employees largely related to the addition of colleagues from FirstMerit and the in-store branch expansion. Net occupancy expense increased $58 million, or 93%, primarily reflecting $38 million of acquisition-related expense. Outside data processing and other services increased $37 million, or 30%, primarily reflecting $21 million of acquisition-related expense.

Provision for Income Taxes
The provision for income taxes in the 2017 second quarter was $79 million. This compared with a provision for income taxes of $54 million in the 2016 second quarter and $59 million in the 2017 first quarter. The provision for income taxes for the six month periods ended June 30, 2017 and June 30, 2016 was $138 million and $109 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 net federal deferred tax asset was $41 million and the net state deferred tax asset was $37 million at June 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. 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.

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Table of Contents

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.
The table below provides the composition of our total loan and lease portfolio: 
Table 10 - Loan and Lease Portfolio Composition
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
Ending Balances by Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
27,969

 
41
%
 
$
28,176

 
42
%
 
$
28,059

 
42
%
 
$
27,668

 
42
%
 
$
21,372

 
41
%
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,145

 
2

 
1,107

 
2

 
1,446

 
2

 
1,414

 
2

 
856

 
2

Commercial
6,000

 
9

 
5,986

 
9

 
5,855

 
9

 
5,842

 
9

 
4,466

 
7

Commercial real estate
7,145

 
11

 
7,093

 
11

 
7,301

 
11

 
7,256

 
11

 
5,322

 
9

Total commercial
35,114

 
52

 
35,269

 
53

 
35,360

 
53

 
34,924

 
53

 
26,694

 
50

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,555

 
17

 
11,155

 
17

 
10,969

 
16

 
10,791

 
16

 
10,381

 
20

Home equity
9,966

 
15

 
9,974

 
15

 
10,106

 
15

 
10,120

 
15

 
8,447

 
17

Residential mortgage
8,237

 
12

 
7,829

 
12

 
7,725

 
12

 
7,665

 
12

 
6,377

 
12

RV and marine finance
2,178

 
3

 
1,935

 
2

 
1,846

 
3

 
1,840

 
3

 

 

Other consumer
1,009

 
1

 
936

 
1

 
956

 
1

 
964

 
1

 
644

 
1

Total consumer
32,945

 
48

 
31,829

 
47

 
31,602

 
47

 
31,380

 
47

 
25,849

 
50

Total loans and leases
$
68,059

 
100
%
 
$
67,098

 
100
%
 
$
66,962

 
100
%
 
$
66,304

 
100
%
 
$
52,543

 
100
%

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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 metrics.
Table 11 - Loan and Lease Portfolio by Industry Type
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate and rental and leasing
$
7,588

 
12
%
 
$
7,482

 
12
%
 
$
7,545

 
11
%
 
$
7,513

 
12
%
 
$
5,345

 
10
%
Manufacturing
4,916

 
7

 
5,048

 
8

 
4,937

 
7

 
4,931

 
7

 
3,392

 
6

Retail trade (1)
4,805

 
7

 
4,902

 
7

 
4,758

 
7

 
4,588

 
7

 
3,884

 
7

Finance and insurance
3,051

 
4

 
2,844

 
4

 
2,010

 
3

 
2,289

 
3

 
1,682

 
3

Health care and social assistance
2,699

 
4

 
2,727

 
4

 
2,729

 
4

 
2,638

 
4

 
1,776

 
3

Wholesale trade
2,058

 
3

 
2,181

 
3

 
2,071

 
3

 
2,009

 
3

 
1,311

 
2

Professional, scientific, and technical services
1,660

 
2

 
1,240

 
2

 
1,264

 
2

 
1,228

 
2

 
839

 
2

Transportation and warehousing
1,284

 
2

 
1,382

 
2

 
1,366

 
2

 
1,357

 
2

 
1,244

 
2

Accommodation and food services
1,261

 
2

 
1,652

 
2

 
1,678

 
3

 
1,612

 
2

 
1,157

 
2

Construction
1,232

 
2

 
924

 
1

 
875

 
1

 
889

 
1

 
674

 
1

Other services
928

 
1

 
1,278

 
2

 
1,223

 
2

 
1,205

 
2

 
978

 
2

Utilities
570

 
1

 
463

 
1

 
470

 
1

 
480

 
1

 
371

 
1

Mining, quarrying, and oil and gas extraction
501

 
1

 
511

 
1

 
668

 
1

 
704

 
1

 
691

 
1

Educational services
469

 
1

 
544

 
1

 
501

 
1

 
495

 
1

 
495

 
1

Arts, entertainment, and recreation
458

 
1

 
506

 
1

 
556

 
1

 
437

 
1

 
293

 
1

Information
444

 
1

 
454

 
1

 
473

 
1

 
475

 
1

 
325

 
1

Admin., support, waste management and remediation services
433

 
1

 
427

 
1

 
429

 
1

 
409

 
1

 
324

 
1

Public administration
274

 

 
266

 

 
272

 

 
273

 

 
282

 
1

Agriculture, forestry, fishing and hunting
203

 

 
170

 

 
151

 

 
161

 

 
132

 

Management of companies and enterprises
97

 

 
100

 

 
96

 

 
95

 

 
84

 

Unclassified, other
183

 

 
167

 

 
1,288

 
2

 
1,135

 
2

 
1,415

 
3

Total commercial loans by industry category
35,114

 
52

 
35,268

 
53

 
35,360

 
53

 
34,923

 
53

 
26,694

 
50

Automobile loans and leases
11,555

 
17

 
11,155

 
17

 
10,969

 
16

 
10,791

 
16

 
10,381

 
20

Home Equity
9,966

 
15

 
9,974

 
15

 
10,106

 
15

 
10,120

 
15

 
8,447

 
17

Residential mortgage
8,237

 
12

 
7,829

 
12

 
7,725

 
12

 
7,665

 
12

 
6,377

 
12

RV and marine finance
2,178

 
3

 
1,935

 
2

 
1,846

 
3

 
1,840

 
3

 

 

Other consumer loans
1,009

 
1

 
936

 
1

 
956

 
1

 
965

 
1

 
644

 
1

Total loans and leases
$
68,059

 
100
%
 
$
67,097

 
100
%
 
$
66,962

 
100
%
 
$
66,304

 
100
%
 
$
52,543

 
100
%
(1)
Amounts include $3.2 billion, $3.3 billion, $3.2 billion, $3.0 billion and $2.7 billion of auto dealer floorplan loans at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.
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

20

Table of Contents

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.
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.
Credit quality performance in the 2017 second quarter reflected continued overall positive results with stable levels of delinquencies and criticized loans and a 9% decline in NPAs. Total NCOs were $36 million, or 0.21%, of average total loans and leases.  Net charge-offs decreased by $3 million from the prior quarter, with the improvement centered in the automobile portfolio. The ACL to total loans and leases ratio declined by 3 basis points to 1.11%.
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 $212 million of CRE and C&I-related NALs at June 30, 2017, $132 million, or 62%, 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 charged-off at 120-days past due.

21

Table of Contents

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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
Nonaccrual loans and leases (NALs):
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
195,279

 
$
232,171

 
$
234,184

 
$
220,862

 
$
289,811

Commercial real estate
16,763

 
13,889

 
20,508

 
21,300

 
23,663

Automobile
3,825

 
4,881

 
5,766

 
4,777

 
5,049

Home equity
67,940

 
69,575

 
71,798

 
69,044

 
56,845

Residential mortgage
80,306

 
80,686

 
90,502

 
88,155

 
85,174

RV and marine finance
341

 
106

 
245

 
96

 

Other consumer
2

 
2

 

 

 
5

Total nonaccrual loans and leases
364,456

 
401,310

 
423,003

 
404,234

 
460,547

Other real estate:
 
 
 
 
 
 
 
 
 
Residential
26,890

 
31,786

 
30,932

 
34,421

 
26,653

Commercial
16,926

 
18,101

 
19,998

 
36,915

 
2,248

Total other real estate
43,816

 
49,887

 
50,930

 
71,336

 
28,901

Other NPAs (1)
6,906

 
6,910

 
6,968

 

 
376

Total nonperforming assets
$
415,178

 
$
458,107

 
$
480,901

 
$
475,570

 
$
489,824

 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases as a % of total loans and leases
0.54
%
 
0.60
%
 
0.63
%
 
0.61
%
 
0.88
%
NPA ratio (2)
0.61

 
0.68

 
0.72

 
0.72

 
0.93

(NPA+90days)/(Loan+OREO)
0.81

 
0.87

 
0.91

 
0.92

 
1.12

 
(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 Second Quarter versus 2016 Fourth Quarter.
Total NPAs decreased by $66 million, or 14%, compared with December 31, 2016 primarily as a result of decreases in the C&I and residential portfolios NALs and a 14% 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 a function of improved delinquencies partially as a result of the efforts by our Home Savers Group actively working with our customers.
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 $507 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 very limited migration from the accruing to non-accruing components, and virtually all of the charge-offs come from the non-accruing TDR balances.

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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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
Troubled debt restructured loans—accruing:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
270,372

 
$
222,303

 
$
210,119

 
$
232,740

 
$
232,112

Commercial real estate
74,429

 
81,202

 
76,844

 
80,553

 
85,015

Automobile
28,140

 
27,968

 
26,382

 
27,843

 
25,892

Home equity
268,731

 
271,258

 
269,709

 
275,601

 
203,047

Residential mortgage
238,087

 
239,175

 
242,901

 
251,529

 
256,859

RV and marine finance
950

 
581

 

 

 

Other consumer
4,017

 
4,128

 
3,780

 
4,102

 
4,522

Total troubled debt restructured loans—accruing
884,726

 
846,615

 
829,735

 
872,368

 
807,447

Troubled debt restructured loans—nonaccruing:
 
 
 
 
 
 
 
 
 
Commercial and industrial
89,757

 
88,759

 
107,087

 
70,179

 
77,592

Commercial real estate
3,823

 
4,357

 
4,507

 
5,672

 
6,833

Automobile
4,291

 
4,763

 
4,579

 
4,437

 
4,907

Home equity
28,667

 
29,090

 
28,128

 
28,009

 
21,145

Residential mortgage
55,590

 
59,773

 
59,157

 
62,027

 
63,638

RV and marine finance
381

 
106

 

 

 

Other consumer
109

 
117

 
118

 
142

 
142

Total troubled debt restructured loans—nonaccruing
182,618

 
186,965

 
203,576

 
170,466

 
174,257

Total troubled debt restructured loans
$
1,067,344

 
$
1,033,580

 
$
1,033,311

 
$
1,042,834

 
$
981,704

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.
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 increased risk levels resulting from loan risk-rating downgrades. Reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale 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 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.

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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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
367,956

 
41
%
 
$
380,504

 
42
%
 
$
355,424

 
42
%
 
$
333,101

 
42
%
 
$
323,465

 
41
%
Commercial real estate
106,620

 
11

 
99,804

 
11

 
95,667

 
11

 
98,694

 
11

 
101,042

 
9

Total commercial
474,576

 
52

 
480,308

 
53

 
451,091

 
53

 
431,795

 
53

 
424,507

 
50

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
48,322

 
17

 
46,402

 
17

 
47,970

 
16

 
42,584

 
16

 
50,531

 
20

Home equity
62,941

 
15

 
64,900

 
15

 
65,474

 
15

 
69,866

 
15

 
76,482

 
17

Residential mortgage
33,304

 
12

 
35,559

 
12

 
33,398

 
12

 
36,510

 
12

 
42,392

 
12

RV and marine finance
7,665

 
3

 
4,022

 
2

 
5,311

 
3

 
4,289

 
3

 

 

Other consumer
41,188

 
1

 
41,389

 
1

 
35,169

 
1

 
31,854

 
1

 
29,152

 
1

Total consumer
193,420

 
48

 
192,272

 
47

 
187,322

 
47

 
185,103

 
47

 
198,557

 
50

Total allowance for loan and lease losses
667,996

 
100
%
 
672,580

 
100
%
 
638,413

 
100
%
 
616,898

 
100
%
 
623,064

 
100
%
Allowance for unfunded loan commitments
85,359

 
 
 
91,838

 
 
 
97,879

 
 
 
88,433

 
 
 
73,748

 
 
Total allowance for credit losses
$
753,355

 
 
 
$
764,418

 
 
 
$
736,292

 
 
 
$
705,331

 
 
 
$
696,812

 
 
Total allowance for loan and leases losses as % of:
Total loans and leases
 
 
0.98
%
 
 
 
1.00
%
 
 
 
0.95
%
 
 
 
0.93
%
 
 
 
1.19
%
Nonaccrual loans and leases
 
 
183

 
 
 
168

 
 
 
151

 
 
 
153

 
 
 
135

Nonperforming assets
 
 
161

 
 
 
147

 
 
 
133

 
 
 
130

 
 
 
127

Total allowance for credit losses as % of:
Total loans and leases
 
 
1.11
%
 
 
 
1.14
%
 
 
 
1.10
%
 
 
 
1.06
%
 
 
 
1.33
%
Nonaccrual loans and leases
 
 
207

 
 
 
190

 
 
 
174

 
 
 
174

 
 
 
151

Nonperforming assets
 
 
181

 
 
 
167

 
 
 
153

 
 
 
148

 
 
 
142

(1)
Percentages represent the percentage of each loan and lease category to total loans and leases.
2017 Second Quarter versus 2016 Fourth Quarter
At June 30, 2017, the ALLL was $668 million, compared to $638 million at December 31, 2016. The $30 million, or 5%, increase in the ALLL relates to an increase in Criticized/Classified assets in the C&I portfolio and growth in the Other consumer loan category.
The ACL to total loans ratio was 1.11% at June 30, 2017, compared with 1.10% at 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.
NCOs
Any 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.

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Table of Contents

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
(dollar amounts in thousands)
 
 
 
 
 
 
Three Months Ended
 
June 30,
 
March 31,
 
June 30,
 
2017
 
2017
 
2016
Net charge-offs (recoveries) by loan and lease type:
Commercial:
 
 
 
 
 
Commercial and industrial
$
12,870

 
$
8,096

 
$
3,702

Commercial real estate:
 
 
 
 
 
Construction
83

 
(3,137
)
 
(377
)
Commercial
(3,638
)
 
895

 
(296
)
Commercial real estate
(3,555
)
 
(2,242
)
 
(673
)
Total commercial
9,315

 
5,854

 
3,029

Consumer:
 
 
 
 
 
Automobile
8,318

 
12,407

 
4,320

Home equity
1,218

 
1,662

 
1,078

Residential mortgage
1,052

 
2,595

 
776

RV and marine finance
1,875

 
2,363

 

Other consumer
14,262

 
14,557

 
7,552

Total consumer
26,725

 
33,584

 
13,726

Total net charge-offs
$
36,040

 
$
39,438

 
$
16,755

 
 
 
 
 
 
 
Three Months Ended
 
June 30,
 
March 31,
 
June 30,
 
2017
 
2017
 
2016
Net charge-offs (recoveries)—annualized percentages:
Commercial:
 
 
 
 
 
Commercial and industrial
0.18
 %
 
0.12
 %
 
0.07
 %
Commercial real estate:
 
 
 
 
 
Construction
0.03

 
(0.96
)
 
(0.17
)
Commercial
(0.24
)
 
0.06

 
(0.03
)
Commercial real estate
(0.20
)
 
(0.12
)
 
(0.05
)
Total commercial
0.11

 
0.07

 
0.05

Consumer:
 
 
 
 
 
Automobile
0.29

 
0.45

 
0.17

Home equity
0.05

 
0.07

 
0.05

Residential mortgage
0.05

 
0.13

 
0.05

RV and marine finance
0.37

 
0.50

 

Other consumer
5.81

 
6.33

 
4.93

Total consumer
0.33

 
0.42

 
0.22

Net charge-offs as a % of average loans
0.21
 %
 
0.24
 %
 
0.13
 %

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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 established is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased based on the updated risk rating. In certain cases, the standard ALLL is determined to not be appropriate, and a specific reserve is established based on the projected cash flow or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds the estimated loss on the loan, a reduction in the overall level of the ALLL could be recognized. 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. 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 Second Quarter versus 2017 First Quarter
NCOs were an annualized 0.21% of average loans and leases in the current quarter, a decrease from 0.24% in the 2017 first quarter, still below our long-term expectation of 0.35% - 0.55%. Commercial charge-offs were slightly higher for the quarter, but well within our expected performance range. Consumer charge-offs were lower for the quarter, driven by an improvement in the Automobile portfolio resulting from seasonality trends which were consistent with our expectations. Given the low level of C&I and CRE NCO’s, we 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 six-month periods ended June 30, 2017 and 2016:
Table 16 - Year to Date Net Charge-off Analysis
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
Net charge-offs by loan and lease type:
 
 
 
Commercial:
 
 
 
Commercial and industrial
$
20,966

 
$
10,216

Commercial real estate:
 
 
 
Construction
(3,054
)
 
(481
)
Commercial
(2,743
)
 
(17,668
)
Commercial real estate
(5,797
)
 
(18,149
)
Total commercial
15,169

 
(7,933
)
Consumer:
 
 
 
Automobile
20,725

 
11,090

Home equity
2,880

 
4,759

Residential mortgage
3,647

 
2,423

RV and marine finance
4,238

 

Other consumer
28,819

 
14,968

Total consumer
60,309

 
33,240

Total net charge-offs
$
75,478

 
$
25,307

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
Net charge-offs - annualized percentages:
 
 
 
Commercial:
 
 
 
Commercial and industrial
0.15
 %
 
0.10
 %
Commercial real estate:
 
 
 
Construction
(0.50
)
 
(0.11
)
Commercial
(0.09
)
 
(0.82
)
Commercial real estate
(0.16
)
 
(0.70
)
Total commercial
0.09

 
(0.06
)
Consumer:
 
 
 
Automobile
0.37

 
0.22

Home equity
0.06

 
0.11

Residential mortgage
0.09

 
0.08

RV and marine finance
0.43

 

Other consumer
5.93

 
5.04

Total consumer
0.38

 
0.27

Net charge-offs as a % of average loans
0.22
 %
 
0.10
 %
2017 First Six Months versus 2016 First Six Months
NCOs were $75.5 million, a $50 million increase from the same period in the prior year. The increase primarily relates to 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
 %
June 30, 2017
-0.6
 %
 
2.8
 %
 
5.5
 %
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 June 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
 %
June 30, 2017
-1.2
 %
 
3.2
 %
 
4.7
 %
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 June 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 June 30, 2017, we had a total of $189 million of capitalized MSRs representing the right to service $19.1 billion in mortgage loans. Of this $189 million, $13 million was recorded using the fair value method and $176 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

28

Table of Contents

the effectiveness of these economic hedges. We report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or a decrease in mortgage banking income.
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, equity investments, and investments in securities backed by mortgage loans. 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 June 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 $14.7 billion as of June 30, 2017.
Bank Liquidity and Sources of Funding
Our primary sources of funding for the Bank are retail and commercial core deposits. At June 30, 2017, these core deposits funded 71% of total assets (105% 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 $22 million and $23 million at June 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2017
 
2017
 
2016
 
2016
 
2016
By Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
21,420

 
28
%
 
$
21,489

 
28
%
 
$
22,836

 
30
%
 
$
23,426

 
30
%
 
$
16,324

 
30
%
Demand deposits—interest-bearing
17,113

 
23

 
18,618

 
24

 
15,676

 
21

 
15,730

 
20

 
8,412

 
15

Money market deposits
19,423

 
26

 
18,664

 
24

 
18,407

 
24

 
18,604

 
24

 
19,480

 
34

Savings and other domestic deposits
11,758

 
15

 
12,043

 
16

 
11,975

 
16

 
12,418

 
16

 
5,341

 
10

Core certificates of deposit
2,088

 
3

 
2,188

 
3

 
2,535

 
3

 
2,724

 
4

 
1,866

 
4

Total core deposits:
71,802

 
95

 
73,002

 
95

 
71,429

 
94

 
72,902

 
94

 
51,423

 
93

Other domestic deposits of $250,000 or more
441

 
1

 
524

 
1

 
394

 
1

 
391

 
1

 
380

 
1

Brokered deposits and negotiable CDs
3,690

 
4

 
3,897

 
4

 
3,785

 
5

 
3,972

 
5

 
3,017

 
6

Deposits in foreign offices

 

 

 

 

 

 
140

 

 
223

 

Total deposits
$
75,933

 
100
%
 
$
77,423

 
100
%
 
$
75,608

 
100
%
 
$
77,405

 
100
%
 
$
55,043

 
100
%
Total core deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
32,201

 
45
%
 
$
32,963

 
45
%
 
$
31,887

 
45
%
 
$
32,936

 
45
%
 
$
24,308

 
47
%
Consumer
39,601

 
55

 
40,039

 
55

 
39,542

 
55

 
39,966

 
55

 
27,115

 
53

Total core deposits
$
71,802

 
100
%
 
$
73,002

 
100
%
 
$
71,429

 
100
%
 
$
72,902

 
100
%
 
$
51,423

 
100
%
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 and securities pledged to the Federal Reserve Discount Window and the FHLB are $30.4 billion and $19.7 billion at June 30, 2017 and December 31, 2016, respectively.

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At June 30, 2017, total wholesale funding was $17.2 billion, an increase from $16.2 billion at December 31, 2016. The increase from year-end primarily relates to an increase 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 June 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 June 30, 2017, the parent company had $1.8 billion in cash and cash equivalents, up slightly from December 31, 2016.
On July 19, 2017, the board of directors declared a quarterly common stock cash dividend of $0.08 per common share. The dividend is payable on October 2, 2017, to shareholders of record on September 18, 2017. Based on the current quarterly dividend of $0.08 per common share, cash demands required for common stock dividends are estimated to be approximately $87 million per quarter. On July 19, 2017, the board of directors declared a quarterly Series A, Series B, Series C, and Series D Preferred Stock dividend payable on October 16, 2017 to shareholders of record on October 1, 2017. 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 six months of 2017, the Bank returned capital totaling $331 million to the holding company. Additionally, the Bank paid a preferred dividend to the holding company of $22 million during the first six 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), interest rate swaps (See Note 12), 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.
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

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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 will occur until all converted systems are 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.
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.

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The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the past five quarters: 
Table 20 - Regulatory Capital Data
 
 
 
 
 
 
 
 
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basel III
 
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
Total risk-weighted assets
Consolidated
 
$
78,366

 
$
77,559

 
$
78,263

 
 
Bank
 
78,489

 
77,534

 
78,242

 
Common equity tier I risk-based capital
Consolidated
 
7,740

 
7,551

 
7,486

 
 
Bank
 
8,367

 
8,146

 
8,153

 
Tier 1 risk-based capital
Consolidated
 
8,809

 
8,619

 
8,547

 
 
Bank
 
9,238

 
9,015

 
9,086

 
Tier 2 risk-based capital
Consolidated
 
1,640

 
1,663

 
1,668

 
 
Bank
 
1,706

 
1,745

 
1,732

 
Total risk-based capital
Consolidated
 
10,449

 
10,282

 
10,215

 
 
Bank
 
10,944

 
10,760

 
10,818

 
Tier 1 leverage ratio
Consolidated
 
8.98
%
 
8.76
%
 
8.70
%
 
 
Bank
 
9.43

 
9.18

 
9.29

 
Common equity tier I risk-based capital ratio
Consolidated
 
9.88

 
9.74

 
9.56

 
 
Bank
 
10.66

 
10.51

 
10.42

 
Tier 1 risk-based capital ratio
Consolidated
 
11.24

 
11.11

 
10.92

 
 
Bank
 
11.77

 
11.63

 
11.61

 
Total risk-based capital ratio
Consolidated
 
13.33

 
13.26

 
13.05

 
 
Bank
 
13.94

 
13.88

 
13.83

 
At June 30, 2017, we maintained Basel III transitional capital ratios in excess of the well-capitalized standards established by the FRB.
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 June 30, 2017, an increase of $0.3 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. 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.

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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 the 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.
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).

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Net Income by Business Segment
The segregation of net income by business segment for the six-month periods ending June 30, 2017 and June 30, 2016 is presented in the following table:
Table 21 - Net Income (Loss) by Business Segment
(dollar amounts in thousands)
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
Consumer and Business Banking
$
201,290

 
$
129,151

Commercial Banking
160,991

 
77,513

CREVF
106,919

 
87,848

RBHPCG
42,678

 
27,240

Treasury / Other
(32,043
)
 
24,102

Net income
$
479,835

 
$
345,854

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 any investment security and trading asset gains or losses. Noninterest expense includes $124 million of FirstMerit acquisition-related expense in 2017 first six-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
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Net interest income
$
828,936

 
$
562,423

 
$
266,513

 
47
%
Provision for credit losses
50,181

 
30,750

 
19,431

 
63

Noninterest income
354,970

 
284,002

 
70,968

 
25

Noninterest expense
824,048

 
616,981

 
207,067

 
34

Provision for income taxes
108,387

 
69,543

 
38,844

 
56

Net income
$
201,290

 
$
129,151

 
$
72,139

 
56
%
Number of employees (average full-time equivalent)
8,737

 
6,543

 
2,194

 
34
%
Total average assets (in millions)
$
25,283

 
$
18,951

 
$
6,332

 
33

Total average loans/leases (in millions)
20,479

 
16,227

 
4,252

 
26

Total average deposits (in millions)
45,461

 
31,428

 
14,033

 
45

Net interest margin
3.78
%
 
3.68
%
 
0.10
%
 
3

NCOs
$
48,576

 
$
28,948

 
$
19,628

 
68

NCOs as a % of average loans and leases
0.47
%
 
0.35
%
 
0.12
%
 
34

2017 First Six Months vs. 2016 First Six Months
Consumer and Business Banking, including Home Lending, reported net income of $201 million in the first six-month period of 2017, an increase of $72 million, or 56%, compared to the year-ago period. Results were predominately impacted by the FirstMerit acquisition. Segment net interest income increased $267 million, or 47%, primarily due to an increase in total average loans and deposits. The provision for credit losses increased $19 million, or 63%, driven by an increase in the

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allowance as well as increased NCOs. Noninterest income increased $71 million, or 25%, due to an increase in net mortgage servicing revenue, 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 $207 million, or 34%, due to an increase in personnel and occupancy expense related to the addition of FirstMerit branches and colleagues. Higher 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 $4 million in the first six-month period of 2017, a decrease of $5 million, or 55%, compared to the year-ago period. Results were impacted by the FirstMerit acquisition. Net interest income increased $4 million, or 16%, which primarily reflects higher residential mortgage balances and lower FTP funding costs. The provision for credit losses increased $4 million, primarily due to an increase in the allowance in for the residential mortgage portfolio held by Home Lending. Noninterest income increased by $10 million, or 31%, primarily due to favorable net MSR hedge-related activities and net servicing income. Income from higher origination volumes was predominately offset by lower spreads on origination volume. Noninterest expense increased $18 million, or 36%, primarily due to higher personnel costs related to the FirstMerit acquisition and higher origination volume.
Commercial Banking
 
 
 
 
 
 
 
 
Table 23 - Key Performance Indicators for Commercial Banking
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Net interest income
$
343,285

 
$
212,240

 
$
131,045

 
62
 %
Provision for credit losses
11,798

 
29,423

 
(17,625
)
 
(60
)
Noninterest income
117,573

 
95,484

 
22,089

 
23

Noninterest expense
201,382

 
159,050

 
42,332

 
27

Provision for income taxes
86,687

 
41,738

 
44,949

 
108

Net income
$
160,991

 
$
77,513

 
$
83,478

 
108
 %
Number of employees (average full-time equivalent)
1,087

 
833

 
254

 
30
 %
Total average assets (in millions)
$
24,000

 
$
17,553

 
$
6,447

 
37

Total average loans/leases (in millions)
19,075

 
13,804

 
5,271

 
38

Total average deposits (in millions)
18,725

 
14,072

 
4,653

 
33

Net interest margin
3.35
%
 
2.88
%
 
0.47
 %
 
16

NCOs
$
6,416

 
$
16,261

 
$
(9,845
)
 
(61
)
NCOs as a % of average loans and leases
0.07
%
 
0.23
%
 
(0.16
)%
 
(70
)
2017 First Six Months vs. 2016 First Six Months
Commercial Banking reported net income of $161 million in the first six-month period of 2017, an increase of $83 million, or 108%, compared to the year-ago period. Results were predominately impacted by the FirstMerit acquisition. Segment net interest income increased $131 million, or 62%, primarily due to an increase in both average loans and deposits combined with a 47 basis point increase in net interest margin. The provision for credit losses decreased $18 million, or 60%, driven by a reduction in NCOs and improvement in energy related credits. Noninterest income increased $22 million, or 23%, largely driven by an increase in loan commitment and other fees, deposit service charges and capital markets related revenues. Noninterest expense increased $42 million, or 27%, 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
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Net interest income
$
279,700

 
$
191,214

 
$
88,486

 
46
%
Provision (reduction in allowance) for credit losses
30,342

 
(6,909
)
 
37,251

 
N.R.

Noninterest income
23,768

 
17,950

 
5,818

 
32

Noninterest expense
108,635

 
80,922

 
27,713

 
34

Provision for income taxes
57,572

 
47,303

 
10,269

 
22

Net income
$
106,919

 
$
87,848

 
$
19,071

 
22
%
Number of employees (average full-time equivalent)
402

 
310

 
92

 
30
%
Total average assets (in millions)
$
23,903

 
$
18,329

 
$
5,574

 
30

Total average loans/leases (in millions)
22,811

 
17,288

 
5,523

 
32

Total average deposits (in millions)
1,825

 
1,649

 
176

 
11

Net interest margin
2.45
%
 
2.18
 %
 
0.27
%
 
12

NCOs
$
19,500

 
$
(16,888
)
 
$
36,388

 
N.R.

NCOs as a % of average loans and leases
0.17
%
 
(0.19
)%
 
0.36
%
 
N.R.

N.R. - Not relevant.
2017 First Six Months vs. 2016 First Six Months
CREVF reported net income of $107 million in the first six-month period of 2017, an increase of $19 million, or 22%, 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 in the year ago period. Segment net interest income increased $88 million or 46%, due to both higher loan balances and a 27 basis point increase in the net interest margin primarily reflecting the purchase accounting impact of the acquired loan portfolios. Noninterest income increased $6 million, or 32%, primarily due to a $3 million increase in gains on various equity investments associated with mezzanine lending related activities. Noninterest expense increased $28 million, or 34%, primarily due to an increase in personnel costs and other allocated costs attributed to higher production and portfolio balance levels.

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Regional Banking and The Huntington Private Client Group
 
 
 
 
 
 
 
 
Table 25 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percent
Net interest income
$
95,492

 
$
70,503

 
$
24,989

 
35
%
Provision (reduction in allowance) for credit losses
295

 
(1,173
)
 
1,468

 
N.R.

Noninterest income
94,395

 
79,403

 
14,992

 
19

Noninterest expense
123,934

 
109,172

 
14,762

 
14

Provision for income taxes
22,980

 
14,667

 
8,313

 
57

Net income
$
42,678

 
$
27,240

 
$
15,438

 
57
%
Number of employees (average full-time equivalent)
1,034

 
930

 
104

 
11
%
Total average assets (in millions)
$
5,401

 
$
4,265

 
$
1,136

 
27

Total average loans/leases (in millions)
4,699

 
3,861

 
838

 
22

Total average deposits (in millions)
5,927

 
4,819

 
1,108

 
23

Net interest margin
3.33
%
 
2.95
 %
 
0.38
%
 
13

NCOs
$
987

 
$
(3,013
)
 
$
4,000

 
N.R.

NCOs as a % of average loans and leases
0.04
%
 
(0.16
)%
 
0.20
%
 
N.R.

Total assets under management (in billions)—eop (1)
$
17.6

 
$
16.8

 
$
0.8

 
5

Total trust assets (in billions)—eop (1)
101.6

 
93.3

 
8.3

 
9

N.R. - Not relevant.
eop - End of Period.
(1)
Includes assets associated with FirstMerit.
2017 First Six Months vs. 2016 First Six Months
RBHPCG reported net income of $43 million in the first six-month period of 2017, an increase of $15 million, or 57%, compared to the year-ago period. Results were predominately impacted by the FirstMerit acquisition. Net interest income increased $25 million, or 35%, due to an increase in average total deposits and loans combined with a 38 basis point increase in net interest margin. The increase in average total loans was primarily due to strong growth in commercial and portfolio mortgage loans combined with balance growth from the FirstMerit acquisition, while the increase in average total deposits was mainly due to the acquisition combined with growth in interest checking balances from the Private Client Account. The provision for credit losses increased $1 million, due to lower recoveries in the current period. Noninterest income increased $15 million, or 19%, primarily due to increased trust and investment management revenue related to the increase in trust assets and assets under management that resulted primarily from the FirstMerit acquisition. Noninterest expense increased $15 million, or 14%, 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,

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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 when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where we do business; diversion of management’s attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger with FirstMerit Corporation; 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 Report on Form 10-Q for the quarter ended March 31, 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 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

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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.

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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 Generally Accepted Accounting Principles (“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.
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)
June 30,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Cash and due from banks
$
1,515,476

 
$
1,384,770

Interest-bearing deposits in banks
77,148

 
58,267

Trading account securities
94,767

 
133,295

Loans held for sale (includes $654,087 and $438,224 respectively, measured at fair value)(1)
748,077

 
512,951

Available-for-sale and other securities
15,388,306

 
15,562,837

Held-to-maturity securities
8,279,577

 
7,806,939

Loans and leases (includes $103,741 and $82,319 respectively, measured at fair value)(1)
68,059,310

 
66,961,996

Allowance for loan and lease losses
(667,996
)
 
(638,413
)
Net loans and leases
67,391,314

 
66,323,583

Bank owned life insurance
2,448,913

 
2,432,086

Premises and equipment
855,347

 
815,508

Goodwill
1,992,849

 
1,992,849

Other intangible assets
373,861

 
402,458

Servicing rights
224,656

 
225,578

Accrued income and other assets
2,016,488

 
2,062,976

Total assets
$
101,406,779

 
$
99,714,097

Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Deposits
$
75,933,373

 
$
75,607,717

Short-term borrowings
4,552,877

 
3,692,654

Long-term debt
8,536,471

 
8,309,159

Accrued expenses and other liabilities
1,729,876

 
1,796,421

Total liabilities
90,752,597

 
89,405,951

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

 
1,071,227

Common stock
10,932

 
10,886

Capital surplus
9,920,052

 
9,881,277

Less treasury shares, at cost
(31,288
)
 
(27,384
)
Accumulated other comprehensive loss
(350,357
)
 
(401,016
)
Retained (deficit) earnings
33,557

 
(226,844
)
Total shareholders’ equity
10,654,182

 
10,308,146

Total liabilities and shareholders’ equity
$
101,406,779

 
$
99,714,097

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

 
1,500,000,000

Common shares issued
1,093,162,464

 
1,088,641,251

Common shares outstanding
1,090,016,469

 
1,085,688,538

Treasury shares outstanding
3,145,995

 
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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Interest and fee income:
 
 
 
 
 
 
 
Loans and leases
$
699,838

 
$
469,770

 
$
1,375,772

 
$
933,192

Available-for-sale and other securities
 
 
 
 
 
 
 
Taxable
78,292

 
40,992

 
154,577

 
80,606

Tax-exempt
18,695

 
13,795

 
37,382

 
26,814

Held-to-maturity securities—taxable
44,276

 
35,420

 
89,471

 
72,209

Other
5,323

 
5,681

 
9,582

 
10,088

Total interest income
846,424

 
565,658

 
1,666,784

 
1,122,909

Interest expense:
 
 
 
 
 
 
 
Deposits
42,287

 
22,324

 
77,077

 
45,342

Short-term borrowings
5,203

 
913

 
11,069

 
1,811

Federal Home Loan Bank advances
66

 
72

 
132

 
141

Subordinated notes and other long-term debt
54,356

 
36,468

 
104,019

 
66,668

Total interest expense
101,912

 
59,777

 
192,297

 
113,962

Net interest income
744,512

 
505,881

 
1,474,487

 
1,008,947

Provision for credit losses
24,978

 
24,509

 
92,616

 
52,091

Net interest income after provision for credit losses
719,534

 
481,372

 
1,381,871

 
956,856

Service charges on deposit accounts
87,582

 
75,613

 
171,002

 
145,875

Cards and payment processing income
52,485

 
39,184

 
99,654

 
75,631

Mortgage banking income
32,268

 
31,591

 
63,960

 
50,134

Trust and investment management services
32,232

 
22,497

 
66,101

 
45,335

Insurance income
15,843

 
15,947

 
31,107

 
32,172

Brokerage income
16,294

 
14,599

 
32,052

 
30,101

Capital markets fees
16,836

 
13,037

 
31,036

 
26,047

Bank owned life insurance income
15,322

 
12,536

 
32,864

 
26,049

Gain on sale of loans
12,002

 
9,265

 
24,824

 
14,660

Net gains on sales of securities
3,694

 
732

 
3,710

 
732

Impairment losses recognized in earnings on available-for-sale securities
(3,559
)
 
(76
)
 
(3,583
)
 
(76
)
Other noninterest income
44,219

 
36,187

 
84,954

 
66,319

Total noninterest income
325,218

 
271,112

 
637,681

 
512,979

Personnel costs
391,997

 
298,949

 
773,997

 
584,346

Outside data processing and other services
75,169

 
63,037

 
162,371

 
124,915

Equipment
42,924

 
31,805

 
89,624

 
64,381

Net occupancy
52,613

 
30,704

 
120,313

 
62,180

Professional services
18,190

 
21,488

 
36,485

 
35,026

Marketing
18,843

 
14,773

 
32,766

 
27,041

Deposit and other insurance expense
20,418

 
12,187

 
40,517

 
23,395

Amortization of intangibles
14,242

 
3,600

 
28,597

 
7,312

Other noninterest expense
59,968

 
47,118

 
117,116

 
86,145

Total noninterest expense
694,364

 
523,661

 
1,401,786

 
1,014,741

Income before income taxes
350,388

 
228,823

 
617,766

 
455,094

Provision for income taxes
78,647

 
54,283

 
137,931

 
109,240

Net income
271,741

 
174,540

 
479,835

 
345,854

Dividends on preferred shares
18,889

 
19,874

 
37,767

 
27,872

Net income applicable to common shares
$
252,852

 
$
154,666

 
$
442,068

 
$
317,982

 
 
 
 
 
 
 
 

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Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Average common shares—basic
1,088,934

 
798,167

 
1,087,654

 
796,961

Average common shares—diluted
1,108,527

 
810,371

 
1,108,572

 
809,360

Per common share:
 
 
 
 
 
 
 
Net income—basic
$
0.23

 
$
0.19

 
$
0.41

 
$
0.40

Net income—diluted
0.23

 
0.19

 
0.40

 
0.39

Cash dividends declared
0.08

 
0.07

 
0.16

 
0.14

OTTI losses for the periods presented:
 
 
 
 
 
 
 
Total OTTI losses
$
(3,563
)
 
$
(76
)
 
$
(3,589
)
 
$
(3,809
)
Noncredit-related portion of loss recognized in OCI
4

 

 
6

 
3,733

Impairment losses recognized in earnings on available-for-sale securities
$
(3,559
)
 
$
(76
)
 
$
(3,583
)
 
$
(76
)
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements



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Table of Contents

Huntington Bancshares Incorporated
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Net income
$
271,741

 
$
174,540

 
$
479,835

 
$
345,854

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
1,602

 
667

 
2,126

 
(1,682
)
Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains and losses
37,052

 
30,603

 
47,050

 
82,154

Total unrealized gains (losses) on available-for-sale and other securities
38,654

 
31,270

 
49,176

 
80,472

Unrealized gains (losses) on cash flow hedging derivatives, net of reclassifications to income
1,070

 
1,134

 
244

 
9,963

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

 
840

 
1,239

 
1,681

Other comprehensive income (loss), net of tax
40,503

 
33,244

 
50,659

 
92,116

Comprehensive income
$
312,244

 
$
207,784

 
$
530,494

 
$
437,970

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
Six Months Ended June 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
345,854

 
345,854

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
92,116

 
 
 
92,116

Net proceeds from issuance of Series D preferred stock
584,987

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
584,987

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.14 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(111,735
)
 
(111,735
)
Preferred Series A ($42.50 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(15,407
)
 
(15,407
)
Preferred Series B ($16.63 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(590
)
 
(590
)
Preferred Series D ($19.79 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(11,875
)
 
(11,875
)
Recognition of the fair value of share-based compensation
 
 
 
 
 
 
27,799

 
 
 
 
 
 
 
 
 
27,799

Other share-based compensation activity
 
 
4,559

 
45

 
7,872

 
 
 
 
 
 
 
(3,004
)
 
4,913

Other
 
 

 

 
76

 
(334
)
 
(3,426
)
 
 
 
(14
)
 
(3,364
)
Balance, end of period
$
971,278

 
801,529

 
$
8,015

 
$
7,074,249

 
(2,375
)
 
$
(21,358
)
 
$
(134,042
)
 
$
(390,838
)
 
$
7,507,304

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
479,835

 
479,835

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
50,659

 
 
 
50,659

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.16 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(174,369
)
 
(174,369
)
Preferred Series A ($42.50 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(15,406
)
 
(15,406
)
Preferred Series B ($18.95 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(673
)
 
(673
)
Preferred Series C ($29.38 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,938
)
 
(2,938
)
Preferred Series D ($31.25 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(18,750
)
 
(18,750
)
Recognition of the fair value of share-based compensation
 
 
 
 
 
 
52,045

 
 
 
 
 
 
 
 
 
52,045

Other share-based compensation activity
 
 
4,514

 
45

 
(14,612
)
 
 
 
 
 
 
 
(7,057
)
 
(21,624
)
Other
59

 
7

 
1

 
1,342

 
(193
)
 
(3,904
)
 
 
 
(241
)
 
(2,743
)
Balance, end of period
$
1,071,286

 
1,093,162

 
$
10,932

 
$
9,920,052

 
(3,146
)
 
$
(31,288
)
 
$
(350,357
)
 
$
33,557

 
$
10,654,182

See Notes to Unaudited Condensed Consolidated Financial Statements

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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
Operating activities
 
Net income
$
479,835

 
$
345,854

Adjustments to reconcile net income to net cash provided by operating activities:
 
Provision for credit losses
92,616

 
52,091

Depreciation and amortization
210,825

 
208,249

Share-based compensation expense
52,045

 
27,799

Net change in:
 
 
 
Trading account securities
38,528

 
1,708

Loans held for sale
(220,674
)
 
(307,880
)
Accrued income and other assets
(57,635
)
 
(97,334
)
Deferred income taxes
11,725

 
(6,864
)
Accrued expense and other liabilities
(60,182
)
 
70,554

Other, net
11,661

 
(7,539
)
Net cash provided by (used for) operating activities
558,744

 
286,638

Investing activities
 
Change in interest bearing deposits in banks
19,474

 
6,942

Proceeds from:
 
 
 
Maturities and calls of available-for-sale and other securities
715,893

 
467,633

Maturities of held-to-maturity securities
523,309

 
495,645

Sales of available-for-sale and other securities
411,763

 
170,986

Purchases of available-for-sale and other securities
(1,891,781
)
 
(1,405,035
)
Purchases of held-to-maturity securities
(8,616
)
 

Net proceeds from sales of portfolio loans
259,165

 
234,608

Net loan and lease activity, excluding sales and purchases
(1,429,367
)
 
(2,220,929
)
Purchases of premises and equipment
(112,566
)
 
(19,846
)
Proceeds from sales of other real estate
17,802

 
13,290

Purchases of loans and leases
(93,560
)
 
(341,985
)
Other, net
8,343

 
2,698

Net cash provided by (used for) investing activities
(1,580,141
)
 
(2,595,993
)
Financing activities
 
 
 
Increase (decrease) in deposits
325,656

 
(256,333
)
Increase (decrease) in short-term borrowings
838,389

 
1,335,888

Net proceeds from issuance of long-term debt
1,060,697

 
1,051,794

Maturity/redemption of long-term debt
(843,019
)
 
(255,750
)
Dividends paid on preferred stock
(37,743
)
 
(27,872
)
Dividends paid on common stock
(174,168
)
 
(112,087
)
Proceeds from stock options exercised
6,884

 
3,887

Net proceeds from issuance of preferred stock

 
584,987

Payments related to tax-withholding for share based compensation awards
(24,593
)
 

Other, net

 
4,865

Net cash provided by (used for) financing activities
1,152,103

 
2,329,379

Increase (decrease) in cash and cash equivalents
130,706

 
20,024

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

 
847,156

Cash and cash equivalents at end of period
$
1,515,476

 
$
867,180


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Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
Supplemental disclosures:
 
Interest paid
$
185,107

 
$
107,428

Income taxes paid
54,434

 
3,099

Non-cash activities
 
Loans transferred to held-for-sale from portfolio
298,331

 
266,527

Loans transferred to portfolio from held-for-sale
1,265

 
10,661

Transfer of loans to OREO
16,926

 
12,974

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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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 flows 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
ASU 2014-09—Revenue from Contracts with Customers (Topic 606): The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require 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. The guidance sets forth a five step approach for revenue recognition. The amendments are 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 and is well into its outlined implementation plan. In this regard, management has completed a preliminary analysis that 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) determination of sample size of contracts for further analysis; and (e) completion of limited analysis on selected contracts to evaluate the potential impact of the new guidance. The 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.
ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update make targeted improvements to GAAP including, but not limited to, requiring an entity to measure its equity investments with changes in the fair value recognized in the income statement; requiring an entity to 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); requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; assessing deferred tax assets related to a net unrealized loss on AFS securities in combination with the entity’s other deferred tax assets; and eliminating some of the disclosures required by the existing GAAP while requiring entities to present and disclose some additional information. The new guidance is effective for the fiscal period beginning after December 15, 2017, including interim periods within those fiscal years. An entity should apply the amendments 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. This Update sets forth a 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. The accounting applied by a lessor is largely unchanged from that applied under the existing guidance. The ASU 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. The Update is effective for the fiscal period beginning after December 15, 2018,

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with early application permitted. Management is currently assessing the impact of the new guidance on Huntington's Unaudited Consolidated Financial Statements. Huntington expects to recognize a right-of-use asset and a lease liability for its operating lease commitments.
ASU 2016-13 - Financial Instruments - Credit Losses. The amendments in this Update eliminate the probable recognition threshold for credit losses on financial assets measured at amortized cost. The Update requires those financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The 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. The Update is 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. The amendments should be 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 currently intends to adopt the guidance on January 1, 2020 and is assessing the impact of this Update on Huntington's Unaudited Consolidated Financial Statements. Management has formed a working group comprised of teams from different disciplines including credit and finance. The working group is currently evaluating 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. The amendments in this Update add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Current guidance lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to several types of cash flows. The amendments in this Update are 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.
ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update simplifies the goodwill impairment test. Under the new guidance, Step 2 of the goodwill impairment process that requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities, is eliminated. Instead, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is 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. The amendments in this Update require 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. The other components of the net benefit cost should be presented in the income statement separately from the service cost component. The amendments in this Update are 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. The Update reduces the current diversity in practice and provides explicit guidance pertaining to the provisions of modification accounting. The Update 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 of the original awards immediately before the original award is modified. The Update is 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.
3. LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES
Loans and leases for 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

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and deferred loan fees and costs and purchase accounting adjustments, which resulted in a net premium of $245 million and $120 million at June 30, 2017 and December 31, 2016, respectively.
Loan and Lease Portfolio Composition
The following table provides a detailed listing of Huntington’s loan and lease portfolio at June 30, 2017 and December 31, 2016:
(dollar amounts in thousands)
June 30,
2017
 
December 31,
2016
Loans and leases:
 
 
 
Commercial and industrial
$
27,969,151

 
$
28,058,712

Commercial real estate
7,145,151

 
7,300,901

Automobile
11,555,137

 
10,968,782

Home equity
9,965,534

 
10,105,774

Residential mortgage
8,237,297

 
7,724,961

RV and marine finance
2,177,732

 
1,846,447

Other consumer
1,009,308

 
956,419

Loans and leases
68,059,310

 
66,961,996

Allowance for loan and lease losses
(667,996
)
 
(638,413
)
Net loans and leases
$
67,391,314

 
$
66,323,583

Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for purchased credit impaired loans for the three-month and six-month period ended June 30, 2017: and 2016:
 
 
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
 
2017
 
2017
FirstMerit
 
 
 
 
Balance, beginning of period
 
$
37,372

 
$
36,669

Accretion
 
(4,788
)
 
(9,490
)
Reclassification (to) from nonaccretable difference
 
3,925

 
9,330

Balance, end of period
 
$
36,509

 
$
36,509

The following table reflects the ending and unpaid balances of the purchase credit impaired loans at June 30, 2017 and December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Balance
 
ALLL
 
Ending
Balance
 
Unpaid
Balance
 
ALLL
FirstMerit
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
54,942

 
$
81,934

 
$
970

 
$
68,338

 
$
100,031

 
$

Commercial real estate
20,780

 
34,904

 

 
34,042

 
56,320

 

Total
$
75,722

 
$
116,838

 
$
970

 
$
102,380

 
$
156,351

 
$

During the second quarter 2017, an allowance for loan losses was recorded on the Commercial and industrial purchased credit-impaired portfolio for $1 million.
 
 
 
 
 
 
NALs 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

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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 following table presents NALs by loan class at June 30, 2017 and December 31, 2016:
(dollar amounts in thousands)
June 30,
2017
 
December 31,
2016
Commercial and industrial
$
195,279

 
$
234,184

Commercial real estate
16,763

 
20,508

Automobile
3,825

 
5,766

Home equity
67,940

 
71,798

Residential mortgage
80,306

 
90,502

RV and marine finance
341

 
245

Other consumer
2

 

Total nonaccrual loans
$
364,456

 
$
423,003

The following table presents an aging analysis of loans and leases, including past due loans, by loan class at June 30, 2017 and December 31, 2016: (1)
 
June 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
$
44,796

 
$
13,608

 
$
84,609

 
$
143,013

 
$
27,771,196

 
$
54,942

 
$

 
$
27,969,151

 
$
21,501

(2)
Commercial real estate
7,382

 
3,918

 
27,314

 
38,614

 
7,085,757

 
20,780

 

 
7,145,151

 
17,040

 
Automobile
68,600

 
15,241

 
8,716

 
92,557

 
11,461,169

 

 
1,411

 
11,555,137

 
8,594

 
Home equity
44,513

 
16,463

 
61,159

 
122,135

 
9,840,922

 

 
2,477

 
9,965,534

 
18,459

 
Residential mortgage
117,779

 
40,327

 
110,842

 
268,948

 
7,869,927

 

 
98,422

 
8,237,297

 
65,159

(3)
RV and marine finance
8,072

 
2,443

 
2,666

 
13,181

 
2,163,346

 

 
1,205

 
2,177,732

 
2,464

 
Other consumer
9,913

 
4,081

 
3,146

 
17,140

 
991,942

 

 
226

 
1,009,308

 
3,143

 
Total loans and leases
$
301,055

 
$
96,081

 
$
298,452

 
$
695,588

 
$
67,184,259

 
$
75,722

 
$
103,741

 
$
68,059,310

 
$
136,360

 

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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 loans
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 the loan’s past due status.
(2)
Amounts include Huntington Technology Finance administrative lease delinquencies.
(3)
Amounts include loans guaranteed by government organizations.
Allowance for Credit Losses
Huntington maintains two reserves, both of which reflect management’s judgment regarding the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: 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.

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The following table presents ALLL and AULC activity by portfolio segment for the three-month and six-month periods ended June 30, 2017 and 2016:
(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
Three-month period ended June 30, 2017:
ALLL balance, beginning of period
 
$
480,308

 
$
192,272

 
$
672,580

Loan charge-offs
 
(15,103
)
 
(41,345
)
 
(56,448
)
Recoveries of loans previously charged-off
 
5,787

 
14,621

 
20,408

Provision for (reduction in allowance) loan and lease losses
 
3,585

 
27,872

 
31,457

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

 
(1
)
ALLL balance, end of period
 
$
474,576

 
$
193,420

 
$
667,996

AULC balance, beginning of period
 
$
88,899

 
$
2,939

 
$
91,838

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
(6,072
)
 
(407
)
 
(6,479
)
AULC balance, end of period
 
$
82,827

 
$
2,532

 
$
85,359

ACL balance, end of period
 
$
557,403

 
$
195,952

 
$
753,355

Six-month period ended June 30, 2017:
ALLL balance, beginning of period
 
$
451,091

 
$
187,322

 
$
638,413

Loan charge-offs
 
(38,773
)
 
(88,390
)
 
(127,163
)
Recoveries of loans previously charged-off
 
23,604

 
28,081

 
51,685

Provision for (reduction in allowance) loan and lease losses
 
38,729

 
66,407

 
105,136

Allowance for loans sold or transferred to loans held for sale
 
(75
)
 

 
(75
)
ALLL balance, end of period
 
$
474,576

 
$
193,420

 
$
667,996

AULC balance, beginning of period
 
$
86,543

 
$
11,336

 
$
97,879

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
(3,716
)
 
(8,804
)
 
(12,520
)
AULC balance, end of period
 
$
82,827

 
$
2,532

 
$
85,359

ACL balance, end of period
 
$
557,403

 
$
195,952

 
$
753,355


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(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
Three-month period ended June 30, 2016:
ALLL balance, beginning of period
 
$
422,441

 
$
191,278

 
$
613,719

Loan charge-offs
 
(16,933
)
 
(26,612
)
 
(43,545
)
Recoveries of loans previously charged-off
 
13,904

 
12,886

 
26,790

Provision for (reduction in allowance) loan and lease losses
 
5,095

 
20,991

 
26,086

Allowance for loans sold or transferred to loans held for sale
 

 
14

 
14

ALLL balance, end of period
 
$
424,507

 
$
198,557

 
$
623,064

AULC balance, beginning of period
 
$
65,872

 
$
9,453

 
$
75,325

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
(2,155
)
 
578

 
(1,577
)
AULC balance, end of period
 
$
63,717

 
$
10,031

 
$
73,748

ACL balance, end of period
 
$
488,224

 
$
208,588

 
$
696,812

Six-month period ended June 30, 2016:
ALLL balance, beginning of period
 
$
398,753

 
$
199,090

 
$
597,843

Loan charge-offs
 
(45,882
)
 
(57,355
)
 
(103,237
)
Recoveries of loans previously charged-off
 
53,815

 
24,115

 
77,930

Provision for (reduction in allowance) loan and lease losses
 
17,821

 
32,603

 
50,424

Allowance for loans sold or transferred to loans held for sale
 

 
104

 
104

ALLL balance, end of period
 
$
424,507

 
$
198,557

 
$
623,064

AULC balance, beginning of period
 
$
63,448

 
$
8,633

 
$
72,081

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
269

 
1,398

 
1,667

AULC balance, end of period
 
$
63,717

 
$
10,031

 
$
73,748

ACL balance, end of period
 
$
488,224

 
$
208,588

 
$
696,812

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.
The following table presents each loan and lease class by credit quality indicator at June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
Credit Risk Profile by UCS Classification
(dollar amounts in thousands)
Pass
 
OLEM
 
Substandard
 
Doubtful
 
Total
Commercial
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
26,006,917

 
$
798,643

 
$
1,138,508

 
$
25,083

 
$
27,969,151

Commercial real estate
6,923,159

 
88,932

 
132,017

 
1,043

 
7,145,151

 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by FICO Score (1), (2)
 
750+
 
650-749
 
<650
 
Other (3)
 
Total
Consumer
 
 
 
 
 
 
 
 
 
Automobile
$
5,728,416

 
$
4,202,063

 
$
1,350,925

 
$
272,322

 
$
11,553,726

Home equity
6,296,801

 
3,013,152

 
619,661

 
33,443

 
9,963,057

Residential mortgage
4,945,403

 
2,449,297

 
610,720

 
133,455

 
8,138,875

RV and marine finance
1,287,480

 
774,873

 
85,844

 
28,330

 
2,176,527

Other consumer
386,659

 
481,324

 
135,161

 
5,938

 
1,009,082


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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.
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 June 30, 2017 and December 31, 2016:
(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
ALLL at June 30, 2017:
 
 
 
 
 
 
Portion of ALLL balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
970

 
$

 
$
970

Attributable to loans individually evaluated for impairment
 
14,239

 
9,044

 
23,283

Attributable to loans collectively evaluated for impairment
 
459,367

 
184,376

 
643,743

Total ALLL balance
 
$
474,576

 
$
193,420

 
$
667,996

Loan and Lease Ending Balances at June 30, 2017: (1)
 
 
 
 
 
 
Portion of loan and lease ending balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
75,722

 
$

 
$
75,722

Individually evaluated for impairment
 
441,499

 
451,192

 
892,691

Collectively evaluated for impairment
 
34,597,081

 
32,390,075

 
66,987,156

Total loans and leases evaluated for impairment
 
$
35,114,302

 
$
32,841,267

 
$
67,955,569


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(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
ALLL at December 31, 2016
 
 
 
 
 
 
Portion of ALLL balance:
 
 
 
 
 
 
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.
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)
 
June 30, 2017
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Principal
Balance (5)
 
Related
Allowance
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
261,285

 
$
270,571

 
$

 
$
262,631

 
$
4,852

 
$
268,041

 
$
9,352

Commercial real estate
76,463

 
106,248

 

 
82,296

 
1,937

 
84,865

 
3,937

Automobile

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

RV and marine finance

 

 

 

 

 

 

Other consumer

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial (3)
283,409

 
342,188

 
24,423

 
258,066

 
2,002

 
310,611

 
3,908

Commercial real estate (4)
34,270

 
41,695

 
2,340

 
38,753

 
453

 
58,563

 
920

Automobile
32,431

 
32,642

 
1,889

 
32,581

 
546

 
32,041

 
1,080

Home equity (6)
325,805

 
357,738

 
17,844

 
326,280

 
3,977

 
323,988

 
7,927

Residential mortgage (6)
329,050

 
363,277

 
11,578

 
339,289

 
2,903

 
335,444

 
6,013

RV and marine finance
1,331

 
1,355

 
134

 
1,009

 
23

 
672

 
34

Other consumer
4,126

 
4,126

 
253

 
4,186

 
55

 
4,090

 
111

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
544,694

 
612,759

 
24,423

 
520,697

 
6,854

 
578,652

 
13,260

Commercial real estate
110,733

 
147,943

 
2,340

 
121,049

 
2,390

 
143,428

 
4,857

Automobile
32,431

 
32,642

 
1,889

 
32,581

 
546

 
32,041

 
1,080

Home equity
325,805

 
357,738

 
17,844

 
326,280

 
3,977

 
323,988

 
7,927

Residential mortgage
329,050

 
363,277

 
11,578

 
339,289

 
2,903

 
335,444

 
6,013

RV and marine finance
1,331

 
1,355

 
134

 
1,009

 
23

 
672

 
34

Other consumer
4,126

 
4,126

 
253

 
4,186

 
55

 
4,090

 
111



56

Table of Contents

 
December 31, 2016
 
Three Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2016
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Principal
Balance (5)
 
Related
Allowance
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
299,606


$
358,712


$


$
289,138


$
2,392


$
284,128


$
4,623

Commercial real estate
88,817


126,152




72,569


1,855


72,640


3,472

Automobile

 

 

 

 

 

 

Home equity













Residential mortgage






1,298


109


1,350


111

RV and marine finance

 

 

 

 

 

 

Other consumer






19


2


30


104

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial (3)
406,243

 
448,121

 
22,259

 
291,761

 
1,739

 
269,518

 
3,829

Commercial real estate (4)
97,238

 
107,512

 
3,434

 
58,357

 
615

 
69,501

 
1,373

Automobile
30,961

 
31,298

 
1,850

 
32,032

 
524

 
31,789

 
1,102

Home equity (6)
319,404

 
352,722

 
15,032

 
248,056

 
2,962

 
248,317

 
5,930

Residential mortgage (6)
327,753

 
363,099

 
12,849

 
352,489

 
3,027

 
357,324

 
6,064

RV and marine finance

 

 

 

 

 

 

Other consumer
3,897

 
3,897

 
260

 
4,812

 
53

 
4,754

 
120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
705,849

 
806,833

 
22,259

 
580,899

 
4,131

 
553,646

 
8,452

Commercial real estate
186,055

 
233,664

 
3,434

 
130,926

 
2,470

 
142,141

 
4,845

Automobile
30,961

 
31,298

 
1,850

 
32,032

 
524

 
31,789

 
1,102

Home equity
319,404

 
352,722

 
15,032

 
248,056

 
2,962

 
248,317

 
5,930

Residential mortgage
327,753

 
363,099

 
12,849

 
353,787

 
3,136

 
358,674

 
6,175

RV and marine finance

 

 

 

 

 

 

Other consumer
3,897

 
3,897

 
260

 
4,831

 
55

 
4,784

 
224

(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 June 30, 2017 and December 31, 2016, commercial and industrial loans of $115 million and $293 million, respectively, were considered impaired due to their status as a TDR.
(4)
At June 30, 2017 and December 31, 2016, commercial real estate loans of $23 million and $81 million, respectively, were considered impaired due to their status as a TDR.
(5)
The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.
(6)
Includes home equity and residential mortgages considered to be collateral dependent as well as home equity and mortgage loans considered impaired due to their status as a TDR.
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 loan 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 six-month periods ended June 30, 2017 an 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
New Troubled Debt Restructurings During The Three-Month Period Ended (1)
 
June 30, 2017
 
June 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
1

 
$
18

 
$

 
1

 
$
22

 
$

Amortization or maturity date change
228

 
168,118

 
(6,856
)
 
199

 
133,933

 
(3,490
)
Other
1

 
220

 

 
2

 
232

 

Total Commercial and industrial
230

 
168,356

 
(6,856
)
 
202

 
134,187

 
(3,490
)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
1

 
84

 

Amortization or maturity date change
19

 
25,027

 
(427
)
 
36

 
16,017

 
(723
)
Other

 

 

 
2

 
52

 

Total commercial real estate:
19

 
25,027

 
(427
)
 
39

 
16,153

 
(723
)
Automobile:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
5

 
58

 
1

 
3

 
64

 
5

Amortization or maturity date change
334

 
2,853

 
67

 
286

 
2,663

 
202

Chapter 7 bankruptcy
198

 
1,494

 
18

 
244

 
1,982

 
114

Other

 

 

 

 

 

Total Automobile
537

 
4,405

 
86

 
533

 
4,709

 
321

Home equity:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
9

 
506

 
6

 
9

 
627

 
26

Amortization or maturity date change
135

 
8,372

 
(754
)
 
127

 
6,401

 
(736
)
Chapter 7 bankruptcy
77

 
2,417

 
364

 
46

 
2,114

 
267

Other
12

 
512

 

 

 

 

Total Home equity
233

 
11,807

 
(384
)
 
182

 
9,142

 
(443
)
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
5

 
404

 
17

Amortization or maturity date change
81

 
8,296

 
(231
)
 
108

 
10,641

 
(420
)
Chapter 7 bankruptcy
25

 
1,981

 
(1
)
 
6

 
1,178

 
(49
)
Other
5

 
464

 
3

 
1

 
164

 

Total Residential mortgage
111

 
10,741

 
(229
)
 
120

 
12,387

 
(452
)
RV and marine finance:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change
10

 
150

 
4

 

 

 

Chapter 7 bankruptcy
34

 
544

 
6

 

 

 

Other

 

 

 

 

 

Total RV and marine finance
44

 
694

 
10

 

 

 

Other consumer:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change
2

 
21

 

 
1

 
4

 

Chapter 7 bankruptcy
2

 
8

 

 

 

 

Other

 

 

 

 

 

Total Other consumer
4

 
29

 

 
1

 
4

 

Total new troubled debt restructurings
1,178

 
$
221,059

 
$
(7,800
)
 
1,077

 
$
176,582

 
$
(4,787
)

58

Table of Contents


 
New Troubled Debt Restructurings During The Six-Month Period Ended (1)
 
June 30, 2017
 
June 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
2

 
$
37

 
$
6

 
2

 
$
39

 
$
(1
)
Amortization or maturity date change
464

 
280,543

 
(7,858
)
 
383

 
256,591

 
(2,918
)
Other
4

 
380

 
(27
)
 
10

 
1,090

 
(4
)
Total Commercial and industrial
470

 
280,960

 
(7,879
)
 
395

 
257,720

 
(2,923
)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
1

 
84

 

Amortization or maturity date change
43

 
56,290

 
(815
)
 
60

 
49,812

 
(1,282
)
Other

 

 

 
4

 
315

 
16

Total commercial real estate:
43

 
56,290

 
(815
)
 
65

 
50,211

 
(1,266
)
Automobile:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
19

 
236

 
6

 
7

 
106

 
7

Amortization or maturity date change
811

 
7,154

 
178

 
707

 
6,564

 
422

Chapter 7 bankruptcy
438

 
3,316

 
47

 
561

 
4,544

 
229

Other

 

 

 

 

 

Total Automobile
1,268

 
10,706

 
231

 
1,275

 
11,214

 
658

Home equity:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
17

 
1,068

 
13

 
29

 
2,011

 
93

Amortization or maturity date change
241

 
13,868

 
(1,428
)
 
356

 
18,291

 
(2,018
)
Chapter 7 bankruptcy
164

 
6,036

 
1,402

 
145

 
5,711

 
1,000

Other
70

 
4,241

 
(326
)
 

 

 

Total Home equity
492

 
25,213

 
(339
)
 
530

 
26,013

 
(925
)
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
2

 
110

 
(9
)
 
10

 
1,061

 
(15
)
Amortization or maturity date change
180

 
19,367

 
(489
)
 
200

 
21,400

 
(997
)
Chapter 7 bankruptcy
49

 
4,672

 
(137
)
 
23

 
2,683

 
21

Other
21

 
2,384

 
17

 
1

 
164

 

Total Residential mortgage
252

 
26,533

 
(618
)
 
234

 
25,308

 
(991
)
RV and marine finance:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change
24

 
626

 
16

 

 

 

Chapter 7 bankruptcy
49

 
754

 
10

 

 

 

Other

 

 

 

 

 

Total RV and marine finance
73

 
1,380

 
26

 

 

 

Other consumer:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
1

 
78

 
2

 

 

 

Amortization or maturity date change
4

 
288

 
7

 
5

 
559

 
24

Chapter 7 bankruptcy
3

 
12

 

 
7

 
66

 
7

Other

 

 

 

 

 

Total Other consumer
8

 
378

 
9

 
12

 
625

 
31

Total new troubled debt restructurings
2,606

 
$
401,460

 
$
(9,385
)
 
2,511

 
$
371,091

 
$
(5,416
)
 
 
 
 
 
 
 
 
(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 modificati
 
 
 
 
 
 
 
 
Pledged Loans and Leases
At June 30, 2017, the Bank has access to the Federal Reserve’s discount window and advances from the FHLB – Cincinnati. As of June 30, 2017, these borrowings and advances are secured by $30.4 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 June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
U.S. Treasury, Federal agency, and other agency securities:
 
 
 
 
 
 
 
U.S. Treasury:
 
 
 
 
 
 
 
1 year or less
$
10,139

 
$
10,139

 
$
4,978

 
$
4,988

After 1 year through 5 years
502

 
505

 
502

 
509

After 5 years through 10 years

 

 

 

After 10 years

 

 

 

Total U.S. Treasury
10,641

 
10,644

 
5,480

 
5,497

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

 

 

 

After 1 year through 5 years
28,085

 
27,891

 
46,591

 
46,762

After 5 years through 10 years
200,334

 
199,224

 
173,941

 
176,404

After 10 years
10,536,086

 
10,396,940

 
10,630,929

 
10,450,176

Total Federal agencies: mortgage-backed securities
10,764,505

 
10,624,055

 
10,851,461

 
10,673,342

Other agencies:
 
 
 
 
 
 
 
1 year or less
4,103

 
4,142

 
4,302

 
4,367

After 1 year through 5 years
9,498

 
9,647

 
5,092

 
5,247

After 5 years through 10 years
86,049

 
86,502

 
63,618

 
63,928

After 10 years

 

 

 

Total other agencies
99,650

 
100,291

 
73,012

 
73,542

Total U.S. Treasury, Federal agency, and other agency securities
10,874,796

 
10,734,990

 
10,929,953

 
10,752,381

Municipal securities:
 
 
 
 
 
 
 
1 year or less
120,216

 
121,345

 
169,636

 
166,887

After 1 year through 5 years
1,113,974

 
1,123,450

 
933,893

 
933,903

After 5 years through 10 years
1,493,652

 
1,508,930

 
1,463,459

 
1,464,583

After 10 years
555,096

 
558,775

 
693,440

 
684,684

Total municipal securities
3,282,938

 
3,312,500

 
3,260,428

 
3,250,057

Asset-backed securities:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years
80,018

 
80,177

 
80,700

 
80,560

After 5 years through 10 years
144,969

 
146,256

 
223,352

 
224,565

After 10 years
389,154

 
368,366

 
520,072

 
488,356

Total asset-backed securities
614,141

 
594,799

 
824,124

 
793,481

Corporate debt:
 
 
 
 
 
 
 
1 year or less
3,238

 
3,268

 
43,223

 
43,603

After 1 year through 5 years
64,369

 
65,808

 
78,430

 
80,196

After 5 years through 10 years
49,546

 
51,878

 
32,523

 
32,865

After 10 years
21,386

 
23,081

 
40,361

 
42,019

Total corporate debt
138,539

 
144,035

 
194,537

 
198,683

Other:
 
 
 
 
 
 
 
1 year or less
3,151

 
3,142

 
1,650

 
1,650

After 1 year through 5 years
800

 
790

 
2,302

 
2,283

After 5 years through 10 years

 

 

 

After 10 years
94

 
94

 
10

 
10

Nonmarketable equity securities
585,472

 
585,471

 
547,704

 
547,704

Mutual funds
11,184

 
11,184

 
15,286

 
15,286

Marketable equity securities
861

 
1,301

 
861

 
1,302

Total other
601,562

 
601,982

 
567,813

 
568,235

Total available-for-sale and other securities
$
15,511,976

 
$
15,388,306

 
$
15,776,855

 
$
15,562,837


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Table of Contents

Other securities at June 30, 2017 and December 31, 2016 include nonmarketable equity securities of $287 million and $249 million of stock issued by the FHLB and $298 million and $299 million of Federal Reserve Bank stock, respectively. Non-marketable equity securities are recorded at amortized cost. Other securities also include Mutual funds and marketable equity securities.
The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at June 30, 2017 and December 31, 2016:
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
June 30, 2017
 
 
 
 
 
 
 
U.S. Treasury
$
10,641

 
$
3

 
$

 
$
10,644

Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
10,764,505

 
8,652

 
(149,102
)
 
10,624,055

Other agencies
99,650

 
689

 
(48
)
 
100,291

Total U.S. Treasury, Federal agency securities
10,874,796

 
9,344

 
(149,150
)
 
10,734,990

Municipal securities
3,282,938

 
47,711

 
(18,149
)
 
3,312,500

Asset-backed securities
614,141

 
2,256

 
(21,598
)
 
594,799

Corporate debt
138,539

 
5,500

 
(4
)
 
144,035

Other securities
601,562

 
439

 
(19
)
 
601,982

Total available-for-sale and other securities
$
15,511,976

 
$
65,250

 
$
(188,920
)
 
$
15,388,306

 
 
 
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


61

Table of Contents

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, at June 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
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,879,526

 
$
(147,900
)
 
$
42,504

 
$
(1,202
)
 
$
8,922,030

 
$
(149,102
)
Other agencies
12,793

 
(48
)
 

 

 
12,793

 
(48
)
Total Federal agency securities
8,892,319

 
(147,948
)
 
42,504

 
(1,202
)
 
8,934,823

 
(149,150
)
Municipal securities
702,379

 
(11,895
)
 
241,487

 
(6,254
)
 
943,866

 
(18,149
)
Asset-backed securities
177,834

 
(1,348
)
 
173,808

 
(20,250
)
 
351,642

 
(21,598
)
Corporate debt
595

 
(4
)
 
200

 

 
795

 
(4
)
Other securities
790

 
(10
)
 
1,491

 
(9
)
 
2,281

 
(19
)
Total temporarily impaired securities
$
9,773,917

 
$
(161,205
)
 
$
459,490

 
$
(27,715
)
 
$
10,233,407

 
$
(188,920
)
 
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 June 30, 2017, 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 $5.4 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at June 30, 2017.
The following table is a summary of realized securities gains and losses for the three-month and six-month periods ended June 30, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Gross gains on sales of securities
$
3,814

 
$
3,391

 
$
4,359

 
$
3,391

Gross (losses) on sales of securities
(120
)
 
(2,659
)
 
(649
)
 
(2,659
)
Net gain on sales of securities
$
3,694

 
$
732

 
$
3,710

 
$
732

OTTI recognized in earnings
(3,559
)
 
(76
)
 
(3,583
)
 
(76
)
Net security gains (losses)
$
135

 
$
656

 
$
127

 
$
656

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 2017 second quarter, 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

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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. 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 maturity.
The highest risk segment in our investment portfolio is the trust preferred CDO securities which are in the asset-backed securities portfolio. This portfolio is in run off, 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).
The following table summarizes the relevant characteristics of the Company's CDO securities portfolio, which are included in asset-backed securities, at June 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)
Deal Name
Par Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Loss (2)
 
Lowest
Credit
Rating
(3)
 
# of Issuers
Currently
Performing/
Remaining (4)
 
Actual
Deferrals
and
Defaults
as a % of
Original
Collateral
 
Expected
Defaults
as a % of
Remaining
Performing
Collateral
 
Excess
Subordination
(5)
MM Comm III
4,509

 
4,308

 
3,581

 
(727
)
 
BB+
 
5/8
 
5
 
5
 
39
Pre TSL IX (1)
5,000

 
3,955

 
3,275

 
(680
)
 
C
 
27/37
 
16
 
8
 
11
Pre TSL XI (1)
25,000

 
19,239

 
15,867

 
(3,372
)
 
C
 
42/51
 
14
 
8
 
14
Reg Diversified
25,500

 
510

 
510

 

 
D
 
21/36
 
32
 
8
 
Tropic III
31,000

 
31,000

 
19,342

 
(11,658
)
 
BB
 
27/36
 
16
 
7
 
41
Total at June 30, 2017
$
91,009

 
$
59,012

 
$
42,575

 
$
(16,437
)
 
 
 
 
 
 
 
 
 
 
Total at December 31, 2016
$
137,197

 
$
101,210

 
$
76,003

 
$
(25,207
)
 
 
 
 
 
 
 
 
 
 
(1)
Security was determined to have OTTI. As such, the amortized cost is net of recorded credit impairment.
(2)
The majority of securities have been in a continuous loss position for 12 months or longer.
(3)
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.
(4)
Includes both banks and/or insurance companies.
(5)
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 six-month periods ended June 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
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Available-for-sale and other securities:
 
 
 
 
 
 
 
Collateralized Debt Obligations
$
3,559

 
$

 
$
3,559

 
$

Municipal Securities

 
76

 
24

 
76

Total available-for-sale and other securities
$
3,559

 
$
76

 
$
3,583

 
$
76


The following table presents the OTTI recognized in earnings on debt securities held by Huntington for the three-month and six-month periods ended June 30, 2017 and 2016 as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
 
$
7,262

 
$
18,368

 
$
11,796

 
$
18,368

Reductions from sales
 

 
(8,613
)
 
(4,558
)
 
(8,613
)
Additional credit losses
 
3,559

 
76

 
3,583

 
76

Balance, end of period
 
$
10,821

 
$
9,831

 
$
10,821

 
$
9,831

5. HELD-TO-MATURITY SECURITIES
These 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 2017 second quarter, 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 June 30, 2017 and December 31, 2016:
 
June 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
70,527

 
70,355

 
41,261

 
40,791

After 10 years
7,634,775

 
7,616,513

 
7,157,083

 
7,139,943

Total Federal agencies: mortgage-backed securities
7,705,302

 
7,686,868

 
7,198,344

 
7,180,734

Other agencies:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years

 

 

 

After 5 years through 10 years
376,837

 
376,750

 
398,341

 
399,452

After 10 years
191,592

 
190,149

 
204,083

 
201,180

Total other agencies
568,429

 
566,899

 
602,424

 
600,632

Total U.S. Government backed agencies
8,273,731

 
8,253,767

 
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
5,846

 
5,635

 
6,171

 
5,902

Total municipal securities
5,846

 
5,635

 
6,171

 
5,902

Total held-to-maturity securities
$
8,279,577

 
$
8,259,402

 
$
7,806,939

 
$
7,787,268

The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at June 30, 2017 and December 31, 2016:
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
June 30, 2017
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
$
7,705,302

 
$
17,950

 
$
(36,384
)
 
$
7,686,868

Other agencies
568,429

 
1,374

 
(2,904
)
 
566,899

Total U.S. Government backed agencies
8,273,731

 
19,324

 
(39,288
)
 
8,253,767

Municipal securities
5,846

 

 
(211
)
 
5,635

Total held-to-maturity securities
$
8,279,577

 
$
19,324

 
$
(39,499
)
 
$
8,259,402

 
 
 
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 U.S. Government backed 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

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 June 30, 2017 and December 31, 2016:

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Less than 12 Months
 
Over 12 Months
 
Total
(dollar amounts in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
4,606,283

 
$
(31,348
)
 
$
160,437

 
$
(5,036
)
 
$
4,766,720

 
$
(36,384
)
Other agencies
375,023

 
(2,904
)
 

 

 
375,023

 
(2,904
)
Total U.S. Government backed securities
4,981,306

 
(34,252
)
 
160,437

 
(5,036
)
 
5,141,743

 
(39,288
)
Municipal securities
5,635

 
(211
)
 

 

 
5,635

 
(211
)
Total temporarily impaired securities
$
4,986,941

 
$
(34,463
)
 
$
160,437

 
$
(5,036
)
 
$
5,147,378

 
$
(39,499
)
 
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 U.S. Government backed securities
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 June 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 six-month periods ended June 30, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Residential mortgage loans sold with servicing retained
$
798,399

 
$
715,589

 
$
1,645,752

 
$
1,348,055

Pretax gains resulting from above loan sales (1)
16,943

 
18,618

 
39,133

 
32,731

(1)
Recorded in mortgage banking income.
A 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 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

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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 six-month periods ended June 30, 2017 and 2016:
Fair Value Method:
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Fair value, beginning of period
$
13,307

 
$
14,819

 
$
13,747

 
$
17,585

Change in fair value during the period due to:
 
 
 
 
 
 
 
Time decay (1)
(217
)
 
(245
)
 
(448
)
 
(518
)
Payoffs (2)
(217
)
 
(465
)
 
(581
)
 
(969
)
Changes in valuation inputs or assumptions (3)
(345
)
 
(1,004
)
 
(190
)
 
(2,993
)
Fair value, end of period:
$
12,528

 
$
13,105

 
$
12,528

 
$
13,105

Weighted-average life (years)
5.7

 
5.1

 
5.7

 
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
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Carrying value, beginning of period
$
177,812

 
$
127,275

 
$
172,466

 
$
143,133

New servicing assets created
8,218

 
7,277

 
17,853

 
13,386

Impairment (charge) / recovery
(2,806
)
 
(7,295
)
 
(1,007
)
 
(23,635
)
Amortization and other
(6,733
)
 
(5,965
)
 
(12,821
)
 
(11,592
)
Carrying value, end of period
$
176,491

 
$
121,292

 
$
176,491

 
$
121,292

Fair value, end of period
$
177,138

 
$
121,464

 
$
177,138

 
$
121,464

Weighted-average life (years)
7.1

 
6.1

 
7.1

 
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 certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.
For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value at June 30, 2017 and December 31, 2016, to changes in these assumptions follows:
 
June 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)
11.40
%
 
$
(476
)
 
$
(919
)
 
10.90
%
 
$
(501
)
 
$
(970
)
Spread over forward interest rate swap rates
876 bps

 
(463
)
 
(874
)
 
536 bps

 
(454
)
 
(879
)

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For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at June 30, 2017 and December 31, 2016, to changes in these assumptions follows:
 
June 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)
8.20
%
 
$
(4,731
)
 
$
(9,191
)
 
7.80
%
 
$
(4,510
)
 
$
(8,763
)
Spread over forward interest rate swap rates
1,084 bps

 
(6,566
)
 
(12,374
)
 
1,173 bps

 
(5,259
)
 
(10,195
)
Total servicing, late and other ancillary fees included in mortgage banking income amounted to $14 million and $12 million for the three-month periods ended June 30, 2017 and 2016, respectively. For the six-month periods ended June 30, 2017 and 2016, total net servicing fees included in mortgage banking income were $28 million and $24 million, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $19.1 billion and $18.9 billion at June 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 six-month periods ended June 30, 2017 and 2016, and the fair value at the end of each period were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Carrying value, beginning of period
$
15,159

 
$
7,029

 
$
18,285

 
$
8,771

Amortization and other
(2,635
)
 
(1,571
)
 
(5,761
)
 
(3,313
)
Carrying value, end of period
$
12,524

 
$
5,458

 
$
12,524

 
$
5,458

Fair value, end of period
$
12,571

 
$
5,551

 
$
12,571

 
$
5,551

Weighted-average contractual life (years)
3.8

 
3.0

 
3.8

 
3.0

A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at June 30, 2017 and December 31, 2016 follows:
 
June 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)
19.91
%
 
$
(688
)
 
$
(1,391
)
 
19.98
%
 
$
(1,047
)
 
$
(2,026
)
Spread over forward interest rate swap rates
500 bps

 
(17
)
 
(34
)
 
500 bps

 
(26
)
 
(53
)
Servicing income amounted to $5 million and $2 million for the three-month periods ending June 30, 2017, and 2016, respectively. For the six-month periods ended June 30, 2017 and 2016, total servicing income was $10 million and $5 million, respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.3 billion and $1.7 billion at June 30, 2017 and December 31, 2016, respectively.

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Small Business Administration (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month and six-month periods ended June 30, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
SBA loans sold with servicing retained
$
87,705

 
$
58,629

 
$
165,377

 
$
104,518

Pretax gains resulting from above loan sales (1)
7,109

 
4,662

 
12,927

 
8,183

(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 six-month periods ended June 30, 2017 and 2016, and the fair value at the end of each period were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Carrying value, beginning of period
$
21,399

 
$
19,526

 
$
21,080

 
$
19,747

New servicing assets created
4,121

 
1,868

 
5,596

 
3,380

Amortization and other
(2,407
)
 
(1,782
)
 
(3,563
)
 
(3,515
)
Carrying value, end of period
$
23,113

 
$
19,612

 
$
23,113

 
$
19,612

Fair value, end of period
$
26,853

 
$
23,823

 
$
26,853

 
$
23,823

Weighted-average life (years)
3.3

 
3.3

 
3.3

 
3.3

A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at June 30, 2017 and December 31, 2016 follows:
 
June 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
%
 
$
(363
)
 
$
(721
)
 
7.40
%
 
$
(324
)
 
$
(644
)
Discount rate
15.00

 
(721
)
 
(1,411
)
 
15.00

 
(1,270
)
 
(1,870
)
Servicing income amounted to $3 million and $2 million for the three-month periods ending June 30, 2017, and 2016, respectively. For the six-month periods ended June 30, 2017 and 2016, total servicing income was $5 million and $5 million, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.2 billion and $1.1 billion at June 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.


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8. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income for the three-month and six-month periods ended June 30, 2017 and 2016, were as follows:
 
Three Months Ended
June 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
$
2,478

 
$
(876
)
 
$
1,602

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
53,285

 
(18,811
)
 
34,474

Less: Reclassification adjustment for net losses (gains) included in net income
3,988

 
(1,410
)
 
2,578

Net change in unrealized holding gains (losses) on available-for-sale debt securities
59,751

 
(21,097
)
 
38,654

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

 

 

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
1,220

 
(427
)
 
793

Less: Reclassification adjustment for net (gains) losses included in net income
427

 
(150
)
 
277

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
1,647

 
(577
)
 
1,070

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

 
(419
)
 
779

Total other comprehensive income (loss)
$
62,596

 
$
(22,093
)
 
$
40,503

 
Three Months Ended
June 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
$
1,032

 
$
(365
)
 
$
667

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
50,278

 
(18,234
)
 
32,044

Less: Reclassification adjustment for net losses (gains) included in net income
(2,294
)
 
811

 
(1,483
)
Net change in unrealized holding gains (losses) on available-for-sale debt securities
49,016

 
(17,788
)
 
31,228

Net change in unrealized holding gains (losses) on available-for-sale equity securities
66

 
(24
)
 
42

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
1,989

 
(696
)
 
1,293

Less: Reclassification adjustment for net (gains) losses included in net income
(248
)
 
89

 
(159
)
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
1,741

 
(607
)
 
1,134

Net change in pension and other post-retirement obligations
1,293

 
(453
)
 
840

Total other comprehensive income (loss)
$
52,116

 
$
(18,872
)
 
$
33,244


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Six Months Ended
June 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
$
3,288

 
$
(1,162
)
 
$
2,126

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
62,282

 
(21,607
)
 
40,675

Less: Reclassification adjustment for net losses (gains) included in net income
9,862

 
(3,487
)
 
6,375

Net change in unrealized holding gains (losses) on available-for-sale debt securities
75,432

 
(26,256
)
 
49,176

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

 

 

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
(611
)
 
214

 
(397
)
Less: Reclassification adjustment for net (gains) losses included in net income
987

 
(346
)
 
641

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
376

 
(132
)
 
244

Net change in pension and other post-retirement obligations
1,906

 
(667
)
 
1,239

Total other comprehensive income (loss)
$
77,714

 
$
(27,055
)
 
$
50,659

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
June 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
$
(2,602
)
 
$
920

 
$
(1,682
)
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
130,746

 
(46,919
)
 
83,827

Less: Reclassification adjustment for net losses (gains) included in net income
(2,758
)
 
975

 
(1,783
)
Net change in unrealized holding gains (losses) on available-for-sale debt securities
125,386

 
(45,024
)
 
80,362

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
16,218

 
(5,676
)
 
10,542

Less: Reclassification adjustment for net (gains) losses included in net income
(892
)
 
313

 
(579
)
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
15,326

 
(5,363
)
 
9,963

Net change in pension and other post-retirement obligations
2,586

 
(905
)
 
1,681

Total other comprehensive income (loss)
$
143,468

 
$
(51,352
)
 
$
92,116


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The following table presents activity in accumulated other comprehensive income (loss), net of tax, for the six-month periods ended June 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
82,145

 
110

 
10,542

 

 
92,797

Amounts reclassified from accumulated OCI to earnings
(1,783
)
 

 
(579
)
 
1,681

 
(681
)
Period change
80,362

 
110

 
9,963

 
1,681

 
92,116

June 30, 2016
$
88,723

 
$
286

 
$
6,015

 
$
(229,066
)
 
$
(134,042
)
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
(192,764
)
 
$
287

 
$
(2,634
)
 
$
(205,905
)
 
$
(401,016
)
Other comprehensive income before reclassifications
42,801

 

 
(397
)
 

 
42,404

Amounts reclassified from accumulated OCI to earnings
6,375

 

 
641

 
1,239

 
8,255

Period change
49,176

 

 
244

 
1,239

 
50,659

June 30, 2017
$
(143,588
)
 
$
287

 
$
(2,390
)
 
$
(204,666
)
 
$
(350,357
)
(1)
Amounts at June 30, 2017 and December 31, 2016 include $98 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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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 six-month periods ended June 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)
June 30, 2017
 
June 30, 2016
 
 
Gains (losses) on debt securities:
 
 
 
 
 
Amortization of unrealized gains (losses)
$
(2,284
)
 
$
740

 
Interest income - held-to-maturity securities - taxable
Realized gain (loss) on sale of securities
1,855

 
1,630

 
Noninterest income - net gains (losses) on sale of securities
OTTI recorded
(3,559
)
 
(76
)
 
Noninterest income - net gains (losses) on sale of securities
 
(3,988
)
 
2,294

 
Total before tax
 
1,410

 
(811
)
 
Tax (expense) benefit
 
$
(2,578
)
 
$
1,483

 
Net of tax
Gains (losses) on cash flow hedging relationships:
 
 
 
 
 
Interest rate contracts
$
(427
)
 
$
248

 
Interest income - loans and leases
Interest rate contracts

 

 
Noninterest income - other income
 
(427
)
 
248

 
Total before tax
 
150

 
(89
)
 
Tax (expense) benefit
 
$
(277
)
 
$
159

 
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

 
453

 
Tax (expense) benefit
 
$
(779
)
 
$
(840
)
 
Net of tax

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Reclassifications out of accumulated OCI
Accumulated OCI components
Amounts reclassified from accumulated OCI
 
Location of net gain (loss) reclassified from accumulated OCI into earnings
 
Six Months Ended
 
 
(dollar amounts in thousands)
June 30, 2017
 
June 30, 2016
 
 
Gains (losses) on debt securities:
 
 
 
 
 
Amortization of unrealized gains (losses)
$
(5,890
)
 
$
1,204

 
Interest income - held-to-maturity securities - taxable
Realized gain (loss) on sale of securities
(389
)
 
1,630

 
Noninterest income - net gains (losses) on sale of securities
OTTI recorded
(3,583
)
 
(76
)
 
Noninterest income - net gains (losses) on sale of securities
 
(9,862
)
 
2,758

 
Total before tax
 
3,487

 
(975
)
 
Tax (expense) benefit
 
$
(6,375
)
 
$
1,783

 
Net of tax
Gains (losses) on cash flow hedging relationships:
 
 
 
 
 
Interest rate contracts
$
(987
)
 
$
893

 
Interest income - loans and leases
Interest rate contracts

 
(1
)
 
Noninterest income - other income
 
(987
)
 
892

 
Total before tax
 
346

 
(313
)
 
Tax (expense) benefit
 
$
(641
)
 
$
579

 
Net of tax
Amortization of defined benefit pension and post-retirement items:
 
 
 
 
 
Actuarial gains (losses)
$
(2,890
)
 
$
(3,570
)
 
Noninterest expense - personnel costs
Prior service credit
984

 
984

 
Noninterest expense - personnel costs
 
(1,906
)
 
(2,586
)
 
Total before tax
 
667

 
905

 
Tax (expense) benefit
 
$
(1,239
)
 
$
(1,681
)
 
Net of tax



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Table of Contents

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 in 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. The calculation of basic and diluted earnings per share for the three and six-month periods ended June 30, 2017 and 2016, was as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
Basic earnings per common share:
 
 
 
 
 
 
 
Net income
$
271,741

 
$
174,540

 
$
479,835

 
$
345,854

Preferred stock dividends
(18,889
)
 
(19,874
)
 
(37,767
)
 
(27,872
)
Net income available to common shareholders
$
252,852

 
$
154,666

 
$
442,068

 
$
317,982

Average common shares issued and outstanding
1,088,934

 
798,167

 
1,087,654

 
796,961

Basic earnings per common share
$
0.23

 
$
0.19

 
$
0.41

 
$
0.40

Diluted earnings per common share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
252,852

 
$
154,666

 
$
442,068

 
$
317,982

Effect of assumed preferred stock conversion

 

 

 

Net income applicable to diluted earnings per share
$
252,852

 
$
154,666

 
$
442,068

 
$
317,982

Average common shares issued and outstanding
1,088,934

 
798,167

 
1,087,654

 
796,961

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options and restricted stock units and awards
16,329

 
9,785

 
17,734

 
10,085

Shares held in deferred compensation plans
3,108

 
2,282

 
3,030

 
2,178

Other
156

 
137

 
154

 
136

Dilutive potential common shares:
19,593

 
12,204

 
20,918

 
12,399

Total diluted average common shares issued and outstanding
1,108,527

 
810,371

 
1,108,572

 
809,360

Diluted earnings per common share
$
0.23

 
$
0.19

 
$
0.40

 
$
0.39

For the three-month periods ended June 30, 2017 and 2016, approximately 2.6 million and 4.7 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 six-month periods ended June 30, 2017 and 2016, approximately 1.8 million and 4.0 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 an unfunded 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.
The following table shows the components of net periodic (benefit) cost for all plans:
 
Pension Benefits
 
Post-Retirement Benefits
 
Three Months Ended June 30,
 
Three Months Ended June 30,
(dollar amounts in thousands)
2017
 
 
2016
 
2017
 
 
2016
Service cost
$
640

 
 
$
1,025

 
$
21

 
 
$

Interest cost
7,478

 
 
6,748

 
99

 
 
54

Expected return on plan assets
(13,803
)
 
 
(10,224
)
 

 
 

Amortization of prior service cost

 
 

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

 
 
1,865

 
(54
)
 
 
(72
)
Settlements
2,500

 
 
3,400

 

 
 

Net periodic (benefit) cost
$
(1,438
)
(1
)
 
$
2,814

 
$
(426
)
(1
)
 
$
(510
)
(1)
Includes expense associated with FirstMerit plans.
 
Pension Benefits
 
Post-Retirement Benefits
 
Six Months Ended June 30,
 
Six Months Ended June 30,
(dollar amounts in thousands)
2017
 
 
2016
 
2017
 
 
2016
Service cost
$
1,280

 
 
$
2,050

 
$
43

 
 
$

Interest cost
14,955

 
 
13,496

 
198

 
 
109

Expected return on plan assets
(27,606
)
 
 
(20,447
)
 

 
 

Amortization of prior service cost

 
 

 
(984
)
 
 
(984
)
Amortization of (gain) loss
3,494

 
 
3,729

 
(109
)
 
 
(144
)
Settlements
5,000

 
 
6,800

 

 
 

Net periodic (benefit) cost
$
(2,877
)
(1
)
 
$
5,628

 
$
(852
)
(1
)
 
$
(1,019
)
(1)
Includes expense associated with FirstMerit plans.
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 second quarter 2017 and 2016 was $11 million and $8 million, respectively. For the six-month periods ended June 30, 2017 and 2016, expense related to the defined contribution plans were $22 million and $16 million, respectively.


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

 
$
654,087

 
$

 
$

 
$
654,087

Loans held for investment

 
59,886

 
43,855

 

 
103,741

Trading account securities:
 
 
 
 
 
 
 
 
 
Federal agencies: Other agencies

 
6,868

 

 

 
6,868

Municipal securities

 
323

 

 

 
323

Other securities
86,560

 
1,016

 

 

 
87,576

 
86,560

 
8,207

 

 

 
94,767

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
10,644

 

 

 

 
10,644

Federal agencies: Mortgage-backed

 
10,624,055

 

 

 
10,624,055

Federal agencies: Other agencies

 
100,291

 

 

 
100,291

Municipal securities

 
440,493

 
2,872,007

 

 
3,312,500

Asset-backed securities

 
552,224

 
42,575

 

 
594,799

Corporate debt

 
144,035

 

 

 
144,035

Other securities
12,485

 
4,026

 

 

 
16,511

 
23,129

 
11,865,124

 
2,914,582

 

 
14,802,835

MSRs

 

 
12,528

 

 
12,528

Derivative assets

 
325,736

 
9,227

 
(144,951
)
 
190,012

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
284,796

 
6,049

 
(212,487
)
 
78,358

Short-term borrowings
4,580

 

 

 

 
4,580


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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.
The tables below present a rollforward of the balance sheet amounts for the three-month and six-month periods ended June 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.

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Level 3 Fair Value Measurements
Three Months Ended June 30, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Loans held for investment
Opening balance
$
13,307

 
$
2,694

 
$
2,867,652

 
$
59,492

 
$
44,219

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(2,124
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(779
)
 
2,608

 
(1,180
)
 
(3,557
)
 
1,493

Included in OCI

 

 
12,419

 
5,598

 

Purchases/originations

 

 
114,944

 

 

Sales

 

 

 
(18,594
)
 

Repayments

 

 

 

 
(1,857
)
Issues

 

 

 

 

Settlements

 

 
(121,828
)
 
(364
)
 

Closing balance
$
12,528

 
$
3,178

 
$
2,872,007

 
$
42,575

 
$
43,855

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(779
)
 
$
2,608

 
$
12,419

 
$
5,598

 
$

 
 
 
 
 
 
 
 
 
 
 
Level 3 Fair Value Measurements
Three Months Ended June 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Loans held for investment
Opening balance
$
14,819

 
$
10,347

 
$
2,281,743

 
$
94,329

 
$
1,216

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(2,508
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(1,714
)
 
4,912

 

 
2

 

Included in OCI

 

 
7,486

 
5,842

 

Purchases/originations

 

 
46,457

 

 

Sales

 

 
(36,657
)
 
(27,794
)
 

Repayments

 

 

 

 
(291
)
Issues

 

 

 

 

Settlements

 

 
(61,054
)
 
(1,000
)
 

Closing balance
$
13,105

 
$
12,751

 
$
2,237,975

 
$
71,379

 
$
925

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(1,714
)
 
$
4,912

 
$

 
$
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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Level 3 Fair Value Measurements
Six Months Ended June 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 into Level 3

 

 

 

 

 
Transfers out of Level 3 (1)

 
(2,457
)
 

 

 

 
Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
 
Included in earnings
(1,219
)
 
7,758

 
(2,975
)
 
(3,528
)
 
1,430

 
Included in OCI

 

 
32,894

 
8,769

 

 
Purchases/originations

 

 
247,609

 

 

 
Sales

 

 

 
(37,728
)
 

 
Repayments

 

 

 

 
(5,455
)
 
Issues

 

 

 

 

 
Settlements

 

 
(203,565
)
 
(941
)
 

 
Closing balance
$
12,528

 
$
3,178

 
$
2,872,007

 
$
42,575

 
$
43,855

 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(1,219
)
 
$
7,758

 
$
32,894

 
$
8,769

 
$

 

 
Level 3 Fair Value Measurements
Six Months Ended June 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 into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(3,423
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(4,480
)
 
10,118

 

 
2

 

Included in OCI

 

 
19,326

 
674

 

Purchases/originations

 

 
283,907

 

 

Sales

 

 
(36,657
)
 
(27,794
)
 

Repayments

 

 

 

 
(823
)
Issues

 

 

 

 

Settlements

 

 
(124,152
)
 
(1,840
)
 

Closing balance
$
13,105

 
$
12,751

 
$
2,237,975

 
$
71,379

 
$
925

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(4,480
)
 
$
10,218

 
$

 
$
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 six-month periods ended June 30, 2017 and 2016:
 
 
 
 
 
 
 
 
 
 
 
Level 3 Fair Value Measurements
Three Months Ended June 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
$
(779
)
 
$
2,608

 
$

 
$

 
$

Securities gains (losses)

 

 
(1,180
)
 
(3,557
)
 

Interest and fee income

 

 

 

 

Noninterest income

 

 

 

 
1,493

Other expense

 

 

 

 

Total
$
(779
)
 
$
2,608

 
$
(1,180
)
 
$
(3,557
)
 
$
1,493

 
 
 
 
 
 
 
 
 
 
 
Level 3 Fair Value Measurements
Three Months Ended June 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
$
(1,714
)
 
$
4,912

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

Interest and fee income

 

 

 

 

Noninterest income

 

 

 
2

 

Other expense

 

 

 

 

Total
$
(1,714
)
 
$
4,912

 
$

 
$
2

 
$

 
Level 3 Fair Value Measurements
Six Months Ended June 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
$
(1,219
)
 
$
7,758

 
$

 
$

 
$

Securities gains (losses)

 

 
(2,975
)
 
(3,528
)
 

Interest and fee income

 

 

 

 

Noninterest income

 

 

 

 
1,430

Other expense

 

 

 

 

Total
$
(1,219
)
 
$
7,758

 
$
(2,975
)
 
$
(3,528
)
 
$
1,430


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Level 3 Fair Value Measurements
Six Months Ended June 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
$
(4,480
)
 
$
10,118

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

Interest and fee income

 

 

 

 

Noninterest income

 

 

 
2

 

Other expense

 

 

 

 

Total
$
(4,480
)
 
$
10,118

 
$

 
$
2

 
$

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:
 
June 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
$
654,087

 
$
628,684

 
$
25,403

 
$
72

 
$
72

 
$

Loans held for investment
103,741

 
113,114

 
(9,373
)
 
13,039

 
15,447

 
(2,408
)
 
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 six-month periods ended June 30, 2017 and 2016:
 
 
Net gains (losses) from
fair value changes
 
Net gains (losses) from
fair value changes
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
 
2017
 
2016
 
2017
 
2016
Assets
 
 
 
 
 
 
 
 
Loans held for sale
 
$
4,551

 
$
8,870

 
$
13,616

 
$
13,519

Loans held for investment
 
1,493

 

 
1,430

 



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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 six months ended June 30, 2017, assets measured at fair value on a nonrecurring basis were as follows:
 
 
 
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)
Six Months Ended
June 30, 2017
MSRs
$
175,454

 
$

 
$

 
$
175,454

 
$
(1,006
)
Impaired loans
36,118

 

 

 
36,118

 
(3,123
)
Other real estate owned
43,816

 

 

 
43,816

 
1,742

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 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.

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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 June 30, 2017 and December 31, 2016:
 
Quantitative Information about Level 3 Fair Value Measurements at June 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
$
12,528

 
Discounted cash flow
 
Constant prepayment rate
 
8.0% - 31.0% (11%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.0% - 10.0% (8.8%)
Derivative assets
9,227

 
Consensus Pricing
 
Net market price
 
-9.2% - 31.7% (1.8%)
Derivative liabilities
6,049

 
 
 
Estimated Pull through %
 
9.0% - 99.0% (78.0%)
Municipal securities
2,872,007

 
Discounted cash flow
 
Discount rate
 
0.0% - 10.3% (3.9%)
 
 
 
 
 
Cumulative default
 
0.0% - 38.4% (2.7%)
 
 
 
 
 
Loss given default
 
5.0% - 80.0% (23.2%)
Asset-backed securities
42,575

 
Discounted cash flow
 
Discount rate
 
6.9% - 12.3% (7.0%)
 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 72% (8.2%)
 
 
 
 
 
Cumulative default
 
0.7% - 100% (10.2%)
 
 
 
 
 
Loss given default
 
85% - 100% (96.6%)
 
 
 
 
 
Cure given deferral
 
0.0% - 75% (37.7%)
Loans held for investment
43,855

 
Discounted cash flow
 
Discount rate
 
7.0% - 17.6% (6.6%)
Measured at fair value on a nonrecurring basis:
MSRs
175,454

 
Discounted cash flow
 
Constant prepayment rate
 
7.0% - 21.0% (8%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.0% - 20.0% 10.8%)
Impaired loans
36,118

 
Appraisal value
 
NA
 
NA
Other real estate owned
43,816

 
Appraisal value
 
NA
 
NA


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Table of Contents

 
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
 
Constant prepayment 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, Asset-backed securities, and Automobile loans.
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 June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
(dollar amounts in thousands)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash and short-term assets
$
1,592,624

 
$
1,592,624

 
$
1,443,037

 
$
1,443,037

Trading account securities
94,767

 
94,767

 
133,295

 
133,295

Loans held for sale
748,077

 
752,800

 
512,951

 
515,640

Available-for-sale and other securities
15,388,306

 
15,388,306

 
15,562,837

 
15,562,837

Held-to-maturity securities
8,279,577

 
8,259,402

 
7,806,939

 
7,787,268

Net loans and direct financing leases
67,391,314

 
67,263,687

 
66,323,583

 
66,294,639

Derivatives
190,012

 
190,012

 
238,219

 
238,219

Financial Liabilities
 
 
 
 
 
 
 
Deposits
75,933,373

 
77,382,067

 
75,607,717

 
76,161,091

Short-term borrowings
4,552,877

 
4,552,877

 
3,692,654

 
3,692,654

Long-term debt
8,536,471

 
8,673,908

 
8,309,159

 
8,387,444

Derivatives
78,358

 
78,358

 
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 June 30, 2017 and December 31, 2016:
 
Estimated Fair Value Measurements at Reporting Date Using
 
June 30, 2017
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
8,259,402

 
$

 
$
8,259,402

Net loans and direct financing leases

 

 
67,263,687

 
67,263,687

Financial Liabilities
 
 
 
 
 
 
 
Deposits

 
73,621,776

 
3,760,291

 
77,382,067

Short-term borrowings
4,580

 

 
4,548,297

 
4,552,877

Long-term debt

 
8,278,588

 
395,320

 
8,673,908

 
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.

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The following table presents the fair values of all derivative instruments included in the Unaudited Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016. Amounts in the table below are presented gross without the impact of any net collateral arrangements:
 
June 30, 2017
December 31, 2016
(dollar amounts in thousands)
Asset
 
Liability
 
Asset
 
Liability
Derivatives designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
$
40,416

 
$
90,326

 
$
46,440

 
$
99,996

Derivatives not designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
192,000

 
114,889

 
213,587

 
143,976

Foreign exchange contracts
27,655

 
27,883

 
23,265

 
19,576

Commodities contracts
53,295

 
49,520

 
108,026

 
104,328

Equity contracts
10,728

 
5,694

 
9,775

 

Total Contracts
$
324,094

 
$
288,312

 
$
401,093

 
$
367,876

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 deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans.
The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at June 30, 2017, identified by the underlying interest rate-sensitive instruments:
(dollar amounts in thousands)
Fair Value Hedges
 
Cash Flow Hedges
 
Total
Instruments associated with:
 
 
 
 
 
Loans
$

 
$
1,925,000

 
$
1,925,000

Deposits

 

 

Subordinated notes
950,000

 

 
950,000

Long-term debt
6,725,000

 

 
6,725,000

Total notional value at June 30, 2017
$
7,675,000

 
$
1,925,000

 
$
9,600,000

The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at June 30, 2017:
 
 
 
 
 
 
 
Weighted-Average
Rate
(dollar amounts in thousands)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
1,925,000

 
0.3
 
$
(3,420
)
 
1.07
%
 
1.44
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
7,675,000

 
2.8
 
(46,490
)
 
1.54

 
1.19

Total swap portfolio at June 30, 2017
$
9,600,000

 
2.3
 
$
(49,910
)
 
1.44
%
 
1.24
%
These derivative financial instruments were entered into for the purpose of managing 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 were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase to net interest income of $6 million and $19 million for the three-month periods ended June 30, 2017, and 2016, respectively. For the six-month periods ended June 30, 2017, and 2016, the net amounts resulted in an increase to net interest income of $16 million and $40 million, respectively.

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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 six-month periods ended June 30, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
Change in fair value of interest rate swaps hedging deposits (1)
$

 
$

 
$
(76
)
 
$
(82
)
Change in fair value of hedged deposits (1)

 

 

 
72

Change in fair value of interest rate swaps hedging subordinated notes (2)
2,277

 
4

 
(2,431
)
 
6,809

Change in fair value of hedged subordinated notes (2)
(2,235
)
 
(4
)
 
3,168

 
(6,809
)
Change in fair value of interest rate swaps hedging other long-term debt (2)
15,832

 
22,017

 
5,551

 
83,049

Change in fair value of hedged other long-term debt (2)
(16,913
)
 
(21,047
)
 
(8,378
)
 
(80,834
)
(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 these 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 six-month periods ended June 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 June 30,
 
 
 
Three Months Ended June 30,
(dollar amounts in thousands)
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
793

 
$
1,293

 
Interest and fee income - loans and leases
 
$
427

 
$
(248
)
Investment Securities

 

 
Noninterest income - other income
 

 

Total
$
793

 
$
1,293

 
 
 
$
427

 
$
(248
)

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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)
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
(dollar amounts in thousands)
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
(397
)
 
$
10,542

 
Interest and fee income - loans and leases
 
$
987

 
$
(893
)
Investment Securities

 

 
Noninterest income - other income
 

 
1


$
(397
)
 
$
10,542

 
 
 
$
987

 
$
(892
)
Gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings approximately $(2) 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 six-month periods ended June 30, 2017 and 2016:
Derivatives in cash flow hedging relationships
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
Loans
$
(31
)
 
$
421

 
$
(134
)
 
$
377

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
June 30, 2017
December 31, 2016
(dollar amounts in thousands)
Asset
 
Liability
 
Asset
 
Liability
Interest rate lock agreements
$
9,227

 
$
355

 
$
5,747

 
$
1,598

Forward trades and options
1,642

 
2,178

 
13,319

 
1,173

Total derivatives used in mortgage banking activities
$
10,869

 
$
2,533

 
$
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 June 30, 2017 and December 31, 2016, was $228 million and $300 million, respectively. The total notional amount at June 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 June 30, 2017 and 2016, were $2 million and $6 million and $1 million and $18 million for the six-month periods ended June 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 consisted 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 June 30, 2017 and December 31, 2016, were $80 million and $80 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $20.6 billion and $20.6 billion at both June 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 2016, Huntington entered into an economic hedge with a $20 million notional amount to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. During the second quarter of 2017, Huntington entered into another economic hedge with a notional value of $8 million for a total notional amount of $28 million to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. The economic hedge is recorded at fair value within 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 June 30, 2017, the fair value of the share swap was $11 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 June 30, 2017, the combined fair value of the swap liabilities of $6 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses and timing of 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 generally enters into master netting agreements with customer counterparties, however collateral is generally not exchanged.
At June 30, 2017 and December 31, 2016, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $44 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 June 30, 2017, Huntington pledged $120 million of investment securities and cash collateral to counterparties, while other counterparties pledged $53 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 June 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
June 30, 2017
Derivatives
$
334,963

 
$
(144,951
)
 
$
190,012

 
$
(5,009
)
 
$
(18,448
)
 
$
166,555

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
June 30, 2017
Derivatives
$
290,845

 
$
(212,487
)
 
$
78,358

 
$

 
$
(24,348
)
 
$
54,010

December 31, 2016
Derivatives
370,647

 
(272,361
)
 
98,286

 
(7,550
)
 
(23,943
)
 
66,793

13. VIEs
Consolidated VIEs
Consolidated VIEs at June 30, 2017, consisted of certain loan and lease securitization trusts. Huntington has determined 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 June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
 
Huntington Technology
Funding Trust
 
Other Consolidated VIEs
 
Total
(dollar amounts in thousands)
 
Series 2014A
 
 
Assets:
 
 
 
 
 
 
Cash
 
$
1,566

 
$

 
$
1,566

Net loans and leases
 
43,039

 

 
43,039

Accrued income and other assets
 

 
271

 
271

Total assets
 
$
44,605

 
$
271

 
$
44,876

Liabilities:
 
 
 
 
 
 
Other long-term debt
 
$
36,040

 
$

 
$
36,040

Accrued interest and other liabilities
 

 
271

 
271

Total liabilities
 
36,040

 
271

 
36,311

Equity:
 
 
 
 
 
 
Beneficial Interest owned by third party
 
8,565

 

 
8,565

Total liabilities and equity
 
$
44,605

 
$
271

 
$
44,876


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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 June 30, 2017, and December 31, 2016:

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

Total Liabilities

Maximum Exposure to Loss
2016-1 Automobile Trust
$
10,464

 
$

 
$
10,464

2015-1 Automobile Trust
2,046




2,046

Trust Preferred Securities
13,919


252,568



Low Income Housing Tax Credit Partnerships
615,691


327,793


615,691

Other Investments
110,318


55,026


110,318

Total
$
752,438


$
635,387


$
738,519

 
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

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



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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 within 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 within 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 within Huntington’s Unaudited Condensed Consolidated Financial Statements. A list of trust preferred securities outstanding at June 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
1.87
%
(2)
$
69,730

 
$
6,186

Huntington Capital II
1.87

(3)
32,093

 
3,093

Sky Financial Capital Trust III
2.70

(4)
72,165

 
2,165

Sky Financial Capital Trust IV
2.55

(4)
74,320

 
2,320

Camco Financial Trust
3.69

(5)
4,260

 
155

Total
 
 
$
252,568

 
$
13,919

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

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The following table presents the balances of Huntington’s affordable housing tax credit investments and related unfunded commitments at June 30, 2017 and December 31, 2016:
(dollar amounts in thousands)
June 30,
2017
 
December 31,
2016
Affordable housing tax credit investments
$
942,769

 
$
877,237

Less: amortization
(327,078
)
 
(300,357
)
Net affordable housing tax credit investments
$
615,691

 
$
576,880

Unfunded commitments
$
327,793

 
$
292,721

The following table presents other information relating to Huntington’s affordable housing tax credit investments for the three-month and six-month periods ended June 30, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Tax credits and other tax benefits recognized
$
22,671

 
$
18,150

 
$
45,955

 
$
36,434

Proportional amortization method
 
 
 
 
 
 
 
Tax credit amortization expense included in provision for income taxes
17,220

 
12,499

 
34,182

 
24,905

Equity method
 
 
 
 
 
 
 
Tax credit investment (gains) losses included in non-interest income

 
132

 
109

 
264

Huntington recognized immaterial impairment losses on tax credit investments during the three-month and six-month periods ended June 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 VIE’s 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 June 30, 2017 and December 31, 2016, were as follows:
(dollar amounts in thousands)
June 30,
2017

December 31,
2016
Contract amount represents credit risk:
 
 
 
Commitments to extend credit
 
 
 
Commercial
$
15,684,661


$
15,190,056

Consumer
12,727,316


12,235,943

Commercial real estate
1,474,831


1,697,671

Standby letters-of-credit
559,903


637,182

Commercial letters-of-credit
11,952


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. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.

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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 $8 million and $8 million at June 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 June 30, 2017 and December 31, 2016, Huntington had commitments to sell residential real estate loans of $1.1 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 $70 million at June 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. $0
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 Banks’s commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), based in Grand Rapids, Michigan. In November 2004, an equipment leasing fraud was uncovered, whereby Cyberco sought financing from equipment lessors and financial institutions, including Huntington, allegedly to purchase computer equipment from Teleservices Group, Inc. (Teleservices). Cyberco created fraudulent documentation to close the financing transactions when, in fact, no computer equipment was ever purchased or leased from Teleservices, which later proved to be a shell corporation. Bankruptcy proceedings for both Cyberco and Teleservices later ensued.
On September 28, 2015, adopting the bankruptcy court's recommendation, the U.S. District Court for the Western District of Michigan entered a judgment against Huntington in the amount of $72 million plus costs and pre- and post-judgment interest. Huntington increased its legal reserve by approximately $38 million to fully accrue for the amount of the judgment in the third quarter of 2015 while appealing the decision to the U.S. Sixth Circuit Court of Appeals. On February 8, 2017, the appellate court reversed the district court decision in part and remanded the case to the district court for further proceedings. Consistent with its reading of the appellate court opinion, Huntington decreased its legal reserve by approximately $42 million in the fourth quarter of 2016.
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

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seek statutory civil penalties, compensatory damages and attorney’s fees. Huntington filed a motion for summary judgment on the plaintiffs’ claims, which was granted by the U.S. District Court on December 28, 2016.  Plaintiffs have filed a notice of appeal to the U.S. Fourth Circuit Court of Appeals and the appeal has been briefed. Oral arguments are scheduled for October 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. The settlement administrator is in the process of assessing claims and it is anticipated claims will be paid from the settlement fund in the third quarter of 2017.
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, and (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 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.
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 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).
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 in the Consumer and Business Banking segment. Additionally, the Insurance operating unit previously included in Commercial Banking was realigned to RBHPCG during the 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 mortgages, 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.

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Listed below is certain operating basis financial information reconciled to Huntington’s June 30, 2017, December 31, 2016, and June 30, 2016, reported results by business segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
Income Statements
Consumer & Business Banking
 
Commercial Banking
 
CREVF
 
RBHPCG
 
Treasury / Other
 
Huntington Consolidated
(dollar amounts in thousands)
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
420,210

 
$
168,814

 
$
140,367

 
$
48,749

 
$
(33,628
)
 
$
744,512

Provision for (reduction in allowance) credit losses
17,000

 
(10,339
)
 
20,793

 
(2,477
)
 
1

 
24,978

Noninterest income
184,199

 
59,926

 
12,559

 
46,385

 
22,149

 
325,218

Noninterest expense
412,400

 
101,184

 
55,946

 
60,885

 
63,949

 
694,364

Income taxes
61,253

 
48,263

 
26,665

 
12,854

 
(70,388
)
 
78,647

Net income
$
113,756

 
$
89,632

 
$
49,522

 
$
23,872

 
$
(5,041
)
 
$
271,741

2016
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
284,896

 
$
106,971

 
$
95,617

 
$
35,499

 
$
(17,102
)
 
$
505,881

Provision for (reduction in allowance) credit losses
20,848

 
(5,630
)
 
9,740

 
(448
)
 
(1
)
 
24,509

Noninterest income
152,242

 
51,158

 
10,640

 
40,097

 
16,975

 
271,112

Noninterest expense
310,924

 
80,842

 
41,185

 
53,757

 
36,953

 
523,661

Income taxes
36,879

 
29,021

 
19,366

 
7,801

 
(38,784
)
 
54,283

Net income
$
68,487

 
$
53,896

 
$
35,966

 
$
14,486

 
$
1,705

 
$
174,540

 
Six Months Ended June 30,
Income Statements
Consumer & Business Banking
 
Commercial Banking
 
CREVF
 
RBHPCG
 
Treasury / Other
 
Huntington Consolidated
(dollar amounts in thousands)
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
828,936

 
$
343,285

 
$
279,700

 
$
95,492

 
$
(72,926
)
 
$
1,474,487

Provision for credit losses
50,181

 
11,798

 
30,342

 
295

 

 
92,616

Noninterest income
354,970

 
117,573

 
23,768

 
94,395

 
46,975

 
637,681

Noninterest expense
824,048

 
201,382

 
108,635

 
123,934

 
143,787

 
1,401,786

Income taxes
108,387

 
86,687

 
57,572

 
22,980

 
(137,695
)
 
137,931

Net income
$
201,290

 
$
160,991

 
$
106,919

 
$
42,678

 
$
(32,043
)
 
$
479,835

2016
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
562,423

 
$
212,240

 
$
191,214

 
$
70,503

 
$
(27,433
)
 
$
1,008,947

Provision for (reduction in allowance) credit losses
30,750

 
29,423

 
(6,909
)
 
(1,173
)
 

 
52,091

Noninterest income
284,002

 
95,484

 
17,950

 
79,403

 
36,140

 
512,979

Noninterest expense
616,981

 
159,050

 
80,922

 
109,172

 
48,616

 
1,014,741

Income taxes
69,543

 
41,738

 
47,303

 
14,667

 
(64,011
)
 
109,240

Net income
$
129,151

 
$
77,513

 
$
87,848

 
$
27,240

 
$
24,102

 
$
345,854

 
Assets at
 
Deposits at
(dollar amounts in thousands)
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
Consumer & Business Banking
$
25,820,232

 
$
25,332,635

 
$
45,971,574

 
$
45,355,745

Commercial Banking
24,021,962

 
24,121,689

 
17,867,356

 
18,053,208

CREVF
24,431,788

 
23,576,832

 
1,943,670

 
1,893,072

RBHPCG
5,570,436

 
5,327,622

 
5,882,745

 
6,214,250

Treasury / Other
21,562,361

 
21,355,319

 
4,268,028

 
4,091,442

Total
$
101,406,779

 
$
99,714,097

 
$
75,933,373

 
$
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 the 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 controls 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.

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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 web site 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 web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.
 
Exhibit
Number
 
Document Description
 
Report or Registration Statement
 
SEC File or
Registration
Number
 
Exhibit
Reference
 
3.1
 
Articles of Restatement of Charter.
 
Annual Report on Form 10-K for the year ended December 31, 1993
 
000-02525
 
3

(i) 
 
 
 
 
 
 
 
 
 
 
3.2
 
Articles of Amendment to Articles of Restatement of Charter.
 
Current Report on Form 8-K dated May 31, 2007
 
000-02525
 
3.1

  
 
 
 
 
 
 
 
 
 
 
3.3
 
Articles of Amendment to Articles of Restatement of Charter.
 
Current Report on Form 8-K dated May 7, 2008
 
000-02525
 
3.1

  
 
 
 
 
 
 
 
 
 
 
3.4
 
Articles of Amendment to Articles of Restatement of Charter.
 
Current Report on Form 8-K dated April 27, 2010
 
001-34073
 
3.1

  
 
 
 
 
 
 
 
 
 
 
3.5
 
Articles Supplementary of Huntington Bancshares Incorporated, as of April 22, 2008.
 
Current Report on Form 8-K dated April 22, 2008
 
000-02525
 
3.1

  
 
 
 
 
 
 
 
 
 
 
3.6
 
Articles Supplementary of Huntington Bancshares Incorporated, as of April 22. 2008.
 
Current Report on Form 8-K dated April 22, 2008
 
000-02525
 
3.2

  
 
 
 
 
 
 
 
 
 
 
3.7
 
Articles Supplementary of Huntington Bancshares Incorporated, as of November 12, 2008.
 
Current Report on Form 8-K dated November 12, 2008
 
001-34073
 
3.1

  
 
 
 
 
 
 
 
 
 
 
3.8
 
Articles Supplementary of Huntington Bancshares Incorporated, as of December 31, 2006.
 
Annual Report on Form 10-K for the year ended December 31, 2006
 
000-02525
 
3.4

 
 
 
 
 
 
 
 
 
 
 
3.9
 
Articles Supplementary of Huntington Bancshares Incorporated, as of December 28, 2011.
 
Current Report on Form 8-K dated December 28, 2011.
 
001-34073
 
3.1

 
 
 
 
 
 
 
 
 
 
 
3.10
 
Articles Supplementary of Huntington Bancshares Incorporated, as of March 18, 2016.
 
Current Report on Form 8-K dated March 21, 2016.
 
001-34073
 
3.1

 
 
 
 
 
 
 
 
 
 
 
3.11
 
Articles Supplementary of Huntington Bancshares Incorporated, as of May 3, 2016.
 
Current Report on Form 8-K dated May 5, 2016.
 
001-34073
 
3.2

 
 
 
 
 
 
 
 
 
 
 
3.12
 
Articles Supplementary of Huntington Bancshares Incorporated, effective as of August 15, 2016.
 
Registration Statement on Form 8-A dated August 15, 2016
 
001-34073
 
3.12

 
 
 
 
 
 
 
 
 
 
 
3.13
 
Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of July 19, 2017.
 
Current Report on Form 8-K dated July 21, 2017
 
001-34073
 
3.1

 
 
 
 
 
 
 
 
 
 
 

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4.1
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
* Corrected First Amendment to the 2015 Long-Term Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
**Rule 13a-14(a) Certification – Chief Executive Officer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
**Rule 13a-14(a) Certification – Chief Financial Officer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
***Section 1350 Certification – Chief Executive Officer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
***Section 1350 Certification – Chief Financial Officer.
 
 
 
 
 
 
 
101
 
**The following material from Huntington’s Form 10-Q Report for the quarterly period ended June 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.
 
 
 
 
 
 
 
 
*
Denotes management contract or compensatory plan or arrangement
**
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:
July 31, 2017
 
/s/ Stephen D. Steinour
 
 
 
Stephen D. Steinour
 
 
 
Chairman, Chief Executive Officer and President
 
 
 
Date:
July 31, 2017
 
/s/ Howell D. McCullough III
 
 
 
Howell D. McCullough III
 
 
 
Chief Financial Officer


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