The Quarterly
HBAN 2016 10-K

Huntington Bancshares Inc (HBAN) SEC Quarterly Report (10-Q) for Q1 2017

HBAN Q2 2017 10-Q
HBAN 2016 10-K HBAN Q2 2017 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 March 31, 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 1,087,119,978 shares of Registrant's common stock ($0.01 par value) outstanding on March 31, 2017 .



Table of Contents


HUNTINGTON BANCSHARES INCORPORATED

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

37

Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016

37

Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016

38

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016

40

Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2017 and 2016

41

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

42

Notes to Unaudited Condensed Consolidated Financial Statements

44

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

6

Executive Overview

7

Discussion of Results of Operations

7

Risk Management and Capital:

15

Credit Risk

16

Market Risk

23

Liquidity Risk

24

Operational Risk

27

Compliance Risk

27

Capital

27

Fair Value

29

Business Segment Discussion

29

Additional Disclosures

34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

90

Item 4. Controls and Procedures

90

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

91

Item 1A. Risk Factors

91

Item 6. Exhibits

92

Signatures

94


2

Table of Contents


Glossary of Acronyms and Terms

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

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


3

Table of Contents


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


4

Table of Contents


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






5

Table of Contents


PART I. FINANCIAL INFORMATION

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

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 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.





6

Table of Contents


EXECUTIVE OVERVIEW

Summary of 2017 First Quarter Results Compared to 2016 First Quarter

For the quarter, we reported net income of $208 million , or $0.17 per common share, compared with $171 million , or $0.20 per common share, in the year-ago quarter ( see Table 1 ). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $71 million pre-tax, or $0.04 per common share.

Fully-taxable equivalent net interest income was $742 million , up $230 million , or 45% . The results reflected the benefit from a $24.9 billion , or 38% , increase in average earning assets and a 19 basis point improvement in the net interest margin to 3.30% . Average earning asset growth included a $16.4 billion , or 32% , increase in average loans and leases, and an $8.6 billion , or 57% , increase in average securities, both of which were impacted by the FirstMerit acquisition. The net interest margin expansion reflected a 26 basis point increase in earning asset yields, including the impact of purchase accounting, and a 1 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 8 basis point increase in funding costs.

The provision for credit losses was $68 million , up $40 million , or 145% . NCOs increased $31 million to $39 million , primarily as a result of material CRE recoveries in the year-ago quarter. NCOs represented an annualized 0.24% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

Noninterest income was $312 million , up $71 million , or 29% . The increase was primarily a result of the FirstMerit acquisition. In addition, service charges on deposit accounts increased, reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Also, mortgage banking income increased, reflecting an increase in mortgage origination volume and an increase from net MSR hedging-related activities.

Noninterest expense was $707 million , up $216 million , or 44% , reflecting the impact of the FirstMerit acquisition. Personnel costs increased, reflecting acquisition-related personnel expense and an increase in average full-time equivalent employees. Also, other expense increased, due to an increase in OREO and foreclosure 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 7.28% , down 61 basis points. The CET1 risk-based capital ratio was 9.74% at March 31, 2017 , compared to 9.73% a year ago. The regulatory tier 1 risk-based capital ratio was 11.11% compared to 10.99% at March 31, 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 D preferred equity during the 2016 second quarter and 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 growth in our pipelines has followed.


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."


7

Table of Contents


Table 1 - Selected Quarterly Income Statement Data (1)

(dollar amounts in thousands, except per share amounts)

Three months ended

March 31,

December 31,

September 30,

June 30,

March 31,

2017

2016

2016

2016

2016

Interest income

$

820,360


$

814,858


$

694,346


$

565,658


$

557,251


Interest expense

90,385


79,877


68,956


59,777


54,185


Net interest income

729,975


734,981


625,390


505,881


503,066


Provision for credit losses

67,638


74,906


63,805


24,509


27,582


Net interest income after provision for credit losses

662,337


660,075


561,585


481,372


475,484


Service charges on deposit accounts

83,420


91,577


86,847


75,613


70,262


Cards and payment processing income

47,169


49,113


44,320


39,184


36,447


Mortgage banking income

31,692


37,520


40,603


31,591


18,543


Trust and investment management services

33,869


34,016


28,923


22,497


22,838


Insurance income

15,264


16,486


15,865


15,947


16,225


Brokerage income

15,758


17,014


14,719


14,599


15,502


Capital markets fees

14,200


18,730


14,750


13,037


13,010


Bank owned life insurance income

17,542


17,067


14,452


12,536


13,513


Gain on sale of loans

12,822


24,987


7,506


9,265


5,395


Securities gains (losses)

(8

)

(1,771

)

1,031


656


-


Other income

40,735


29,598


33,399


36,187


30,132


Total noninterest income

312,463


334,337


302,415


271,112


241,867


Personnel costs

382,000


359,755


405,024


298,949


285,397


Outside data processing and other services

87,202


88,695


91,133


63,037


61,878


Equipment

46,700


59,666


40,792


31,805


32,576


Net occupancy

67,700


49,450


41,460


30,704


31,476


Professional services

18,295


23,165


47,075


21,488


13,538


Marketing

13,923


21,478


14,438


14,773


12,268


Deposit and other insurance expense

20,099


15,772


14,940


12,187


11,208


Amortization of intangibles

14,355


14,099


9,046


3,600


3,712


Other expense

57,148


49,417


48,339


47,118


39,027


Total noninterest expense

707,422


681,497


712,247


523,661


491,080


Income before income taxes

267,378


312,915


151,753


228,823


226,271


Provision for income taxes

59,284


73,952


24,749


54,283


54,957


Net income

208,094


238,963


127,004


174,540


171,314


Dividends on preferred shares

18,878


18,865


18,537


19,874


7,998


Net income applicable to common shares

$

189,216


$

220,098


$

108,467


$

154,666


$

163,316


Average common shares-basic

1,086,374


1,085,253


938,578


798,167


795,755


Average common shares-diluted

1,108,617


1,104,358


952,081


810,371


808,349


Net income per common share-basic

$

0.17


$

0.20


$

0.12


$

0.19


$

0.21


Net income per common share-diluted

0.17


0.20


0.11


0.19


0.20


Cash dividends declared per common share

0.08


0.08


0.07


0.07


0.07


Return on average total assets

0.84

%

0.95

%

0.58

%

0.96

%

0.96

%

Return on average common shareholders' equity

8.2


9.4


5.4


9.6


10.4


Return on average tangible common shareholders' equity (2)

11.3


12.9


7.0


11.0


11.9


Net interest margin (3)

3.30


3.25


3.18


3.06


3.11


Efficiency ratio (4)

65.7


61.6


75.0


66.1


64.6


Effective tax rate

22.2


23.6


16.3


23.7


24.3


Revenue-FTE

Net interest income

$

729,975


$

734,981


$

625,390


$

505,881


$

503,066


FTE adjustment

12,058


12,560


10,598


10,091


9,159


Net interest income (3)

742,033


747,541


635,988


515,972


512,225


Noninterest income

312,463


334,337


302,415


271,112


241,867


Total revenue (3)

$

1,054,496


$

1,081,878


$

938,403


$

787,084


$

754,092



8

Table of Contents


(1)

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

(2)

Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders' equity. Average tangible common shareholders' equity equals average total common shareholders' equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.

(3)

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

(4)

Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains.

Significant Items

Earnings comparisons are impacted by the Significant Items summarized below:


1. 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 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 fourth quarter, $95 million of noninterest expense and a decrease of $1 million of noninterest income was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.06 per common share.


During the 2016 first quarter, $6 million of noninterest expense was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.01 per common share.


2. Litigation reserves. During the 2016 fourth quarter, a $42 million reduction of litigation reserves was recorded as other noninterest expense. This resulted in a positive impact of $0.02 per common share.


The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected:

Table 2 - Significant Items Influencing Earnings Performance Comparison

(dollar amounts in thousands, except per share amounts)

Three Months Ended

March 31, 2017

December 31, 2016

March 31, 2016

Amount

EPS (1)

Amount

EPS (1)

Amount

EPS (1)

Net income

$

208,094


$

238,963


$

171,314


Earnings per share, after-tax

$

0.17


$

0.20


$

0.20


Significant Items-favorable (unfavorable) impact:

Earnings

EPS

Earnings

EPS

Earnings

EPS

Mergers and acquisitions, net expenses

$

(71,145

)

$

(96,142

)

$

(6,406

)

Tax impact

24,901


33,457


2,006


Mergers and acquisitions, after-tax

$

(46,244

)

$

(0.04

)

$

(62,685

)

$

(0.06

)

$

(4,400

)

$

(0.01

)

Litigation reserves

$

-


$

41,587


$

-


Tax impact

-


(14,888

)

-


Litigation reserves, after-tax

$

-


$

-


$

26,699


$

0.02


$

-


$

-


(1)

Based upon the quarterly average outstanding diluted common shares.

Net Interest Income / Average Balance Sheet

The following tables detail the change in our average balance sheet and the net interest margin:


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Table of Contents


Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis

(dollar amounts in millions)

Average Balances

Three Months Ended

Change

March 31,

December 31,

September 30,

June 30,

March 31,

1Q17 vs. 1Q16

2017

2016

2016

2016

2016

Amount

Percent

Assets:

Interest-bearing deposits in banks

$

100


$

110


$

95


$

99


$

98


$

2


2

 %

Loans held for sale

415


2,507


695


571


433


(18

)

(4

)

Securities:

Available-for-sale and other securities:

Taxable

12,800


13,734


9,785


6,904


6,633


6,167


93


Tax-exempt

3,049


3,136


2,854


2,510


2,358


691


29


Total available-for-sale and other securities

15,849


16,870


12,639


9,414


8,991


6,858


76


Trading account securities

137


139


49


41


40


97


245


Held-to-maturity securities-taxable

7,656


5,432


5,487


5,806


6,054


1,602


26


Total securities

23,643


22,441


18,175


15,261


15,085


8,558


57


Loans and leases: (1)

Commercial:

Commercial and industrial

27,922


27,727


24,957


21,344


20,649


7,273


35


Commercial real estate:

Construction

1,314


1,413


1,132


881


923


391


42


Commercial

6,039


5,805


5,227


4,345


4,283


1,756


41


Commercial real estate

7,353


7,218


6,359


5,226


5,206


2,147


41


Total commercial

35,276


34,945


31,316


26,570


25,855


9,421


36


Consumer:

Automobile

11,063


10,866


11,402


10,146


9,730


1,333


14


Home equity

10,072


10,101


9,260


8,416


8,441


1,631


19


Residential mortgage

7,777


7,690


7,012


6,187


6,018


1,759


29


RV and marine finance

1,874


1,844


915


-


-


N.R.


N.R.


Other consumer

919


959


817


613


574


345


60


Total consumer

31,705


31,460


29,406


25,362


24,763


6,942


28


Total loans and leases

66,981


66,405


60,722


51,932


50,618


16,363


32


Allowance for loan and lease losses

(636

)

(614

)

(623

)

(616

)

(604

)

(32

)

5


Net loans and leases

66,345


65,791


60,099


51,316


50,014


16,331


33


Total earning assets

91,139


91,463


79,687


67,863


66,234


24,905


38


Cash and due from banks

2,011


1,538


1,325


1,001


1,013


998


99


Intangible assets

2,387


2,421


1,547


726


730


1,657


227


All other assets

5,442


5,559


4,962


4,149


4,223


1,219


29


Total assets

$

100,343


$

100,367


$

86,898


$

73,123


$

71,596


$

28,747


40

 %

Liabilities and Shareholders' Equity:

Deposits:

Demand deposits-noninterest-bearing

$

21,730


$

23,250


$

20,033


$

16,507


$

16,334


$

5,396


33

 %

Demand deposits-interest-bearing

16,805


15,294


12,362


8,445


7,776


9,029


116


Total demand deposits

38,535


38,544


32,395


24,952


24,110


14,425


60


Money market deposits

18,653


18,618


18,453


19,534


19,682


(1,029

)

(5

)

Savings and other domestic deposits

11,970


12,272


8,889


5,402


5,306


6,664


126


Core certificates of deposit

2,342


2,636


2,285


2,007


2,265


77


3


Total core deposits

71,500


72,070


62,022


51,895


51,363


20,137


39


Other domestic time deposits of $250,000 or more

470


391


382


402


455


15


3


Brokered deposits and negotiable CDs

3,969


4,273


3,904


2,909


2,897


1,072


37


Deposits in foreign offices

-


152


194


208


264


(264

)

-



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Table of Contents


Total deposits

75,939


76,886


66,502


55,414


54,979


20,960


38


Short-term borrowings

3,792


2,628


1,306


1,032


1,145


2,647


231


Long-term debt

8,529


8,594


8,488


7,899


7,202


1,327


18


Total interest-bearing liabilities

66,530


64,858


56,263


47,838


46,992


19,538


42


All other liabilities

1,661


1,833


1,608


1,416


1,515


146


10


Shareholders' equity

10,422


10,426


8,994


7,362


6,755


3,667


54


Total liabilities and shareholders' equity

$

100,343


$

100,367


$

86,898


$

73,123


$

71,596


$

28,747


40

 %

Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)

Average Yield Rates (2)

Three Months Ended

March 31,

December 31,

September 30,

June 30,

March 31,

Fully-taxable equivalent basis (3)

2017

2016

2016

2016

2016

Assets:

Interest-bearing deposits in banks

1.09

%

0.64

%

0.64

%

0.25

%

0.21

%

Loans held for sale

3.82


2.95


3.53


3.89


3.99


Securities:

Available-for-sale and other securities:

Taxable

2.38


2.43


2.35


2.37


2.39


Tax-exempt

3.79


3.60


3.01


3.38


3.40


Total available-for-sale and other securities

2.65


2.65


2.50


2.64


2.65


Trading account securities

0.11


0.18


0.58


0.98


0.50


Held-to-maturity securities-taxable

2.36


2.43


2.41


2.44


2.43


Total securities

2.54


2.58


2.47


2.56


2.56


Loans and leases: (1)

Commercial:

Commercial and industrial

3.98


3.83


3.68


3.49


3.52


Commercial real estate:

Construction

3.95


3.65


3.76


3.70


3.51


Commercial

3.69


3.54


3.54


3.35


3.59


Commercial real estate

3.74


3.56


3.58


3.41


3.57


Total commercial

3.93


3.78


3.66


3.47


3.53


Consumer:

Automobile

3.55


3.57


3.37


3.15


3.17


Home equity

4.45


4.24


4.21


4.17


4.20


Residential mortgage

3.63


3.58


3.61


3.65


3.69


RV and marine finance

5.63


5.64


5.70


-


-


Other consumer

12.05


10.91


10.93


10.28


10.02


Total consumer

4.23


4.13


3.97


3.79


3.81


Total loans and leases

4.07


3.95


3.81


3.63


3.67


Total earning assets

3.70


3.60


3.52


3.41


3.44


Liabilities:

Deposits:

Demand deposits-noninterest-bearing

-


-


-


-


-


Demand deposits-interest-bearing

0.15


0.11


0.11


0.09


0.09


Total demand deposits

0.07


0.04


0.04


0.03


0.03


Money market deposits

0.26


0.24


0.24


0.24


0.24


Savings and other domestic deposits

0.22


0.25


0.21


0.11


0.13


Core certificates of deposit

0.39


0.29


0.43


0.79


0.82


Total core deposits

0.22


0.20


0.20


0.22


0.23


Other domestic time deposits of $250,000 or more

0.45


0.39


0.40


0.40


0.41


Brokered deposits and negotiable CDs

0.72


0.48


0.44


0.40


0.38



11

Table of Contents


Deposits in foreign offices

-


0.13


0.13


0.13


0.13


Total deposits

0.26


0.23


0.22


0.23


0.24


Short-term borrowings

0.63


0.36


0.29


0.36


0.32


Long-term debt

2.33


2.19


1.97


1.85


1.68


Total interest-bearing liabilities

0.54


0.48


0.49


0.50


0.46


Net interest rate spread

3.16


3.12


3.03


2.91


2.98


Impact of noninterest-bearing funds on margin

0.14


0.13


0.15


0.15


0.13


Net interest margin

3.30

%

3.25

%

3.18

%

3.06

%

3.11

%

(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.

2017 First Quarter versus 2016 First Quarter

FTE net interest income for the 2017 first quarter increased $230 million , or 45% , from the 2016 first quarter . This reflected the benefit from the $24.9 billion , or 38% , increase in average earning assets coupled with a 19 basis point improvement in the FTE net interest margin to 3.30% . The NIM expansion reflected a 26 basis point increase in earning asset yields, including the 16 basis point impact of purchase accounting, and a 1 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 8 basis point increase in funding costs.

Average earning assets for the 2017 first quarter increased $24.9 billion , or 38% , from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average securities increased $8.6 billion , or 57% , which included $2.8 billion of direct purchase municipal instruments in our commercial banking segment compared to $2.1 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 first quarter increased $21.0 billion , or 38% , from the year-ago quarter, while average total core deposits increased $20.1 billion , or 39% , primarily reflecting the impact of the FirstMerit acquisition. Average demand deposits increased $14.4 billion , or 60% , comprised of a $10.3 billion, or 67%, increase in average commercial demand deposits and a $4.2 billion, or 47%, increase in average consumer demand deposits. Average short-term borrowings increased $2.6 billion , or 231% , reflecting the maintenance of excess liquidity surrounding the branch conversion. Average long-term debt increased $1.3 billion , or 18% , reflecting the issuance of $3.0 billion and maturity of $1.0 billion of senior debt over the past five quarters.

2017 First Quarter versus 2016 Fourth Quarter

Compared to the 2016 fourth quarter , FTE net interest income decreased $6 million , or 1% . The impact of a $0.3 billion decrease in average earning assets was partially offset by a 5 basis points increase in NIM. The increase in the NIM reflected a 10 basis point increase in earning asset yields and a 1 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 6 basis point increase in funding costs.

Average earning assets decreased $0.3 billion , or less than 1% from the 2016 fourth quarter . Average loans held for sale and other earnings assets decreased $2.1 billion , or 80% , primarily reflecting the $1.5 billion automobile loan securitization and the balance sheet optimization-related loan sales completed during the 2016 fourth quarter. Average securities increased $1.2 billion , or 5% , reflecting the reinvestment of the proceeds from the 2016 fourth quarter automobile loan securitization into securities qualifying as High Quality Liquid Assets for the LCR. Average loans and leases increased $0.6 billion , or 1% , primarily reflecting growth in automobile loans and core middle market and small business C&I lending.

Average total core deposits decreased $0.6 billion , or 1% , primarily reflecting the divestiture of thirteen branches, including $0.6 billion of deposits, in the 2016 fourth quarter. Average demand deposits were flat as a $1.5 billion , or 10% , increase in average interest-bearing demand deposits offset a $1.5 billion , or 7% , decrease in average noninterest-bearing demand deposits. Average total debt increased $1.1 billion, driven by an increase in short-term borrowings of $1.2 billion , or 44% , reflecting the maintenance of excess liquidity surrounding the branch conversion.


12

Table of Contents


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 (See Credit Quality discussion).

The provision for credit losses was $68 million , up $40 million , or 145% . NCOs increased $31 million to $39 million , primarily as a result of material CRE recoveries in the year-ago quarter. Net charge-offs represented an annualized 0.24% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

Noninterest Income

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

Table 4 - Noninterest Income

(dollar amounts in thousands)

Three Months Ended

1Q17 vs. 1Q16

1Q17 vs. 4Q16

March 31,

December 31,

September 30,

June 30,

March 31,

Change

Change

2017

2016

2016

2016

2016

Amount

Percent

Amount

Percent

Service charges on deposit accounts

$

83,420


$

91,577


$

86,847


$

75,613


$

70,262


$

13,158


19

 %

$

(8,157

)

(9

)%

Cards and payment processing income

47,169


49,113


44,320


39,184


36,447


10,722


29


(1,944

)

(4

)

Mortgage banking income

31,692


37,520


40,603


31,591


18,543


13,149


71


(5,828

)

(16

)

Trust and investment management services

33,869


34,016


28,923


22,497


22,838


11,031


48


(147

)

-


Insurance income

15,264


16,486


15,865


15,947


16,225


(961

)

(6

)

(1,222

)

(7

)

Brokerage income

15,758


17,014


14,719


14,599


15,502


256


2


(1,256

)

(7

)

Capital markets fees

14,200


18,730


14,750


13,037


13,010


1,190


9


(4,530

)

(24

)

Bank owned life insurance income

17,542


17,067


14,452


12,536


13,513


4,029


30


475


3


Gain on sale of loans

12,822


24,987


7,506


9,265


5,395


7,427


138


(12,165

)

(49

)

Securities gains (losses)

(8

)

(1,771

)

1,031


656


-


(8

)

-


1,763


(100

)

Other income

40,735


29,598


33,399


36,187


30,132


10,603


35


11,137


38


Total noninterest income

$

312,463


$

334,337


$

302,415


$

271,112


$

241,867


$

70,596


29

 %

$

(21,874

)

(7

)%


2017 First Quarter versus 2016 First Quarter

Noninterest income for the 2017 first quarter increased $71 million , or 29% , from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Service charges on deposit accounts increased $13 million , or 19% , reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Of the increase, $8 million was attributable to consumer deposit accounts, and $6 million was attributable to commercial deposit accounts. Mortgage banking income increased $13 million , or 71% , reflecting a 35% increase in mortgage origination volume and an $8 million increase from net mortgage servicing rights hedging-related activities.

2017 First Quarter versus 2016 Fourth Quarter

Compared to the 2016 fourth quarter , total noninterest income decreased $22 million , or 7% . Gain on sale of loans decreased $12 million , or 49% , primarily reflecting the $11 million of gains related to the balance sheet optimization strategy completed in the 2016 fourth quarter. Service charges on deposit accounts decreased $8 million , or 9% , primarily reflecting a $7 million seasonal decline in service charges on consumer accounts. Mortgage banking income decreased $6 million , or 16% , primarily driven by a decline in net MSR activity. These decreases were partially offset by an $11 million , or 38% , increase in other income, primarily reflecting the $8 million unfavorable impact recorded in the prior quarter, related to ineffectiveness of derivatives used to hedge fixed-rate, long-term debt.


13

Table of Contents


Noninterest Expense

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

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

Table 5 - Noninterest Expense

(dollar amounts in thousands)

Three Months Ended

1Q17 vs. 1Q16

1Q17 vs. 4Q16

March 31,

December 31,

September 30,

June 30,

March 31,

Change

Change

2017

2016

2016

2016

2016

Amount

Percent

Amount

Percent

Personnel costs

$

382,000


$

359,755


$

405,024


$

298,949


$

285,397


$

96,603


34

%

$

22,245


6

 %

Outside data processing and other services

87,202


88,695


91,133


63,037


61,878


25,324


41


(1,493

)

(2

)

Equipment

46,700


59,666


40,792


31,805


32,576


14,124


43


(12,966

)

(22

)

Net occupancy

67,700


49,450


41,460


30,704


31,476


36,224


115


18,250


37


Professional services

18,295


23,165


47,075


21,488


13,538


4,757


35


(4,870

)

(21

)

Marketing

13,923


21,478


14,438


14,773


12,268


1,655


13


(7,555

)

(35

)

Deposit and other insurance expense

20,099


15,772


14,940


12,187


11,208


8,891


79


4,327


27


Amortization of intangibles

14,355


14,099


9,046


3,600


3,712


10,643


287


256


2


Other expense

57,148


49,417


48,339


47,118


39,027


18,121


46


7,731


16


Total noninterest expense

$

707,422


$

681,497


$

712,247


$

523,661


$

491,080


$

216,342


44

%

$

25,925


4

 %

Number of employees (average full-time equivalent)

16,331


15,993


14,511


12,363


12,386


3,945


32

%

338


2

 %

Impacts of Significant Items:

Three Months Ended

March 31,

December 31,

March 31,

(dollar amounts in thousands)

2017

2016

2016

Personnel costs

$

19,555


$

(5,385

)

$

474


Outside data processing and other services

14,475


15,420


363


Equipment

5,763


20,000


-


Net occupancy

23,342


7,146


20


Professional services

4,218


9,141


4,288


Marketing

816


4,340


13


Other expense

5,126


2,742


1,248


Total noninterest expense adjustments

$

73,295


$

53,404


$

6,406



14

Table of Contents


Adjusted Noninterest Expense (See Non-GAAP Financial Measures in the Additional Disclosures section):

Three Months Ended

1Q17 vs. 1Q16

1Q17 vs. 4Q16

March 31,

December 31,

March 31,

Change

Change

(dollar amounts in thousands)

2017

2016

2016

Amount

Percent

Amount

Percent

Personnel costs

$

362,445


$

365,140


$

284,923


$

77,522


27

%

$

(2,695

)

(1

)%

Outside data processing and other services

72,727


73,275


61,515


11,212


18


(548

)

(1

)

Equipment

40,937


39,666


32,576


8,361


26


1,271


3


Net occupancy

44,358


42,304


31,456


12,902


41


2,054


5


Professional services

14,077


14,024


9,250


4,827


52


53


-


Marketing

13,107


17,138


12,255


852


7


(4,031

)

(24

)

Deposit and other insurance expense

20,099


15,772


11,208


8,891


79


4,327


27


Amortization of intangibles

14,355


14,099


3,712


10,643


287


256


2


Other expense

52,022


46,675


37,779


14,243


38


5,347


11


Total adjusted noninterest expense (Non-GAAP)

$

634,127


$

628,093


$

484,674


$

149,453


31

%

$

6,034


1

 %


2017 First Quarter versus 2016 First Quarter


Reported noninterest expense for the 2017 first quarter increased $216 million , or 44% , from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition, including Significant Items. Personnel costs increased $97 million , or 34% , primarily reflecting $20 million of acquisition-related personnel expense and a 32% increase in average full-time equivalent employees. Other expense increased $18 million , or 46% , including a $5 million increase in OREO and foreclosure expense as well as the $4 million net increase in acquisition-related expenses. Deposit and other insurance expense increased $9 million , or 79% , reflecting the larger assessment base as well as the FDIC Large Institution Surcharge implemented during the 2016 third quarter.

2017 First Quarter versus 2016 Fourth Quarter

Reported noninterest expense increased $26 million , or 4% , from the 2016 fourth quarter , including a $20 million net increase in Significant Items. Personnel costs increased $22 million , or 6% , primarily related to the $18 million gain on the settlement of a portion of the FirstMerit pension plan liability during the 2016 fourth quarter. Other expense increased $8 million , or 16% , primarily reflecting the $6 million benefit related to the extinguishment of trust preferred securities in the 2016 fourth quarter. Marketing expense decreased $8 million , or 35% , primarily reflecting the $3 million net decrease in acquisition-related expenses and the timing of advertising campaigns.

Provision for Income Taxes

The provision for income taxes in the 2017 first quarter was $59 million . This compared with a provision for income taxes of $55 million in the 2016 first quarter and $74 million in the 2016 fourth quarter . 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 $91 million and the net state deferred tax asset was $41 million at March 31, 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.

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


15

Table of Contents


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 use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and 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 6 - Loan and Lease Portfolio Composition

(dollar amounts in millions)

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

March 31,
2016

Ending Balances by Type:

Commercial:

Commercial and industrial

$

28,176


42

%

$

28,059


42

%

$

27,668


42

%

$

21,372


41

%

$

21,254


41

%

Commercial real estate:

Construction

1,107


2


1,446


2


1,414


2


856


2


939


2


Commercial

5,986


9


5,855


9


5,842


9


4,466


7


4,343


8


Commercial real estate

7,093


11


7,301


11


7,256


11


5,322


9


5,282


10


Total commercial

35,269


53


35,360


53


34,924


53


26,694


50


26,536


51


Consumer:

Automobile

11,155


17


10,969


16


10,791


16


10,381


20


9,920


19


Home equity

9,974


15


10,106


15


10,120


15


8,447


17


8,422


17


Residential mortgage

7,829


12


7,725


12


7,665


12


6,377


12


6,082


12


RV and marine finance

1,935


2


1,846


3


1,840


3


-


-


-


-


Other consumer

936


1


956


1


964


1


644


1


579


1


Total consumer

31,829


47


31,602


47


31,380


47


25,849


50


25,003


49


Total loans and leases

$

67,098


100

%

$

66,962


100

%

$

66,304


100

%

$

52,543


100

%

$

51,539


100

%

Our loan portfolio is composed of a managed mix of consumer and commercial credits. At the corporate level, we manage the overall credit exposure and portfolio composition in part via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned maximum exposure limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. There are no identified concentrations that exceed the assigned exposure


16

Table of Contents


limit. Our concentration management policy is approved by the ROC of the Board and is one of the strategies used to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. Changes to existing concentration limits require the approval of the ROC prior to implementation, incorporating specific information relating to the potential impact on the overall portfolio composition and performance metrics.

Commercial Credit

Refer to the "Commercial Credit" section of our 2016 Form 10-K for our commercial credit underwriting and on-going credit management processes.

Consumer Credit

Refer to the "Consumer Credit" section of our 2016 Form 10-K for our consumer credit underwriting and on-going credit management processes.

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 first quarter reflected continued overall positive results with stable delinquencies, and a 5% decline in NPAs from the prior quarter to $458 million . Net charge-offs decreased by $4 million from the prior quarter. Total NCOs were $39 million , or 0.24%, of average total loans and leases. The ACL to total loans and leases ratio increased by 4 basis point to 1.14% .

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 $246 million of CRE and C&I-related NALs at March 31, 2017 , $165 million, or 67%, 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 and other consumer loans are charged-off at 120-days past due.

The following table reflects period-end NALs and NPAs detail for each of the last five quarters:


17

Table of Contents


Table 7 - Nonaccrual Loans and Leases and Nonperforming Assets

(dollar amounts in thousands)

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

March 31,
2016

Nonaccrual loans and leases (NALs):

Commercial and industrial

$

232,171


$

234,184


$

220,862


$

289,811


$

307,824


Commercial real estate

13,889


20,508


21,300


23,663


30,801


Automobile

4,881


5,766


4,777


5,049


7,598


Residential mortgage

80,686


90,502


88,155


85,174


90,303


RV and marine finance

106


245


96


-


-


Home equity

69,575


71,798


69,044


56,845


62,208


Other consumer

2


-


-


5


-


Total nonaccrual loans and leases

401,310


423,003


404,234


460,547


498,734


Other real estate:

Residential

31,786


30,932


34,421


26,653


23,175


Commercial

18,101


19,998


36,915


2,248


2,957


Total other real estate

49,887


50,930


71,336


28,901


26,132


Other NPAs (1)

6,910


6,968


-


376


-


Total nonperforming assets

$

458,107


$

480,901


$

475,570


$

489,824


$

524,866


Nonaccrual loans and leases as a % of total loans and leases

0.60

%

0.63

%

0.61

%

0.88

%

0.97

%

NPA ratio (2)

0.68


0.72


0.72


0.93


1.02


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

0.87


0.91


0.92


1.12


1.22


(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 First Quarter versus 2016 Fourth Quarter

Total NPAs decreased by $23 million , or 5% , compared with December 31, 2016 primarily as a result of decreases in the CRE and residential portfolios, while other NPAs remained constant. 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 $510 million of accruing TDRs secured by residential real estate (Residential mortgage and Home Equity in Table 8 ) 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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Table of Contents


The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:

Table 8 - Accruing and Nonaccruing Troubled Debt Restructured Loans

(dollar amounts in thousands)

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

March 31,
2016

Troubled debt restructured loans-accruing:

Commercial and industrial

$

222,303


$

210,119


$

232,740


$

232,112


$

205,989


Commercial real estate

81,202


76,844


80,553


85,015


108,861


Automobile

27,968


26,382


27,843


25,892


25,856


Home equity

271,258


269,709


275,601


203,047


204,244


Residential mortgage

239,175


242,901


251,529


256,859


259,750


RV and marine finance

581


-


-


-


-


Other consumer

4,128


3,780


4,102


4,522


4,768


Total troubled debt restructured loans-accruing

846,615


829,735


872,368


807,447


809,468


Troubled debt restructured loans-nonaccruing:

Commercial and industrial

88,759


107,087


70,179


77,592


83,600


Commercial real estate

4,357


4,507


5,672


6,833


14,607


Automobile

4,763


4,579


4,437


4,907


7,407


Home equity

29,090


28,128


28,009


21,145


23,211


Residential mortgage

59,773


59,157


62,027


63,638


68,918


RV and marine finance

106


-


-


-


-


Other consumer

117


118


142


142


191


Total troubled debt restructured loans-nonaccruing

186,965


203,576


170,466


174,257


197,934


Total troubled debt restructured loans

$

1,033,580


$

1,033,311


$

1,042,834


$

981,704


$

1,007,402


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.

An ALLL for acquired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.

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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Table of Contents


The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:

Table 9 - Allocation of Allowance for Credit Losses (1)

(dollar amounts in thousands)

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

March 31,
2016

Allowance for Credit Losses

Commercial

Commercial and industrial

$

380,504


42

%

$

355,424


42

%

$

333,101


42

%

$

323,465


41

%

$

320,367


41

%

Commercial real estate

99,804


11


95,667


11


98,694


11


101,042


9


102,074


10


Total commercial

480,308


53


451,091


53


431,795


53


424,507


50


422,441


51


Consumer

Automobile

46,402


17


47,970


16


42,584


16


50,531


20


48,032


19


Home equity

64,900


15


65,474


15


69,866


15


76,482


17


78,102


17


Residential mortgage

35,559


12


33,398


12


36,510


12


42,392


12


40,842


12


RV and marine finance

4,022


2


5,311


3


4,289


3


-


-


-


-


Other consumer

41,389


1


35,169


1


31,854


1


29,152


1


24,302


1


Total consumer

192,272


47


187,322


47


185,103


47


198,557


50


191,278


49


Total allowance for loan and lease losses

672,580


100

%

638,413


100

%

616,898


100

%

623,064


100

%

613,719


100

%

Allowance for unfunded loan commitments

91,838


97,879


88,433


73,748


75,325


Total allowance for credit losses

$

764,418


$

736,292


$

705,331


$

696,812


$

689,044


Total allowance for loan and leases losses as % of:

Total loans and leases

1.00

%

0.95

%

0.93

%

1.19

%

1.19

%

Nonaccrual loans and leases

168


151


153


135


123


Nonperforming assets

147


133


130


127


117


Total allowance for credit losses as % of:

Total loans and leases

1.14

%

1.10

%

1.06

%

1.33

%

1.34

%

Nonaccrual loans and leases

190


174


174


151


138


Nonperforming assets

167


153


148


142


131


(1)

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

2017 First Quarter versus 2016 Fourth Quarter

At March 31, 2017 , the ALLL was $673 million , compared to $638 million at December 31, 2016 . The $34 million , or 5% , increase in the ALLL is primarily driven by an increase in Criticized/Classified assets in the C&I portfolio, partially offset by improved delinquency performances in automobile, home equity, and RV and marine finance classes.

The ACL to total loans ratio of 1.14% at March 31, 2017 , increased compared to 1.10% at December 31, 2016 . Management believes the ratio is appropriate given the 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. Given the combination of these noted positive and negative factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.


20

Table of Contents


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.

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 administrative small ticket 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.


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Table of Contents


Table 10 - Quarterly Net Charge-off Analysis

(dollar amounts in thousands)

Three months ended

March 31,

December 31,

September 30,

June 30,

March 31,

2017

2016

2016

2016

2016

Net charge-offs (recoveries) by loan and lease type:

Commercial:

Commercial and industrial

$

8,096


$

15,674


$

19,225


$

3,702


$

6,514


Commercial real estate:

Construction

(3,137

)

(1,332

)

(271

)

(377

)

(104

)

Commercial

895


(4,160

)

(2,427

)

(296

)

(17,372

)

Commercial real estate

(2,242

)

(5,492

)

(2,698

)

(673

)

(17,476

)

Total commercial

5,854


10,182


16,527


3,029


(10,962

)

Consumer:

Automobile

12,407


13,132


7,769


4,320


6,770


Home equity

1,662


1,621


2,624


1,078


3,681


Residential mortgage

2,595


1,673


1,728


776


1,647


RV and marine finance

2,363


2,182


106


-


-


Other consumer

14,557


14,734


11,311


7,552


7,416


Total consumer

33,584


33,342


23,538


13,726


19,514


Total net charge-offs

$

39,438


$

43,524


$

40,065


$

16,755


$

8,552


Three months ended

March 31,

December 31,

September 30,

June 30,

March 31,

2017

2016

2016

2016

2016

Net charge-offs (recoveries)-annualized percentages:

Commercial:

Commercial and industrial

0.12

 %

0.23

 %

0.31

 %

0.07

 %

0.13

 %

Commercial real estate:

Construction

(0.96

)

(0.38

)

(0.10

)

(0.17

)

(0.05

)

Commercial

0.06


(0.29

)

(0.19

)

(0.03

)

(1.62

)

Commercial real estate

(0.12

)

(0.30

)

(0.17

)

(0.05

)

(1.34

)

Total commercial

0.07


0.12


0.21


0.05


(0.17

)

Consumer:

Automobile

0.45


0.48


0.27


0.17


0.28


Home equity

0.07


0.06


0.11


0.05


0.17


Residential mortgage

0.13


0.09


0.10


0.05


0.11


RV and marine finance

0.50


0.47


0.05


-


-


Other consumer

6.33


6.14


5.54


4.93


5.17


Total consumer

0.42


0.42


0.32


0.22


0.32


Net charge-offs as a % of average loans

0.24

 %

0.26

 %

0.26

 %

0.13

 %

0.07

 %

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


22

Table of Contents


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 First Quarter versus 2016 Fourth Quarter

NCOs were an annualized 0.24% of average loans and leases in the current quarter, a decrease from 0.26% in the 2016 fourth quarter , still below our long-term expectation of 0.35% - 0.55%. Commercial charge-offs were positively impacted by continued recoveries in both the C&I and CRE portfolio and broader continued successful workout strategies, while consumer charge-offs remain within our expected range and were relatively flat compared to the prior period. Given the low level of C&I and CRE NCO's, we expect some volatility on a quarter-to-quarter comparison basis.


Market Risk

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

(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.)

Table 11 - 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

 %

March 31, 2017

-0.7

 %

3.0

 %

5.9

 %

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 reported shows that the balance sheet is asset sensitive at March 31, 2017 , reflecting a slight increase from December 31, 2016.

Table 12 - 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

 %

March 31, 2017

-1.1

 %

3.0

 %

4.3

 %

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.


23

Table of Contents


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.

MSRs

(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)

At March 31, 2017 , we had a total of $191 million of capitalized MSRs representing the right to service $19.1 billion in mortgage loans. Of this $191 million , $13 million was recorded using the fair value method and $178 million was recorded using the amortization method.

MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed hedging strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report 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 March 31, 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 $15.1 billion as of March 31, 2017 . The treasury department also prepares a contingency funding plan that details the potential erosion of funds in the event of a systemic financial market crisis or institutional-specific stress. An example of an institution specific event would be a downgrade in our public credit rating by a rating agency due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition. Examples of systemic events unrelated to us that could have an effect on our access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about us, or the banking industry in general, may adversely affect the cost and availability of normal funding sources. The liquidity contingency plan therefore outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period. Please see the Liquidity Risk section in Item 1A of our 2016 Form 10-K for more details.

Bank Liquidity and Sources of Funding

Our primary sources of funding for the Bank are retail and commercial core deposits. At March 31, 2017 , these core deposits funded 73% of total assets ( 109% of total loans). Other sources of liquidity include non-core deposits, FHLB advances, wholesale debt instruments, and securitizations. Demand deposit overdrafts that have been reclassified as loan balances were $18 million and $23 million at March 31, 2017 and December 31, 2016 , respectively.


24

Table of Contents


The following tables reflect deposit composition and short-term borrowings detail for each of the last five quarters:

Table 13 - Deposit Composition

(dollar amounts in millions)

March 31,

December 31,

September 30,

June 30,

March 31,

2017

2016

2016

2016

2016

By Type:

Demand deposits-noninterest-bearing

$

21,489


28

%

$

22,836


30

%

$

23,426


30

%

$

16,324


30

%

$

16,571


30

%

Demand deposits-interest-bearing

18,618


24


15,676


21


15,730


20


8,412


15


8,174


15


Money market deposits

18,664


24


18,407


24


18,604


24


19,480


34


19,844


35


Savings and other domestic deposits

12,043


16


11,975


16


12,418


16


5,341


10


5,423


10


Core certificates of deposit

2,188


3


2,535


3


2,724


4


1,866


4


2,123


4


Total core deposits:

73,002


95


71,429


94


72,902


94


51,423


93


52,135


94


Other domestic deposits of $250,000 or more

524


1


394


1


391


1


380


1


424


-


Brokered deposits and negotiable CDs

3,897


4


3,784


5


3,972


5


3,017


6


2,890


5


Deposits in foreign offices

-


-


-


-


140


-


223


-


180


-


Total deposits

$

77,423


100

%

$

75,608


100

%

$

77,405


100

%

$

55,043


100

%

$

55,629


100

%

Total core deposits:

Commercial

$

32,963


45

%

$

31,887


45

%

$

32,936


45

%

$

24,308


47

%

$

24,543


47

%

Consumer

40,039


55


39,542


55


39,966


55


27,115


53


27,592


53


Total core deposits

$

73,002


100

%

$

71,429


100

%

$

72,902


100

%

$

51,423


100

%

$

52,135


100

%

Table 14 - Federal Funds Purchased and Repurchase Agreements

(dollar amounts in millions)

March 31,

December 31,

September 30,

June 30,

March 31,

2017

2016

2016

2016

2016

Balance at period-end

Federal Funds purchased and securities sold under agreements to repurchase

$

837


$

1,248


$

1,537


$

149


$

204


Federal Home Loan Bank advances

400


2,425


600


1,800


250


Other short-term borrowings

26


20


11


8


18


Weighted average interest rate at period-end

Federal Funds purchased and securities sold under agreements to repurchase

0.01

%

0.17

%

0.18

%

0.05

%

0.04

%

Federal Home Loan Bank advances

0.73


0.16


0.40


0.42


0.41


Other short-term borrowings

1.54


2.28


3.03


4.19


2.13


Maximum amount outstanding at month-end during the period

Federal Funds purchased and securities sold under agreements to repurchase

$

1,020


$

1,444


$

1,537


$

258


$

401


Federal Home Loan Bank advances

3,800


2,425


600


1,800


1,575


Other short-term borrowings

32


64


34


21


20


Average amount outstanding during the period


25

Table of Contents


Federal Funds purchased and securities sold under agreements to repurchase

$

702


$

1,043


$

618


$

515


$

582


Federal Home Loan Bank advances

3,069


1,557


668


504


553


Other short-term borrowings

21


28


20


13


9


Weighted average interest rate during the period

Federal Funds purchased and securities sold under agreements to repurchase

0.02

%

0.14

%

0.07

%

0.25

%

0.18

%

Federal Home Loan Bank advances

0.18


0.44


0.43


0.42


0.40


Other short-term borrowings

1.49


2.86


2.53


1.81


3.69


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 $29.3 billion and $19.7 billion at March 31, 2017 and December 31, 2016 , respectively.

During the first quarter, the Bank issued $1 billion of senior notes. For further information related to debt issuances, please see Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

At March 31, 2017 , total wholesale funding was $15.0 billion , a decrease from $16.2 billion at December 31, 2016 . The decrease from prior year-end primarily relates to a decrease in short-term borrowings.

Liquidity Coverage Ratio

On September 3, 2014, the U.S. banking regulators adopted a final LCR for internationally active banking organizations, generally those with $250 billion or more in total assets, and a Modified LCR rule for banking organizations, similar to Huntington, with $50 billion or more in total assets that are not internationally active banking organizations. The LCR is designed to promote the short-term resilience of the liquidity risk profile of banks to which it applies. The Modified LCR requires Huntington to maintain HQLA to meet its net cash outflows over a prospective 30 calendar-day period, which takes into account the potential impact of idiosyncratic and market-wide shocks. The Modified LCR transition period began on January 1, 2016, with Huntington required to maintain HQLA equal to 90 percent of the stated requirement. The ratio increased to 100 percent on January 1, 2017. At March 31, 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 both March 31, 2017 and December 31, 2016 , the parent company had $1.8 billion in cash and cash equivalents.

On April 18, 2017 , the board of directors declared a quarterly common stock cash dividend of $0.08 per common share. The dividend is payable on July 3, 2017 , to shareholders of record on June 19, 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 April 18, 2017 , the board of directors declared a quarterly Series A, Series B, Series C, and Series D Preferred Stock dividend payable on July 17, 2017 to shareholders of record on July 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 quarter, the Bank returned capital totaling $174 million to the holding company. The Bank declared a return of capital to the holding company of $225 million payable in the 2017 second quarter. 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).


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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 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 15 - Regulatory Capital Data

(dollar amounts in millions)

Basel III

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

March 31,
2016

Total risk-weighted assets

Consolidated

$

77,559


$

78,263


$

80,513


$

60,720


$

59,798


Bank

77,534


78,242


80,345


60,673


59,723


Common equity tier I risk-based capital

Consolidated

7,551


7,486


7,315


5,949


5,821


Bank

8,146


8,153


8,019


5,578


5,518


Tier 1 risk-based capital

Consolidated

8,619


8,547


8,371


6,905


6,574


Bank

9,015


9,086


8,661


6,221


5,672


Tier 2 risk-based capital

Consolidated

1,663


1,668


1,741


1,287


1,300


Bank

1,745


1,732


1,600


1,331


1,119


Total risk-based capital

Consolidated

10,282


10,215


10,112


8,193


7,874


Bank

10,760


10,818


10261


7,552


6,791


Tier 1 leverage ratio

Consolidated

8.76

%

8.70

%

9.89

%

9.55

%

9.29

%

Bank

9.18


9.29


8.61


8.61


8.02


Common equity tier I risk-based capital ratio

Consolidated

9.74


9.56


9.80


9.80


9.73


Bank

10.51


10.42


9.19


9.19


9.24


Tier 1 risk-based capital ratio

Consolidated

11.11


10.92


10.40


11.37


10.99


Bank

11.63


11.61


10.25


10.25


9.50


Total risk-based capital ratio

Consolidated

13.26


13.05


12.56


13.49


13.17


Bank

13.88


13.83


12.45


12.45


11.37


At March 31, 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 $10.4 billion at March 31, 2017 , an increase of $0.1 billion when compared with December 31, 2016 .

On June 29, 2016, we announced that the Federal Reserve did not object to our proposed capital actions included in our capital plan submitted to the Federal Reserve in April 2016 as part of the 2016 Comprehensive Capital Analysis and Review ("CCAR"). These actions included a 14% increase in the quarterly dividend per common share to $0.08, starting in the fourth quarter of 2016. Our capital plan also included the issuance of capital in connection with the acquisition of FirstMerit Corporation and continues the previously announced suspension of our share repurchase program.

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 five major business segments: Consumer and Business Banking , Commercial Banking , Commercial Real Estate and Vehicle Finance (CREVF) , Regional Banking and The Huntington Private Client Group (RBHPCG) , and Home Lending . A Treasury / Other function includes 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.

We recently announced a change within our executive leadership team, which will become effective during the 2017 second quarter. As a result, management is currently evaluating the business segment structure which may impact how we monitor future results and assess performance.

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 five 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 five 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 three-month periods ending March 31, 2017 and March 31, 2016 is presented in the following table:

Table 16 - Net Income (Loss) by Business Segment

(dollar amounts in thousands)

Three months ended March 31,

2017

2016

Consumer and Business Banking

$

87,691


$

60,117


Commercial Banking

69,513


23,541


CREVF

58,912


51,578


RBHPCG

18,126


12,910


Home Lending

1,725


1,410


Treasury / Other

(27,873

)

21,758


Net income

$

208,094


$

171,314


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 five 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 $73 million of FirstMerit acquisition-related expense in the current 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 17 - Key Performance Indicators for Consumer and Business Banking

(dollar amounts in thousands unless otherwise noted)

Three months ended March 31,

Change

2017

2016

Amount

Percent

Net interest income

$

393,496


$

264,529


$

128,967


49

%

Provision for credit losses

31,294


12,177


19,117


157


Noninterest income

146,790


120,257


26,533


22


Noninterest expense

374,083


280,121


93,962


34


Provision for income taxes

47,218


32,371


14,847


46


Net income

$

87,691


$

60,117


$

27,574


46

%

Number of employees (average full-time equivalent)

7,848


5,742


2,106


37

%

Total average assets (in millions)

$

21,707


$

15,751


$

5,956


38


Total average loans/leases (in millions)

17,611


13,614


3,997


29


Total average deposits (in millions)

44,636


30,834


13,802


45


Net interest margin

3.68

%

3.54

%

0.14

%

4


NCOs

$

22,649


$

13,891


$

8,758


63


NCOs as a % of average loans and leases

0.51

%

0.41

%

0.10

%

24


2017 First Three Months vs. 2016 First Three Months

Consumer and Business Banking reported net income of $88 million in the first three-month period of 2017 , an increase of $28 million , or 46% , compared to the year-ago period. Results were impacted by the FirstMerit acquisition. Segment net interest income increased $129 million , or 49% , primarily due to an increase in total average loans and deposits. The provision


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for credit losses increased $19 million , or 157% , driven by an increase in the allowance as well as increased NCOs. Noninterest income increased $27 million , or 22% , due to an increase in card and payment processing income and service charges on deposit accounts, which were driven by higher debit card-related transaction volumes and an increase in the number of households. In addition, SBA sales and servicing rights gains contributed to improved noninterest income. Noninterest expense increased $94 million , or 34% , due to an increase in personnel expense related to the addition of FirstMerit branches and colleagues, and an increase in allocated noninterest expense.

Commercial Banking

Table 18 - Key Performance Indicators for Commercial Banking

(dollar amounts in thousands unless otherwise noted)

Three months ended March 31,

Change

2017

2016

Amount

Percent

Net interest income

$

174,563


$

105,350


$

69,213


66

 %

Provision for credit losses

22,137


35,054


(12,917

)

(37

)

Noninterest income

69,487


58,916


10,571


18


Noninterest expense

114,970


92,995


21,975


24


Provision for income taxes

37,430


12,676


24,754


195


Net income

$

69,513


$

23,541


$

45,972


195

 %

Number of employees (average full-time equivalent)

1,459


1,215


244


20

 %

Total average assets (in millions)

$

24,206


$

17,313


$

6,893


40


Total average loans/leases (in millions)

19,202


13,535


5,667


42


Total average deposits (in millions)

18,731


14,278


4,453


31


Net interest margin

3.42

%

2.90

%

0.52

 %

18


NCOs

$

2,301


$

17,108


$

(14,807

)

(87

)

NCOs as a % of average loans and leases

0.05

%

0.51

%

(0.46

)%

(90

)

2017 First Three Months vs. 2016 First Three Months

Commercial Banking reported net income of $70 million in the first three-month period of 2017 , an increase of $46 million , or 195% , compared to the year-ago period. Results were impacted by the FirstMerit acquisition. Segment net interest income increased $69 million , or 66% , primarily due to an increase in both average earning assets and deposits. In addition, the NIM increased 52 basis points as a result of the recapture of interest income on nonaccrual loans and a significant mix shift to lower cost deposits as well as the impact of purchase accounting. The provision for credit losses decreased $13 million , or 37% , primarily from a reduction in NCOs. Noninterest income increased $11 million , or 18% , primarily due to an increase in loan commitment, other fees and treasury management related revenue. Noninterest expense increased $22 million , or 24% , primarily due to an increase in personnel expense, allocated noninterest expense, and operating lease expense intangible amortization.


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Commercial Real Estate and Vehicle Finance

Table 19 - Commercial Real Estate and Vehicle Finance

(dollar amounts in thousands unless otherwise noted)

Three months ended March 31,

Change

2017

2016

Amount

Percent

Net interest income

$

139,333


$

95,597


$

43,736


46

%

Provision (reduction in allowance) for credit losses

9,549


(16,649

)

26,198


N.R.


Noninterest income

11,209


7,311


3,898


53


Noninterest expense

50,359


40,206


10,153


25


Provision for income taxes

31,722


27,773


3,949


14


Net income

$

58,912


$

51,578


$

7,334


14

%

Number of employees (average full-time equivalent)

396


309


87


28

%

Total average assets (in millions)

$

23,715


$

18,029


$

5,686


32


Total average loans/leases (in millions)

22,620


17,022


5,598


33


Total average deposits (in millions)

1,800


1,637


163


10


Net interest margin

2.47

%

2.21

 %

0.26

%

12


NCOs

$

12,901


$

(21,054

)

$

33,955


N.R.


NCOs as a % of average loans and leases

0.23

%

(0.49

)%

0.72

%

N.R.


N.R.-Not relevant.

2017 First Three Months vs. 2016 First Three Months

CREVF reported net income of $59 million in the first three-month period of 2017 , an increase of $7 million , or 14% , compared to the year-ago period. Results were impacted by the FirstMerit acquisition as well as a higher provision for credit losses reflecting significant commercial real estate recoveries in the year ago quarter. Segment net interest income increased $44 million or 46% , due to both higher loan balances and a 26 basis point increase in the net interest margin reflecting the purchase accounting impact of the acquired loan portfolios. Noninterest income increased $4 million , or 53% , primarily due to an increase in unrealized gains on various equity investments associated with mezzanine lending related activities. Noninterest expense increased $10 million , or 25% , 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 20 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group

(dollar amounts in thousands unless otherwise noted)

Three months ended March 31,

Change

2017

2016

Amount

Percent

Net interest income

$

46,649


$

34,923


$

11,726


34

 %

Provision (reduction in allowance) for credit losses

2,771


(725

)

3,496


(482

)

Noninterest income

36,170


24,717


11,453


46


Noninterest expense

52,162


40,503


11,659


29


Provision for income taxes

9,760


6,952


2,808


40


Net income

$

18,126


$

12,910


$

5,216


40

 %

Number of employees (average full-time equivalent)

689


577


112


19

 %

Total average assets (in millions)

$

5,230


$

4,111


$

1,119


27


Total average loans/leases (in millions)

4,640


3,821


819


21


Total average deposits (in millions)

5,918


4,719


1,199


25


Net interest margin

3.29

%

2.98

 %

0.31

%

10


NCOs

$

783


$

(2,549

)

$

3,332


N.R.


NCOs as a % of average loans and leases

0.07

%

(0.27

)%

0.34

%

N.R.


Total assets under management (in billions)-eop (1)

$

18.4


$

16.9


$

1.5


9


Total trust assets (in billions)-eop (1)

100.6


91.3


9.3


10


N.R.-Not relevant.

eop-End of Period.

(1)

Includes assets associated with FirstMerit.

2017 First Three Months vs. 2016 First Three Months

RBHPCG reported net income of $18 million in the first three-month period of 2017 , an increase of $5 million , or 40% , compared to the year-ago period. Results were impacted by the FirstMerit acquisition. Net interest income increased $12 million , or 34% , due to an increase in average total loans and deposits combined with a 31 basis point increase in net interest margin driven by the impact of purchase accounting. The provision for credit losses increased $3 million , due to lower recoveries in the current period. Noninterest income increased $11 million , or 46% , primarily due to increased trust and investment management revenue related to the increase in trust assets and assets under management. Noninterest expense increased $12 million , or 29% , as a result of increased personnel expenses, amortization of intangibles, and allocated product costs resulting from the FirstMerit acquisition.


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Home Lending

Table 21 - Key Performance Indicators for Home Lending

(dollar amounts in thousands unless otherwise noted)

Three months ended March 31,

Change

2017

2016

Amount

Percent

Net interest income

$

15,215


$

12,985


$

2,230


17

 %

Provision (reduction in allowance) for credit losses

1,887


(2,274

)

4,161


N.R.


Noninterest income

23,981


11,503


12,478


108


Noninterest expense

34,655


24,593


10,062


41


Provision for income taxes

929


759


170


22


Net income

$

1,725


$

1,410


$

315


22


Number of employees (average full-time equivalent)

1,119


872


247


28

 %

Total average assets (in millions)

$

3,447


$

3,042


$

405


13


Total average loans/leases (in millions)

2,822


2,533


289


11


Total average deposits (in millions)

579


308


271


88


Net interest margin

1.92

%

1.83

%

0.09

 %

5


NCOs

$

802


$

1,155


$

(353

)

(31

)

NCOs as a % of average loans and leases

0.11

%

0.18

%

(0.07

)%

(39

)

Mortgage banking origination volume (in millions)

$

1,266


$

936


$

330


35


2017 First Three Months vs. 2016 First Three Months

Home Lending reported net income of $2 million in the first three-month period of 2017 , an increase compared to the year-ago period. Results were impacted by the FirstMerit acquisition. Net interest income increased $2 million , or 17% , which primarily reflects higher residential mortgage balances and lower funding costs. The provision for credit losses increased $4 million , primarily due to an increase in the allowance in the residential mortgage portfolio. Noninterest income increased by $12 million , or 108% , primarily due to favorable net MSR hedge-related activities and higher origination volume. Noninterest expense increased $10 million , or 41% , primarily due to higher personnel costs related to the FirstMerit acquisition, higher origination volume and higher allocated expenses.


ADDITIONAL DISCLOSURES

Forward-Looking Statements

This report, including MD&A, contains certain forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements, which are not historical facts and are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our "Fair Play" banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the possibility that the anticipated benefits of the merger with FirstMerit Corporation are not realized 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; our ability to complete the integration of FirstMerit Corporation successfully; and other factors


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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, which is 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

Interest income, yields, and ratios on a FTE basis are considered non-GAAP financial measures.  Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes.  The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources.  The FTE basis assumes a federal statutory tax rate of 35 percent. We encourage readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.

Non-Regulatory Capital Ratios

In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:

Tangible common equity to tangible assets, and

Tangible common equity to risk-weighted assets using Basel III definitions.

These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Company's capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities, the nature and extent of which varies among different financial services companies. These ratios are not defined in Generally Accepted Accounting Principles ("GAAP") or


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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)

March 31,

December 31,

2017

2016

Assets

Cash and due from banks

$

1,308,813


$

1,384,770


Interest-bearing deposits in banks

63,055


58,267


Trading account securities

97,785


133,295


Loans held for sale (includes $423,324 and $438,224 respectively, measured at fair value)(1)

518,238


512,951


Available-for-sale and other securities

16,173,605


15,562,837


Held-to-maturity securities

7,533,517


7,806,939


Loans and leases (includes $98,342 and $82,319 respectively, measured at fair value)(1)

67,098,269


66,961,996


Allowance for loan and lease losses

(672,580

)

(638,413

)

Net loans and leases

66,425,689


66,323,583


Bank owned life insurance

2,445,545


2,432,086


Premises and equipment

852,582


815,508


Goodwill

1,992,849


1,992,849


Other intangible assets

388,103


402,458


Servicing rights

227,678


225,578


Accrued income and other assets

2,018,047


2,062,976


Total assets

$

100,045,506


$

99,714,097


Liabilities and shareholders' equity

Liabilities

Deposits

$

77,422,510


$

75,607,717


Short-term borrowings

1,263,430


3,692,654


Long-term debt

9,279,140


8,309,159


Accrued expenses and other liabilities

1,643,279


1,796,421


Total liabilities

89,608,359


89,405,951


Shareholders' equity

Preferred stock

1,071,227


1,071,227


Common stock

10,900


10,886


Capital surplus

9,898,889


9,881,277


Less treasury shares, at cost

(26,765

)

(27,384

)

Accumulated other comprehensive loss

(390,860

)

(401,016

)

Retained (deficit) earnings

(126,244

)

(226,844

)

Total shareholders' equity

10,437,147


10,308,146


Total liabilities and shareholders' equity

$

100,045,506


$

99,714,097


Common shares authorized (par value of $0.01)

1,500,000,000


1,500,000,000


Common shares issued

1,089,986,453


1,088,641,251


Common shares outstanding

1,087,119,978


1,085,688,538


Treasury shares outstanding

2,866,475


2,952,713


Preferred stock, authorized shares

6,617,808


6,617,808


Preferred shares issued

2,705,571


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
March 31,

2017

2016

Interest and fee income:

Loans and leases

$

675,934


$

463,422


Available-for-sale and other securities

Taxable

76,109


39,614


Tax-exempt

18,862


13,019


Held-to-maturity securities-taxable

45,195


36,789


Other

4,260


4,407


Total interest income

820,360


557,251


Interest expense:

Deposits

34,790


23,018


Short-term borrowings

5,866


898


Federal Home Loan Bank advances

66


69


Subordinated notes and other long-term debt

49,663


30,200


Total interest expense

90,385


54,185


Net interest income

729,975


503,066


Provision for credit losses

67,638


27,582


Net interest income after provision for credit losses

662,337


475,484


Service charges on deposit accounts

83,420


70,262


Cards and payment processing income

47,169


36,447


Mortgage banking income

31,692


18,543


Trust and investment management services

33,869


22,838


Insurance income

15,264


16,225


Brokerage income

15,758


15,502


Capital markets fees

14,200


13,010


Bank owned life insurance income

17,542


13,513


Gain on sale of loans

12,822


5,395


Net gains on sales of securities

16


-


Impairment losses recognized in earnings on available-for-sale securities

(24

)

-


Other noninterest income

40,735


30,132


Total noninterest income

312,463


241,867


Personnel costs

382,000


285,397


Outside data processing and other services

87,202


61,878


Equipment

46,700


32,576


Net occupancy

67,700


31,476


Professional services

18,295


13,538


Marketing

13,923


12,268


Deposit and other insurance expense

20,099


11,208


Amortization of intangibles

14,355


3,712


Other noninterest expense

57,148


39,027


Total noninterest expense

707,422


491,080


Income before income taxes

267,378


226,271


Provision for income taxes

59,284


54,957


Net income

208,094


171,314


Dividends on preferred shares

18,878


7,998


Net income applicable to common shares

$

189,216


$

163,316



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Average common shares-basic

1,086,374


795,755


Average common shares-diluted

1,108,617


808,349


Per common share:

Net income-basic

$

0.17


$

0.21


Net income-diluted

0.17


0.20


Cash dividends declared

0.08


0.07


OTTI losses for the periods presented:

Total OTTI losses

$

(26

)

$

(3,733

)

Noncredit-related portion of loss recognized in OCI

2


3,733


Impairment losses recognized in earnings on available-for-sale securities

$

(24

)

$

-


See Notes to Unaudited Condensed Consolidated Financial Statements




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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended
March 31,

(dollar amounts in thousands)

2017

2016

Net income

$

208,094


$

171,314


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

524


(2,349

)

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

9,998


51,551


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

10,522


49,202


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

(826

)

8,829


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

460


841


Other comprehensive income (loss), net of tax

10,156


58,872


Comprehensive income

$

218,250


$

230,186


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

Three months ended March 31, 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

171,314


171,314


Other comprehensive income (loss)

58,872


58,872


Net proceeds from issuance of Series D preferred stock

386,348


386,348


Cash dividends declared:

Common ($0.07 per share)

(55,774

)

(55,774

)

Preferred Series A ($21.25 per share)

(7,703

)

(7,703

)

Preferred Series B ($8.31 per share)

(295

)

(295

)

Recognition of the fair value of share-based compensation

11,268


11,268


Other share-based compensation activity

1,811


18


683


(1,166

)

(465

)

Other

-


-


10


(51

)

(485

)

(26

)

(501

)

Balance, end of period

$

772,639


798,781


$

7,988


$

7,050,463


(2,092

)

$

(18,417

)

$

(167,286

)

$

(487,717

)

$

7,157,670


Three months ended March 31, 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

208,094


208,094


Other comprehensive income (loss)

10,156


10,156


Cash dividends declared:

Common ($0.08 per share)

(87,069

)

(87,069

)

Preferred Series A ($21.25 per share)

(7,703

)

(7,703

)

Preferred Series B ($9.31 per share)

(330

)

(330

)

Preferred Series C ($14.69 per share)

(1,469

)

(1,469

)

Preferred Series D ($15.63 per share)

(9,375

)

(9,375

)

Recognition of the fair value of share-based compensation

(1,885

)

(1,885

)

Other share-based compensation activity

1,338


13


19,089


(1,326

)

17,776


Other

7


1


408


87


619


(222

)

806


Balance, end of period

$

1,071,227


1,089,986


$

10,900


$

9,898,889


(2,866

)

$

(26,765

)

$

(390,860

)

$

(126,244

)

$

10,437,147


See Notes to Unaudited Condensed Consolidated Financial Statements


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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

Operating activities

Net income

$

208,094


$

171,314


Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses

67,638


27,582


Depreciation and amortization

211,198


105,103


Share-based compensation expense

(1,885

)

11,268


Net change in:

Trading account securities

35,510


(8,927

)

Loans held for sale

23,544


(39,502

)

Accrued income and other assets

54,010


(41,066

)

Deferred income taxes

(20,271

)

(4,366

)

Accrued expense and other liabilities

(188,072

)

(25,580

)

Other, net

5,985


(4,036

)

Net cash provided by (used for) operating activities

395,751


191,790


Investing activities

Change in interest bearing deposits in banks

16,876


(14,830

)

Proceeds from:

Maturities and calls of available-for-sale and other securities

116,261


217,015


Maturities of held-to-maturity securities

279,077


210,606


Sales of available-for-sale and other securities

165,364


-


Purchases of available-for-sale and other securities

(887,880

)

(691,607

)

Purchases of held-to-maturity securities

(8,616

)

-


Net proceeds from sales of portfolio loans

118,626


74,831


Net loan and lease activity, excluding sales and purchases

(437,084

)

(714,140

)

Purchases of premises and equipment

(55,485

)

(12,157

)

Proceeds from sales of other real estate

5,860


6,950


Purchases of loans and leases

(43,972

)

(667,031

)

Other, net

(6,094

)

920


Net cash provided by (used for) investing activities

(737,067

)

(1,589,443

)

Financing activities

Increase (decrease) in deposits

1,814,793


363,177


Increase (decrease) in short-term borrowings

(2,433,055

)

(147,339

)

Net proceeds from issuance of long-term debt

1,029,231


1,024,068


Maturity/redemption of long-term debt

(47,434

)

(195,475

)

Dividends paid on preferred stock

(18,865

)

(7,998

)

Dividends paid on common stock

(87,015

)

(56,195

)

Proceeds from stock options exercised

4,822


1,126


Net proceeds from issuance of preferred stock

-


386,348


Other, net

2,882


(967

)

Net cash provided by (used for) financing activities

265,359


1,366,745


Increase (decrease) in cash and cash equivalents

(75,957

)

(30,908

)

Cash and cash equivalents at beginning of period

1,384,770


847,156


Cash and cash equivalents at end of period

$

1,308,813


$

816,248



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Supplemental disclosures:

Interest paid

$

86,477


$

41,398


Income taxes paid

1,059


1,051


Non-cash activities

Loans transferred to held-for-sale from portfolio

158,735


145,210


Loans transferred to portfolio from held-for-sale

168


9,259


Transfer of loans to OREO

10,271


6,468


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.

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 material 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, with early application permitted. Management is currently assessing the impact of the new guidance on Huntington's Unaudited


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Consolidated Financial Statements. Huntington expects to recognize a right-of-use asset and a lease liability for its operating lease commitments.

ASU 2016-05 - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This Update provides accounting clarification for changes in the counterparty to a derivative instrument that has been designated as a qualified hedging instrument. Specifically, a change in the derivative counterparty does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Update was adopted in the current reporting period and did not have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2016-06 - Contingent Put and Call Options in Debt Instruments. This Update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt instruments. An entity performing the assessment set forth in this Update will be required to assess embedded call (put) options solely in accordance with the four-step decision sequence. The Update was adopted in the current reporting period and did not have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2016-07 - Simplifying the Transition to the Equity Method of Accounting. This Update eliminates the requirement for the retrospective use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence of an investor. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method accounting. The Update was adopted in the current reporting period and did not have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

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 2016-17 - Consolidation - Interests Held Through Related Parties that are Under Common Control. The Update amends the guidance included in ASU 2015-02, Consolidation: Amendments to Consolidation Analysis adopted by Huntington in 2016. The Update makes a narrow amendment and requires that a single decision maker should consider indirect economic interests in the entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. Prior to this amendment, indirect interests held through related parties that are under common control were to be considered equivalent of single decision maker's direct interests in their entirety. The Update was adopted in the current reporting period and did not 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


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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 material 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 2017-08 - Premium Amortization on Purchased Callable Debt Securities. The Update amends the guidance related to amortization for certain callable debt securities held at a premium. The new guidance requires the premium to be amortized to the earliest call date. The guidance does not require an accounting change for securities purchased at discount. The Update was adopted in the current reporting period and did not 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 and deferred loan fees and costs and purchase accounting adjustments, which resulted in a net premium of $179 million and $120 million at March 31, 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 March 31, 2017 and December 31, 2016 :

(dollar amounts in thousands)

March 31,
2017

December 31,
2016

Loans and leases:

Commercial and industrial

$

28,175,924


$

28,058,712


Commercial real estate

7,093,118


7,300,901


Automobile

11,155,094


10,968,782


Home equity

9,974,294


10,105,774


Residential mortgage

7,829,137


7,724,961


RV and marine finance

1,934,983


1,846,447


Other consumer

935,719


956,419


Loans and leases

67,098,269


66,961,996


Allowance for loan and lease losses

(672,580

)

(638,413

)

Net loans and leases

$

66,425,689


$

66,323,583



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Purchased Credit-Impaired Loans

The following table presents a rollforward of the accretable yield for purchased credit impaired loans for the three-month period ended March 31, 2017 : and 2016 :

Three months ended
March 31,

(dollar amounts in thousands)

2017

FirstMerit

Balance, beginning of period

$

36,669


Accretion

(4,702

)

Reclassification (to) from nonaccretable difference

5,405


Balance, end of period

$

37,372


The following table reflects the ending and unpaid balances of the purchase credit impaired loans at March 31, 2017 and December 31, 2016 :

March 31, 2017

December 31, 2016

(dollar amounts in thousands)

Ending
Balance

Unpaid
Balance

Ending
Balance

Unpaid
Balance

FirstMerit

Commercial and industrial

$

67,514


$

97,946


$

68,338


$

100,031


Commercial real estate

22,597


38,045


34,042


56,320


Total

$

90,111


$

135,991


$

102,380


$

156,351


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.

The following table presents NALs by loan class at March 31, 2017 and December 31, 2016 :

(dollar amounts in thousands)

March 31,
2017

December 31,
2016

Commercial and industrial

$

232,171


$

234,184


Commercial real estate

13,889


20,508


Automobile

4,881


5,766


Home equity

69,575


71,798


Residential mortgage

80,686


90,502


RV and marine finance

106


245


Other consumer

2


-


Total nonaccrual loans

$

401,310


$

423,003


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

March 31, 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

$

77,998


$

11,428


$

77,392


$

166,818


$

27,941,592


$

67,514


$

-


$

28,175,924


$

15,054


(2)

Commercial real estate

38,046


460


26,281


64,787


7,005,734


22,597


-


7,093,118


14,499


Automobile

70,564


15,517


8,331


94,412


11,058,889


-


1,793


11,155,094


8,123



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Home equity

43,532


18,464


58,631


120,627


9,850,680


-


2,987


9,974,294


15,453


Residential mortgage

91,831


38,144


112,207


242,182


7,495,211


-


91,744


7,829,137


69,244


(3)

RV and marine finance

10,101


3,064


2,202


15,367


1,918,199


-


1,417


1,934,983


2,200


Other consumer

9,234


3,766


3,369


16,369


918,949


-


401


935,719


3,370


Total loans and leases

$

341,306


$

90,843


$

288,413


$

720,562


$

66,189,254


$

90,111


$

98,342


$

67,098,269


$

127,943



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.

The appropriateness of the ACL is based on management's current judgments about the credit quality of the loan portfolio. These judgments consider on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. Further, management evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing commercial real estate values and the development of new or expanded Commercial business segments. Also, the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.

The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings, and (2) the general reserve. The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics, and (2) an estimate of loss based on an impairment review of each impaired C&I and CRE loan where obligor balance is greater than $1 million . For the C&I and CRE portfolios, the estimate of loss based on pools of loans and leases with similar characteristics is made by applying a PD factor and a LGD factor to each individual loan based on a regularly updated loan grade, using a standardized loan grading system. The PD factor and an LGD factor are determined for each loan grade using statistical models based on historical performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower's industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed based on credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data.


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In the case of more homogeneous portfolios, such as automobile loans, home equity loans, residential mortgage loans and RV and marine finance, the determination of the transaction reserve also incorporates PD and LGD factors. The estimate of loss is based on pools of loans and leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis for understanding the borrower's past and current payment performance, and this information is used to estimate expected losses over the emergence period. The performance of first-lien loans ahead of our junior-lien loans is available to use as part of our updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as required.

The general reserve consists of various risk-profile reserve components. The risk-profile component considers items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the loan portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.

The estimate for the AULC is determined using the same procedures and methodologies as used for the ALLL. The loss factors used in the AULC are the same as the loss factors used in the ALLL while also considering a historical utilization of unused commitments. The AULC is reflected in accrued expenses and other liabilities in the Unaudited Condensed Consolidated Balance Sheets.

The acquired loans were recorded at their fair value as of the acquisition date and the prior ALLL was eliminated. An ALLL for acquired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.

The ACL is increased through a provision for credit losses that is charged to earnings, based on Management's quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries, and the ACL associated with loans sold or transferred to held for sale.

The following table presents ALLL and AULC activity by portfolio segment for the three-month periods ended March 31, 2017 and 2016 :

(dollar amounts in thousands)

Commercial

Consumer

Total

Three-month period ended March 31, 2017:

ALLL balance, beginning of period

$

451,091


$

187,322


$

638,413


Loan charge-offs

(23,669

)

(47,046

)

(70,715

)

Recoveries of loans previously charged-off

17,815


13,462


31,277


Provision (reduction in allowance) for loan and lease losses

35,145


38,534


73,679


Allowance for loans sold or transferred to loans held for sale

(74

)

-


(74

)

ALLL balance, end of period

$

480,308


$

192,272


$

672,580


AULC balance, beginning of period

$

86,543


$

11,336


$

97,879


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

2,356


(8,397

)

(6,041

)

AULC balance, end of period

$

88,899


$

2,939


$

91,838


ACL balance, end of period

$

569,207


$

195,211


$

764,418



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(dollar amounts in thousands)

Commercial

Consumer

Total

Three-month period ended March 31, 2016:

ALLL balance, beginning of period

$

398,753


$

199,090


$

597,843


Loan charge-offs

(28,949

)

(30,743

)

(59,692

)

Recoveries of loans previously charged-off

39,911


11,229


51,140


Provision for (reduction in allowance) loan and lease losses

12,726


11,612


24,338


Allowance for loans sold or transferred to loans held for sale

-


90


90


ALLL balance, end of period

$

422,441


$

191,278


$

613,719


AULC balance, beginning of period

$

63,448


$

8,633


$

72,081


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

2,424


820


3,244


AULC balance, end of period

$

65,872


$

9,453


$

75,325


ACL balance, end of period

$

488,313


$

200,731


$

689,044


Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.

C&I and CRE loans are either fully or partially charged-off at 90 -days past due. Automobile, RV and marine finance loans and other consumer loans are 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 at 150 -days past due.

Credit Quality Indicators

To facilitate the monitoring of credit quality for C&I and CRE loans, and for purposes of determining an appropriate ACL level for these loans, Huntington utilizes the following internally defined categories of credit grades:

Pass - Higher quality loans that do not fit any of the other categories described below.

OLEM - The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the loan may weaken or the collateral may be inadequate to protect Huntington's position in the future.

Substandard - Inadequately protected loans by the borrower's ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely Huntington will sustain some loss if any identified weaknesses are not mitigated.

Doubtful - Loans that have all of the weaknesses inherent in those loans classified as Substandard, with the added elements of the full collection of the loan is improbable and that the possibility of loss is high.

The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan or lease and subsequently updated as appropriate.

Commercial loans categorized as OLEM, Substandard, or Doubtful are considered Criticized loans. Commercial loans categorized as Substandard or Doubtful are both considered Classified loans.

For all classes within the consumer loan portfolios, each loan is assigned a specific PD factor that is partially based on the borrower's most recent credit bureau score, which we update quarterly. A credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality.

Huntington assesses the risk in the loan portfolio by utilizing numerous risk characteristics. The classifications described above, and also presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management processes.

The following table presents each loan and lease class by credit quality indicator at March 31, 2017 and December 31, 2016 :


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March 31, 2017

Credit Risk Profile by UCS Classification

(dollar amounts in thousands)

Pass

OLEM

Substandard

Doubtful

Total

Commercial

Commercial and industrial

$

26,216,400


$

808,467


$

1,131,835


$

19,222


$

28,175,924


Commercial real estate

6,867,440


120,212


103,983


1,483


7,093,118


Credit Risk Profile by FICO Score (1), (2)

750+

650-749

<650

Other (3)

Total

Consumer

Automobile

$

5,445,124


$

4,254,397


$

1,172,859


$

280,921


$

11,153,301


Home equity

6,131,710


2,924,593


631,268


283,736


9,971,307


Residential mortgage

4,643,664


2,406,782


611,675


75,272


7,737,393


RV and marine finance

1,179,561


699,701


16,202


38,102


1,933,566


Other consumer

333,683


440,599


142,515


18,521


935,318



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

For all classes within the C&I and CRE portfolios, all loans with an obligor balance of $1 million or greater are evaluated on a quarterly basis for impairment. Generally, consumer loans within any class are not individually evaluated on a regular basis for impairment. However, certain home equity and residential mortgage loans are measured for impairment based on the underlying collateral value. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Loans acquired with evidence of deterioration of credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired.

Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.


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When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any cost, fee, premium, or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALLL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve.

When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full (including already charged-off portion), after which time any additional cash receipts are recognized as interest income. Cash receipts on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.

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 March 31, 2017 and December 31, 2016 :

(dollar amounts in thousands)

Commercial

Consumer

Total

ALLL at March 31, 2017:

Portion of ALLL balance:

Attributable to loans individually evaluated for impairment

$

24,519


$

11,888


$

36,407


Attributable to loans collectively evaluated for impairment

455,789


180,384


636,173


Total ALLL balance

$

480,308


$

192,272


$

672,580


Loan and Lease Ending Balances at March 31, 2017: (1)

Portion of loan and lease ending balance:

Purchased credit-impaired loans

$

90,111


$

-


$

90,111


Individually evaluated for impairment

425,793


457,790


883,583


Collectively evaluated for impairment

34,753,138


31,273,095


66,026,233


Total loans and leases evaluated for impairment

$

35,269,042


$

31,730,885


$

66,999,927


(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.


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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)

March 31, 2017

Three months ended
March 31,

(dollar amounts in thousands)

Ending

Balance

Unpaid

Principal

Balance (5)

Related

Allowance

Average

Balance

Interest

Income

Recognized

With no related allowance recorded:

Commercial and industrial

$

250,789


$

290,673


$

-


$

275,409


$

4,500


Commercial real estate

86,621


117,745


-


85,829


2,000


Automobile

-


-


-


-


-


Home equity

-


-


-


-


-


Residential mortgage

-


-


-


-


-


RV and marine finance

-


-


-


-


-


Other consumer

-


-


-


-


-


With an allowance recorded:

Commercial and industrial (3)

278,368


306,613


33,678


334,179


1,906


Commercial real estate (4)

41,416


49,444


2,810


69,094


467


Automobile

32,731


32,942


2,004


31,846


534


Home equity (6)

326,755


360,622


16,232


323,079


3,949


Residential mortgage (6) (7)

349,527


383,685


14,217


338,640


3,110


RV and marine finance

687


710


26


343


11


Other consumer

4,245


4,245


248


4,071


57


Total

Commercial and industrial

529,157


597,286


33,678


609,588


6,406


Commercial real estate

128,037


167,189


2,810


154,923


2,467


Automobile

32,731


32,942


2,004


31,846


534


Home equity

326,755


360,622


16,232


323,079


3,949


Residential mortgage

349,527


383,685


14,217


338,640


3,110


RV and marine finance

687


710


26


343


11


Other consumer

4,245


4,245


248


4,071


57




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December 31, 2016

Three months ended
March 31,

(dollar amounts in thousands)

Ending

Balance

Unpaid

Principal

Balance (5)

Related

Allowance

Average

Balance

Interest

Income

Recognized

With no related allowance recorded:

Commercial and industrial

$

299,606



$

358,712



$

-



$

261,144



$

1,233


Commercial real estate

88,817



126,152



-



71,807



1,616


Automobile

-


-


-


-


-


Home equity

-



-



-



-



-


Residential mortgage

-



-



-



1,473



2


RV and marine finance

-


-


-


-


-


Other consumer

-



-



-



45



102


With an allowance recorded:

Commercial and industrial (3)

406,243


448,121


22,259


264,084


3,086


Commercial real estate (4)

97,238


107,512


3,434


79,857


758


Automobile

30,961


31,298


1,850


32,284


578


Home equity (6)

319,404


352,722


15,032


250,016


2,968


Residential mortgage (6) (7)

327,753


363,099


12,849


362,280


3,036


RV and marine finance

-


-


-


-


-


Other consumer

3,897


3,897


260


4,799


66


Total

Commercial and industrial

705,849


806,833


22,259


525,228


4,319


Commercial real estate

186,055


233,664


3,434


151,664


2,374


Automobile

30,961


31,298


1,850


32,284


578


Home equity

319,404


352,722


15,032


250,016


2,968


Residential mortgage

327,753


363,099


12,849


363,753


3,038


RV and marine finance

-


-


-


-


-


Other consumer

3,897


3,897


260


4,844


168


(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 March 31, 2017 and December 31, 2016 , commercial and industrial loans with an allowance recorded of $117 million and $293 million , respectively, were considered impaired due to their status as a TDR.

(4)

At March 31, 2017 and December 31, 2016 , commercial real estate loans with an allowance recorded of $24 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.

(7)

At March 31, 2017 and December 31, 2016 , residential mortgage loans with an allowance recorded of $30 million and $29 million , respectively, were guaranteed by the U.S. government.

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.


54

Table of Contents


The following table presents by class and by the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month periods ended March 31, 2017 an 2016 :

New Troubled Debt Restructurings During The Three-Month Period Ended (1)

March 31, 2017

March 31, 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


$

19


$

6


1


$

17


$

(1

)

Amortization or maturity date change

236


112,425


(1,002

)

184


122,658


572


Other

3


160


(27

)

8


858


(4

)

Total Commercial and industrial

240


112,604


(1,023

)

193


123,533


567


Commercial real estate:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

24


31,263


(388

)

24


33,795


(559

)

Other

-


-


-


2


263


16


Total commercial real estate:

24


31,263


(388

)

26


34,058


(543

)

Automobile:

Interest rate reduction

14


178


5


4


42


2


Amortization or maturity date change

477


4,301


111


421


3,901


220


Chapter 7 bankruptcy

240


1,822


29


317


2,562


115


Other

-


-


-


-


-


-


Total Automobile

731


6,301


145


742


6,505


337


Home equity:

Interest rate reduction

8


562


7


20


1,384


67


Amortization or maturity date change

106


5,496


(674

)

229


11,890


(1,282

)

Chapter 7 bankruptcy

87


3,619


1,038


99


3,597


733


Other

58


3,729


(326

)

-


-


-


Total Home equity

259


13,406


45


348


16,871


(482

)

Residential mortgage:

Interest rate reduction

2


110


(9

)

5


657


(32

)

Amortization or maturity date change

99


11,071


(258

)

92


10,759


(577

)

Chapter 7 bankruptcy

24


2,691


(136

)

17


1,505


70


Other

16


1,920


14


-


-


-


Total Residential mortgage

141


15,792


(389

)

114


12,921


(539

)

RV and marine finance:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

14


476


12


-


-


-


Chapter 7 bankruptcy

15


210


4


-


-


-


Other

-


-


-


-


-


-


Total RV and marine finance

29


686


16


-


-


-



55

Table of Contents


Other consumer:

Interest rate reduction

1


78


2


-


-


-


Amortization or maturity date change

2


267


7


4


555


24


Chapter 7 bankruptcy

1


4


-


7


66


7


Other

-


-


-


-


-


-


Total Other consumer

4


349


9


11


621


31


Total new troubled debt restructurings

1,428


$

180,401


$

(1,585

)

1,434


$

194,509


$

(629

)

(1)

TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.

(2)

Amount represents the financial impact via provision for loan and lease losses as a result of the modification.

Pledged Loans and Leases

At March 31, 2017 , the Bank has access to the Federal Reserve's discount window and advances from the FHLB – Cincinnati. As of March 31, 2017 , these borrowings and advances are secured by $29.3 billion of loans and securities.

On March 31, 2015, Huntington completed its acquisition of Macquarie Equipment Finance, which we have re-branded Huntington Technology Finance. Huntington assumed debt associated with a related securitization. As of March 31, 2017 , the debt is secured by $55 million of leases held by the trust.

4 . AVAILABLE-FOR-SALE AND OTHER SECURITIES

Listed below are the contractual maturities of available-for-sale and other securities at March 31, 2017 and December 31, 2016 :

March 31, 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

$

6,379


$

6,383


$

4,978


$

4,988


After 1 year through 5 years

502


507


502


509


After 5 years through 10 years

-


-


-


-


After 10 years

-


-


-


-


Total U.S. Treasury

6,881


6,890


5,480


5,497


Federal agencies: mortgage-backed securities:

1 year or less

-


-


-


-


After 1 year through 5 years

41,925


41,995


46,591


46,762


After 5 years through 10 years

273,555


274,738


173,941


176,404


After 10 years

11,099,533


10,905,134


10,630,929


10,450,176


Total Federal agencies: mortgage-backed securities

11,415,013


11,221,867


10,851,461


10,673,342


Other agencies:

1 year or less

4,354


4,417


4,302


4,367


After 1 year through 5 years

9,503


9,690


5,092


5,247


After 5 years through 10 years

75,673


75,736


63,618


63,928


After 10 years

-


-


-


-


Total other agencies

89,530


89,843


73,012


73,542



56

Table of Contents


Total U.S. Treasury, Federal agency, and other agency securities

11,511,424


11,318,600


10,929,953


10,752,381


Municipal securities:

1 year or less

180,536


178,416


169,636


166,887


After 1 year through 5 years

951,261


953,776


933,893


933,903


After 5 years through 10 years

1,481,804


1,493,797


1,463,459


1,464,583


After 10 years

689,993


691,165


693,440


684,684


Total municipal securities

3,303,594


3,317,154


3,260,428


3,250,057


Asset-backed securities:

1 year or less

-


-


-


-


After 1 year through 5 years

88,216


88,681


80,700


80,560


After 5 years through 10 years

168,634


170,102


223,352


224,565


After 10 years

537,534


508,154


520,072


488,356


Total asset-backed securities

794,384


766,937


824,124


793,481


Corporate debt:

1 year or less

59,021


59,429


43,223


43,603


After 1 year through 5 years

64,529


66,027


78,430


80,196


After 5 years through 10 years

34,681


35,362


32,523


32,865


After 10 years

36,098


37,863


40,361


42,019


Total corporate debt

194,329


198,681


194,537


198,683


Other:

1 year or less

1,652


1,652


1,650


1,650


After 1 year through 5 years

2,300


2,275


2,302


2,283


After 5 years through 10 years

-


-


-


-


After 10 years

46


46


10


10


Nonmarketable equity securities

552,628


552,628


547,704


547,704


Mutual funds

14,331


14,331


15,286


15,286


Marketable equity securities

861


1,301


861


1,302


Total other

571,818


572,233


567,813


568,235


Total available-for-sale and other securities

$

16,375,549


$

16,173,605


$

15,776,855


$

15,562,837


Other securities at March 31, 2017 and December 31, 2016 include nonmarketable equity securities of $249 million and $249 million of stock issued by the FHLB and $303 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 March 31, 2017 and December 31, 2016 :


57

Table of Contents


Unrealized

(dollar amounts in thousands)

Amortized

Cost

Gross

Gains

Gross

Losses

Fair Value

March 31, 2017

U.S. Treasury

$

6,881


$

9


$

-


$

6,890


Federal agencies:

Mortgage-backed securities

11,415,013


10,882


(204,028

)

11,221,867


Other agencies

89,530


356


(43

)

89,843


Total U.S. Treasury, Federal agency securities

11,511,424


11,247


(204,071

)

11,318,600


Municipal securities

3,303,594


39,687


(26,127

)

3,317,154


Asset-backed securities

794,384


2,225


(29,672

)

766,937


Corporate debt

194,329


4,357


(5

)

198,681


Other securities

571,818


441


(26

)

572,233


Total available-for-sale and other securities

$

16,375,549


$

57,957


$

(259,901

)

$

16,173,605


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


The following tables provide detail on investment securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at March 31, 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

March 31, 2017

Federal agencies:

Mortgage-backed securities

$

9,846,004


$

(202,610

)

$

40,432


$

(1,418

)

$

9,886,436


$

(204,028

)

Other agencies

25,475


(43

)

-


-


25,475


(43

)

Total Federal agency securities

9,871,479


(202,653

)

40,432


(1,418

)

9,911,911


(204,071

)

Municipal securities

859,848


(19,825

)

257,829


(6,302

)

1,117,677


(26,127

)

Asset-backed securities

260,870


(2,268

)

201,436


(27,404

)

462,306


(29,672

)

Corporate debt

694


(5

)

200


-


894


(5

)

Other securities

785


(15

)

1,489


(11

)

2,274


(26

)

Total temporarily impaired securities

$

10,993,676


$

(224,766

)

$

501,386


$

(35,135

)

$

11,495,062


$

(259,901

)


58

Table of Contents


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 March 31, 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 $5.2 billion . There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders' equity at March 31, 2017 .

The following table is a summary of realized securities gains and losses for the three-month periods ended March 31, 2017 and 2016 :

Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

Gross gains on sales of securities

$

545


$

-


Gross (losses) on sales of securities

(553

)

-


Net gain on sales of securities

$

(8

)

$

-



Security Impairment

Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment. The Company conducts a comprehensive security-level assessment on all available-for-sale 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. Impairment would exist 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. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost.

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


59

Table of Contents


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 March 31, 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)

ICONS

$

18,594


$

18,594


$

15,416


$

(3,178

)

BB

19/21

7

13

55

MM Comm III

4,573


4,369


3,625


(744

)

BB+

5/8

5

6

39

Pre TSL IX (1)

5,000


3,955


3,285


(670

)

C

27/37

16

8

10

Pre TSL XI (1)

25,000


19,413


15,923


(3,490

)

C

43/53

14

8

14

Reg Diversified (1)

25,500


4,195


1,832


(2,363

)

D

20/36

33

8

-

Tropic III

31,000


31,000


19,411


(11,589

)

BB

27/36

16

7

42

Total at March 31, 2017

$

109,667


$

81,526


$

59,492


$

(22,034

)

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.


For the three-month periods ended March 31, 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
March 31,

(dollar amounts in thousands)

2017

2016

Available-for-sale and other securities:

Collateralized Debt Obligations

$

-


$

-


Municipal Securities

24


-


Total available-for-sale and other securities

$

24


$

-



The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the three-month periods ended March 31, 2017 and 2016 as follows:


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Table of Contents


Three Months Ended
March 31,

(dollar amounts in thousands)

2017

2016

Balance, beginning of period

$

11,796


$

18,368


Reductions from sales

(4,558

)

-


Additional credit losses

24


-


Balance, end of period

$

7,262


$

18,368


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.

Listed below are the contractual maturities of held-to-maturity securities at March 31, 2017 and December 31, 2016 :

March 31, 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

59,710


59,420


41,261


40,791


After 10 years

6,887,466


6,857,540


7,157,083


7,139,943


Total Federal agencies: mortgage-backed securities

6,947,176


6,916,960


7,198,344


7,180,734


Other agencies:

1 year or less

-


-


-


-


After 1 year through 5 years

-


-


-


-


After 5 years through 10 years

382,617


383,290


398,341


399,452


After 10 years

197,714


195,990


204,083


201,180


Total other agencies

580,331


579,280


602,424


600,632


Total U.S. Government backed agencies

7,527,507


7,496,240


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

6,010


5,862


6,171


5,902


Total municipal securities

6,010


5,862


6,171


5,902


Total held-to-maturity securities

$

7,533,517


$

7,502,102


$

7,806,939


$

7,787,268


The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at March 31, 2017 and December 31, 2016 :

Unrealized

(dollar amounts in thousands)

Amortized

Cost

Gross

Gains

Gross

Losses

Fair Value

March 31, 2017

Federal agencies:

Mortgage-backed securities

$

6,947,176


$

11,534


$

(41,750

)

$

6,916,960


Other agencies

580,331


1,886


(2,937

)

579,280


Total U.S. Government backed agencies

7,527,507


13,420


(44,687

)

7,496,240


Municipal securities

6,010


-


(148

)

5,862


Total held-to-maturity securities

$

7,533,517


$

13,420


$

(44,835

)

$

7,502,102



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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 losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at March 31, 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

March 31, 2017

Federal agencies:

Mortgage-backed securities

$

4,852,958


$

(35,507

)

$

169,422


$

(6,243

)

$

5,022,380


$

(41,750

)

Other agencies

412,793


(2,937

)

-


-


412,793


(2,937

)

Total U.S. Government backed securities

5,265,751


(38,444

)

169,422


(6,243

)

5,435,173


(44,687

)

Municipal securities

5,862


(148

)

-


-


5,862


(148

)

Total temporarily impaired securities

$

5,271,613


$

(38,592

)

$

169,422


$

(6,243

)

$

5,441,035


$

(44,835

)

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 would exist 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 March 31, 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 periods ended March 31, 2017 and 2016 :


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Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

Residential mortgage loans sold with servicing retained

$

845,415


$

632,466


Pretax gains resulting from above loan sales (1)

22,190


14,113


(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 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 periods ended March 31, 2017 and 2016 :

Fair Value Method:

Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

Fair value, beginning of period

$

13,747


$

17,585


Change in fair value during the period due to:

Time decay (1)

(231

)

(273

)

Payoffs (2)

(364

)

(504

)

Changes in valuation inputs or assumptions (3)

155


(1,989

)

Fair value, end of period:

$

13,307


$

14,819


Weighted-average life (years)

5.6


5.2


(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
March 31,

(dollar amounts in thousands)

2017

2016

Carrying value, beginning of period

$

172,466


$

143,133


New servicing assets created

9,635


6,109


Impairment (charge) / recovery

1,800


(16,340

)

Amortization and other

(6,089

)

(5,627

)

Carrying value, end of period

$

177,812


$

127,275


Fair value, end of period

$

178,581


$

127,516


Weighted-average life (years)

7.1


6.5


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 very 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.


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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 March 31, 2017 and December 31, 2016 , to changes in these assumptions follows:

March 31, 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)

11.90

%

$

(522

)

$

(1,007

)

10.90

%

$

(501

)

$

(970

)

Spread over forward interest rate swap rates

839 bps


(411

)

(798

)

536 bps


(454

)

(879

)

For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at March 31, 2017 and December 31, 2016 , to changes in these assumptions follows:

March 31, 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)

8.10

%

$

(4,756

)

$

(9,242

)

7.80

%

$

(4,510

)

$

(8,763

)

Spread over forward interest rate swap rates

1,064 bps


(5,518

)

(10,692

)

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 March 31, 2017 and 2016 , respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $19.1 billion and $18.9 billion at March 31, 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 periods ended March 31, 2017 and 2016 , and the fair value at the end of each period were as follows:

Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

Carrying value, beginning of period

$

18,285


$

8,771


New servicing assets created

-


-


Amortization and other

(3,126

)

(1,742

)

Carrying value, end of period

$

15,159


$

7,029


Fair value, end of period

$

15,278


$

7,250


Weighted-average life (years)

4.0


3.3


A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at March 31, 2017 and December 31, 2016 follows:


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March 31, 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)

19.95

%

$

(877

)

$

(1,695

)

19.98

%

$

(1,047

)

$

(2,026

)

Spread over forward interest rate swap rates

500 bps


(22

)

(45

)

500 bps


(26

)

(53

)


Servicing income amounted to $5 million and $3 million for the three-month periods ending March 31, 2017 , and 2016 , respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.5 billion and $1.7 billion at March 31, 2017 and December 31, 2016 , respectively.

Small Business Administration (SBA) Portfolio

The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month periods ended March 31, 2017 and 2016 :

Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

SBA loans sold with servicing retained

$

77,672


$

45,889


Pretax gains resulting from above loan sales (1)

5,818


3,521


(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 periods ended March 31, 2017 and 2016 , and the fair value at the end of each period were as follows:

Three months ended
March 31,

(dollar amounts in thousands)

2017

2016

Carrying value, beginning of period

$

21,080


$

19,747


New servicing assets created

1,475


1,511


Amortization and other

(1,156

)

(1,733

)

Carrying value, end of period

$

21,399


$

19,525


Fair value, end of period

$

25,857


$

23,048


Weighted-average life (years)

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 March 31, 2017 and December 31, 2016 follows:

March 31, 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)

7.40

%

$

(346

)

$

(687

)

7.40

%

$

(324

)

$

(644

)

Discount rate

15.00


(696

)

(1,363

)

15.00


(1,270

)

(1,870

)

Servicing income amounted to $3 million and $2 million for the three-month periods ending March 31, 2017 , and 2016 , respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.2 billion and $1.1 billion at March 31, 2017 and December 31, 2016 , respectively.


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Table of Contents


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.

8 . OTHER COMPREHENSIVE INCOME

The components of other comprehensive income for the three-month periods ended March 31, 2017 and 2016 , were as follows:

Three Months Ended
March 31, 2017

Tax (Expense)

(dollar amounts in thousands)

Pretax

Benefit

After-tax

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

$

810


$

(286

)

$

524


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

8,996


(2,795

)

6,201


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

5,874


(2,077

)

3,797


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

15,680


(5,158

)

10,522


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

(1,831

)

641


(1,190

)

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

560


(196

)

364


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

(1,271

)

445


(826

)

Net change in pension and other post-retirement obligations

708


(248

)

460


Total other comprehensive income (loss)

$

15,117


$

(4,961

)

$

10,156



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Table of Contents


Three Months Ended
March 31, 2016

Tax (Expense)

(dollar amounts in thousands)

Pretax

Benefit

After-tax

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

$

(3,634

)

$

1,285


$

(2,349

)

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

80,468


(28,685

)

51,783


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

(464

)

164


(300

)

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

76,370


(27,236

)

49,134


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

104


(36

)

68


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

14,229


(4,980

)

9,249


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

(644

)

224


(420

)

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

13,585


(4,756

)

8,829


Net change in pension and other post-retirement obligations

1,293


(452

)

841


Total other comprehensive income (loss)

$

91,352


$

(32,480

)

$

58,872


The following table presents activity in accumulated other comprehensive income (loss), net of tax, for the three -month periods ended March 31, 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

49,434


68


9,249


-


58,751


Amounts reclassified from accumulated OCI to earnings

(300

)

-


(420

)

841


121


Period change

49,134


68


8,829


841


58,872


March 31, 2016

$

57,495


$

244


$

4,881


$

(229,906

)

$

(167,286

)

December 31, 2016

$

(192,764

)

$

287


$

(2,634

)

$

(205,905

)

$

(401,016

)

Other comprehensive income before reclassifications

6,725


-


(1,190

)

-


5,535


Amounts reclassified from accumulated OCI to earnings

3,797


-


364


460


4,621


Period change

10,522


-


(826

)

460


10,156


March 31, 2017

$

(182,242

)

$

287


$

(3,460

)

$

(205,445

)

$

(390,860

)

(1)

Amounts at March 31, 2017 and December 31, 2016 include $81 million and $82 million , respectively, of net unrealized gains on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized gains will be recognized in earnings over the remaining life of the security using the effective interest method.



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Table of Contents


The following table presents the reclassification adjustments out of accumulated OCI included in net income and the impacted line items as listed on the Unaudited Condensed Consolidated Statements of Income for the three-month periods ended March 31, 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)

March 31, 2017

March 31, 2016

Gains (losses) on debt securities:

Amortization of unrealized gains (losses)

$

(3,606

)

$

464


Interest income - held-to-maturity securities - taxable

Realized gain (loss) on sale of securities

(2,244

)

-


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

OTTI recorded

(24

)

-


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

(5,874

)

464


Total before tax

2,077


(164

)

Tax (expense) benefit

$

(3,797

)

$

300


Net of tax

Gains (losses) on cash flow hedging relationships:

Interest rate contracts

$

(560

)

$

645


Interest income - loans and leases

Interest rate contracts

-


(1

)

Noninterest income - other income

(560

)

644


Total before tax

196


(224

)

Tax (expense) benefit

$

(364

)

$

420


Net of tax

Amortization of defined benefit pension and post-retirement items:

Actuarial gains (losses)

$

(1,200

)

$

(1,785

)

Noninterest expense - personnel costs

Prior service credit

492


492


Noninterest expense - personnel costs

(708

)

(1,293

)

Total before tax

248


452


Tax (expense) benefit

$

(460

)

$

(841

)

Net of tax


9 . EARNINGS PER SHARE

Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of the Company's convertible preferred. 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 -month periods ended March 31, 2017 and 2016 , was as follows:


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Table of Contents


Three Months Ended
March 31,

(dollar amounts in thousands, except per share amounts)

2017

2016

Basic earnings per common share:

Net income

$

208,094


$

171,314


Preferred stock dividends

(18,878

)

(7,998

)

Net income available to common shareholders

$

189,216


$

163,316


Average common shares issued and outstanding

1,086,374


795,755


Basic earnings per common share

$

0.17


$

0.21


Diluted earnings per common share:

Net income available to common shareholders

$

189,216


$

163,316


Effect of assumed preferred stock conversion

-


-


Net income applicable to diluted earnings per share

$

189,216


$

163,316


Average common shares issued and outstanding

1,086,374


795,755


Dilutive potential common shares:

Stock options and restricted stock units and awards

19,139


10,385


Shares held in deferred compensation plans

2,953


2,075


Other

151


134


Dilutive potential common shares:

22,243


12,594


Total diluted average common shares issued and outstanding

1,108,617


808,349


Diluted earnings per common share

$

0.17


$

0.20


For the three-month periods ended March 31, 2017 and 2016 , approximately 0.9 million and 3.5 million , respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.

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. For additional information on benefit plans, see the Benefit Plan footnote in our 2016 Form 10-K.

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.

The following table shows the components of net periodic (benefit) cost for all plans:


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Pension Benefits

Post Retirement Benefits

Three Months Ended March 31,

Three Months Ended March 31,

(dollar amounts in thousands)

2017

2016

2017

2016

Service cost

$

640


$

1,025


$

22


$

-


Interest cost

7,477


6,748


99


55


Expected return on plan assets

(13,803

)

(10,223

)

-


-


Amortization of prior service cost

-


-


(492

)

(492

)

Amortization of (gain) loss

1,747


1,864


(55

)

(72

)

Settlements

2,500


3,400


-


-


Net periodic (benefit) cost

$

(1,439

)

(1

)

$

2,814


$

(426

)

(1

)

$

(509

)

(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 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 first quarter 2017 and 2016 was $11 million and $8 million , respectively.


11 . FAIR VALUES OF ASSETS AND LIABILITIES

See Note 17 "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 periods ended March 31, 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 March 31, 2017 and December 31, 2016 are summarized below:

Fair Value Measurements at Reporting Date Using

Netting Adjustments (1)

March 31, 2017

(dollar amounts in thousands)

Level 1

Level 2

Level 3

Assets

Loans held for sale

$

-


$

423,324


$

-


$

-


$

423,324


Loans held for investment

-


54,123


44,219


-


98,342


Trading account securities:

Municipal securities

-


3,434


-


-


3,434


Other securities

94,201


150


-


-


94,351


94,201


3,584


-


-


97,785


Available-for-sale and other securities:

U.S. Treasury securities

6,890


-


-


-


6,890


Federal agencies: Mortgage-backed

-


11,221,867


-


-


11,221,867


Federal agencies: Other agencies

-


89,843


-


-


89,843


Municipal securities

-


449,502


2,867,652


-


3,317,154


Asset-backed securities

-


707,445


59,492


-


766,937


Corporate debt

-


198,681


-


-


198,681


Other securities

15,632


3,973


-


-


19,605


22,522


12,671,311


2,927,144


-


15,620,977


MSRs

-


-


13,307


-


13,307


Derivative assets

-


342,584


9,439


(173,603

)

178,420


Liabilities

Derivative liabilities

-


322,999


6,745


(246,192

)

83,552


Short-term borrowings

1,420


-


-


-


1,420



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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 periods ended March 31, 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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Table of Contents


Level 3 Fair Value Measurements
Three months ended March 31, 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)

-


(333

)

-


-


-


Total gains/losses for the period:

Included in earnings

(440

)

5,150


(1,386

)

28


(63

)

Included in OCI

-


-


20,475


3,172


-


Purchases/originations

-


-


132,666


-


-


Sales

-


-


-


(19,133

)

-


Repayments

-


-


-


-


(3,598

)

Issues

-


-


-


-


-


Settlements

-


-


(82,147

)

(578

)

-


Closing balance

$

13,307


$

2,694


$

2,867,652


$

59,492


$

44,219


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

$

(440

)

$

5,150


$

20,269


$

1,212


$

-



Level 3 Fair Value Measurements
Three months ended March 31, 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