The Quarterly
HBAN Q1 2017 10-Q

Huntington Bancshares Inc (HBAN) SEC Quarterly Report (10-Q) for Q2 2017

HBAN Q3 2017 10-Q
HBAN Q1 2017 10-Q HBAN Q3 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 June 30, 2017

Commission File Number 1-34073

Huntington Bancshares Incorporated

Maryland

31-0724920

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant's telephone number, including area code (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.      x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨   (Do not check if a smaller reporting company)

Smaller reporting company

¨

Emerging growth company

¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ¨   Yes     x   No

There were 1,090,016,469 shares of Registrant's common stock ($0.01 par value) outstanding on June 30, 2017 .



Table of Contents


HUNTINGTON BANCSHARES INCORPORATED

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

41

Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016

41

Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2017 and 2016

42

Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2017 and 2016

44

Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2017 and 2016

45

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

46

Notes to Unaudited Condensed Consolidated Financial Statements

48

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:

18

Credit Risk

19

Market Risk

28

Liquidity Risk

29

Operational Risk

30

Compliance Risk

31

Capital

31

Fair Value

33

Business Segment Discussion

33

Additional Disclosures

37

Item 3. Quantitative and Qualitative Disclosures about Market Risk

100

Item 4. Controls and Procedures

100

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

101

Item 1A. Risk Factors

101

Item 6. Exhibits

102

Signatures

104


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 over 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. Our 996 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2016 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2016 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.





6

Table of Contents


EXECUTIVE OVERVIEW

Summary of 2017 Second Quarter Results Compared to 2016 Second Quarter

For the quarter, we reported net income of $272 million , or $0.23 per common share, compared with $175 million , or $0.19 per common share, in the year-ago quarter ( see Table 1 ). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $50 million pre-tax, or $0.03 per common share.

Fully-taxable equivalent net interest income was $757 million , up $241 million , or 47% . The results reflected the benefit from a $23.9 billion , or 35% , increase in average earning assets and a 25 basis point improvement in the net interest margin to 3.31% . Average earning asset growth included a $15.4 billion , or 30% , increase in average loans and leases, and an $8.5 billion , or 56% , increase in average securities, both of which were impacted by the FirstMerit acquisition. The net interest margin expansion reflected a 34 basis point increase in earning asset yields, including an approximate 15 basis point impact of purchase accounting, and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 11 basis point increase in funding costs.

The provision for credit losses was $25 million consistent with the year-ago quarter. NCOs increased $19 million to $36 million , primarily as a result of Consumer charge-offs on the acquired FirstMerit portfolio. NCOs represented an annualized 0.21% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

Noninterest income was $325 million , up $54 million , or 20% . The increase was primarily a result of the FirstMerit acquisition. In addition, card and payment processing income increased due to higher credit and debit card related income and underlying customer growth. Also, service charges on deposit accounts increased reflecting continued new customer acquisition.

Noninterest expense was $694 million , up $171 million , or 33% , primarily reflecting the impact of the FirstMerit acquisition. Personnel costs increased primarily reflecting an increase in average full-time equivalent employees and an increase in acquisition-related personnel expense. Further, deposit and other insurance expense increased, as a result of the larger assessment base as well as the FDIC Large Institution Surcharge implemented during the 2016 third quarter.

The tangible common equity to tangible assets ratio was 7.41% , down 55 basis points from a year-ago. The CET1 risk-based capital ratio was 9.88% at June 30, 2017 , compared to 9.80% a year ago. The regulatory tier 1 risk-based capital ratio was 11.24% compared to 11.37% at June 30, 2016 . Capital ratios were impacted by the goodwill created and the issuance of common stock as part of the FirstMerit acquisition. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of Class C preferred equity during the 2016 third quarter in exchange for FirstMerit preferred equity in conjunction with the acquisition. The total risk-based capital ratio was impacted by the repurchase of trust preferred securities during the 2016 third quarter and fourth quarter. In addition, certain trust preferred securities were acquired in the FirstMerit acquisition and subsequently were redeemed. There were no common shares repurchased over the past five quarters.

Business Overview

General

Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary customer relationships across all business segments, (4) continue to strengthen risk management and (5) maintain capital and liquidity positions consistent with our risk appetite.

Economy

We expect ongoing consumer and business confidence to translate into private sector investment fueling continued economic momentum. We are seeing solid manufacturing and infrastructure growth in the Midwest. Businesses are adding jobs and investing more, and our pipelines have remained steady.


DISCUSSION OF RESULTS OF OPERATIONS

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


7

Table of Contents


Table 1 - Selected Quarterly Income Statement Data (1)

(dollar amounts in thousands, except per share amounts)

Three Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,

2017

2017

2016

2016

2016

Interest income

$

846,424


$

820,360


$

814,858


$

694,346


$

565,658


Interest expense

101,912


90,385


79,877


68,956


59,777


Net interest income

744,512


729,975


734,981


625,390


505,881


Provision for credit losses

24,978


67,638


74,906


63,805


24,509


Net interest income after provision for credit losses

719,534


662,337


660,075


561,585


481,372


Service charges on deposit accounts

87,582


83,420


91,577


86,847


75,613


Cards and payment processing income

52,485


47,169


49,113


44,320


39,184


Mortgage banking income

32,268


31,692


37,520


40,603


31,591


Trust and investment management services

32,232


33,869


34,016


28,923


22,497


Insurance income

15,843


15,264


16,486


15,865


15,947


Brokerage income

16,294


15,758


17,014


14,719


14,599


Capital markets fees

16,836


14,200


18,730


14,750


13,037


Bank owned life insurance income

15,322


17,542


17,067


14,452


12,536


Gain on sale of loans

12,002


12,822


24,987


7,506


9,265


Securities gains (losses)

135


(8

)

(1,771

)

1,031


656


Other Income

44,219


40,735


29,598


33,399


36,187


Total noninterest income

325,218


312,463


334,337


302,415


271,112


Personnel costs

391,997


382,000


359,755


405,024


298,949


Outside data processing and other services

75,169


87,202


88,695


91,133


63,037


Equipment

42,924


46,700


59,666


40,792


31,805


Net occupancy

52,613


67,700


49,450


41,460


30,704


Professional services

18,190


18,295


23,165


47,075


21,488


Marketing

18,843


13,923


21,478


14,438


14,773


Deposit and other insurance expense

20,418


20,099


15,772


14,940


12,187


Amortization of intangibles

14,242


14,355


14,099


9,046


3,600


Other expense

59,968


57,148


49,417


48,339


47,118


Total noninterest expense

694,364


707,422


681,497


712,247


523,661


Income before income taxes

350,388


267,378


312,915


151,753


228,823


Provision for income taxes

78,647


59,284


73,952


24,749


54,283


Net income

271,741


208,094


238,963


127,004


174,540


Dividends on preferred shares

18,889


18,878


18,865


18,537


19,874


Net income applicable to common shares

$

252,852


$

189,216


$

220,098


$

108,467


$

154,666


Average common shares-basic

1,088,934


1,086,374


1,085,253


938,578


798,167


Average common shares-diluted

1,108,527


1,108,617


1,104,358


952,081


810,371


Net income per common share-basic

$

0.23


$

0.17


$

0.20


$

0.12


$

0.19


Net income per common share-diluted

0.23


0.17


0.20


0.11


0.19


Cash dividends declared per common share

0.08


0.08


0.08


0.07


0.07


Return on average total assets

1.09

%

0.84

%

0.95

%

0.58

%

0.96

%

Return on average common shareholders' equity

10.6


8.2


9.4


5.4


9.6


Return on average tangible common shareholders' equity (2)

14.4


11.3


12.9


7.0


11.0


Net interest margin (3)

3.31


3.30


3.25


3.18


3.06


Efficiency ratio (4)

62.9


65.7


61.6


75.0


66.1


Effective tax rate

22.4


22.2


23.6


16.3


23.7


Revenue-FTE

Net interest income

$

744,512


$

729,975


$

734,981


$

625,390


$

505,881


FTE adjustment

12,069


12,058


12,560


10,598


10,091


Net interest income (3)

756,581


742,033


747,541


635,988


515,972


Noninterest income

325,218


312,463


334,337


302,415


271,112


Total revenue (3)

$

1,081,799


$

1,054,496


$

1,081,878


$

938,403


$

787,084




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Table of Contents


Table 2 - Selected Year to Date Income Statements (1)

(dollar amounts in thousands, except per share amounts)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Interest income

$

1,666,784


$

1,122,909


$

543,875


48

 %

Interest expense

192,297


113,962


78,335


69


Net interest income

1,474,487


1,008,947


465,540


46


Provision for credit losses

92,616


52,091


40,525


78


Net interest income after provision for credit losses

1,381,871


956,856


425,015


44


Service charges on deposit accounts

171,002


145,875


25,127


17


Cards and payment processing income

99,654


75,631


24,023


32


Mortgage banking income

63,960


50,134


13,826


28


Trust and investment management services

66,101


45,335


20,766


46


Insurance income

31,107


32,172


(1,065

)

(3

)

Brokerage income

32,052


30,101


1,951


6


Capital markets fees

31,036


26,047


4,989


19


Bank owned life insurance income

32,864


26,049


6,815


26


Gain on sale of loans

24,824


14,660


10,164


69


Securities gains

127


656


(529

)

(81

)

Other income

84,954


66,319


18,635


28


Total noninterest income

637,681


512,979


124,702


24


Personnel costs

773,997


584,346


189,651


32


Outside data processing and other services

162,371


124,915


37,456


30


Equipment

89,624


64,381


25,243


39


Net occupancy

120,313


62,180


58,133


93


Professional services

36,485


35,026


1,459


4


Marketing

32,766


27,041


5,725


21


Deposit and other insurance expense

40,517


23,395


17,122


73


Amortization of intangibles

28,597


7,312


21,285


291


Other expense

117,116


86,145


30,971


36


Total noninterest expense

1,401,786


1,014,741


387,045


38


Income before income taxes

617,766


455,094


162,672


36


Provision for income taxes

137,931


109,240


28,691


26


Net income

479,835


345,854


133,981


39


Dividends declared on preferred shares

37,767


27,872


9,895


36


Net income applicable to common shares

$

442,068


$

317,982


$

124,086


39

 %

Average common shares-basic

1,087,654


796,961


290,693


36

 %

Average common shares-diluted

1,108,572


809,360


299,212


37


Net income per common share-basic

$

0.41


$

0.40


$

0.01


3


Net income per common share-diluted

0.40


0.39


0.01


3


Cash dividends declared per common share

0.16


0.14


0.02


14


Revenue-FTE

Net interest income

$

1,474,487


$

1,008,947


$

465,540


46

 %

FTE adjustment

24,127


19,250


4,877


25


Net interest income (3)

1,498,614


1,028,197


470,417


46


Noninterest income

637,681


512,979


124,702


24


Total revenue (3)

$

2,136,295


$

1,541,176


$

595,119


39

 %

(1)

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

(2)

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

(3)

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

(4)

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






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Table of Contents


Significant Items

Earnings comparisons are impacted by the Significant Items summarized below:


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


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


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


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


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

Table 3 - Significant Items Influencing Earnings Performance Comparison

(dollar amounts in thousands, except per share amounts)

Three Months Ended

June 30, 2017

March 31, 2017

June 30, 2016

Amount

EPS (1)

Amount

EPS (1)

Amount

EPS (1)

Net income

$

271,741


$

208,094


$

174,540


Earnings per share, after-tax

$

0.23


$

0.17


$

0.19


Significant Items-favorable (unfavorable) impact:

Earnings

EPS (1)

Earnings

EPS (1)

Earnings

EPS (1)

Mergers and acquisitions, net expenses

$

(50,243

)

$

(71,145

)

$

(20,789

)

Tax impact

17,585


24,901


7,213


Mergers and acquisitions, after-tax

$

(32,658

)

$

(0.03

)

$

(46,244

)

$

(0.04

)

$

(13,576

)

$

(0.02

)

(1)

Based upon the quarterly average outstanding diluted common shares.


Six Months Ended

June 30, 2017

June 30, 2016

After-tax

EPS (1)

After-tax

EPS (1)

Net income

$

479,835


$

345,854


Earnings per share, after-tax

$

0.40


$

0.39


Significant Items-favorable (unfavorable) impact:

Earnings

EPS (1)

Earnings

EPS (1)

Mergers and acquisitions, net expenses

$

(121,388

)

$

(27,195

)

Tax impact

42,486


9,219


Mergers and acquisitions, after-tax

$

(78,902

)

$

(0.07

)

$

(17,976

)

$

(0.03

)

(1)

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


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Table of Contents


Net Interest Income / Average Balance Sheet

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

Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis

(dollar amounts in millions)

Average Balances

Three Months Ended

Change

June 30,

March 31,

December 31,

September 30,

June 30,

2Q17 vs. 2Q16

2017

2017

2016

2016

2016

Amount

Percent

Assets:

Interest-bearing deposits in banks

$

102


$

100


$

110


$

95


$

99


$

3


4

 %

Loans held for sale

525


415


2,507


695


571


(46

)

(8

)

Securities:

Available-for-sale and other securities:

Taxable

13,135


12,801


13,734


9,785


6,904


6,231


90


Tax-exempt

3,104


3,049


3,136


2,854


2,510


594


24


Total available-for-sale and other securities

16,239


15,850


16,870


12,639


9,414


6,825


72


Trading account securities

91


137


139


49


41


50


121


Held-to-maturity securities-taxable

7,427


7,656


5,432


5,487


5,806


1,621


28


Total securities

23,756


23,643


22,441


18,175


15,261


8,495


56


Loans and leases: (1)

Commercial:

Commercial and industrial

27,992


27,922


27,727


24,957


21,344


6,648


31


Commercial real estate:

Construction

1,130


1,314


1,413


1,132


881


249


28


Commercial

5,940


6,039


5,805


5,227


4,345


1,595


37


Commercial real estate

7,070


7,353


7,218


6,359


5,226


1,844


35


Total commercial

35,062


35,276


34,945


31,316


26,570


8,492


32


Consumer:

Automobile

11,324


11,063


10,866


11,402


10,146


1,178


12


Home equity

9,958


10,072


10,101


9,260


8,416


1,542


18


Residential mortgage

7,979


7,777


7,690


7,012


6,187


1,792


29


RV and marine finance

2,039


1,874


1,844


915


-


N.R.


N.R.


Other consumer

983


919


959


817


613


370


60


Total consumer

32,283


31,705


31,460


29,406


25,362


6,921


27


Total loans and leases

67,345


66,981


66,405


60,722


51,932


15,413


30


Allowance for loan and lease losses

(672

)

(636

)

(614

)

(623

)

(616

)

(56

)

9


Net loans and leases

66,673


66,345


65,791


60,099


51,316


15,357


30


Total earning assets

91,728


91,139


91,463


79,687


67,863


23,865


35


Cash and due from banks

1,287


2,011


1,538


1,325


1,001


286


29


Intangible assets

2,373


2,387


2,421


1,547


726


1,647


227


All other assets

5,405


5,442


5,559


4,962


4,149


1,256


30


Total assets

$

100,121


$

100,343


$

100,367


$

86,898


$

73,123


$

26,998


37

 %

Liabilities and Shareholders' Equity:

Deposits:

Demand deposits-noninterest-bearing

$

21,599


$

21,730


$

23,250


$

20,033


$

16,507


$

5,092


31

 %

Demand deposits-interest-bearing

17,445


16,805


15,294


12,362


8,445


9,000


107


Total demand deposits

39,044


38,535


38,544


32,395


24,952


14,092


56


Money market deposits

19,212


18,653


18,618


18,453


19,534


(322

)

(2

)

Savings and other domestic deposits

11,889


11,970


12,272


8,889


5,402


6,487


120


Core certificates of deposit

2,146


2,342


2,636


2,285


2,007


139


7


Total core deposits

72,291


71,500


72,070


62,022


51,895


20,396


39


Other domestic time deposits of $250,000 or more

479


470


391


382


402


77


19


Brokered deposits and negotiable CDs

3,783


3,969


4,273


3,904


2,909


874


30


Deposits in foreign offices

-


-


152


194


208


(208

)

-


Total deposits

76,553


75,939


76,886


66,502


55,414


21,139


38


Short-term borrowings

2,687


3,792


2,628


1,306


1,032


1,655


160


Long-term debt

8,730


8,529


8,594


8,488


7,899


831


11


Total interest-bearing liabilities

66,371


66,530


64,858


56,263


47,838


18,533


39


All other liabilities

1,557


1,661


1,833


1,608


1,416


141


10


Shareholders' equity

10,594


10,422


10,426


8,994


7,362


3,232


44


Total liabilities and shareholders' equity

$

100,121


$

100,343


$

100,367


$

86,898


$

73,123


$

26,998


37

 %


11

Table of Contents


Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)

Average Yield Rates (2)

Three Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,

Fully-taxable equivalent basis (3)

2017

2017

2016

2016

2016

Assets:

Interest-bearing deposits in banks

1.53

%

1.09

%

0.64

%

0.64

%

0.25

%

Loans held for sale

3.73


3.82


2.95


3.53


3.89


Securities:

Available-for-sale and other securities:

Taxable

2.38


2.38


2.43


2.35


2.37


Tax-exempt

3.71


3.77


3.60


3.01


3.38


Total available-for-sale and other securities

2.64


2.65


2.65


2.50


2.64


Trading account securities

0.25


0.11


0.18


0.58


0.98


Held-to-maturity securities-taxable

2.38


2.36


2.43


2.41


2.44


Total securities

2.55


2.54


2.58


2.47


2.56


Loans and leases: (1)

Commercial:

Commercial and industrial

4.04


3.98


3.83


3.68


3.49


Commercial real estate:

Construction

4.26


3.95


3.65


3.76


3.70


Commercial

3.97


3.69


3.54


3.54


3.35


Commercial real estate

4.02


3.74


3.56


3.58


3.41


Total commercial

4.04


3.93


3.78


3.66


3.47


Consumer:

Automobile

3.55


3.55


3.57


3.37


3.15


Home equity

4.61


4.45


4.24


4.21


4.17


Residential mortgage

3.66


3.63


3.58


3.61


3.65


RV and marine finance

5.57


5.63


5.64


5.70


-


Other consumer

11.47


12.05


10.91


10.93


10.28


Total consumer

4.27


4.23


4.13


3.97


3.79


Total loans and leases

4.15


4.07


3.95


3.81


3.63


Total earning assets

3.75


3.70


3.60


3.52


3.41


Liabilities:

Deposits:

Demand deposits-noninterest-bearing

-


-


-


-


-


Demand deposits-interest-bearing

0.20


0.15


0.11


0.11


0.09


Total demand deposits

0.09


0.07


0.04


0.04


0.03


Money market deposits

0.31


0.26


0.24


0.24


0.24


Savings and other domestic deposits

0.21


0.22


0.25


0.21


0.11


Core certificates of deposit

0.56


0.39


0.29


0.43


0.79


Total core deposits

0.26


0.22


0.20


0.20


0.22


Other domestic time deposits of $250,000 or more

0.49


0.45


0.39


0.40


0.40


Brokered deposits and negotiable CDs

0.95


0.72


0.48


0.44


0.40


Deposits in foreign offices

-


-


0.13


0.13


0.13


Total deposits

0.31


0.26


0.23


0.22


0.23


Short-term borrowings

0.78


0.63


0.36


0.29


0.36


Long-term debt

2.49


2.33


2.19


1.97


1.85


Total interest-bearing liabilities

0.61


0.54


0.48


0.49


0.50


Net interest rate spread

3.14


3.16


3.12


3.03


2.91


Impact of noninterest-bearing funds on margin

0.17


0.14


0.13


0.15


0.15


Net interest margin

3.31

%

3.30

%

3.25

%

3.18

%

3.06

%

(1)

For purposes of this analysis, NALs are reflected in the average balances of loans.

(2)

Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.

(3)

FTE yields are calculated assuming a 35% tax rate.

N.R. - Not relevant.


12

Table of Contents


2017 Second Quarter versus 2016 Second Quarter

FTE net interest income for the 2017 second quarter increased $241 million , or 47% , from the 2016 second quarter . This reflected the benefit from the $23.9 billion , or 35% , increase in average earning assets coupled with a 25 basis point improvement in the FTE net interest margin to 3.31% . The NIM expansion reflected a 34 basis point increase related to the mix and yield of earning assets and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by an 11 basis point increase in funding costs. FTE net interest income during the 2017 second quarter included $34 million, or approximately 15 basis points, of purchase accounting impact.

Average earning assets for the 2017 second quarter increased $23.9 billion , or 35% , from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average earning asset growth included a $15.4 billion , or 30% , increase in average loans and leases and an $8.5 billion , or 56% , increase in average securities. Average securities included $2.9 billion of direct purchase municipal instruments in our commercial banking segment compared to $2.3 billion in the year-ago quarter. Average residential mortgage loans increased $1.8 billion , or 29% , as we continue to see increased demand for residential mortgage loans across our footprint.

Average total deposits for the 2017 second quarter increased $21.1 billion , or 38% , from the year-ago quarter, while average total core deposits increased $20.4 billion , or 39% . Average total interest-bearing liabilities increased $18.5 billion , or 39% , from the year-ago quarter. These increases primarily reflect the impact of the FirstMerit acquisition. Average demand deposits increased $14.1 billion , or 56% , comprised of a $9.9 billion, or 62%, increase in average commercial demand deposits and a $4.2 billion, or 46%, increase in average consumer demand deposits. Average long-term borrowings increased $0.8 billion , or 11% , reflecting the issuance of $2.0 billion and maturity of $1.6 billion of senior debt over the past five quarters.

2017 Second Quarter versus 2017 First Quarter

Compared to the 2017 first quarter , FTE net interest income increased $15 million , or 2% . The increase in the NIM reflected a 5 basis point increase in earning asset yields and a 3 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 7 basis point increase in the cost of interest-bearing liabilities. The purchase accounting impact on the net interest margin was approximately 15 basis points in the 2017 second quarter compared to approximately 16 basis points in the prior quarter.

Average earning assets increased $0.6 billion , or less than 1% from the 2017 first quarter . Average loans and leases increased $0.4 billion , or less than 1%, primarily reflecting growth in residential mortgage, automobile, and RV and marine loans partially offset by a decline in average commercial real estate loans. Total commercial lending was impacted by anticipated FirstMerit-related runoff and lower utilization.

Average total core deposits increased $0.8 billion , or 1% , primarily reflecting a $0.6 billion , or 3% , increase in money market deposits and a $0.5 billion , or 1% , increase in average demand deposits. Average total debt decreased $0.9 billion, or 7%, driven by a $1.1 billion , or 29% , decrease in short-term borrowings, reflecting the maintenance of excess liquidity surrounding the branch conversion during the 2017 first quarter.


13

Table of Contents


Table 5 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis

(dollar amounts in millions)

YTD Average Balances

YTD Average Rates (2)

Six Months Ended June 30,

Change

Six Months Ended June 30,

Fully-taxable equivalent basis (1)

2017

2016

Amount

Percent

2017

2016

Assets:

Interest-bearing deposits in banks

$

101


$

98


$

3


3

 %

1.31

%

0.23

%

Loans held for sale

470


502


(32

)

(6

)

3.76


3.93


Securities:





Available-for-sale and other securities:





Taxable

12,969


6,768


6,201


92


2.38


2.38


Tax-exempt

3,076


2,434


642


26


3.74


3.39


Total available-for-sale and other securities

16,045


9,202


6,843


74


2.64


2.65


Trading account securities

114


40


74


185


0.17


0.75


Held-to-maturity securities-taxable

7,541


5,930


1,611


27


2.37


2.44


Total securities

23,700


15,172


8,528


56


2.55


2.56


Loans and leases: (3)





Commercial:





Commercial and industrial

27,957


20,996


6,961


33


4.01


3.51


Commercial real estate:





Construction

1,221


902


319


35


4.09


3.60


Commercial

5,990


4,314


1,676


39


3.83


3.47


Commercial real estate

7,211


5,216


1,995


38


3.88


3.49


Total commercial

35,168


26,212


8,956


34


3.98


3.50


Consumer:





Automobile

11,194


9,938


1,256


13


3.55


3.16


Home equity

9,994


8,429


1,565


19


4.54


4.18


Residential mortgage

7,879


6,102


1,777


29


3.65


3.67


RV and marine finance

1,957


-


1,957


N.R.


5.60


-


Other consumer

972


594


378


64


11.49


10.16


Total consumer

31,996


25,063


6,933


28


4.25


3.80


Total loans and leases

67,164


51,275


15,889


31


4.11


3.65


Allowance for loan and lease losses

(654

)

(610

)

(44

)

7


Net loans and leases

66,510


50,665


15,845


31


Total earning assets

91,435


67,047


24,388


36


3.73

%

3.43

%

Cash and due from banks

1,647


1,007


640


64


Intangible assets

2,380


728


1,652


227


All other assets

5,424


4,187


1,237


30


Total assets

$

100,232


$

72,359


$

27,873


39

 %

Liabilities and Shareholders' Equity:

Deposits:

Demand deposits-noninterest-bearing

$

21,664


$

16,421


$

5,243


32

 %

-

%

-

%

Demand deposits-interest-bearing

17,127


8,111


9,016


111


0.18


0.09


Total demand deposits

38,791


24,532


14,259


58


0.08


0.03


Money market deposits

18,934


19,608


(674

)

(3

)

0.29


0.24


Savings and other domestic deposits

11,930


5,354


6,576


123


0.21


0.12


Core certificates of deposit

2,243


2,136


107


5


0.47


0.81


Total core deposits

71,898


51,630


20,268


39


0.24


0.22


Other domestic time deposits of $250,000 or more

474


429


45


10


0.47


0.40


Brokered deposits and negotiable CDs

3,876


2,903


973


34


0.83


0.39


Deposits in foreign offices

-


236


(236

)

-


-


0.13


Total deposits

76,248


55,198


21,050


38


0.28


0.24


Short-term borrowings

3,236


1,089


2,147


197


0.69


0.33


Long-term debt

8,630


7,549


1,081


14


2.41


1.77


Total interest-bearing liabilities

66,450


47,415


19,035


40


0.58


0.48


All other liabilities

1,609


1,465


144


10


Shareholders' equity

10,509


7,058


3,451


49


Total liabilities and shareholders' equity

$

100,232


$

72,359


$

27,873


39

 %

Net interest rate spread

3.15


2.94


Impact of noninterest-bearing funds on margin

0.16


0.14


Net interest margin

3.31

%

3.08

%


(1)

FTE yields are calculated assuming a 35% tax rate.

(2)

Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3)

For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

N.R.-Not relevant.



14

Table of Contents


2017 First Six Months versus 2016 First Six Months


FTE net interest income for the first six-month period of 2017 increased $470 million , or 46% . This reflected the benefit of a $24.4 billion , or 36% , increase in average total earning assets coupled with a FTE net interest margin increased to 3.31% from 3.08% . Average securities increased $ 8.5 billion , or 56% , primarily reflecting the acquisition of FirstMerit and an increase in direct purchase municipal instruments in our commercial banking segment. Average loans and leases increased $15.9 billion , or 31% , primarily reflecting an increase in C&I lending, residential mortgage loans and RV and marine finance resulting from the acquisition of FirstMerit.

Provision for Credit Losses

(This section should be read in conjunction with the Credit Risk section.)

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision for credit losses for the 2017 second quarter was $25 million , which remained relatively unchanged compared to the second quarter 2016. NCOs increased $19 million to $36 million compared with the same period in the prior year. Net charge-offs represented an annualized 0.21% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

On a year-to-date basis, provision for credit losses for the first six-month period of 2017 was $93 million , an increase of $41 million , or 78% , compared to year-ago period. The increase primarily relates to the FirstMerit acquisition as well as one large commercial recovery in the prior year period.

Noninterest Income

The following table reflects noninterest income for each of the periods presented:

Table 6 - Noninterest Income

(dollar amounts in thousands)

Three Months Ended

2Q17 vs. 2Q16

2Q17 vs. 1Q17

June 30,

March 31,

June 30,

Change

Change

2017

2017

2016

Amount

Percent

Amount

Percent

Service charges on deposit accounts

$

87,582


$

83,420


$

75,613


$

11,969


16

 %

$

4,162


5

 %

Cards and payment processing income

52,485


47,169


39,184


13,301


34


5,316


11


Mortgage banking income

32,268


31,692


31,591


677


2


576


2


Trust and investment management services

32,232


33,869


22,497


9,735


43


(1,637

)

(5

)

Insurance income

15,843


15,264


15,947


(104

)

(1

)

579


4


Brokerage income

16,294


15,758


14,599


1,695


12


536


3


Capital markets fees

16,836


14,200


13,037


3,799


29


2,636


19


Bank owned life insurance income

15,322


17,542


12,536


2,786


22


(2,220

)

(13

)

Gain on sale of loans

12,002


12,822


9,265


2,737


30


(820

)

(6

)

Securities gains (losses)

135


(8

)

656


(521

)

(79

)

143


(1,788

)

Other Income

44,219


40,735


36,187


8,032


22


3,484


9


Total noninterest income

$

325,218


$

312,463


$

271,112


$

54,106


20

 %

$

12,755


4

 %

2017 Second Quarter versus 2016 Second Quarter

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


15

Table of Contents


2017 Second Quarter versus 2017 First Quarter

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


Table 7 - Noninterest Income-2017 First Six Months vs. 2016 First Six Months

(dollar amounts in thousands)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Service charges on deposit accounts

$

171,002


$

145,875


$

25,127


17

 %

Cards and payment processing income

99,654


75,631


24,023


32


Mortgage banking income

63,960


50,134


13,826


28


Trust and investment management services

66,101


45,335


20,766


46


Insurance income

31,107


32,172


(1,065

)

(3

)

Brokerage income

32,052


30,101


1,951


6


Capital markets fees

31,036


26,047


4,989


19


Bank owned life insurance income

32,864


26,049


6,815


26


Gain on sale of loans

24,824


14,660


10,164


69


Securities gains (losses)

127


656


(529

)

(81

)

Other Income

84,954


66,319


18,635


28


Total noninterest income

$

637,681


$

512,979


$

124,702


24

 %

Noninterest income for the first six-month period of 2017 increased $125 million , or 24% , from the year-ago period, primarily reflecting the impact of the FirstMerit acquisition. Service charges on deposit accounts increased $25 million , or 17% , reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Cards and payment processing income increased $24 million , or 32% , due to higher credit and debit card related income and underlying customer growth. Trust and investment management services increased $21 million , or 46% , primarily reflecting an increase in personal trust services reflecting the benefit of the FirstMerit acquisition.

Noninterest Expense

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

The following table reflects noninterest expense for each of the periods presented:

Table 8 - Noninterest Expense

(dollar amounts in thousands)

Three Months Ended

2Q17 vs. 2Q16

2Q17 vs. 1Q17

June 30,

March 31,

June 30,

Change

Change

2017

2017

2016

Amount

Percent

Amount

Percent

Personnel costs

$

391,997


$

382,000


$

298,949


$

93,048


31

 %

$

9,997


3

 %

Outside data processing and other services

75,169


87,202


63,037


12,132


19


(12,033

)

(14

)

Equipment

42,924


46,700


31,805


11,119


35


(3,776

)

(8

)

Net occupancy

52,613


67,700


30,704


21,909


71


(15,087

)

(22

)

Professional services

18,190


18,295


21,488


(3,298

)

(15

)

(105

)

(1

)

Marketing

18,843


13,923


14,773


4,070


28


4,920


35


Deposit and other insurance expense

20,418


20,099


12,187


8,231


68


319


2


Amortization of intangibles

14,242


14,355


3,600


10,642


296


(113

)

(1

)

Other expense

59,968


57,148


47,118


12,850


27


2,820


5


Total noninterest expense

$

694,364


$

707,422


$

523,661


$

170,703


33

 %

$

(13,058

)

(2

)%

Number of employees (average full-time equivalent)

16,103


16,331


12,363


3,740


30

 %

(228

)

(1

)%


16

Table of Contents



Impacts of Significant Items:

Three Months Ended

June 30,

March 31,

June 30,

(dollar amounts in thousands)

2017

2017

2016

Personnel costs

$

17,934


$

19,555


$

4,732


Outside data processing and other services

6,246


14,475


3,045


Equipment

3,994


5,763


3


Net occupancy

14,415


23,342


490


Professional services

3,804


4,218


10,709


Marketing

112


816


241


Other expense

3,738


5,126


1,569


Total noninterest expense adjustments

$

50,243


$

73,295


$

20,789


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

Three Months Ended

2Q17 vs. 2Q16

2Q17 vs. 1Q17

June 30,

March 31,

June 30,

Change

Change

(dollar amounts in thousands)

2017

2017

2016

Amount

Percent

Amount

Percent

Personnel costs

$

374,063


$

362,445


$

294,217


$

79,846


27

%

$

11,618


3

 %

Outside data processing and other services

68,923


72,727


59,992


8,931


15


(3,804

)

(5

)

Equipment

38,930


40,937


31,802


7,128


22


(2,007

)

(5

)

Net occupancy

38,198


44,358


30,214


7,984


26


(6,160

)

(14

)

Professional services

14,386


14,077


10,779


3,607


33


309


2


Marketing

18,731


13,107


14,532


4,199


29


5,624


43


Deposit and other insurance expense

20,418


20,099


12,187


8,231


68


319


2


Amortization of intangibles

14,242


14,355


3,600


10,642


296


(113

)

(1

)

Other expense

56,230


52,022


45,549


10,681


23


4,208


8


Total adjusted noninterest expense (Non-GAAP)

$

644,121


$

634,127


$

502,872


$

141,249


28

%

$

9,994


2

 %


2017 Second Quarter versus 2016 Second Quarter

Reported noninterest expense for the 2017 second quarter increased $171 million , or 33% , from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition, including Significant Items. Personnel costs increased $93 million , or 31% , primarily reflecting a 30% increase in average full-time equivalent employees and a $13 million net increase in acquisition-related personnel expense. Deposit and other insurance expense increased $8 million , or 68% , reflecting the larger assessment base and the FDIC Large Institution Surcharge implemented during the 2016 third quarter.

2017 Second Quarter versus 2017 First Quarter

Reported noninterest expense decreased $13 million , or 2% , from the 2017 first quarter , including a $23 million net decrease in Significant Items. Net occupancy costs decreased $15 million , or 22% , reflecting a $9 million net decrease in acquisition-related expenses and the branch consolidations completed during the 2017 first quarter. Partially offsetting those decreases, personnel costs increased $10 million , or 3% , reflecting the implementation of annual merit increases and grant of annual long-term equity incentive compensation, both in May, partially offset by a $2 million net decrease in acquisition-related expenses.



17

Table of Contents


Table 9 - Noninterest Expense-2017 First Six Months vs. 2016 First Six Months

(dollar amounts in thousands)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Personnel costs

$

773,997


$

584,346


$

189,651


32

%

Outside data processing and other services

162,371


124,915


37,456


30


Equipment

89,624


64,381


25,243


39


Net occupancy

120,313


62,180


58,133


93


Professional services

36,485


35,026


1,459


4


Marketing

32,766


27,041


5,725


21


Deposit and other insurance expense

40,517


23,395


17,122


73


Amortization of intangibles

28,597


7,312


21,285


291


Other expense

117,116


86,145


30,971


36


Total noninterest expense

$

1,401,786


$

1,014,741


$

387,045


38

%

Impacts of Significant Items:

Six Months Ended June 30,

2017

2016

Personnel costs

$

37,489


$

5,206


Outside data processing and other services

20,721


3,408


Equipment

9,757


3


Net occupancy

37,757


510


Professional services

8,022


14,997


Marketing

928


254


Other expense

8,864


2,817


Total noninterest expense adjustments

$

123,538


$

27,195


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

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Personnel costs

$

736,508


$

579,140


$

157,368


27

%

Outside data processing and other services

141,650


121,507


20,143


17


Equipment

79,867


64,378


15,489


24


Net occupancy

82,556


61,670


20,886


34


Professional services

28,463


20,029


8,434


42


Marketing

31,838


26,787


5,051


19


Deposit and other insurance expense

40,517


23,395


17,122


73


Amortization of intangibles

28,597


7,312


21,285


291


Other expense

108,252


83,328


24,924


30


Total adjusted noninterest expense (Non-GAAP)

$

1,278,248


$

987,546


$

290,702


29

%


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


Provision for Income Taxes

The provision for income taxes in the 2017 second quarter was $79 million . This compared with a provision for income taxes of $54 million in the 2016 second quarter and $59 million in the 2017 first quarter . The provision for income taxes for the six month periods ended June 30, 2017 and June 30, 2016 was $138 million and $109 million, respectively. All periods included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, excess tax deductions for stock-based compensation, and capital losses. The net federal deferred tax asset was $41 million and the net state deferred tax asset was $37 million at June 30, 2017 .

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. The IRS is currently examining our 2010 and 2011 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.

RISK MANAGEMENT AND CAPITAL

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


18

Table of Contents


We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2016 Form 10-K and subsequent filings with the SEC. The MD&A included in our 2016 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2016 Form 10-K.

Credit Risk

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

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

Loan and Lease Credit Exposure Mix

Refer to the " Loan and Lease Credit Exposure Mix " section of our 2016 Form 10-K for a brief description of each portfolio segment.

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

Table 10 - Loan and Lease Portfolio Composition

(dollar amounts in millions)

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

Ending Balances by Type:

Commercial:

Commercial and industrial

$

27,969


41

%

$

28,176


42

%

$

28,059


42

%

$

27,668


42

%

$

21,372


41

%

Commercial real estate:

Construction

1,145


2


1,107


2


1,446


2


1,414


2


856


2


Commercial

6,000


9


5,986


9


5,855


9


5,842


9


4,466


7


Commercial real estate

7,145


11


7,093


11


7,301


11


7,256


11


5,322


9


Total commercial

35,114


52


35,269


53


35,360


53


34,924


53


26,694


50


Consumer:

Automobile

11,555


17


11,155


17


10,969


16


10,791


16


10,381


20


Home equity

9,966


15


9,974


15


10,106


15


10,120


15


8,447


17


Residential mortgage

8,237


12


7,829


12


7,725


12


7,665


12


6,377


12


RV and marine finance

2,178


3


1,935


2


1,846


3


1,840


3


-


-


Other consumer

1,009


1


936


1


956


1


964


1


644


1


Total consumer

32,945


48


31,829


47


31,602


47


31,380


47


25,849


50


Total loans and leases

$

68,059


100

%

$

67,098


100

%

$

66,962


100

%

$

66,304


100

%

$

52,543


100

%


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Table of Contents


The table below provides our total loan and lease portfolio segregated by industry type. The changes in the industry composition from December 31, 2016 are consistent with the portfolio growth metrics.

Table 11 - Loan and Lease Portfolio by Industry Type

(dollar amounts in millions)

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

Commercial loans:

Real estate and rental and leasing

$

7,588


12

%

$

7,482


12

%

$

7,545


11

%

$

7,513


12

%

$

5,345


10

%

Manufacturing

4,916


7


5,048


8


4,937


7


4,931


7


3,392


6


Retail trade (1)

4,805


7


4,902


7


4,758


7


4,588


7


3,884


7


Finance and insurance

3,051


4


2,844


4


2,010


3


2,289


3


1,682


3


Health care and social assistance

2,699


4


2,727


4


2,729


4


2,638


4


1,776


3


Wholesale trade

2,058


3


2,181


3


2,071


3


2,009


3


1,311


2


Professional, scientific, and technical services

1,660


2


1,240


2


1,264


2


1,228


2


839


2


Transportation and warehousing

1,284


2


1,382


2


1,366


2


1,357


2


1,244


2


Accommodation and food services

1,261


2


1,652


2


1,678


3


1,612


2


1,157


2


Construction

1,232


2


924


1


875


1


889


1


674


1


Other services

928


1


1,278


2


1,223


2


1,205


2


978


2


Utilities

570


1


463


1


470


1


480


1


371


1


Mining, quarrying, and oil and gas extraction

501


1


511


1


668


1


704


1


691


1


Educational services

469


1


544


1


501


1


495


1


495


1


Arts, entertainment, and recreation

458


1


506


1


556


1


437


1


293


1


Information

444


1


454


1


473


1


475


1


325


1


Admin., support, waste management and remediation services

433


1


427


1


429


1


409


1


324


1


Public administration

274


-


266


-


272


-


273


-


282


1


Agriculture, forestry, fishing and hunting

203


-


170


-


151


-


161


-


132


-


Management of companies and enterprises

97


-


100


-


96


-


95


-


84


-


Unclassified, other

183


-


167


-


1,288


2


1,135


2


1,415


3


Total commercial loans by industry category

35,114


52


35,268


53


35,360


53


34,923


53


26,694


50


Automobile loans and leases

11,555


17


11,155


17


10,969


16


10,791


16


10,381


20


Home Equity

9,966


15


9,974


15


10,106


15


10,120


15


8,447


17


Residential mortgage

8,237


12


7,829


12


7,725


12


7,665


12


6,377


12


RV and marine finance

2,178


3


1,935


2


1,846


3


1,840


3


-


-


Other consumer loans

1,009


1


936


1


956


1


965


1


644


1


Total loans and leases

$

68,059


100

%

$

67,097


100

%

$

66,962


100

%

$

66,304


100

%

$

52,543


100

%

(1)

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

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


20

Table of Contents


risk profile. Changes to existing concentration limits require the approval of the ROC prior to implementation, incorporating specific information relating to the potential impact on the overall portfolio composition and performance metrics.

Commercial Credit

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

Consumer Credit

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

Credit Quality

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.

Credit quality performance in the 2017 second quarter reflected continued overall positive results with stable levels of delinquencies and criticized loans and a 9% decline in NPAs. Total NCOs were $36 million, or 0.21%, of average total loans and leases.  Net charge-offs decreased by $3 million from the prior quarter , with the improvement centered in the automobile portfolio. The ACL to total loans and leases ratio declined by 3 basis points to 1.11% .

NPAs, NALs, AND TDRs

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements and "Credit Quality" section of our 2016 Form 10-K.)

NPAs and NALs

Of the $212 million of CRE and C&I-related NALs at June 30, 2017 , $132 million, or 62%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile, RV and marine and other consumer loans are charged-off at 120-days past due.


21

Table of Contents


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

Table 12 - Nonaccrual Loans and Leases and Nonperforming Assets

(dollar amounts in thousands)

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

Nonaccrual loans and leases (NALs):

Commercial and industrial

$

195,279


$

232,171


$

234,184


$

220,862


$

289,811


Commercial real estate

16,763


13,889


20,508


21,300


23,663


Automobile

3,825


4,881


5,766


4,777


5,049


Home equity

67,940


69,575


71,798


69,044


56,845


Residential mortgage

80,306


80,686


90,502


88,155


85,174


RV and marine finance

341


106


245


96


-


Other consumer

2


2


-


-


5


Total nonaccrual loans and leases

364,456


401,310


423,003


404,234


460,547


Other real estate:

Residential

26,890


31,786


30,932


34,421


26,653


Commercial

16,926


18,101


19,998


36,915


2,248


Total other real estate

43,816


49,887


50,930


71,336


28,901


Other NPAs (1)

6,906


6,910


6,968


-


376


Total nonperforming assets

$

415,178


$

458,107


$

480,901


$

475,570


$

489,824


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

0.54

%

0.60

%

0.63

%

0.61

%

0.88

%

NPA ratio (2)

0.61


0.68


0.72


0.72


0.93


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

0.81


0.87


0.91


0.92


1.12


(1)

Other nonperforming assets includes certain impaired investment securities.

(2)

Nonperforming assets divided by the sum of loans and leases, other real estate owned, and other NPAs.

2017 Second Quarter versus 2016 Fourth Quarter .

Total NPAs decreased by $66 million , or 14% , compared with December 31, 2016 primarily as a result of decreases in the C&I and residential portfolios NALs and a 14% decrease in OREO. The C&I decline was a result of significant payoffs and return to accrual of large relationships that were identified as NAL in the fourth quarter of 2016.  The residential mortgage decline was a function of improved delinquencies partially as a result of the efforts by our Home Savers Group actively working with our customers.

TDR Loans

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements and "TDR Loans" section of our 2016 Form 10-K.)

Over the past five quarters, the accruing component of the total TDR balance has been between 80% and 84%, as borrowers continue to make their monthly payments in accordance with the modified terms.  From a payment standpoint, over 80% of the $507 million of accruing TDRs secured by residential real estate (Residential mortgage and Home Equity in Table 13 ) are current on their required payments.  In addition, over 60% of the accruing pool have had no delinquency at all in the past 12 months. There is very limited migration from the accruing to non-accruing components, and virtually all of the charge-offs come from the non-accruing TDR balances.


22

Table of Contents


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

Table 13 - Accruing and Nonaccruing Troubled Debt Restructured Loans

(dollar amounts in thousands)

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

Troubled debt restructured loans-accruing:

Commercial and industrial

$

270,372


$

222,303


$

210,119


$

232,740


$

232,112


Commercial real estate

74,429


81,202


76,844


80,553


85,015


Automobile

28,140


27,968


26,382


27,843


25,892


Home equity

268,731


271,258


269,709


275,601


203,047


Residential mortgage

238,087


239,175


242,901


251,529


256,859


RV and marine finance

950


581


-


-


-


Other consumer

4,017


4,128


3,780


4,102


4,522


Total troubled debt restructured loans-accruing

884,726


846,615


829,735


872,368


807,447


Troubled debt restructured loans-nonaccruing:

Commercial and industrial

89,757


88,759


107,087


70,179


77,592


Commercial real estate

3,823


4,357


4,507


5,672


6,833


Automobile

4,291


4,763


4,579


4,437


4,907


Home equity

28,667


29,090


28,128


28,009


21,145


Residential mortgage

55,590


59,773


59,157


62,027


63,638


RV and marine finance

381


106


-


-


-


Other consumer

109


117


118


142


142


Total troubled debt restructured loans-nonaccruing

182,618


186,965


203,576


170,466


174,257


Total troubled debt restructured loans

$

1,067,344


$

1,033,580


$

1,033,311


$

1,042,834


$

981,704


Accruing TDRs increased by $55 million compared with December 31, 2016 , primarily as a result of the addition of C&I loans that meet the well secured definition.

ACL

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our ACL Methodology Committee is responsible for developing the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for the recognition of loan losses due to increased risk levels resulting from loan risk-rating downgrades. Reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the same quantitative reserve determination process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Acquired loans are those purchased in the FirstMerit acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related ALLL. The difference between acquired contractual balance and estimated fair value at acquisition date was recorded as a purchase premium or discount.

Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.


23

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 14 - Allocation of Allowance for Credit Losses (1)

(dollar amounts in thousands)

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

June 30,
2016

Allowance for Credit Losses

Commercial

Commercial and industrial

$

367,956


41

%

$

380,504


42

%

$

355,424


42

%

$

333,101


42

%

$

323,465


41

%

Commercial real estate

106,620


11


99,804


11


95,667


11


98,694


11


101,042


9


Total commercial

474,576


52


480,308


53


451,091


53


431,795


53


424,507


50


Consumer

Automobile

48,322


17


46,402


17


47,970


16


42,584


16


50,531


20


Home equity

62,941


15


64,900


15


65,474


15


69,866


15


76,482


17


Residential mortgage

33,304


12


35,559


12


33,398


12


36,510


12


42,392


12


RV and marine finance

7,665


3


4,022


2


5,311


3


4,289


3


-


-


Other consumer

41,188


1


41,389


1


35,169


1


31,854


1


29,152


1


Total consumer

193,420


48


192,272


47


187,322


47


185,103


47


198,557


50


Total allowance for loan and lease losses

667,996


100

%

672,580


100

%

638,413


100

%

616,898


100

%

623,064


100

%

Allowance for unfunded loan commitments

85,359


91,838


97,879


88,433


73,748


Total allowance for credit losses

$

753,355


$

764,418


$

736,292


$

705,331


$

696,812


Total allowance for loan and leases losses as % of:

Total loans and leases

0.98

%

1.00

%

0.95

%

0.93

%

1.19

%

Nonaccrual loans and leases

183


168


151


153


135


Nonperforming assets

161


147


133


130


127


Total allowance for credit losses as % of:

Total loans and leases

1.11

%

1.14

%

1.10

%

1.06

%

1.33

%

Nonaccrual loans and leases

207


190


174


174


151


Nonperforming assets

181


167


153


148


142


(1)

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

2017 Second Quarter versus 2016 Fourth Quarter

At June 30, 2017 , the ALLL was $668 million , compared to $638 million at December 31, 2016 . The $30 million , or 5% , increase in the ALLL relates to an increase in Criticized/Classified assets in the C&I portfolio and growth in the Other consumer loan category.

The ACL to total loans ratio was 1.11% at June 30, 2017 , compared with 1.10% at December 31, 2016 . Management believes the ratio is appropriate given the overall moderate-to-low risk profile of our loan portfolio. We continue to focus on early identification of loans with changes in credit metrics and proactive action plans for these loans. We believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.

NCOs

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


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C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due with the exception of Huntington Technology Finance administrative lease delinquencies. Automobile loans, RV and marine finance and other consumer loans are generally charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.

Table 15 - Quarterly Net Charge-off Analysis

(dollar amounts in thousands)

Three Months Ended

June 30,

March 31,

June 30,

2017

2017

2016

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

Commercial:

Commercial and industrial

$

12,870


$

8,096


$

3,702


Commercial real estate:

Construction

83


(3,137

)

(377

)

Commercial

(3,638

)

895


(296

)

Commercial real estate

(3,555

)

(2,242

)

(673

)

Total commercial

9,315


5,854


3,029


Consumer:

Automobile

8,318


12,407


4,320


Home equity

1,218


1,662


1,078


Residential mortgage

1,052


2,595


776


RV and marine finance

1,875


2,363


-


Other consumer

14,262


14,557


7,552


Total consumer

26,725


33,584


13,726


Total net charge-offs

$

36,040


$

39,438


$

16,755


Three Months Ended

June 30,

March 31,

June 30,

2017

2017

2016

Net charge-offs (recoveries)-annualized percentages:

Commercial:

Commercial and industrial

0.18

 %

0.12

 %

0.07

 %

Commercial real estate:

Construction

0.03


(0.96

)

(0.17

)

Commercial

(0.24

)

0.06


(0.03

)

Commercial real estate

(0.20

)

(0.12

)

(0.05

)

Total commercial

0.11


0.07


0.05


Consumer:

Automobile

0.29


0.45


0.17


Home equity

0.05


0.07


0.05


Residential mortgage

0.05


0.13


0.05


RV and marine finance

0.37


0.50


-


Other consumer

5.81


6.33


4.93


Total consumer

0.33


0.42


0.22


Net charge-offs as a % of average loans

0.21

 %

0.24

 %

0.13

 %


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In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time. The ALLL established is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased based on the updated risk rating. In certain cases, the standard ALLL is determined to not be appropriate, and a specific reserve is established based on the projected cash flow or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds the estimated loss on the loan, a reduction in the overall level of the ALLL could be recognized. Consumer loans are treated in much the same manner as commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are not identified for consumer loans. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.

2017 Second Quarter versus 2017 First Quarter

NCOs were an annualized 0.21% of average loans and leases in the current quarter, a decrease from 0.24% in the 2017 first quarter , still below our long-term expectation of 0.35% - 0.55%. Commercial charge-offs were slightly higher for the quarter, but well within our expected performance range. Consumer charge-offs were lower for the quarter, driven by an improvement in the Automobile portfolio resulting from seasonality trends which were consistent with our expectations. Given the low level of C&I and CRE NCO's, we expect some volatility on a quarter-to-quarter comparison basis.


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The table below reflects NCO detail for the six-month periods ended June 30, 2017 and 2016 :

Table 16 - Year to Date Net Charge-off Analysis

(dollar amounts in thousands)

Six Months Ended June 30,

2017

2016

Net charge-offs by loan and lease type:

Commercial:

Commercial and industrial

$

20,966


$

10,216


Commercial real estate:

Construction

(3,054

)

(481

)

Commercial

(2,743

)

(17,668

)

Commercial real estate

(5,797

)

(18,149

)

Total commercial

15,169


(7,933

)

Consumer:

Automobile

20,725


11,090


Home equity

2,880


4,759


Residential mortgage

3,647


2,423


RV and marine finance

4,238


-


Other consumer

28,819


14,968


Total consumer

60,309


33,240


Total net charge-offs

$

75,478


$

25,307


Six Months Ended June 30,

2017

2016

Net charge-offs - annualized percentages:

Commercial:

Commercial and industrial

0.15

 %

0.10

 %

Commercial real estate:

Construction

(0.50

)

(0.11

)

Commercial

(0.09

)

(0.82

)

Commercial real estate

(0.16

)

(0.70

)

Total commercial

0.09


(0.06

)

Consumer:

Automobile

0.37


0.22


Home equity

0.06


0.11


Residential mortgage

0.09


0.08


RV and marine finance

0.43


-


Other consumer

5.93


5.04


Total consumer

0.38


0.27


Net charge-offs as a % of average loans

0.22

 %

0.10

 %

2017 First Six Months versus 2016 First Six Months

NCOs were $75.5 million , a $50 million increase from the same period in the prior year. The increase primarily relates to the FirstMerit acquisition as well as one large commercial recovery in the prior year period. Given the low level of C&I and CRE NCO's, there will continue to be some volatility on a period-to-period comparison basis.


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Table of Contents



Market Risk

(This section should be read in conjunction with the "Market Risk" section of our 2016 Form 10-K for our on-going market risk management processes.)

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from trading securities, securities owned by our broker-dealer subsidiary, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans.

Interest Rate Risk

Table 17 - Net Interest Income at Risk

Net Interest Income at Risk (%)

Basis point change scenario

-25


+100


+200


Board policy limits

N/A


-2.0

 %

-4.0

 %

June 30, 2017

-0.6

 %

2.8

 %

5.5

 %

December 31, 2016

-1.0

 %

2.7

 %

5.6

 %

The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual -25, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.

Our NII at Risk is within our board of director's policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The NII at Risk shows that the balance sheet is asset sensitive at both June 30, 2017 , and December 31, 2016.

Table 18 - Economic Value of Equity at Risk

Economic Value of Equity at Risk (%)

Basis point change scenario

-25


+100


+200


Board policy limits

N/A


-5.0

 %

-12.0

 %

June 30, 2017

-1.2

 %

3.2

 %

4.7

 %

December 31, 2016

-0.6

 %

0.9

 %

0.2

 %

The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -25, +100 and +200 basis point parallel shifts in market interest rates. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which deposit costs reach zero percent.

We are within our board of director's policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The EVE depicts a moderate level of long-term interest rate risk, which indicates the balance sheet is positioned favorably for rising interest rates. The EVE increase at June 30, 2017 from December 31, 2016 is primarily the result of a change in the average life assumptions for certain loans, deposits and securities.

MSRs

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

At June 30, 2017 , we had a total of $189 million of capitalized MSRs representing the right to service $19.1 billion in mortgage loans. Of this $189 million , $13 million was recorded using the fair value method and $176 million was recorded using the amortization method.

MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed hedging strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish


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Table of Contents


the effectiveness of these economic hedges. We report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or a decrease in mortgage banking income.

MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in servicing rights in the Unaudited Condensed Consolidated Financial Statements.

Price Risk

Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiary, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held.

Liquidity Risk

(This section should be read in conjunction with the "Liquidity Risk" section of our 2016 Form 10-K for our on-going liquidity risk management processes.)

Our primary source of liquidity is our core deposit base. Core deposits comprised approximately 95% of total deposits at June 30, 2017 . We also have available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets, and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $14.7 billion as of June 30, 2017 .

Bank Liquidity and Sources of Funding

Our primary sources of funding for the Bank are retail and commercial core deposits. At June 30, 2017 , these core deposits funded 71% of total assets ( 105% of total loans). Other sources of liquidity include non-core deposits, FHLB advances, wholesale debt instruments, and securitizations. Demand deposit overdrafts that have been reclassified as loan balances were $22 million and $23 million at June 30, 2017 and December 31, 2016 , respectively.

The following table reflects deposit composition detail for each of the last five quarters:

Table 19 - Deposit Composition

(dollar amounts in millions)

June 30,

March 31,

December 31,

September 30,

June 30,

2017

2017

2016

2016

2016

By Type:

Demand deposits-noninterest-bearing

$

21,420


28

%

$

21,489


28

%

$

22,836


30

%

$

23,426


30

%

$

16,324


30

%

Demand deposits-interest-bearing

17,113


23


18,618


24


15,676


21


15,730


20


8,412


15


Money market deposits

19,423


26


18,664


24


18,407


24


18,604


24


19,480


34


Savings and other domestic deposits

11,758


15


12,043


16


11,975


16


12,418


16


5,341


10


Core certificates of deposit

2,088


3


2,188


3


2,535


3


2,724


4


1,866


4


Total core deposits:

71,802


95


73,002


95


71,429


94


72,902


94


51,423


93


Other domestic deposits of $250,000 or more

441


1


524


1


394


1


391


1


380


1


Brokered deposits and negotiable CDs

3,690


4


3,897


4


3,785


5


3,972


5


3,017


6


Deposits in foreign offices

-


-


-


-


-


-


140


-


223


-


Total deposits

$

75,933


100

%

$

77,423


100

%

$

75,608


100

%

$

77,405


100

%

$

55,043


100

%

Total core deposits:

Commercial

$

32,201


45

%

$

32,963


45

%

$

31,887


45

%

$

32,936


45

%

$

24,308


47

%

Consumer

39,601


55


40,039


55


39,542


55


39,966


55


27,115


53


Total core deposits

$

71,802


100

%

$

73,002


100

%

$

71,429


100

%

$

72,902


100

%

$

51,423


100

%

The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans and securities pledged to the Federal Reserve Discount Window and the FHLB are $30.4 billion and $19.7 billion at June 30, 2017 and December 31, 2016 , respectively.


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Table of Contents


At June 30, 2017 , total wholesale funding was $17.2 billion , an increase from $16.2 billion at December 31, 2016 . The increase from year-end primarily relates to an increase in short-term borrowings.

Liquidity Coverage Ratio

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

Parent Company Liquidity

The parent company's funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends and interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.

At June 30, 2017 , the parent company had $1.8 billion in cash and cash equivalents, up slightly from December 31, 2016 .

On July 19, 2017 , the board of directors declared a quarterly common stock cash dividend of $0.08 per common share. The dividend is payable on October 2, 2017 , to shareholders of record on September 18, 2017 . Based on the current quarterly dividend of $0.08 per common share, cash demands required for common stock dividends are estimated to be approximately $87 million per quarter. On July 19, 2017 , the board of directors declared a quarterly Series A, Series B, Series C, and Series D Preferred Stock dividend payable on October 16, 2017 to shareholders of record on October 1, 2017 . Based on the current dividend, cash demands required for Series A, Series B, Series C, and Series D Preferred Stock are estimated to be approximately $8 million , $0.3 million , $1.5 million , and $9 million per quarter, respectively.

During the first six months of 2017, the Bank returned capital totaling $331 million to the holding company. Additionally, the Bank paid a preferred dividend to the holding company of $22 million during the first six months of 2017 . To meet any additional liquidity needs, the parent company may issue debt or equity securities from time to time.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include commitments to extend credit (See Note 14 ), interest rate swaps (See Note 12 ), financial guarantees contained in standby letters-of-credit issued by the Bank (See Note 14 ), and commitments by the Bank to sell mortgage loans (See Note 14 ).

Operational Risk

Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We actively and continuously monitor cyber-attacks such as attempts related to online deception and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses.

Our objective for managing cyber security risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate our systems. We work to achieve this objective by hardening networks and systems against attack, and by diligently managing visibility and monitoring controls within our data and communications environment to recognize events and respond before the attacker has the opportunity to plan and execute on its own goals. To this end we employ a set of defense in-depth strategies, which include efforts to make us less attractive as a target and less vulnerable to threats, while investing in threat analytic capabilities for rapid detection and response. Potential concerns related to cyber security may be escalated to our board-level Technology Committee, as appropriate. As a complement to the overall cyber security risk management, we use a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. We also use third-party services to test the effectiveness of our cyber


30

Table of Contents


security risk management framework, and any such third parties are required to comply with our policies regarding information security and confidentiality.

To mitigate operational risks, we have a senior management Operational Risk Committee and a senior management Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. In addition, we have a senior management Model Risk Oversight Committee that is responsible for policies and procedures describing how model risk is evaluated and managed and the application of the governance process to implement these practices throughout the enterprise. These committees report any significant findings and recommendations to the Risk Management Committee. Potential concerns may be escalated to our ROC, as appropriate.

The FirstMerit integration was inherently large and complex. Our objective for managing execution risk was to minimize impacts to daily operations. We established an Integration Management Office led by senior management. Responsibilities included central management, reporting, and escalation of key integration deliverables. In addition, a board level Integration Governance Committee was established to assist in the oversight of the integration of people, systems, and processes of FirstMerit with Huntington. While the systems' conversion is now largely completed, continued oversight will occur until all converted systems are fully decommissioned.


The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational fraud, and legal losses; minimize the impact of inadequately designed models and enhance our overall performance.

Compliance Risk

Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. These broad-based laws, rules, and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. Additionally, the volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti-money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and/or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.

Capital

Both regulatory capital and shareholders' equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Company's overall capital adequacy. We believe our current levels of both regulatory capital and shareholders' equity are adequate.


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The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the past five quarters:

Table 20 - Regulatory Capital Data

(dollar amounts in millions)

Basel III

June 30,
2017

March 31,
2017

December 31,
2016

Total risk-weighted assets

Consolidated

$

78,366


$

77,559


$

78,263


Bank

78,489


77,534


78,242


Common equity tier I risk-based capital

Consolidated

7,740


7,551


7,486


Bank

8,367


8,146


8,153


Tier 1 risk-based capital

Consolidated

8,809


8,619


8,547


Bank

9,238


9,015


9,086


Tier 2 risk-based capital

Consolidated

1,640


1,663


1,668


Bank

1,706


1,745


1,732


Total risk-based capital

Consolidated

10,449


10,282


10,215


Bank

10,944


10,760


10,818


Tier 1 leverage ratio

Consolidated

8.98

%

8.76

%

8.70

%

Bank

9.43


9.18


9.29


Common equity tier I risk-based capital ratio

Consolidated

9.88


9.74


9.56


Bank

10.66


10.51


10.42


Tier 1 risk-based capital ratio

Consolidated

11.24


11.11


10.92


Bank

11.77


11.63


11.61


Total risk-based capital ratio

Consolidated

13.33


13.26


13.05


Bank

13.94


13.88


13.83


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

Shareholders' Equity

We generate shareholders' equity primarily through the retention of earnings, net of dividends and share repurchases. Other potential sources of shareholders' equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities.

Shareholders' equity totaled $10.7 billion at June 30, 2017 , an increase of $0.3 billion when compared with December 31, 2016 .

On June 28, 2017, Huntington was notified by the Federal Reserve that it had no objection to Huntington's proposed capital actions included in Huntington's capital plan submitted in the 2017 Comprehensive Capital Analysis and Review ("CCAR"). These actions included a 38% increase in the quarterly dividend per common share to $0.11, starting in the fourth quarter of 2017, the repurchase of up to $308 million of common stock over the next four quarters (July 1, 2017 through June 30, 2018), subject to authorization by the Board of Directors, and maintaining dividends on the outstanding classes of preferred stock and trust preferred securities.

On July 19, 2017, the Board authorized the repurchase of up to $308 million of common shares over the four quarters through the 2018 second quarter. Purchases of common stock under the authorization may include open market purchases, privately negotiated transactions, and accelerated repurchase programs.

Dividends

We consider disciplined capital management as a key objective, with dividends representing one component. Our strong capital ratios and expectations for continued earnings growth positions us to continue to actively explore additional capital management opportunities.


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Fair Value

At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. As necessary, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs at the measurement date. The fair values measured at each level of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs, can be found in Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements.

BUSINESS SEGMENT DISCUSSION

Overview

Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have four major business segments: Consumer and Business Banking , Commercial Banking , Commercial Real Estate and Vehicle Finance (CREVF) , and Regional Banking and The Huntington Private Client Group (RBHPCG) . A Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.

Business segment results are determined based upon our management accounting practices, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.

We announced a change within our executive leadership team, which became effective during the 2017 second quarter. As a result, the previously reported Home Lending segment is now included as an operating unit within the Consumer and Business Banking segment. Additionally, the Insurance operating unit previously included in Commercial Banking was realigned to RBHPCG during the quarter. Prior period results have been reclassified to conform to the current period presentation.

Revenue Sharing

Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations.

Expense Allocation

The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all four business segments from Treasury / Other . We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the four business segments.

Funds Transfer Pricing (FTP)

We use an active and centralized FTP methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).


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Net Income by Business Segment

The segregation of net income by business segment for the six-month periods ending June 30, 2017 and June 30, 2016 is presented in the following table:

Table 21 - Net Income (Loss) by Business Segment

(dollar amounts in thousands)

Six Months Ended June 30,

2017

2016

Consumer and Business Banking

$

201,290


$

129,151


Commercial Banking

160,991


77,513


CREVF

106,919


87,848


RBHPCG

42,678


27,240


Treasury / Other

(32,043

)

24,102


Net income

$

479,835


$

345,854


Treasury / Other

The Treasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the four business segments. Other assets include investment securities and bank owned life insurance. The financial impact associated with our FTP methodology, as described above, is also included.

Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and any investment security and trading asset gains or losses. Noninterest expense includes $124 million of FirstMerit acquisition-related expense in 2017 first six-month period, certain corporate administrative, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury / Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the business segments.

Consumer and Business Banking

Table 22 - Key Performance Indicators for Consumer and Business Banking

(dollar amounts in thousands unless otherwise noted)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Net interest income

$

828,936


$

562,423


$

266,513


47

%

Provision for credit losses

50,181


30,750


19,431


63


Noninterest income

354,970


284,002


70,968


25


Noninterest expense

824,048


616,981


207,067


34


Provision for income taxes

108,387


69,543


38,844


56


Net income

$

201,290


$

129,151


$

72,139


56

%

Number of employees (average full-time equivalent)

8,737


6,543


2,194


34

%

Total average assets (in millions)

$

25,283


$

18,951


$

6,332


33


Total average loans/leases (in millions)

20,479


16,227


4,252


26


Total average deposits (in millions)

45,461


31,428


14,033


45


Net interest margin

3.78

%

3.68

%

0.10

%

3


NCOs

$

48,576


$

28,948


$

19,628


68


NCOs as a % of average loans and leases

0.47

%

0.35

%

0.12

%

34


2017 First Six Months vs. 2016 First Six Months

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


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allowance as well as increased NCOs. Noninterest income increased $71 million , or 25% , due to an increase in net mortgage servicing revenue, card and payment processing income and service charges on deposit accounts, which were driven by higher debit card-related transaction volumes and an increase in the number of households. In addition, SBA loan sales gains contributed to improved noninterest income. Noninterest expense increased $207 million , or 34% , due to an increase in personnel and occupancy expense related to the addition of FirstMerit branches and colleagues. Higher allocated expenses also contributed to the increase in noninterest expense.

Home Lending, an operating unit of Consumer and Business Banking , reflects the result of the origination and servicing of mortgage loans less referral fees and net interest income for mortgage banking products distributed by the retail branch network and other business segments. Home Lending reported net income of $4 million in the first six-month period of 2017 , a decrease of $5 million , or 55% , compared to the year-ago period. Results were impacted by the FirstMerit acquisition. Net interest income increased $4 million , or 16% , which primarily reflects higher residential mortgage balances and lower FTP funding costs. The provision for credit losses increased $4 million , primarily due to an increase in the allowance in for the residential mortgage portfolio held by Home Lending. Noninterest income increased by $10 million , or 31% , primarily due to favorable net MSR hedge-related activities and net servicing income. Income from higher origination volumes was predominately offset by lower spreads on origination volume. Noninterest expense increased $18 million , or 36% , primarily due to higher personnel costs related to the FirstMerit acquisition and higher origination volume.

Commercial Banking

Table 23 - Key Performance Indicators for Commercial Banking

(dollar amounts in thousands unless otherwise noted)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Net interest income

$

343,285


$

212,240


$

131,045


62

 %

Provision for credit losses

11,798


29,423


(17,625

)

(60

)

Noninterest income

117,573


95,484


22,089


23


Noninterest expense

201,382


159,050


42,332


27


Provision for income taxes

86,687


41,738


44,949


108


Net income

$

160,991


$

77,513


$

83,478


108

 %

Number of employees (average full-time equivalent)

1,087


833


254


30

 %

Total average assets (in millions)

$

24,000


$

17,553


$

6,447


37


Total average loans/leases (in millions)

19,075


13,804


5,271


38


Total average deposits (in millions)

18,725


14,072


4,653


33


Net interest margin

3.35

%

2.88

%

0.47

 %

16


NCOs

$

6,416


$

16,261


$

(9,845

)

(61

)

NCOs as a % of average loans and leases

0.07

%

0.23

%

(0.16

)%

(70

)

2017 First Six Months vs. 2016 First Six Months

Commercial Banking reported net income of $161 million in the first six-month period of 2017 , an increase of $83 million , or 108% , compared to the year-ago period. Results were predominately impacted by the FirstMerit acquisition. Segment net interest income increased $131 million , or 62% , primarily due to an increase in both average loans and deposits combined with a 47 basis point increase in net interest margin. The provision for credit losses decreased $18 million , or 60% , driven by a reduction in NCOs and improvement in energy related credits. Noninterest income increased $22 million , or 23% , largely driven by an increase in loan commitment and other fees, deposit service charges and capital markets related revenues. Noninterest expense increased $42 million , or 27% , primarily due to an increase in personnel expense, allocated expenses, and amortization of intangibles, partially offset by a decrease in operating lease expense.


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Commercial Real Estate and Vehicle Finance

Table 24 - Commercial Real Estate and Vehicle Finance

(dollar amounts in thousands unless otherwise noted)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Net interest income

$

279,700


$

191,214


$

88,486


46

%

Provision (reduction in allowance) for credit losses

30,342


(6,909

)

37,251


N.R.


Noninterest income

23,768


17,950


5,818


32


Noninterest expense

108,635


80,922


27,713


34


Provision for income taxes

57,572


47,303


10,269


22


Net income

$

106,919


$

87,848


$

19,071


22

%

Number of employees (average full-time equivalent)

402


310


92


30

%

Total average assets (in millions)

$

23,903


$

18,329


$

5,574


30


Total average loans/leases (in millions)

22,811


17,288


5,523


32


Total average deposits (in millions)

1,825


1,649


176


11


Net interest margin

2.45

%

2.18

 %

0.27

%

12


NCOs

$

19,500


$

(16,888

)

$

36,388


N.R.


NCOs as a % of average loans and leases

0.17

%

(0.19

)%

0.36

%

N.R.


N.R. - Not relevant.

2017 First Six Months vs. 2016 First Six Months

CREVF reported net income of $107 million in the first six-month period of 2017 , an increase of $19 million , or 22% , compared to the year-ago period. Results were positively impacted by the FirstMerit acquisition, offset in part by a higher provision for credit losses reflecting significant commercial real estate recoveries in the year ago period. Segment net interest income increased $88 million or 46% , due to both higher loan balances and a 27 basis point increase in the net interest margin primarily reflecting the purchase accounting impact of the acquired loan portfolios. Noninterest income increased $6 million , or 32% , primarily due to a $3 million increase in gains on various equity investments associated with mezzanine lending related activities. Noninterest expense increased $28 million , or 34% , primarily due to an increase in personnel costs and other allocated costs attributed to higher production and portfolio balance levels.


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Regional Banking and The Huntington Private Client Group

Table 25 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group

(dollar amounts in thousands unless otherwise noted)

Six Months Ended June 30,

Change

2017

2016

Amount

Percent

Net interest income

$

95,492


$

70,503


$

24,989


35

%

Provision (reduction in allowance) for credit losses

295


(1,173

)

1,468


N.R.


Noninterest income

94,395


79,403


14,992


19


Noninterest expense

123,934


109,172


14,762


14


Provision for income taxes

22,980


14,667


8,313


57


Net income

$

42,678


$

27,240


$

15,438


57

%

Number of employees (average full-time equivalent)

1,034


930


104


11

%

Total average assets (in millions)

$

5,401


$

4,265


$

1,136


27


Total average loans/leases (in millions)

4,699


3,861


838


22


Total average deposits (in millions)

5,927


4,819


1,108


23


Net interest margin

3.33

%

2.95

 %

0.38

%

13


NCOs

$

987


$

(3,013

)

$

4,000


N.R.


NCOs as a % of average loans and leases

0.04

%

(0.16

)%

0.20

%

N.R.


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

$

17.6


$

16.8


$

0.8


5


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

101.6


93.3


8.3


9


N.R. - Not relevant.

eop - End of Period.

(1)

Includes assets associated with FirstMerit.

2017 First Six Months vs. 2016 First Six Months

RBHPCG reported net income of $43 million in the first six-month period of 2017 , an increase of $15 million , or 57% , compared to the year-ago period. Results were predominately impacted by the FirstMerit acquisition. Net interest income increased $25 million , or 35% , due to an increase in average total deposits and loans combined with a 38 basis point increase in net interest margin. The increase in average total loans was primarily due to strong growth in commercial and portfolio mortgage loans combined with balance growth from the FirstMerit acquisition, while the increase in average total deposits was mainly due to the acquisition combined with growth in interest checking balances from the Private Client Account. The provision for credit losses increased $1 million , due to lower recoveries in the current period. Noninterest income increased $15 million , or 19% , primarily due to increased trust and investment management revenue related to the increase in trust assets and assets under management that resulted primarily from the FirstMerit acquisition. Noninterest expense increased $15 million , or 14% , as a result of increased personnel expenses and amortization of intangibles resulting from the FirstMerit acquisition.

ADDITIONAL DISCLOSURES

Forward-Looking Statements

This report, including MD&A, contains certain forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements, which are not historical facts and are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect,


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anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our "Fair Play" banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the possibility that the anticipated benefits of the merger with FirstMerit Corporation are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where we do business; diversion of management's attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger with FirstMerit Corporation; and other factors that may affect our future results. Additional factors that could cause results to differ materially from those described above can be found in our Annual Report on Form 10-K for the year ended December 31, 2016, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, which are on file with the Securities and Exchange Commission (the "SEC") and available in the "Investor Relations" section of our website, http://www.huntington.com , under the heading "Publications and Filings" and in other documents we file with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not assume any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

Non-GAAP Financial Measures

This document contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding Huntington's results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein where applicable.

Significant Items

From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the Company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.

We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.

Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.

Fully-Taxable Equivalent Basis


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


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Table of Contents


Non-Regulatory Capital Ratios

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

Tangible common equity to tangible assets, and

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

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

Because there are no standardized definitions for these non-regulatory capital ratios, the Company's calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.

Risk Factors

Information on risk is discussed in the Risk Factors section included in Item 1A of our 2016 Form 10-K. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report.

Critical Accounting Policies and Use of Significant Estimates

Our financial statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of Notes to Consolidated Financial Statements included in our December 31, 2016 Form 10-K, as supplemented by this report, lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that significantly differ from when those estimates were made.

Our most significant accounting estimates relate to our ACL, valuation of financial instruments, contingent liabilities, income taxes, and deferred tax assets. These significant accounting estimates and their related application are discussed in our December 31, 2016 Form 10-K.

Recent Accounting Pronouncements and Developments

Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2017 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Unaudited Condensed Consolidated Financial Statements.



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Item 1: Financial Statements

Huntington Bancshares Incorporated

Condensed Consolidated Balance Sheets

(Unaudited)

(dollar amounts in thousands, except number of shares)

June 30,

December 31,

2017

2016

Assets

Cash and due from banks

$

1,515,476


$

1,384,770


Interest-bearing deposits in banks

77,148


58,267


Trading account securities

94,767


133,295


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

748,077


512,951


Available-for-sale and other securities

15,388,306


15,562,837


Held-to-maturity securities

8,279,577


7,806,939


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

68,059,310


66,961,996


Allowance for loan and lease losses

(667,996

)

(638,413

)

Net loans and leases

67,391,314


66,323,583


Bank owned life insurance

2,448,913


2,432,086


Premises and equipment

855,347


815,508


Goodwill

1,992,849


1,992,849


Other intangible assets

373,861


402,458


Servicing rights

224,656


225,578


Accrued income and other assets

2,016,488


2,062,976


Total assets

$

101,406,779


$

99,714,097


Liabilities and shareholders' equity

Liabilities

Deposits

$

75,933,373


$

75,607,717


Short-term borrowings

4,552,877


3,692,654


Long-term debt

8,536,471


8,309,159


Accrued expenses and other liabilities

1,729,876


1,796,421


Total liabilities

90,752,597


89,405,951


Commitments and contingencies (Note 14)

Shareholders' equity

Preferred stock

1,071,286


1,071,227


Common stock

10,932


10,886


Capital surplus

9,920,052


9,881,277


Less treasury shares, at cost

(31,288

)

(27,384

)

Accumulated other comprehensive loss

(350,357

)

(401,016

)

Retained (deficit) earnings

33,557


(226,844

)

Total shareholders' equity

10,654,182


10,308,146


Total liabilities and shareholders' equity

$

101,406,779


$

99,714,097


Common shares authorized (par value of $0.01)

1,500,000,000


1,500,000,000


Common shares issued

1,093,162,464


1,088,641,251


Common shares outstanding

1,090,016,469


1,085,688,538


Treasury shares outstanding

3,145,995


2,952,713


Preferred stock, authorized shares

6,617,808


6,617,808


Preferred shares issued

2,702,571


2,702,571


Preferred shares outstanding

1,098,006


1,098,006


(1)

Amounts represent loans for which Huntington has elected the fair value option. See Note 11 .

See Notes to Unaudited Condensed Consolidated Financial Statements



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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Income

(Unaudited)

(dollar amounts in thousands, except per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

Interest and fee income:

Loans and leases

$

699,838


$

469,770


$

1,375,772


$

933,192


Available-for-sale and other securities

Taxable

78,292


40,992


154,577


80,606


Tax-exempt

18,695


13,795


37,382


26,814


Held-to-maturity securities-taxable

44,276


35,420


89,471


72,209


Other

5,323


5,681


9,582


10,088


Total interest income

846,424


565,658


1,666,784


1,122,909


Interest expense:

Deposits

42,287


22,324


77,077


45,342


Short-term borrowings

5,203


913


11,069


1,811


Federal Home Loan Bank advances

66


72


132


141


Subordinated notes and other long-term debt

54,356


36,468


104,019


66,668


Total interest expense

101,912


59,777


192,297


113,962


Net interest income

744,512


505,881


1,474,487


1,008,947


Provision for credit losses

24,978


24,509


92,616


52,091


Net interest income after provision for credit losses

719,534


481,372


1,381,871


956,856


Service charges on deposit accounts

87,582


75,613


171,002


145,875


Cards and payment processing income

52,485


39,184


99,654


75,631


Mortgage banking income

32,268


31,591


63,960


50,134


Trust and investment management services

32,232


22,497


66,101


45,335


Insurance income

15,843


15,947


31,107


32,172


Brokerage income

16,294


14,599


32,052


30,101


Capital markets fees

16,836


13,037


31,036


26,047


Bank owned life insurance income

15,322


12,536


32,864


26,049


Gain on sale of loans

12,002


9,265


24,824


14,660


Net gains on sales of securities

3,694


732


3,710


732


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

(3,559

)

(76

)

(3,583

)

(76

)

Other noninterest income

44,219


36,187


84,954


66,319


Total noninterest income

325,218


271,112


637,681


512,979


Personnel costs

391,997


298,949


773,997


584,346


Outside data processing and other services

75,169


63,037


162,371


124,915


Equipment

42,924


31,805


89,624


64,381


Net occupancy

52,613


30,704


120,313


62,180


Professional services

18,190


21,488


36,485


35,026


Marketing

18,843


14,773


32,766


27,041


Deposit and other insurance expense

20,418


12,187


40,517


23,395


Amortization of intangibles

14,242


3,600


28,597


7,312


Other noninterest expense

59,968


47,118


117,116


86,145


Total noninterest expense

694,364


523,661


1,401,786


1,014,741


Income before income taxes

350,388


228,823


617,766


455,094


Provision for income taxes

78,647


54,283


137,931


109,240


Net income

271,741


174,540


479,835


345,854


Dividends on preferred shares

18,889


19,874


37,767


27,872


Net income applicable to common shares

$

252,852


$

154,666


$

442,068


$

317,982



42

Table of Contents


Three Months Ended
June 30,

Six Months Ended
June 30,

(dollar amounts in thousands, except per share amounts)

2017

2016

2017

2016

Average common shares-basic

1,088,934


798,167


1,087,654


796,961


Average common shares-diluted

1,108,527


810,371


1,108,572


809,360


Per common share:

Net income-basic

$

0.23


$

0.19


$

0.41


$

0.40


Net income-diluted

0.23


0.19


0.40


0.39


Cash dividends declared

0.08


0.07


0.16


0.14


OTTI losses for the periods presented:

Total OTTI losses

$

(3,563

)

$

(76

)

$

(3,589

)

$

(3,809

)

Noncredit-related portion of loss recognized in OCI

4


-


6


3,733


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

$

(3,559

)

$

(76

)

$

(3,583

)

$

(76

)

See Notes to Unaudited Condensed Consolidated Financial Statements




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Table of Contents


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2016

2017

2016

Net income

$

271,741


$

174,540


$

479,835


$

345,854


Other comprehensive income, net of tax:

Unrealized gains (losses) on available-for-sale and other securities:

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

1,602


667


2,126


(1,682

)

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

37,052


30,603


47,050


82,154


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

38,654


31,270


49,176


80,472


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

1,070


1,134


244


9,963


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

779


840


1,239


1,681


Other comprehensive income (loss), net of tax

40,503


33,244


50,659


92,116


Comprehensive income

$

312,244


$

207,784


$

530,494


$

437,970


See Notes to Unaudited Condensed Consolidated Financial Statements



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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

Accumulated Other Comprehensive Gain (Loss)

Retained Earnings (Deficit)

(dollar amounts in thousands, except per share amounts)

Preferred Stock

Common Stock

Capital Surplus

Treasury Stock

Amount

Shares

Amount

Shares

Amount

Total

Six Months Ended June 30, 2016

Balance, beginning of period

$

386,291


796,970


$

7,970


$

7,038,502


(2,041

)

$

(17,932

)

$

(226,158

)

$

(594,067

)

$

6,594,606


Net income

345,854


345,854


Other comprehensive income (loss)

92,116


92,116


Net proceeds from issuance of Series D preferred stock

584,987


584,987


Cash dividends declared:

Common ($0.14 per share)

(111,735

)

(111,735

)

Preferred Series A ($42.50 per share)

(15,407

)

(15,407

)

Preferred Series B ($16.63 per share)

(590

)

(590

)

Preferred Series D ($19.79 per share)

(11,875

)

(11,875

)

Recognition of the fair value of share-based compensation

27,799


27,799


Other share-based compensation activity

4,559


45


7,872


(3,004

)

4,913


Other

-


-


76


(334

)

(3,426

)

(14

)

(3,364

)

Balance, end of period

$

971,278


801,529


$

8,015


$

7,074,249


(2,375

)

$

(21,358

)

$

(134,042

)

$

(390,838

)

$

7,507,304


Six Months Ended June 30, 2017

Balance, beginning of period

$

1,071,227


1,088,641


$

10,886


$

9,881,277


(2,953

)

$

(27,384

)

$

(401,016

)

$

(226,844

)

$

10,308,146


Net income

479,835


479,835


Other comprehensive income (loss)

50,659


50,659


Cash dividends declared:

Common ($0.16 per share)

(174,369

)

(174,369

)

Preferred Series A ($42.50 per share)

(15,406

)

(15,406

)

Preferred Series B ($18.95 per share)

(673

)

(673

)

Preferred Series C ($29.38 per share)

(2,938

)

(2,938

)

Preferred Series D ($31.25 per share)

(18,750

)

(18,750

)

Recognition of the fair value of share-based compensation

52,045


52,045


Other share-based compensation activity

4,514


45


(14,612

)

(7,057

)

(21,624

)

Other

59


7


1


1,342


(193

)

(3,904

)

(241

)

(2,743

)

Balance, end of period

$

1,071,286


1,093,162


$

10,932


$

9,920,052


(3,146

)

$

(31,288

)

$

(350,357

)

$

33,557


$

10,654,182


See Notes to Unaudited Condensed Consolidated Financial Statements


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Table of Contents


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2016

Operating activities

Net income

$

479,835


$

345,854


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

Provision for credit losses

92,616


52,091


Depreciation and amortization

210,825


208,249


Share-based compensation expense

52,045


27,799


Net change in:

Trading account securities

38,528


1,708


Loans held for sale

(220,674

)

(307,880

)

Accrued income and other assets

(57,635

)

(97,334

)

Deferred income taxes

11,725


(6,864

)

Accrued expense and other liabilities

(60,182

)

70,554


Other, net

11,661


(7,539

)

Net cash provided by (used for) operating activities

558,744


286,638


Investing activities

Change in interest bearing deposits in banks

19,474


6,942


Proceeds from:

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

715,893


467,633


Maturities of held-to-maturity securities

523,309


495,645


Sales of available-for-sale and other securities

411,763


170,986


Purchases of available-for-sale and other securities

(1,891,781

)

(1,405,035

)

Purchases of held-to-maturity securities

(8,616

)

-


Net proceeds from sales of portfolio loans

259,165


234,608


Net loan and lease activity, excluding sales and purchases

(1,429,367

)

(2,220,929

)

Purchases of premises and equipment

(112,566

)

(19,846

)

Proceeds from sales of other real estate

17,802


13,290


Purchases of loans and leases

(93,560

)

(341,985

)

Other, net

8,343


2,698


Net cash provided by (used for) investing activities

(1,580,141

)

(2,595,993

)

Financing activities

Increase (decrease) in deposits

325,656


(256,333

)

Increase (decrease) in short-term borrowings

838,389


1,335,888


Net proceeds from issuance of long-term debt

1,060,697


1,051,794


Maturity/redemption of long-term debt

(843,019

)

(255,750

)

Dividends paid on preferred stock

(37,743

)

(27,872

)

Dividends paid on common stock

(174,168

)

(112,087

)

Proceeds from stock options exercised

6,884


3,887


Net proceeds from issuance of preferred stock

-


584,987


Payments related to tax-withholding for share based compensation awards

(24,593

)

-


Other, net

-


4,865


Net cash provided by (used for) financing activities

1,152,103


2,329,379


Increase (decrease) in cash and cash equivalents

130,706


20,024


Cash and cash equivalents at beginning of period

1,384,770


847,156


Cash and cash equivalents at end of period

$

1,515,476


$

867,180



46

Table of Contents


Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2016

Supplemental disclosures:

Interest paid

$

185,107


$

107,428


Income taxes paid

54,434


3,099


Non-cash activities

Loans transferred to held-for-sale from portfolio

298,331


266,527


Loans transferred to portfolio from held-for-sale

1,265


10,661


Transfer of loans to OREO

16,926


12,974


Transfer of securities to held to maturity from available for sale


992,760


-


See Notes to Unaudited Condensed Consolidated Financial Statements



47

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Huntington Bancshares Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

1 . BASIS OF PRESENTATION

The accompanying Unaudited Condensed Consolidated Financial Statements of Huntington reflect all adjustments consisting of normal recurring accruals which are, in the opinion of Management, necessary for a fair statement of the consolidated financial position, the results of operations, and cash flows for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These Unaudited Condensed Consolidated Financial Statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington's 2016 Form 10-K, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

For statement of cash flows purposes, cash and cash equivalents are defined as the sum of "Cash and due from banks" which includes amounts on deposit with the Federal Reserve and "Federal funds sold and securities purchased under resale agreements."

In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Consolidated Financial Statements or disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.

Certain amounts reported in prior periods have been reclassified to conform to the current period presentation.

2 . ACCOUNTING STANDARDS UPDATE

ASU 2014-09-Revenue from Contracts with Customers (Topic 606): The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach for revenue recognition. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Management intends to adopt the new guidance on January 1, 2018 using the modified retrospective approach and is well into its outlined implementation plan. In this regard, management has completed a preliminary analysis that includes (a) identification of all revenue streams included in the financial statements; (b) determination of scope exclusions to identify ‘in-scope' revenue streams; (c) determination of size, timing, and amount of revenue recognition for in-scope items; (d) determination of sample size of contracts for further analysis; and (e) completion of limited analysis on selected contracts to evaluate the potential impact of the new guidance. The key revenue streams identified include service charges, credit card and payment processing fees, trust services fees, insurance income, brokerage services, and mortgage banking income. The new guidance is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update make targeted improvements to GAAP including, but not limited to, requiring an entity to measure its equity investments with changes in the fair value recognized in the income statement; requiring an entity to present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (i.e., FVO liability); requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; assessing deferred tax assets related to a net unrealized loss on AFS securities in combination with the entity's other deferred tax assets; and eliminating some of the disclosures required by the existing GAAP while requiring entities to present and disclose some additional information. The new guidance is effective for the fiscal period beginning after December 15, 2017, including interim periods within those fiscal years. An entity should apply the amendments as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendment is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2016-02 - Leases. This Update sets forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting applied by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Update is effective for the fiscal period beginning after December 15, 2018,


48

Table of Contents


with early application permitted. Management is currently assessing the impact of the new guidance on Huntington's Unaudited Consolidated Financial Statements. Huntington expects to recognize a right-of-use asset and a lease liability for its operating lease commitments.

ASU 2016-13 - Financial Instruments - Credit Losses. The amendments in this Update eliminate the probable recognition threshold for credit losses on financial assets measured at amortized cost. The Update requires those financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The Update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management currently intends to adopt the guidance on January 1, 2020 and is assessing the impact of this Update on Huntington's Unaudited Consolidated Financial Statements. Management has formed a working group comprised of teams from different disciplines including credit and finance. The working group is currently evaluating the requirements of the new standard and the impact it will have on our processes. The early stages of this evaluation include a review of existing credit models to identify areas where existing credit models used to comply with other regulatory requirements may be leveraged and areas where new impairment models may be required.

ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Current guidance lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to several types of cash flows. The amendments in this Update are effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update simplifies the goodwill impairment test. Under the new guidance, Step 2 of the goodwill impairment process that requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities, is eliminated. Instead, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. The amendment is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Periodic Postretirement Benefit Cost. The amendments in this Update require that an employer report the service cost component of the pension cost and postretirement benefit cost in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the net benefit cost should be presented in the income statement separately from the service cost component. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. This Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

ASU 2017-09 - Stock Compensation Modification Accounting. The Update reduces the current diversity in practice and provides explicit guidance pertaining to the provisions of modification accounting. The Update clarifies that an entity should account for effects of modification unless the fair value, vesting conditions and the classification of the modified award are the same as of the original awards immediately before the original award is modified. The Update is effective prospectively for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Earlier application is permitted. The Update is not expected to have a significant impact on Huntington's Unaudited Consolidated Financial Statements.

3 . LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES

Loans and leases for which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Unaudited Condensed Consolidated Balance Sheets as loans and leases. Except for loans which are accounted for at fair value, loans are carried at the principal amount outstanding, net of unamortized premiums and discounts


49

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and deferred loan fees and costs and purchase accounting adjustments, which resulted in a net premium of $245 million and $120 million at June 30, 2017 and December 31, 2016 , respectively.

Loan and Lease Portfolio Composition

The following table provides a detailed listing of Huntington's loan and lease portfolio at June 30, 2017 and December 31, 2016 :

(dollar amounts in thousands)

June 30,
2017

December 31,
2016

Loans and leases:

Commercial and industrial

$

27,969,151


$

28,058,712


Commercial real estate

7,145,151


7,300,901


Automobile

11,555,137


10,968,782


Home equity

9,965,534


10,105,774


Residential mortgage

8,237,297


7,724,961


RV and marine finance

2,177,732


1,846,447


Other consumer

1,009,308


956,419


Loans and leases

68,059,310


66,961,996


Allowance for loan and lease losses

(667,996

)

(638,413

)

Net loans and leases

$

67,391,314


$

66,323,583


Purchased Credit-Impaired Loans

The following table presents a rollforward of the accretable yield for purchased credit impaired loans for the three-month and six-month period ended June 30, 2017 : and 2016 :

Three Months Ended
June 30,

Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2017

FirstMerit

Balance, beginning of period

$

37,372


$

36,669


Accretion

(4,788

)

(9,490

)

Reclassification (to) from nonaccretable difference

3,925


9,330


Balance, end of period

$

36,509


$

36,509


The following table reflects the ending and unpaid balances of the purchase credit impaired loans at June 30, 2017 and December 31, 2016 :

June 30, 2017

December 31, 2016

(dollar amounts in thousands)

Ending
Balance

Unpaid
Balance

ALLL

Ending
Balance

Unpaid
Balance

ALLL

FirstMerit

Commercial and industrial

$

54,942


$

81,934


$

970


$

68,338


$

100,031


$

-


Commercial real estate

20,780


34,904


-


34,042


56,320


-


Total

$

75,722


$

116,838


$

970


$

102,380


$

156,351


$

-


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

NALs and Past Due Loans

Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. See Note 1 "Significant Accounting Policies" to the consolidated financial


50

Table of Contents


statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the accounting policies related to the ACL.

The following table presents NALs by loan class at June 30, 2017 and December 31, 2016 :

(dollar amounts in thousands)

June 30,
2017

December 31,
2016

Commercial and industrial

$

195,279


$

234,184


Commercial real estate

16,763


20,508


Automobile

3,825


5,766


Home equity

67,940


71,798


Residential mortgage

80,306


90,502


RV and marine finance

341


245


Other consumer

2


-


Total nonaccrual loans

$

364,456


$

423,003


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

June 30, 2017

Past Due

 Loans Accounted for Under the Fair Value Option

Total Loans
and Leases

90 or
more days
past due
and accruing

(dollar amounts in thousands)

30-59
Days

60-89
 Days

90 or 
more days

Total

Current

Purchased Credit

Impaired

Commercial and industrial

$

44,796


$

13,608


$

84,609


$

143,013


$

27,771,196


$

54,942


$

-


$

27,969,151


$

21,501


(2)

Commercial real estate

7,382


3,918


27,314


38,614


7,085,757


20,780


-


7,145,151


17,040


Automobile

68,600


15,241


8,716


92,557


11,461,169


-


1,411


11,555,137


8,594


Home equity

44,513


16,463


61,159


122,135


9,840,922


-


2,477


9,965,534


18,459


Residential mortgage

117,779


40,327


110,842


268,948


7,869,927


-


98,422


8,237,297


65,159


(3)

RV and marine finance

8,072


2,443


2,666


13,181


2,163,346


-


1,205


2,177,732


2,464


Other consumer

9,913


4,081


3,146


17,140


991,942


-


226


1,009,308


3,143


Total loans and leases

$

301,055


$

96,081


$

298,452


$

695,588


$

67,184,259


$

75,722


$

103,741


$

68,059,310


$

136,360



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Table of Contents


December 31, 2016

Past Due

Loans Accounted for Under the Fair Value Option

Total Loans
and Leases

90 or
more days
past due
and accruing

(dollar amounts in thousands)

30-59
Days

60-89
 Days

90 or 
more days

Total

Current

Purchased
Credit Impaired

Commercial and industrial

42,052


20,136


74,174


136,362


27,854,012


68,338


-


28,058,712


18,148


(2)

Commercial real estate

21,187


3,202


29,659


54,048


7,212,811


34,042


-


7,300,901


17,215


Automobile loans

76,283


17,188


10,442


103,913


10,862,715


-


2,154


10,968,782


10,182


Home equity

38,899


23,903


53,002


115,804


9,986,697


-


3,273


10,105,774


11,508


Residential mortgage

122,469


37,460


116,682


276,611


7,373,414


-


74,936


7,724,961


66,952


(3)

RV and marine finance

10,009


2,230


1,566


13,805


1,831,123


-


1,519


1,846,447


1,462


Other consumer

9,442


4,324


3,894


17,660


938,322


-


437


956,419


3,895


Total loans and leases

$

320,341


$

108,443


$

289,419


$

718,203


$

66,059,094


$

102,380


$

82,319


$

66,961,996


$

129,362


(1)

NALs are included in this aging analysis based on the loan's past due status.

(2)

Amounts include Huntington Technology Finance administrative lease delinquencies.

(3)

Amounts include loans guaranteed by government organizations.

Allowance for Credit Losses

Huntington maintains two reserves, both of which reflect management's judgment regarding the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change. See Note 1 "Significant Accounting Policies" to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the accounting policies related to the ACL.

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


52

Table of Contents


The following table presents ALLL and AULC activity by portfolio segment for the three-month and six-month periods ended June 30, 2017 and 2016 :

(dollar amounts in thousands)

Commercial

Consumer

Total

Three-month period ended June 30, 2017:

ALLL balance, beginning of period

$

480,308


$

192,272


$

672,580


Loan charge-offs

(15,103

)

(41,345

)

(56,448

)

Recoveries of loans previously charged-off

5,787


14,621


20,408


Provision for (reduction in allowance) loan and lease losses

3,585


27,872


31,457


Allowance for loans sold or transferred to loans held for sale

(1

)

-


(1

)

ALLL balance, end of period

$

474,576


$

193,420


$

667,996


AULC balance, beginning of period

$

88,899


$

2,939


$

91,838


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

(6,072

)

(407

)

(6,479

)

AULC balance, end of period

$

82,827


$

2,532


$

85,359


ACL balance, end of period

$

557,403


$

195,952


$

753,355


Six-month period ended June 30, 2017:

ALLL balance, beginning of period

$

451,091


$

187,322


$

638,413


Loan charge-offs

(38,773

)

(88,390

)

(127,163

)

Recoveries of loans previously charged-off

23,604


28,081


51,685


Provision for (reduction in allowance) loan and lease losses

38,729


66,407


105,136


Allowance for loans sold or transferred to loans held for sale

(75

)

-


(75

)

ALLL balance, end of period

$

474,576


$

193,420


$

667,996


AULC balance, beginning of period

$

86,543


$

11,336


$

97,879


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

(3,716

)

(8,804

)

(12,520

)

AULC balance, end of period

$

82,827


$

2,532


$

85,359


ACL balance, end of period

$

557,403


$

195,952


$

753,355



53

Table of Contents


(dollar amounts in thousands)

Commercial

Consumer

Total

Three-month period ended June 30, 2016:

ALLL balance, beginning of period

$

422,441


$

191,278


$

613,719


Loan charge-offs

(16,933

)

(26,612

)

(43,545

)

Recoveries of loans previously charged-off

13,904


12,886


26,790


Provision for (reduction in allowance) loan and lease losses

5,095


20,991


26,086


Allowance for loans sold or transferred to loans held for sale

-


14


14


ALLL balance, end of period

$

424,507


$

198,557


$

623,064


AULC balance, beginning of period

$

65,872


$

9,453


$

75,325


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

(2,155

)

578


(1,577

)

AULC balance, end of period

$

63,717


$

10,031


$

73,748


ACL balance, end of period

$

488,224


$

208,588


$

696,812


Six-month period ended June 30, 2016:

ALLL balance, beginning of period

$

398,753


$

199,090


$

597,843


Loan charge-offs

(45,882

)

(57,355

)

(103,237

)

Recoveries of loans previously charged-off

53,815


24,115


77,930


Provision for (reduction in allowance) loan and lease losses

17,821


32,603


50,424


Allowance for loans sold or transferred to loans held for sale

-


104


104


ALLL balance, end of period

$

424,507


$

198,557


$

623,064


AULC balance, beginning of period

$

63,448


$

8,633


$

72,081


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

269


1,398


1,667


AULC balance, end of period

$

63,717


$

10,031


$

73,748


ACL balance, end of period

$

488,224


$

208,588


$

696,812


Credit Quality Indicators

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

The following table presents each loan and lease class by credit quality indicator at June 30, 2017 and December 31, 2016 :

June 30, 2017

Credit Risk Profile by UCS Classification

(dollar amounts in thousands)

Pass

OLEM

Substandard

Doubtful

Total

Commercial

Commercial and industrial

$

26,006,917


$

798,643


$

1,138,508


$

25,083


$

27,969,151


Commercial real estate

6,923,159


88,932


132,017


1,043


7,145,151


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

750+

650-749

<650

Other (3)

Total

Consumer

Automobile

$

5,728,416


$

4,202,063


$

1,350,925


$

272,322


$

11,553,726


Home equity

6,296,801


3,013,152


619,661


33,443


9,963,057


Residential mortgage

4,945,403


2,449,297


610,720


133,455


8,138,875


RV and marine finance

1,287,480


774,873


85,844


28,330


2,176,527


Other consumer

386,659


481,324


135,161


5,938


1,009,082



54

Table of Contents



December 31, 2016

Credit Risk Profile by UCS Classification

(dollar amounts in thousands)

Pass

OLEM

Substandard

Doubtful

Total

Commercial

Commercial and industrial

$

26,211,885


$

810,287


$

1,028,819


$

7,721


$

28,058,712


Commercial real estate

7,042,304


96,975


159,098


2,524


7,300,901


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

750+

650-749

<650

Other (3)

Total

Consumer

Automobile

$

5,369,085


$

4,043,611


$

1,298,460


$

255,472


$

10,966,628


Home equity

6,280,328


2,891,330


637,560


293,283


10,102,501


Residential mortgage

4,662,777


2,285,121


615,067


87,060


7,650,025


RV and marine finance

1,064,143


644,039


72,995


63,751


1,844,928


Other consumer

346,867


455,959


133,243


19,913


955,982


(1)

Excludes loans accounted for under the fair value option.

(2)

Reflects most recent customer credit scores.

(3)

Reflects deferred fees and costs, loans in process, loans to legal entities, etc.

Impaired Loans

See Note 1 "Significant Accounting Policies" to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of accounting policies related to impaired loans.

The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance at June 30, 2017 and December 31, 2016 :

(dollar amounts in thousands)

Commercial

Consumer

Total

ALLL at June 30, 2017:

Portion of ALLL balance:

Purchased credit-impaired loans

$

970


$

-


$

970


Attributable to loans individually evaluated for impairment

14,239


9,044


23,283


Attributable to loans collectively evaluated for impairment

459,367


184,376


643,743


Total ALLL balance

$

474,576


$

193,420


$

667,996


Loan and Lease Ending Balances at June 30, 2017: (1)

Portion of loan and lease ending balance:

Purchased credit-impaired loans

$

75,722


$

-


$

75,722


Individually evaluated for impairment

441,499


451,192


892,691


Collectively evaluated for impairment

34,597,081


32,390,075


66,987,156


Total loans and leases evaluated for impairment

$

35,114,302


$

32,841,267


$

67,955,569



55

Table of Contents


(dollar amounts in thousands)

Commercial

Consumer

Total

ALLL at December 31, 2016

Portion of ALLL balance:

Attributable to loans individually evaluated for impairment

$

10,525


$

11,021


$

21,546


Attributable to loans collectively evaluated for impairment

440,566


176,301


616,867


Total ALLL balance:

$

451,091


$

187,322


$

638,413


Loan and Lease Ending Balances at December 31, 2016 (1)

Portion of loan and lease ending balances:

Purchased credit-impaired loans

$

102,380


$

-


$

102,380


Individually evaluated for impairment

415,624


457,890


873,514


Collectively evaluated for impairment

34,841,609


31,062,174


65,903,783


Total loans and leases evaluated for impairment

$

35,359,613


$

31,520,064


$

66,879,677


(1)

Excludes loans accounted for under the fair value option.

The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for impaired loans and leases and purchased credit-impaired loans: (1), (2)

June 30, 2017

Three Months Ended
June 30, 2017

Six Months Ended
June 30, 2017

(dollar amounts in thousands)

Ending

Balance

Unpaid

Principal

Balance (5)

Related

Allowance

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

With no related allowance recorded:

Commercial and industrial

$

261,285


$

270,571


$

-


$

262,631


$

4,852


$

268,041


$

9,352


Commercial real estate

76,463


106,248


-


82,296


1,937


84,865


3,937


Automobile

-


-


-


-


-


-


-


Home equity

-


-


-


-


-


-


-


Residential mortgage

-


-


-


-


-


-


-


RV and marine finance

-


-


-


-


-


-


-


Other consumer

-


-


-


-


-


-


-


With an allowance recorded:

Commercial and industrial (3)

283,409


342,188


24,423


258,066


2,002


310,611


3,908


Commercial real estate (4)

34,270


41,695


2,340


38,753


453


58,563


920


Automobile

32,431


32,642


1,889


32,581


546


32,041


1,080


Home equity (6)

325,805


357,738


17,844


326,280


3,977


323,988


7,927


Residential mortgage (6)

329,050


363,277


11,578


339,289


2,903


335,444


6,013


RV and marine finance

1,331


1,355


134


1,009


23


672


34


Other consumer

4,126


4,126


253


4,186


55


4,090


111


Total

Commercial and industrial

544,694


612,759


24,423


520,697


6,854


578,652


13,260


Commercial real estate

110,733


147,943


2,340


121,049


2,390


143,428


4,857


Automobile

32,431


32,642


1,889


32,581


546


32,041


1,080


Home equity

325,805


357,738


17,844


326,280


3,977


323,988


7,927


Residential mortgage

329,050


363,277


11,578


339,289


2,903


335,444


6,013


RV and marine finance

1,331


1,355


134


1,009


23


672


34


Other consumer

4,126


4,126


253


4,186


55


4,090


111




56

Table of Contents


December 31, 2016

Three Months Ended
June 30, 2016

Six Months Ended
June 30, 2016

(dollar amounts in thousands)

Ending

Balance

Unpaid

Principal

Balance (5)

Related

Allowance

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

With no related allowance recorded:

Commercial and industrial

$

299,606



$

358,712



$

-



$

289,138



$

2,392



$

284,128



$

4,623


Commercial real estate

88,817



126,152



-



72,569



1,855



72,640



3,472


Automobile

-


-


-


-


-


-


-


Home equity

-



-



-



-



-



-



-


Residential mortgage

-



-



-



1,298



109



1,350



111


RV and marine finance

-


-


-


-


-


-


-


Other consumer

-



-



-



19



2



30



104


With an allowance recorded:

Commercial and industrial (3)

406,243


448,121


22,259


291,761


1,739


269,518


3,829


Commercial real estate (4)

97,238


107,512


3,434


58,357


615


69,501


1,373


Automobile

30,961


31,298


1,850


32,032


524


31,789


1,102


Home equity (6)

319,404


352,722


15,032


248,056


2,962


248,317


5,930


Residential mortgage (6)

327,753


363,099


12,849


352,489


3,027


357,324


6,064


RV and marine finance

-


-


-


-


-


-


-


Other consumer

3,897


3,897


260


4,812


53


4,754


120


Total

Commercial and industrial

705,849


806,833


22,259


580,899


4,131


553,646


8,452


Commercial real estate

186,055


233,664


3,434


130,926


2,470


142,141


4,845


Automobile

30,961


31,298


1,850


32,032


524


31,789


1,102


Home equity

319,404


352,722


15,032


248,056


2,962


248,317


5,930


Residential mortgage

327,753


363,099


12,849


353,787


3,136


358,674


6,175


RV and marine finance

-


-


-


-


-


-


-


Other consumer

3,897


3,897


260


4,831


55


4,784


224


(1)

These tables do not include loans fully charged-off.

(2)

All automobile, RV and marine finance and other consumer impaired loans included in these tables are considered impaired due to their status as a TDR.

(3)

At June 30, 2017 and December 31, 2016 , commercial and industrial loans of $115 million and $293 million , respectively, were considered impaired due to their status as a TDR.

(4)

At June 30, 2017 and December 31, 2016 , commercial real estate loans of $23 million and $81 million , respectively, were considered impaired due to their status as a TDR.

(5)

The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.

(6)

Includes home equity and residential mortgages considered to be collateral dependent as well as home equity and mortgage loans considered impaired due to their status as a TDR.

TDR Loans

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


57

Table of Contents


The following table presents by class and modification type, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month and six-month periods ended June 30, 2017 an 2016 :

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

June 30, 2017

June 30, 2016

(dollar amounts in thousands)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Commercial and industrial:

Interest rate reduction

1


$

18


$

-


1


$

22


$

-


Amortization or maturity date change

228


168,118


(6,856

)

199


133,933


(3,490

)

Other

1


220


-


2


232


-


Total Commercial and industrial

230


168,356


(6,856

)

202


134,187


(3,490

)

Commercial real estate:

Interest rate reduction

-


-


-


1


84


-


Amortization or maturity date change

19


25,027


(427

)

36


16,017


(723

)

Other

-


-


-


2


52


-


Total commercial real estate:

19


25,027


(427

)

39


16,153


(723

)

Automobile:

Interest rate reduction

5


58


1


3


64


5


Amortization or maturity date change

334


2,853


67


286


2,663


202


Chapter 7 bankruptcy

198


1,494


18


244


1,982


114


Other

-


-


-


-


-


-


Total Automobile

537


4,405


86


533


4,709


321


Home equity:

Interest rate reduction

9


506


6


9


627


26


Amortization or maturity date change

135


8,372


(754

)

127


6,401


(736

)

Chapter 7 bankruptcy

77


2,417


364


46


2,114


267


Other

12


512


-


-


-


-


Total Home equity

233


11,807


(384

)

182


9,142


(443

)

Residential mortgage:

Interest rate reduction

-


-


-


5


404


17


Amortization or maturity date change

81


8,296


(231

)

108


10,641


(420

)

Chapter 7 bankruptcy

25


1,981


(1

)

6


1,178


(49

)

Other

5


464


3


1


164


-


Total Residential mortgage

111


10,741


(229

)

120


12,387


(452

)

RV and marine finance:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

10


150


4


-


-


-


Chapter 7 bankruptcy

34


544


6


-


-


-


Other

-


-


-


-


-


-


Total RV and marine finance

44


694


10


-


-


-


Other consumer:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

2


21


-


1


4


-


Chapter 7 bankruptcy

2


8


-


-


-


-


Other

-


-


-


-


-


-


Total Other consumer

4


29


-


1


4


-


Total new troubled debt restructurings

1,178


$

221,059


$

(7,800

)

1,077


$

176,582


$

(4,787

)


58

Table of Contents



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

June 30, 2017

June 30, 2016

(dollar amounts in thousands)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Commercial and industrial:

Interest rate reduction

2


$

37


$

6


2


$

39


$

(1

)

Amortization or maturity date change

464


280,543


(7,858

)

383


256,591


(2,918

)

Other

4


380


(27

)

10


1,090


(4

)

Total Commercial and industrial

470


280,960


(7,879

)

395


257,720


(2,923

)

Commercial real estate:

Interest rate reduction

-


-


-


1


84


-


Amortization or maturity date change

43


56,290


(815

)

60


49,812


(1,282

)

Other

-


-


-


4


315


16


Total commercial real estate:

43


56,290


(815

)

65


50,211


(1,266

)

Automobile:

Interest rate reduction

19


236


6


7


106


7


Amortization or maturity date change

811


7,154


178


707


6,564


422


Chapter 7 bankruptcy

438


3,316


47


561


4,544


229


Other

-


-


-


-


-


-


Total Automobile

1,268


10,706


231


1,275


11,214


658


Home equity:

Interest rate reduction

17


1,068


13


29


2,011


93


Amortization or maturity date change

241


13,868


(1,428

)

356


18,291


(2,018

)

Chapter 7 bankruptcy

164


6,036


1,402


145


5,711


1,000


Other

70


4,241


(326

)

-


-


-


Total Home equity

492


25,213


(339

)

530


26,013


(925

)

Residential mortgage:

Interest rate reduction

2


110


(9

)

10


1,061


(15

)

Amortization or maturity date change

180


19,367


(489

)

200


21,400


(997

)

Chapter 7 bankruptcy

49


4,672


(137

)

23


2,683


21


Other

21


2,384


17


1


164


-


Total Residential mortgage

252


26,533


(618

)

234


25,308


(991

)

RV and marine finance:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

24


626


16


-


-


-


Chapter 7 bankruptcy

49


754


10


-


-


-


Other

-


-


-


-


-


-


Total RV and marine finance

73


1,380


26


-


-


-


Other consumer:

Interest rate reduction

1


78


2


-


-


-


Amortization or maturity date change

4


288


7


5


559


24


Chapter 7 bankruptcy

3


12


-


7


66


7


Other

-


-


-


-


-


-


Total Other consumer

8


378


9


12


625


31


Total new troubled debt restructurings

2,606


$

401,460


$

(9,385

)

2,511


$

371,091


$

(5,416

)

(1)

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

(2) Amount represents the financial impact via provision for loan and lease losses as a result of the modificati

Pledged Loans and Leases

At June 30, 2017 , the Bank has access to the Federal Reserve's discount window and advances from the FHLB – Cincinnati. As of June 30, 2017 , these borrowings and advances are secured by $30.4 billion of loans and securities.



59

Table of Contents


4 . AVAILABLE-FOR-SALE AND OTHER SECURITIES

Listed below are the contractual maturities of available-for-sale and other securities at June 30, 2017 and December 31, 2016 :

June 30, 2017

December 31, 2016

(dollar amounts in thousands)

Amortized

Cost

Fair Value

Amortized

Cost

Fair Value

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

U.S. Treasury:

1 year or less

$

10,139


$

10,139


$

4,978


$

4,988


After 1 year through 5 years

502


505


502


509


After 5 years through 10 years

-


-


-


-


After 10 years

-


-


-


-


Total U.S. Treasury

10,641


10,644


5,480


5,497


Federal agencies: mortgage-backed securities:

1 year or less

-


-


-


-


After 1 year through 5 years

28,085


27,891


46,591


46,762


After 5 years through 10 years

200,334


199,224


173,941


176,404


After 10 years

10,536,086


10,396,940


10,630,929


10,450,176


Total Federal agencies: mortgage-backed securities

10,764,505


10,624,055


10,851,461


10,673,342


Other agencies:

1 year or less

4,103


4,142


4,302


4,367


After 1 year through 5 years

9,498


9,647


5,092


5,247


After 5 years through 10 years

86,049


86,502


63,618


63,928


After 10 years

-


-


-


-


Total other agencies

99,650


100,291


73,012


73,542


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

10,874,796


10,734,990


10,929,953


10,752,381


Municipal securities:

1 year or less

120,216


121,345


169,636


166,887


After 1 year through 5 years

1,113,974


1,123,450


933,893


933,903


After 5 years through 10 years

1,493,652


1,508,930


1,463,459


1,464,583


After 10 years

555,096


558,775


693,440


684,684


Total municipal securities

3,282,938


3,312,500


3,260,428


3,250,057


Asset-backed securities:

1 year or less

-


-


-


-


After 1 year through 5 years

80,018


80,177


80,700


80,560


After 5 years through 10 years

144,969


146,256


223,352


224,565


After 10 years

389,154


368,366


520,072


488,356


Total asset-backed securities

614,141


594,799


824,124


793,481


Corporate debt:

1 year or less

3,238


3,268


43,223


43,603


After 1 year through 5 years

64,369


65,808


78,430


80,196


After 5 years through 10 years

49,546


51,878


32,523


32,865


After 10 years

21,386


23,081


40,361


42,019


Total corporate debt

138,539


144,035


194,537


198,683


Other:

1 year or less

3,151


3,142


1,650


1,650


After 1 year through 5 years

800


790


2,302


2,283


After 5 years through 10 years

-


-


-


-


After 10 years

94


94


10


10


Nonmarketable equity securities

585,472


585,471


547,704


547,704


Mutual funds

11,184


11,184


15,286


15,286


Marketable equity securities

861


1,301


861


1,302


Total other

601,562


601,982


567,813


568,235


Total available-for-sale and other securities

$

15,511,976


$

15,388,306


$

15,776,855


$

15,562,837



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Other securities at June 30, 2017 and December 31, 2016 include nonmarketable equity securities of $287 million and $249 million of stock issued by the FHLB and $298 million and $299 million of Federal Reserve Bank stock, respectively. Non-marketable equity securities are recorded at amortized cost. Other securities also include Mutual funds and marketable equity securities.

The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at June 30, 2017 and December 31, 2016 :

Unrealized

(dollar amounts in thousands)

Amortized

Cost

Gross

Gains

Gross

Losses

Fair Value

June 30, 2017

U.S. Treasury

$

10,641


$

3


$

-


$

10,644


Federal agencies:

Mortgage-backed securities

10,764,505


8,652


(149,102

)

10,624,055


Other agencies

99,650


689


(48

)

100,291


Total U.S. Treasury, Federal agency securities

10,874,796


9,344


(149,150

)

10,734,990


Municipal securities

3,282,938


47,711


(18,149

)

3,312,500


Asset-backed securities

614,141


2,256


(21,598

)

594,799


Corporate debt

138,539


5,500


(4

)

144,035


Other securities

601,562


439


(19

)

601,982


Total available-for-sale and other securities

$

15,511,976


$

65,250


$

(188,920

)

$

15,388,306


Unrealized

(dollar amounts in thousands)

Amortized

Cost

Gross

Gains

Gross

Losses

Fair Value

December 31, 2016

U.S. Treasury

$

5,480


$

17


$

-


$

5,497


Federal agencies:

Mortgage-backed securities

10,851,461


12,548


(190,667

)

10,673,342


Other agencies

73,012


536


(6

)

73,542


Total U.S. Treasury, Federal agency securities

10,929,953


13,101


(190,673

)

10,752,381


Municipal securities

3,260,428


28,431


(38,802

)

3,250,057


Asset-backed securities

824,124


1,492


(32,135

)

793,481


Corporate debt

194,537


4,161


(15

)

198,683


Other securities

567,813


441


(19

)

568,235


Total available-for-sale and other securities

$

15,776,855


$

47,626


$

(261,644

)

$

15,562,837



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The following tables provide detail on investment securities with unrealized gross losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at June 30, 2017 and December 31, 2016 :

Less than 12 Months

Over 12 Months

Total

(dollar amounts in thousands)

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

June 30, 2017

Federal agencies:

Mortgage-backed securities

$

8,879,526


$

(147,900

)

$

42,504


$

(1,202

)

$

8,922,030


$

(149,102

)

Other agencies

12,793


(48

)

-


-


12,793


(48

)

Total Federal agency securities

8,892,319


(147,948

)

42,504


(1,202

)

8,934,823


(149,150

)

Municipal securities

702,379


(11,895

)

241,487


(6,254

)

943,866


(18,149

)

Asset-backed securities

177,834


(1,348

)

173,808


(20,250

)

351,642


(21,598

)

Corporate debt

595


(4

)

200


-


795


(4

)

Other securities

790


(10

)

1,491


(9

)

2,281


(19

)

Total temporarily impaired securities

$

9,773,917


$

(161,205

)

$

459,490


$

(27,715

)

$

10,233,407


$

(188,920

)

Less than 12 Months

Over 12 Months

Total

(dollar amounts in thousands)

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

December 31, 2016

Federal agencies:

Mortgage-backed securities

$

8,908,470


$

(189,318

)

$

41,706


$

(1,349

)

$

8,950,176


$

(190,667

)

Other agencies

924


(6

)

-


-


924


(6

)

Total Federal agency securities

8,909,394


(189,324

)

41,706


(1,349

)

8,951,100


(190,673

)

Municipal securities

1,412,152


(29,175

)

272,292


(9,627

)

1,684,444


(38,802

)

Asset-backed securities

361,185


(3,043

)

178,924


(29,092

)

540,109


(32,135

)

Corporate debt

3,567


(15

)

200


-


3,767


(15

)

Other securities

790


(11

)

1,492


(8

)

2,282


(19

)

Total temporarily impaired securities

$

10,687,088


$

(221,568

)

$

494,614


$

(40,076

)

$

11,181,702


$

(261,644

)

At June 30, 2017 , the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $5.4 billion . There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders' equity at June 30, 2017 .

The following table is a summary of realized securities gains and losses for the three-month and six-month periods ended June 30, 2017 and 2016 :

Three Months Ended
June 30,

Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2016

2017

2016

Gross gains on sales of securities

$

3,814


$

3,391


$

4,359


$

3,391


Gross (losses) on sales of securities

(120

)

(2,659

)

(649

)

(2,659

)

Net gain on sales of securities

$

3,694


$

732


$

3,710


$

732


OTTI recognized in earnings

(3,559

)

(76

)

(3,583

)

(76

)

Net security gains (losses)

$

135


$

656


$

127


$

656


Security Impairment

Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment and conducts a comprehensive security-level assessment on all available-for-sale securities. Impairment exists when the present value of the expected cash flows are not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any credit impairment would be recognized in earnings. At the end of the 2017 second quarter, Huntington changed its intent from able and willing to hold to sell sometime in the near future prior to final maturity for the two Reg


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Diversified CDO securities. Related to this change in intent, Huntington estimated the fair value of these bonds by obtaining bids. As a result of this analysis, Huntington recognized $3.6 million of OTTI on these two securities. For all other securities, Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be maturity.

The highest risk segment in our investment portfolio is the trust preferred CDO securities which are in the asset-backed securities portfolio. This portfolio is in run off, and the Company has not purchased these types of securities since 2005. The fair values of the CDO assets have been impacted by various market conditions. The unrealized losses are primarily the result of wider liquidity spreads on asset-backed securities and the longer expected average lives of the trust-preferred CDO securities, due to changes in the expectations of when the underlying securities will be repaid.

Collateralized Debt Obligations are backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. Many collateral issuers have the option of deferring interest payments on their debt for up to five years. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third party pricing specialist with direct industry experience in pooled-trust-preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security and terms of the security's structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current / near-term operating conditions, and the impact of macroeconomic and regulatory changes.  Using the results of the analysis, the Company estimates appropriate default and recovery probabilities for each piece of collateral then estimates the expected cash flows for each security. The fair value of each security is obtained by discounting the expected cash flows at a market discount rate. The market discount rate is determined by reference to yields observed in the market for similarly rated collateralized debt obligations, specifically high-yield collateralized loan obligations. The relatively high market discount rate is reflective of the uncertainty of the cash flows and illiquid nature of these securities. The large differential between the fair value and amortized cost of some of the securities reflects the high market discount rate and the expectation that the majority of the cash flows will not be received until near the final maturity of the security (the final maturities range from 2032 to 2035).

The following table summarizes the relevant characteristics of the Company's CDO securities portfolio, which are included in asset-backed securities, at June 30, 2017 . Each security is part of a pool of issuers and supports a more senior tranche of securities except for the MM Comm III securities which are the most senior class.

Collateralized Debt Obligation Securities

(dollar amounts in thousands)

Deal Name

Par Value

Amortized

Cost

Fair

Value

Unrealized

Loss (2)

Lowest

Credit

Rating

(3)

# of Issuers

Currently

Performing/

Remaining (4)

Actual

Deferrals

and

Defaults

as a % of

Original

Collateral

Expected

Defaults

as a % of

Remaining

Performing

Collateral

Excess

Subordination

(5)

MM Comm III

4,509


4,308


3,581


(727

)

BB+

5/8

5

5

39

Pre TSL IX (1)

5,000


3,955


3,275


(680

)

C

27/37

16

8

11

Pre TSL XI (1)

25,000


19,239


15,867


(3,372

)

C

42/51

14

8

14

Reg Diversified

25,500


510


510


-


D

21/36

32

8

-

Tropic III

31,000


31,000


19,342


(11,658

)

BB

27/36

16

7

41

Total at June 30, 2017

$

91,009


$

59,012


$

42,575


$

(16,437

)

Total at December 31, 2016

$

137,197


$

101,210


$

76,003


$

(25,207

)

(1)

Security was determined to have OTTI. As such, the amortized cost is net of recorded credit impairment.

(2)

The majority of securities have been in a continuous loss position for 12 months or longer.

(3)

For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency.

(4)

Includes both banks and/or insurance companies.

(5)

Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.


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For the three-month and six-month periods ended June 30, 2017 and 2016 , the following table summarizes by security type the total OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.

Three Months Ended
June 30,

Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2016

2017

2016

Available-for-sale and other securities:

Collateralized Debt Obligations

$

3,559


$

-


$

3,559


$

-


Municipal Securities

-


76


24


76


Total available-for-sale and other securities

$

3,559


$

76


$

3,583


$

76



The following table presents the OTTI recognized in earnings on debt securities held by Huntington for the three-month and six-month periods ended June 30, 2017 and 2016 as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,

(dollar amounts in thousands)

2017

2016

2017

2016

Balance, beginning of period

$

7,262


$

18,368


$

11,796


$

18,368


Reductions from sales

-


(8,613

)

(4,558

)

(8,613

)

Additional credit losses

3,559


76


3,583


76


Balance, end of period

$

10,821


$

9,831


$

10,821


$

9,831


5 . HELD-TO-MATURITY SECURITIES

These are debt securities that Huntington has the intent and ability to hold until maturity. The debt securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method.

During the 2017 second quarter, Huntington transferred $1.0 billion of mortgage-backed and other agency securities from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The securities were reclassified at fair value at the date of transfer. At the time of the transfer, $13.5 million of unrealized net losses were recognized in OCI. The amounts in OCI will be recognized in earnings over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of the premium on the same transferred securities, resulting in an immaterial impact on net income.


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Listed below are the contractual maturities of held-to-maturity securities at June 30, 2017 and December 31, 2016 :

June 30, 2017

December 31, 2016

(dollar amounts in thousands)

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Federal agencies: mortgage-backed securities:

1 year or less

$

-


$

-


$

-


$

-


After 1 year through 5 years

-


-


-


-


After 5 years through 10 years

70,527


70,355


41,261


40,791


After 10 years

7,634,775


7,616,513


7,157,083


7,139,943