The Quarterly
HBAN Q2 2017 10-Q

Huntington Bancshares Inc (HBAN) SEC Quarterly Report (10-Q) for Q3 2017

HBAN 2017 10-K
HBAN Q2 2017 10-Q HBAN 2017 10-K

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED September 30, 2017

Commission File Number 1-34073

Huntington Bancshares Incorporated

Maryland

31-0724920

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Registrant's address: 41 South High Street, Columbus, Ohio 43287

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

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

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

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

Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨   (Do not check if a smaller reporting company)

Smaller reporting company

¨

Emerging growth company

¨

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

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

There were 1,080,946,315 shares of the Registrant's common stock ($0.01 par value) outstanding on September 30, 2017 .



Table of Contents


HUNTINGTON BANCSHARES INCORPORATED

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

39

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

40

Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2017 and 2016

41

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

43

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

44

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

45

Notes to Unaudited Condensed Consolidated Financial Statements

47

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

6

Executive Overview

6

Discussion of Results of Operations

7

Risk Management and Capital:

19

Credit Risk

19

Market Risk

27

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

98

Item 4. Controls and Procedures

99

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

100

Item 1A. Risk Factors

100

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

100

Item 6. Exhibits

100

Signatures

103


2

Table of Contents


Glossary of Acronyms

The following listing provides a comprehensive reference of common acronyms used throughout this document.

ABS

Asset-Backed Securities

ACL

Allowance for Credit Losses

AFS

Available-for-Sale

ALCO

Asset-Liability Management Committee

ALLL

Allowance for Loan and Lease Losses

ANPR

Advance Notice of Proposed Rulemaking

ASC

Accounting Standards Codification

ATM

Automated Teller Machine

AULC

Allowance for Unfunded Loan Commitments

Basel III

Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013

BHC

Bank Holding Companies

BHC Act

Bank Holding Company Act of 1956

C&I

Commercial and Industrial

CCAR

Comprehensive Capital Analysis and Review

CDO

Collateralized Debt Obligations

CDs

Certificate of Deposit

CET1

Common equity tier 1 on a transitional Basel III basis

CFPB

Consumer Financial Protection Bureau

CISA

Cybersecurity Information Sharing Act

CMO

Collateralized Mortgage Obligations

CRA

Community Reinvestment Act

CRE

Commercial Real Estate

CREVF

Commercial Real Estate and Vehicle Finance

DIF

Deposit Insurance Fund

Dodd-Frank Act

Dodd-Frank Wall Street Reform and Consumer Protection Act

EFT

Electronic Fund Transfer

EPS

Earnings Per Share

EVE

Economic Value of Equity

FASB

Financial Accounting Standards Board

FDIC

Federal Deposit Insurance Corporation

FDICIA

Federal Deposit Insurance Corporation Improvement Act of 1991

FHA

Federal Housing Administration

FHC

Financial Holding Company

FHLB

Federal Home Loan Bank

FICO

Fair Isaac Corporation


3

Table of Contents


FirstMerit

FirstMerit Corporation

FRB

Federal Reserve Bank

FTE

Fully-Taxable Equivalent

FTP

Funds Transfer Pricing

GAAP

Generally Accepted Accounting Principles in the United States of America

HIP

Huntington Investment and Tax Savings Plan

HQLA

High Quality Liquid Asset

HTM

Held-to-Maturity

IRS

Internal Revenue Service

LCR

Liquidity Coverage Ratio

LGD

Loss-Given-Default

LIBOR

London Interbank Offered Rate

LIHTC

Low Income Housing Tax Credit

LTV

Loan to Value

MBS

Mortgage-Backed Securities

MD&A

Management's Discussion and Analysis of Financial Condition and Results of Operations

MSA

Metropolitan Statistical Area

MSR

Mortgage Servicing Rights

NAICS

North American Industry Classification System

NALs

Nonaccrual Loans

NCO

Net Charge-off

NII

Net Interest Income

NIM

Net Interest Margin

NPAs

Nonperforming Assets

OCC

Office of the Comptroller of the Currency

OCI

Other Comprehensive Income (Loss)

OCR

Optimal Customer Relationship

OLEM

Other Loans Especially Mentioned

OREO

Other Real Estate Owned

OTTI

Other-Than-Temporary Impairment

PD

Probability-Of-Default

Plan

Huntington Bancshares Retirement Plan

RBHPCG

Regional Banking and The Huntington Private Client Group

REIT

Real Estate Investment Trust

ROC

Risk Oversight Committee

RWA

Risk-Weighted Assets

SAD

Special Assets Division

SBA

Small Business Administration

SEC

Securities and Exchange Commission


4

Table of Contents


SERP

Supplemental Executive Retirement Plan

SRIP

Supplemental Retirement Income Plan

TCE

Tangible Common Equity

TDR

Troubled Debt Restructured Loan

U.S. Treasury

U.S. Department of the Treasury

UCS

Uniform Classification System

UPB

Unpaid Principal Balance

USDA

U.S. Department of Agriculture

VIE

Variable Interest Entity

XBRL

eXtensible Business Reporting Language






5

Table of Contents


PART I. FINANCIAL INFORMATION

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

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have over 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. Our 958 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. Our foreign banking activities, in total or with any individual country, are not significant.

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


EXECUTIVE OVERVIEW

Summary of 2017 Third Quarter Results Compared to 2016 Third Quarter

For the quarter, we reported net income of $275 million , or $0.23 per common share, compared with $127 million , or $0.11 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related net expenses totaling $31 million pre-tax, or $0.02 per common share.

Fully-taxable equivalent net interest income was $771 million , up $135 million , or 21% . The results reflected the benefit from a $13.2 billion , or 17% , increase in average earning assets and an 11 basis point improvement in the net interest margin to 3.29% . Average earning asset growth included a $7.6 billion , or 12% , increase in average loans and leases, and a $5.6 billion , or 31% , increase in average securities. The net interest margin expansion reflected a 26 basis point increase in earning asset yields, including an approximate 12 basis point impact of purchase accounting, and a 4 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 19 basis point increase in funding costs.

The provision for credit losses decreased $20 million year-over-year to $44 million in the 2017 third quarter. NCOs increased $3 million to $43 million . NCOs represented an annualized 0.25% of average loans and leases, which remains below our long-term expectation of 35 to 55 basis points.

Non-interest income was $330 million , up $28 million , or 9% . The increase was primarily a result of the FirstMerit acquisition. In addition, card and payment processing income increased due to higher credit and debit card related income and underlying customer growth. Capital markets fees increased reflecting our continued strategic focus on expanding the business.

Non-interest expense was $680 million , down $32 million , or 4% , primarily reflecting the impact of the FirstMerit acquisition. Personnel costs decreased primarily related to acquisition-related personnel expense partially offset by an increase in average full-time equivalent employees. Further, professional services, outside data processing and other services decreased primarily reflecting a net decrease in acquisition-related Significant Items, partially offset by higher card and data processing expense from increased usage. Partially offsetting these decreases, other expense increased primarily reflecting an increase in donations and sponsorships and equipment lease residual impairments.


6

Table of Contents



The tangible common equity to tangible assets ratio was 7.42% , up 28 basis points from a year-ago. The CET1 risk-based capital ratio was 9.94% at September 30, 2017 , compared to 9.09% a year ago. The regulatory Tier 1 risk-based capital ratio was 11.30% compared to 10.40% at September 30, 2016 . All capital ratios were impacted by the repurchase of $123 million of common stock at an average cost of $12.75 per share during the 2017 third quarter. The total risk-based capital ratio was impacted by the repurchase of trust preferred securities during the 2016 fourth quarter.

Business Overview

General

Our general business objectives are:

1. Grow net interest income and fee income.

2. Deliver positive operating leverage.

3. Increase primary customer relationships across all business segments.

4. Continue to strengthen risk management.

5. Maintain capital and liquidity positions consistent with our risk appetite.

Economy

We expect consumer and business optimism to remain high across our footprint. Labor markets and consumer spending are strong with some inflationary pressures. Throughout 2017, consumer loan growth has remained steady. To date manufacturing has benefited the Midwest. Our pipelines support commercial loan growth, although the commercial lending environment is competitive on both structures and rates.

DISCUSSION OF RESULTS OF OPERATIONS

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


7

Table of Contents



Table 1 - Selected Quarterly Income Statement Data (1)

(dollar amounts in thousands, except per share amounts)

Three Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

2017

2017

2017

2016

2016

Interest income

$

872,987


$

846,424


$

820,360


$

814,858


$

694,346


Interest expense

114,554


101,912


90,385


79,877


68,956


Net interest income

758,433


744,512


729,975


734,981


625,390


Provision for credit losses

43,590


24,978


67,638


74,906


63,805


Net interest income after provision for credit losses

714,843


719,534


662,337


660,075


561,585


Service charges on deposit accounts

90,681


87,582


83,420


91,577


86,847


Cards and payment processing income

53,647


52,485


47,169


49,113


44,320


Mortgage banking income

33,615


32,268


31,692


37,520


40,603


Trust and investment management services

33,531


32,232


33,869


34,016


28,923


Insurance income

13,992


15,843


15,264


16,486


15,865


Brokerage income

14,458


16,294


15,758


17,014


14,719


Capital markets fees

21,719


16,836


14,200


18,730


14,750


Bank owned life insurance income

16,453


15,322


17,542


17,067


14,452


Gain on sale of loans

13,877


12,002


12,822


24,987


7,506


Net securities gains (losses)

(33

)

135


(8

)

(1,771

)

1,031


Other noninterest income

38,157


44,219


40,735


29,598


33,399


Total noninterest income

330,097


325,218


312,463


334,337


302,415


Personnel costs

377,088


391,997


382,000


359,755


405,024


Outside data processing and other services

79,586


75,169


87,202


88,695


91,133


Equipment

45,458


42,924


46,700


59,666


40,792


Net occupancy

55,124


52,613


67,700


49,450


41,460


Professional services

15,227


18,190


18,295


23,165


47,075


Marketing

16,970


18,843


13,923


21,478


14,438


Deposit and other insurance expense

18,514


20,418


20,099


15,772


14,940


Amortization of intangibles

14,017


14,242


14,355


14,099


9,046


Other noninterest expense

58,444


59,968


57,148


49,417


48,339


Total noninterest expense

680,428


694,364


707,422


681,497


712,247


Income before income taxes

364,512


350,388


267,378


312,915


151,753


Provision for income taxes

89,944


78,647


59,284


73,952


24,749


Net income

274,568


271,741


208,094


238,963


127,004


Dividends on preferred shares

18,903


18,889


18,878


18,865


18,537


Net income applicable to common shares

$

255,665


$

252,852


$

189,216


$

220,098


$

108,467


Average common shares-basic

1,086,038


1,088,934


1,086,374


1,085,253


938,578


Average common shares-diluted

1,106,491


1,108,527


1,108,617


1,104,358


952,081


Net income per common share-basic

$

0.24


$

0.23


$

0.17


$

0.20


$

0.12


Net income per common share-diluted

0.23


0.23


0.17


0.20


0.11


Cash dividends declared per common share

0.08


0.08


0.08


0.08


0.07


Return on average total assets

1.08

%

1.09

%

0.84

%

0.95

%

0.58

%

Return on average common shareholders' equity

10.5


10.6


8.2


9.4


5.4


Return on average tangible common shareholders' equity (2)

14.1


14.4


11.3


12.9


7.0


Net interest margin (3)

3.29


3.31


3.30


3.25


3.18


Efficiency ratio (4)

60.5


62.9


65.7


61.6


75.0


Effective tax rate

24.7


22.4


22.2


23.6


16.3


Revenue-FTE

Net interest income

$

758,433


$

744,512


$

729,975


$

734,981


$

625,390


FTE adjustment

12,209


12,069


12,058


12,560


10,598


Net interest income (3)

770,642


756,581


742,033


747,541


635,988


Noninterest income

330,097


325,218


312,463


334,337


302,415


Total revenue (3)

$

1,100,739


$

1,081,799


$

1,054,496


$

1,081,878


$

938,403



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Table of Contents


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

Nine Months Ended September 30,

Change

(dollar amounts in thousands, except per share amounts)

2017

2016

Amount

Percent

Interest income

$

2,539,771


$

1,817,255


$

722,516


40

 %

Interest expense

306,851


182,918


123,933


68


Net interest income

2,232,920


1,634,337


598,583


37


Provision for credit losses

136,206


115,896


20,310


18


Net interest income after provision for credit losses

2,096,714


1,518,441


578,273


38


Service charges on deposit accounts

261,683


232,722


28,961


12


Cards and payment processing income

153,301


119,951


33,350


28


Mortgage banking income

97,575


90,737


6,838


8


Trust and investment management services

99,633


74,258


25,375


34


Insurance income

45,099


48,037


(2,938

)

(6

)

Brokerage income

46,510


44,819


1,691


4


Capital markets fees

52,755


40,797


11,958


29


Bank owned life insurance income

49,317


40,500


8,817


22


Gain on sale of loans

38,701


22,166


16,535


75


Net securities gains (losses)


94


1,687


(1,593

)

(94

)

Other noninterest income

123,110


99,720


23,390


23


Total noninterest income

967,778


815,394


152,384


19


Personnel costs

1,151,085


989,369


161,716


16


Outside data processing and other services

241,957


216,047


25,910


12


Equipment

135,082


105,173


29,909


28


Net occupancy

175,437


103,640


71,797


69


Professional services

51,712


82,101


(30,389

)

(37

)

Marketing

49,736


41,479


8,257


20


Deposit and other insurance expense

59,031


38,335


20,696


54


Amortization of intangibles

42,614


16,357


26,257


161


Other noninterest expense

175,560


134,487


41,073


31


Total noninterest expense

2,082,214


1,726,988


355,226


21


Income before income taxes

982,278


606,847


375,431


62


Provision for income taxes

227,875


133,989


93,886


70


Net income

754,403


472,858


281,545


60


Dividends declared on preferred shares

56,670


46,409


10,261


22


Net income applicable to common shares

$

697,733


$

426,449


$

271,284


64

 %

Average common shares-basic

1,087,115


844,167


242,948


29

 %

Average common shares-diluted

1,107,878


856,934


250,944


29


Net income per common share-basic

$

0.64


$

0.51


$

0.13


25


Net income per common share-diluted

0.63


0.50


0.13


26


Cash dividends declared per common share

0.24


0.21


0.03


14


Revenue-FTE

Net interest income

$

2,232,920


$

1,634,337


$

598,583


37

 %

FTE adjustment

36,336


29,848


6,488


22


Net interest income (3)

2,269,256


1,664,185


605,071


36


Noninterest income

967,778


815,394


152,384


19


Total revenue (3)

$

3,237,034


$

2,479,579


$

757,455


31

 %

(1)

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

(2)

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

(3)

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

(4)

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






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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 third quarter, $31 million of noninterest expense was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.02 per common share.


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


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


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

Table 3 - Significant Items Influencing Earnings Performance Comparison

(dollar amounts in thousands, except per share amounts)

Three Months Ended

September 30, 2017

June 30, 2017

September 30, 2016

Amount

EPS (1)

Amount

EPS (1)

Amount

EPS (1)

Net income

$

274,568


$

271,741


$

127,004


Earnings per share, after-tax

$

0.23


$

0.23


$

0.11


Significant Items-favorable (unfavorable) impact:

Earnings

EPS (1)

Earnings

EPS (1)

Earnings

EPS (1)

Mergers and acquisitions, net expenses

$

(30,733

)

$

(50,243

)

$

(158,749

)

Tax impact

10,757


17,585


52,033


Mergers and acquisitions, after-tax

$

(19,976

)


$

(0.02

)


$

(32,658

)


$

(0.03

)

$

(106,716

)

$

(0.11

)


(1)

Based upon the quarterly average outstanding diluted common shares.

Nine Months Ended

September 30, 2017

September 30, 2016

Amount

EPS (1)

Amount

EPS (1)

Net income

$

754,403


$

472,858


Earnings per share, after-tax

$

0.63


$

0.50


Significant Items-favorable (unfavorable) impact:

Earnings

EPS (1)

Earnings

EPS (1)

Mergers and acquisitions, net expenses

$

(152,121

)

$

(185,944

)

Tax impact

53,243


61,252


Mergers and acquisitions, after-tax

$

(98,878

)

$

(0.09

)

$

(124,692

)

$

(0.14

)


(1)

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


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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

Average Balances

(dollar amounts in millions)

Three Months Ended

Change

September 30,

June 30,

March 31,

December 31,

September 30,

3Q17 vs. 3Q16

2017

2017

2017

2016

2016

Amount

Percent

Assets:

Interest-bearing deposits in banks

$

102


$

102


$

100


$

110


$

95


$

7


8

 %

Loans held for sale

678


525


415


2,507


695


(17

)

(2

)

Securities:

Available-for-sale and other securities:

Taxable

12,275


13,135


12,801


13,734


9,785


2,490


25


Tax-exempt

3,161


3,104


3,049


3,136


2,854


307


11


Total available-for-sale and other securities

15,436


16,239


15,850


16,870


12,639


2,797


22


Trading account securities

92


91


137


139


49


43


88


Held-to-maturity securities-taxable

8,264


7,427


7,656


5,432


5,487


2,777


51


Total securities

23,793


23,756


23,643


22,441


18,175


5,618


31


Loans and leases: (1)

Commercial:

Commercial and industrial

27,643


27,992


27,922


27,727


24,957


2,686


11


Commercial real estate:

Construction

1,152


1,130


1,314


1,413


1,132


20


2


Commercial

6,064


5,940


6,039


5,805


5,227


837


16


Commercial real estate

7,216


7,070


7,353


7,218


6,359


857


13


Total commercial

34,859


35,062


35,276


34,945


31,316


3,543


11


Consumer:

Automobile

11,713


11,324


11,063


10,866


11,402


311


3


Home equity

9,960


9,958


10,072


10,101


9,260


700


8


Residential mortgage

8,402


7,979


7,777


7,690


7,012


1,390


20


RV and marine finance

2,296


2,039


1,874


1,844


915


1,381


151


Other consumer

1,046


983


919


959


817


229


28


Total consumer

33,417


32,283


31,705


31,460


29,406


4,011


14


Total loans and leases

68,276


67,345


66,981


66,405


60,722


7,554


12


Allowance for loan and lease losses

(672

)

(672

)

(636

)

(614

)

(623

)

(49

)

8


Net loans and leases

67,604


66,673


66,345


65,791


60,099


7,505


12


Total earning assets

92,849


91,728


91,139


91,463


79,687


13,162


17


Cash and due from banks

1,299


1,287


2,011


1,538


1,325


(26

)

(2

)

Intangible assets

2,359


2,373


2,387


2,421


1,547


812


52


All other assets

5,455


5,405


5,442


5,559


4,962


493


10


Total assets

$

101,290


$

100,121


$

100,343


$

100,367


$

86,898


$

14,392


17

 %

Liabilities and Shareholders' Equity:

Deposits:

Demand deposits-noninterest-bearing

$

21,723


$

21,599


$

21,730


$

23,250


$

20,033


$

1,690


8

 %

Demand deposits-interest-bearing

17,878


17,445


16,805


15,294


12,362


5,516


45


Total demand deposits

39,601


39,044


38,535


38,544


32,395


7,206


22


Money market deposits

20,314


19,212


18,653


18,618


18,453


1,861


10


Savings and other domestic deposits

11,590


11,889


11,970


12,272


8,889


2,701


30


Core certificates of deposit

2,044


2,146


2,342


2,636


2,285


(241

)

(11

)

Total core deposits

73,549


72,291


71,500


72,070


62,022


11,527


19


Other domestic time deposits of $250,000 or more

432


479


470


391


382


50


13


Brokered deposits and negotiable CDs

3,563


3,783


3,969


4,273


3,904


(341

)

(9

)

Deposits in foreign offices

-


-


-


152


194


(194

)

-


Total deposits

77,544


76,553


75,939


76,886


66,502


11,042


17


Short-term borrowings

2,391


2,687


3,792


2,628


1,306


1,085


83


Long-term debt

8,949


8,730


8,529


8,594


8,488


461


5


Total interest-bearing liabilities

67,161


66,371


66,530


64,858


56,263


10,898


19


All other liabilities

1,661


1,557


1,661


1,833


1,608


53


3


Shareholders' equity

10,745


10,594


10,422


10,426


8,994


1,751


19


Total liabilities and shareholders' equity

$

101,290


$

100,121


$

100,343


$

100,367


$

86,898


$

14,392


17

 %


11

Table of Contents


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

Average Yield Rates (2)

Three Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

Fully-taxable equivalent basis (3)

2017

2017

2017

2016

2016

Assets:

Interest-bearing deposits in banks

1.77

%

1.53

%

1.09

%

0.64

%

0.64

%

Loans held for sale

3.83


3.73


3.82


2.95


3.53


Securities:

Available-for-sale and other securities:

Taxable

2.42


2.38


2.38


2.43


2.35


Tax-exempt

3.62


3.71


3.77


3.60


3.01


Total available-for-sale and other securities

2.67


2.64


2.65


2.65


2.50


Trading account securities

0.16


0.25


0.11


0.18


0.58


Held-to-maturity securities-taxable

2.36


2.38


2.36


2.43


2.41


Total securities

2.55


2.55


2.54


2.58


2.47


Loans and leases: (1)

Commercial:

Commercial and industrial

4.05


4.04


3.98


3.83


3.68


Commercial real estate:

Construction

4.55


4.26


3.95


3.65


3.76


Commercial

4.08


3.97


3.69


3.54


3.54


Commercial real estate

4.16


4.02


3.74


3.56


3.58


Total commercial

4.07


4.04


3.93


3.78


3.66


Consumer:

Automobile

3.60


3.55


3.55


3.57


3.37


Home equity

4.72


4.61


4.45


4.24


4.21


Residential mortgage

3.65


3.66


3.63


3.58


3.61


RV and marine finance

5.43


5.57


5.63


5.64


5.70


Other consumer

11.59


11.47


12.05


10.91


10.93


Total consumer

4.32


4.27


4.23


4.13


3.97


Total loans and leases

4.20


4.15


4.07


3.95


3.81


Total earning assets

3.78


3.75


3.70


3.60


3.52


Liabilities:

Deposits:

Demand deposits-noninterest-bearing

-


-


-


-


-


Demand deposits-interest-bearing

0.23


0.20


0.15


0.11


0.11


Total demand deposits

0.10


0.09


0.07


0.04


0.04


Money market deposits

0.36


0.31


0.26


0.24


0.24


Savings and other domestic deposits

0.20


0.21


0.22


0.25


0.21


Core certificates of deposit

0.73


0.56


0.39


0.29


0.43


Total core deposits

0.30


0.26


0.22


0.20


0.20


Other domestic time deposits of $250,000 or more

0.61


0.49


0.45


0.39


0.40


Brokered deposits and negotiable CDs

1.16


0.95


0.72


0.48


0.44


Deposits in foreign offices

-


-


-


0.13


0.13


Total deposits

0.35


0.31


0.26


0.23


0.22


Short-term borrowings

0.95


0.78


0.63


0.36


0.29


Long-term debt

2.65


2.49


2.33


2.19


1.97


Total interest-bearing liabilities

0.68


0.61


0.54


0.48


0.49


Net interest rate spread

3.10


3.14


3.16


3.12


3.03


Impact of noninterest-bearing funds on margin

0.19


0.17


0.14


0.13


0.15


Net interest margin

3.29

%

3.31

%

3.30

%

3.25

%

3.18

%


(1)

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

(2)

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

(3)

FTE yields are calculated assuming a 35% tax rate.



12

Table of Contents


2017 Third Quarter versus 2016 Third Quarter

Fully-taxable equivalent (FTE) net interest income for the 2017 third quarter increased $135 million , or 21% , from the 2016 third quarter . This reflected the benefit from the $13.2 billion , or 17% , increase in average earning assets coupled with an 11 basis point improvement in the FTE net interest margin (NIM) to 3.29% . Average earning asset growth included a $7.6 billion , or 12% , increase in average loans and leases and a $5.6 billion , or 31% , increase in average securities. The NIM expansion reflected a 26 basis point increase related to the mix and yield of earning assets and a 4 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 19 basis point increase in funding costs. FTE net interest income during the 2017 third quarter included $27 million, or approximately 12 basis points, of purchase accounting impact.

Average earning assets for the 2017 third quarter increased $13.2 billion , or 17% , from the year-ago quarter, primarily reflecting the impact of the FirstMerit acquisition. Average securities increased $5.6 billion , or 31% , which included a $0.3 billion increase in direct purchase municipal instruments in our commercial banking segment. Average residential mortgage loans increased $1.4 billion , or 20% , as we continue to see the benefits associated with the expansion of our home lending business. Average RV and marine finance loans increased $1.4 billion , or 151% , reflecting the expansion of the acquired business into 17 new states over the past year.

Average total deposits for the 2017 third quarter increased $11.0 billion , or 17% , from the year-ago quarter, while average total core deposits increased $11.5 billion , or 19% . Average total interest-bearing liabilities increased $10.9 billion , or 19% , from the year-ago quarter. These increases primarily reflect the impact of the FirstMerit acquisition. Average demand deposits increased $7.2 billion , or 22% , comprised of a $5.1 billion, or 24%, increase in average commercial demand deposits and a $2.1 billion, or 20%, increase in average consumer demand deposits. Average long-term borrowings increased $0.5 billion , or 5% , reflecting the issuance of $2.7 billion and maturity of $1.6 billion of senior debt over the past five quarters.

2017 Third Quarter versus 2017 Second Quarter

Compared to the 2017 second quarter , FTE net interest income increased $14 million , or 2% . Average earning assets increased $1.1 billion , or 1% , sequentially, while the NIM decreased 2 basis points. The decrease in the NIM reflected a 7 basis point increase in the cost of interest-bearing liabilities, partially offset by a 3 basis point increase in earning asset yields and a 2 basis point increase in the benefit from noninterest-bearing funds. The purchase accounting impact on the net interest margin was approximately 12 basis points in the 2017 third quarter compared to approximately 15 basis points in the prior quarter.

Compared to the 2017 second quarter , average earning assets increased $1.1 billion , or 1% . Average loans and leases increased $0.9 billion , or 1% , primarily reflecting growth in residential mortgage, automobile, and RV and marine loans partially offset by a decline in average commercial and industrial loans. Average commercial and industrial loans were negatively impacted by the seasonal decline in automobile floorplan lending, a reduction in mortgage warehouse lending, and continued runoff in corporate banking, partially offset by growth in asset finance.

Compared to the 2017 second quarter , average total core deposits increased $1.3 billion , or 2% , primarily reflecting a $1.1 billion , or 6% , increase in money market deposits and a $0.6 billion , or 1% , increase in average demand deposits.



13

Table of Contents



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

(dollar amounts in millions)

YTD Average Balances

YTD Average Rates (2)

Nine Months Ended September 30,

Change

Nine Months Ended September 30,

Fully-taxable equivalent basis (1)

2017

2016

Amount

Percent

2017

2016

Assets:

Interest-bearing deposits in banks

$

102


$

97


$

5


5

 %

1.46

%

0.37

%

Loans held for sale

540


567


(27

)

(5

)

3.79


3.76


Securities:





Available-for-sale and other securities:





Taxable

12,735


7,781


4,954


64


2.40


2.37


Tax-exempt

3,105


2,576


529


21


3.70


3.25


Total available-for-sale and other securities

15,840


10,357


5,483


53


2.65


2.59


Trading account securities

107


43


64


149


0.17


0.68


Held-to-maturity securities-taxable

7,785


5,781


2,004


35


2.37


2.43


Total securities

23,732


16,181


7,551


47


2.55


2.53


Loans and leases: (3)





Commercial:





Commercial and industrial

27,852


22,326


5,526


25


4.03


3.57


Commercial real estate:





Construction

1,198


979


219


22


4.24


3.66


Commercial

6,014


4,621


1,393


30


3.92


3.50


Commercial real estate

7,212


5,600


1,612


29


3.97


3.52


Total commercial

35,064


27,926


7,138


26


4.01


3.56


Consumer:





Automobile

11,369


10,430


939


9


3.57


3.24


Home equity

9,983


8,708


1,275


15


4.60


4.19


Residential mortgage

8,055


6,406


1,649


26


3.65


3.65


RV and marine finance

2,071


307


1,764


575


5.54


5.70


Other consumer

997


670


327


49


11.53


10.46


Total consumer

32,475


26,521


5,954


22


4.27


3.86


Total loans and leases

67,539


54,447


13,092


24


4.14


3.71


Allowance for loan and lease losses

(660

)

(614

)

(46

)

7


Net loans and leases

66,879


53,833


13,046


24


Total earning assets

91,913


71,292


20,621


29


3.75

%

3.46

%

Cash and due from banks

1,530


1,114


416


37


Intangible assets

2,373


1,003


1,370


137


All other assets

5,433


4,446


987


22


Total assets

$

100,589


$

77,241


$

23,348


30

 %

Liabilities and Shareholders' Equity:

Deposits:

Demand deposits-noninterest-bearing

$

21,684


$

17,634


$

4,050


23

 %

-

%

-

%

Demand deposits-interest-bearing

17,380


9,538


7,842


82


0.20


0.10


Total demand deposits

39,064


27,172


11,892


44


0.09


0.03


Money market deposits

19,399


19,220


179


1


0.31


0.24


Savings and other domestic deposits

11,815


6,541


5,274


81


0.21


0.16


Core certificates of deposit

2,176


2,186


(10

)

-


0.55


0.67


Total core deposits

72,454


55,119


17,335


31


0.26


0.21


Other domestic time deposits of $250,000 or more

460


413


47


11


0.51


0.40


Brokered deposits and negotiable CDs

3,770


3,239


531


16


0.93


0.41


Deposits in foreign offices

-


222


(222

)

-


-


0.13


Total deposits

76,684


58,993


17,691


30


0.31


0.23


Short-term borrowings

2,952


1,161


1,791


154


0.76


0.32


Long-term debt

8,738


7,866


872


11


2.49


1.84


Total interest-bearing liabilities

66,690


50,386


16,304


32


0.61


0.48


All other liabilities

1,627


1,513


114


8


Shareholders' equity

10,588


7,708


2,880


37


Total liabilities and shareholders' equity

$

100,589


$

77,241


$

23,348


30

 %

Net interest rate spread

3.13


2.98


Impact of noninterest-bearing funds on margin

0.17


0.14


Net interest margin

3.30

%

3.12

%


(1)

FTE yields are calculated assuming a 35% tax rate.

(2)

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

(3)

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


14

Table of Contents



2017 First Nine Months versus 2016 First Nine Months

FTE net interest income for the first nine-month period of 2017 increased $605 million , or 36% . This reflected the benefit of a $20.6 billion , or 29% , increase in average total earning assets coupled with a FTE net interest margin, which increased to 3.30% from 3.12% . Average securities increased $ 7.6 billion , or 47% , primarily reflecting the acquisition of FirstMerit and an increase in direct purchase municipal instruments in our commercial banking segment. Average loans and leases increased $13.1 billion , or 24% , primarily reflecting an increase in C&I lending, residential mortgage loans and RV and marine finance resulting from the acquisition of FirstMerit.

Provision for Credit Losses

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

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

The provision for credit losses for the 2017 third quarter was $44 million , which decreased $20 million , or 32% , compared to the third quarter 2016 . NCOs increased $3 million to $43 million compared with the same period in the prior year reflecting an increase in consumer net charge-offs, partially offset by a decrease in commercial net charge-offs. Net charge-offs represented an annualized 0.25% of average loans and leases, which remains below our long-term expectation of 35 to 55 basis points.

On a year-to-date basis, provision for credit losses for the first nine-month period of 2017 was $136 million , an increase of $20 million , or 18% , compared to the year-ago period, reflecting increased net charge-offs due to portfolio loan growth.

Noninterest Income

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

Table 6 - Noninterest Income

Three Months Ended

3Q17 vs. 3Q16

3Q17 vs. 2Q17

September 30,

June 30,

September 30,

Change

Change

(dollar amounts in thousands)

2017

2017

2016

Amount

Percent

Amount

Percent

Service charges on deposit accounts

$

90,681


$

87,582


$

86,847


$

3,834


4

 %

$

3,099


4

 %

Cards and payment processing income

53,647


52,485


44,320


9,327


21


1,162


2


Mortgage banking income

33,615


32,268


40,603


(6,988

)

(17

)

1,347


4


Trust and investment management services

33,531


32,232


28,923


4,608


16


1,299


4


Insurance income

13,992


15,843


15,865


(1,873

)

(12

)

(1,851

)

(12

)

Brokerage income

14,458


16,294


14,719


(261

)

(2

)

(1,836

)

(11

)

Capital markets fees

21,719


16,836


14,750


6,969


47


4,883


29


Bank owned life insurance income

16,453


15,322


14,452


2,001


14


1,131


7


Gain on sale of loans

13,877


12,002


7,506


6,371


85


1,875


16


Net securities gains (losses)

(33

)

135


1,031


(1,064

)

(103

)

(168

)

(124

)

Other noninterest income

38,157


44,219


33,399


4,758


14


(6,062

)

(14

)

Total noninterest income

$

330,097


$

325,218


$

302,415


$

27,682


9

 %

$

4,879


2

 %


2017 Third Quarter versus 2016 Third Quarter

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


15

Table of Contents


2017 Third Quarter versus 2017 Second Quarter

Compared to the 2017 second quarter , total noninterest income increased $5 million , or 2% . Capital markets fees increased $5 million , or 29% , as a result of the previously-mentioned expansion of the business. Conversely, other income decreased $6 million , or 14% , primarily reflecting a decrease in loan syndication fees.

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

Nine Months Ended September 30,

Change

(dollar amounts in thousands)

2017

2016

Amount

Percent

Service charges on deposit accounts

$

261,683


$

232,722


$

28,961


12

 %

Cards and payment processing income

153,301


119,951


33,350


28


Mortgage banking income

97,575


90,737


6,838


8


Trust and investment management services

99,633


74,258


25,375


34


Insurance income

45,099


48,037


(2,938

)

(6

)

Brokerage income

46,510


44,819


1,691


4


Capital markets fees

52,755


40,797


11,958


29


Bank owned life insurance income

49,317


40,500


8,817


22


Gain on sale of loans

38,701


22,166


16,535


75


Net securities gains (losses)

94


1,687


(1,593

)

(94

)

Other noninterest income

123,110


99,720


23,390


23


Total noninterest income

$

967,778


$

815,394


$

152,384


19

 %


Noninterest income for the first nine-month period of 2017 increased $152 million , or 19% , from the year-ago period, primarily reflecting the impact of the FirstMerit acquisition. Service charges on deposit accounts increased $29 million , or 12% , reflecting the benefit of the FirstMerit acquisition and continued new customer acquisition. Cards and payment processing income increased $33 million , or 28% , due to an increase in credit and debit card transactions and underlying customer growth. Trust and investment management services increased $25 million , or 34% , primarily reflecting an increase in assets under management as a result of the FirstMerit acquisition.

Noninterest Expense

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

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

Table 8 - Noninterest Expense

Three Months Ended

3Q17 vs. 3Q16

3Q17 vs. 2Q17

September 30,

June 30,

September 30,

Change

Change

(dollar amounts in thousands)

2017

2017

2016

Amount

Percent

Amount

Percent

Personnel costs

$

377,088


$

391,997


$

405,024


$

(27,936

)

(7

)%

$

(14,909

)

(4

)%

Outside data processing and other services

79,586


75,169


91,133


(11,547

)

(13

)

4,417


6


Equipment

45,458


42,924


40,792


4,666


11


2,534


6


Net occupancy

55,124


52,613


41,460


13,664


33


2,511


5


Professional services

15,227


18,190


47,075


(31,848

)

(68

)

(2,963

)

(16

)

Marketing

16,970


18,843


14,438


2,532


18


(1,873

)

(10

)

Deposit and other insurance expense

18,514


20,418


14,940


3,574


24


(1,904

)

(9

)

Amortization of intangibles

14,017


14,242


9,046


4,971


55


(225

)

(2

)

Other noninterest expense

58,444


59,968


48,339


10,105


21


(1,524

)

(3

)

Total noninterest expense

$

680,428


$

694,364


$

712,247


$

(31,819

)

(4

)%

$

(13,936

)

(2

)%

Number of employees (average full-time equivalent)

15,508


15,877


14,511


997


7

 %

(369

)

(2

)%


16

Table of Contents


Impacts of Significant Items:

Three Months Ended

September 30,

June 30,

September 30,

(dollar amounts in thousands)

2017

2017

2016

Personnel costs

$

4,362


$

17,934


$

76,199


Outside data processing and other services

3,304


6,246


27,639


Equipment

6,505


3,994


4,739


Net occupancy

14,255


14,415


7,116


Professional services

2,038


3,804


33,679


Marketing

17


112


926


Other noninterest expense

252


3,738


8,451


Total noninterest expense adjustments

$

30,733


$

50,243


$

158,749


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

Three Months Ended

3Q17 vs. 3Q16

3Q17 vs. 2Q17

September 30,

June 30,

September 30,

Change

Change

(dollar amounts in thousands)

2017

2017

2016

Amount

Percent

Amount

Percent

Personnel costs

$

372,726


$

374,063


$

328,825


$

43,901


13

 %

$

(1,337

)

-

 %

Outside data processing and other services

76,282


68,923


63,494


12,788


20


7,359


11


Equipment

38,953


38,930


36,053


2,900


8


23


-


Net occupancy

40,869


38,198


34,344


6,525


19


2,671


7


Professional services

13,189


14,386


13,396


(207

)

(2

)

(1,197

)

(8

)

Marketing

16,953


18,731


13,512


3,441


25


(1,778

)

(9

)

Deposit and other insurance expense

18,514


20,418


14,940


3,574


24


(1,904

)

(9

)

Amortization of intangibles

14,017


14,242


9,046


4,971


55


(225

)

(2

)

Other noninterest expense

58,192


56,230


39,888


18,304


46


1,962


3


Total adjusted noninterest expense (Non-GAAP)

$

649,695


$

644,121


$

553,498


$

96,197


17

 %

$

5,574


1

 %


2017 Third Quarter versus 2016 Third Quarter

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

2017 Third Quarter versus 2017 Second Quarter

Reported noninterest expense decreased $14 million , or 2% , from the 2017 second quarter , including a $20 million net decrease in Significant Items. Personnel costs decreased $15 million , or 4% , reflecting a $14 million net decrease in acquisition-related expenses.



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Table of Contents



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

Nine Months Ended September 30,

Change

(dollar amounts in thousands)

2017

2016

Amount

Percent

Personnel costs

$

1,151,085


$

989,369


$

161,716


16

 %

Outside data processing and other services

241,957


216,047


25,910


12


Equipment

135,082


105,173


29,909


28


Net occupancy

175,437


103,640


71,797


69


Professional services

51,712


82,101


(30,389

)

(37

)

Marketing

49,736


41,479


8,257


20


Deposit and other insurance expense

59,031


38,335


20,696


54


Amortization of intangibles

42,614


16,357


26,257


161


Other noninterest expense

175,560


134,487


41,073


31


Total noninterest expense

$

2,082,214


$

1,726,988


$

355,226


21

 %

Impacts of Significant Items:

Nine Months Ended September 30,

(dollar amounts in thousands)

2017

2016

Personnel costs

$

41,851


$

81,405


Outside data processing and other services

24,025


31,047


Equipment

16,262


4,743


Net occupancy

52,012


7,626


Professional services

10,060


48,676


Marketing

945


1,180


Other noninterest expense

9,116


11,267


Total noninterest expense adjustments

$

154,271


$

185,944


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

Nine Months Ended September 30,

Change

(dollar amounts in thousands)

2017

2016

Amount

Percent

Personnel costs

$

1,109,234


$

907,964


$

201,270


22

%

Outside data processing and other services

217,932


185,000


32,932


18


Equipment

118,820


100,430


18,390


18


Net occupancy

123,425


96,014


27,411


29


Professional services

41,652


33,425


8,227


25


Marketing

48,791


40,299


8,492


21


Deposit and other insurance expense

59,031


38,335


20,696


54


Amortization of intangibles

42,614


16,357


26,257


161


Other noninterest expense

166,444


123,220


43,224


35


Total adjusted noninterest expense (Non-GAAP)

$

1,927,943


$

1,541,044


$

386,899


25

%


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


18

Table of Contents


increase in donations and sponsorships and a $3 million impairment on certain equipment lease residuals. These increases were partially offset by a decrease of $30 million, or 37%, in professional services reflecting a $39 million decrease in acquisition-related expenses.

Provision for Income Taxes

The provision for income taxes in the 2017 third quarter was $90 million . This compared with a provision for income taxes of $25 million in the 2016 third quarter and $79 million in the 2017 second quarter . The provision for income taxes for the nine month periods ended September 30, 2017 and September 30, 2016 was $228 million and $134 million , respectively. All periods included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, excess tax deductions for stock-based compensation, and capital losses. The effective tax rates for the 2017 third quarter , 2016 third quarter , and 2017 second quarter were 24.7% , 16.3% , and 22.4% , respectively. The effective tax rates for the nine-month periods ended September 30, 2017 and September 30, 2016 were 23.2% and 22.1% , respectively. The variance between the 2017 third quarter compared to the 2016 third quarter and 2017 second quarter and for the nine-month period ended September 30, 2017 compared to the nine-month period ended September 30, 2016 in the provision for income taxes and effective tax rates relates primarily to the Significant Items. The net federal deferred tax asset was $29 million and the net state deferred tax asset was $35 million at September 30, 2017 .

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. The IRS is currently examining our 2010 and 2011 consolidated federal income tax returns. While the statute of limitations remains open for tax years 2012-2016, the IRS has advised that tax years 2012-2014 will not be audited, and plans to begin the examination of the 2015 federal income tax return during the 2017 fourth quarter. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.

RISK MANAGEMENT AND CAPITAL

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

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

Credit Risk

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

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

Loan and Lease Credit Exposure Mix

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


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Table of Contents


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

Table 10 - Loan and Lease Portfolio Composition

(dollar amounts in millions)

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

Ending Balances by Type:

Commercial:

Commercial and industrial

$

27,469


40

%

$

27,969


41

%

$

28,176


42

%

$

28,059


42

%

$

27,668


42

%

Commercial real estate:

Construction

1,182


2


1,145


2


1,107


2


1,446


2


1,414


2


Commercial

6,024


9


6,000


9


5,986


9


5,855


9


5,842


9


Commercial real estate

7,206


11


7,145


11


7,093


11


7,301


11


7,256


11


Total commercial

34,675


51


35,114


52


35,269


53


35,360


53


34,924


53


Consumer:

Automobile

11,876


17


11,555


17


11,155


17


10,969


16


10,791


16


Home equity

9,985


15


9,966


15


9,974


15


10,106


15


10,120


15


Residential mortgage

8,616


13


8,237


12


7,829


12


7,725


12


7,665


12


RV and marine finance

2,371


3


2,178


3


1,935


2


1,846


3


1,840


3


Other consumer

1,064


1


1,009


1


936


1


956


1


964


1


Total consumer

33,912


49


32,945


48


31,829


47


31,602


47


31,380


47


Total loans and leases

$

68,587


100

%

$

68,059


100

%

$

67,098


100

%

$

66,962


100

%

$

66,304


100

%


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

Commercial Credit

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

Consumer Credit

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



20

Table of Contents


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

Table 11 - Loan and Lease Portfolio by Industry Type

(dollar amounts in millions)

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

Commercial loans and leases:

Real estate and rental and leasing

$

7,461


11

%

$

7,588


12

%

$

7,482


12

%

$

7,545


11

%

$

7,513


12

%

Manufacturing

4,874


7


4,916


7


5,048


8


4,937


7


4,931


7


Retail trade (1)

4,643


7


4,805


7


4,902


7


4,758


7


4,588


7


Finance and insurance

2,900


4


3,051


4


2,844


4


2,010


3


2,289


3


Health care and social assistance

2,727


4


2,699


4


2,727


4


2,729


4


2,638


4


Wholesale trade

2,070


3


2,058


3


2,181


3


2,071


3


2,009


3


Accommodation and food services

1,653


2


1,660


2


1,652


2


1,678


3


1,612


2


Other services

1,265


2


1,261


2


1,278


2


1,223


2


1,205


2


Transportation and warehousing

1,255


2


1,284


2


1,382


2


1,366


2


1,357


2


Professional, scientific, and technical services

1,230


2


1,232


2


1,240


2


1,264


2


1,228


2


Construction

913


1


928


1


924


1


875


1


889


1


Mining, quarrying, and oil and gas extraction

619


1


501


1


511


1


668


1


704


1


Arts, entertainment, and recreation

530


1


469


1


506


1


556


1


437


1


Educational services

509


1


570


1


544


1


501


1


495


1


Admin./Support/Waste Mgmt. and Remediation Services

484


1


444


1


427


1


429


1


409


1


Information

468


1


458


1


454


1


473


1


475


1


Utilities

431


1


433


1


463


1


470


1


480


1


Public administration

262


-


274


-


266


-


272


-


273


-


Agriculture, forestry, fishing and hunting

176


-


203


-


170


-


151


-


161


-


Unclassified/Other

122


-


183


-


167


-


1,288


2


1,136


2


Management of companies and enterprises

86


-


97


-


101


-


96


-


95


-


Total commercial loans and leases by industry category

34,675


51


35,114


52


35,269


53


35,360


53


34,924


53


Automobile

11,876


17


11,555


17


11,155


17


10,969


16


10,791


16


Home Equity

9,985


15


9,966


15


9,974


15


10,106


15


10,120


15


Residential mortgage

8,616


13


8,237


12


7,829


12


7,725


12


7,665


12


RV and marine finance

2,371


3


2,178


3


1,935


2


1,846


3


1,840


3


Other consumer loans

1,064


1


1,009


1


936


1


956


1


964


1


Total loans and leases

$

68,587


100

%

$

68,059


100

%

$

67,098


100

%

$

66,962


100

%

$

66,304


100

%

(1)

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


Credit Quality

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

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


21

Table of Contents


Credit quality performance in the 2017 third quarter reflected continued overall positive results with stable levels of delinquencies and a 7% decline in NPAs from the prior quarter. Total NCOs were $43 million , or 0.25% annualized, of average total loans and leases.  Net charge-offs increased by $7 million from the prior quarter, due to an increase in the net charge-offs of the consumer portfolios. The ACL to total loans and leases ratio declined by 1 basis point to 1.10% .

NPAs, NALs, AND TDRs

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

NPAs and NALs

Of the $187 million of CRE and C&I-related NALs at September 30, 2017 , $106 million, or 57%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile, RV and marine and other consumer loans are generally charged-off at 120-days past due. TDR recognition at an earlier past due status than summarized above also may result in NAL designation.

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

Table 12 - Nonaccrual Loans and Leases and Nonperforming Assets

(dollar amounts in thousands)

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

Nonaccrual loans and leases (NALs):

Commercial and industrial

$

169,751


$

195,279


$

232,171


$

234,184


$

220,862


Commercial real estate

17,397


16,763


13,889


20,508


21,300


Automobile

4,076


3,825


4,881


5,766


4,777


Home equity

71,353


67,940


69,575


71,798


69,044


Residential mortgage

75,251


80,306


80,686


90,502


88,155


RV and marine finance

309


341


106


245


96


Other consumer

108


2


2


-


-


Total nonaccrual loans and leases

338,245


364,456


401,310


423,003


404,234


Other real estate:

Residential

26,449


26,890


31,786


30,932


34,421


Commercial

15,592


16,926


18,101


19,998


36,915


Total other real estate

42,041


43,816


49,887


50,930


71,336


Other NPAs (1)

6,677


6,906


6,910


6,968


-


Total nonperforming assets

$

386,963


$

415,178


$

458,107


$

480,901


$

475,570


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

0.49

%

0.54

%

0.60

%

0.63

%

0.61

%

NPA ratio (2)

0.56


0.61


0.68


0.72


0.72


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

0.74


0.81


0.87


0.91


0.92



(1) Other nonperforming assets includes certain impaired investment securities.

(2)

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


2017 Third Quarter versus 2016 Fourth Quarter .

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


22

Table of Contents


TDR Loans

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

Over the past five quarters, the accruing component of the total TDR balance has been between 80% and 84%, as borrowers continue to make their monthly payments in accordance with the modified terms.  From a payment standpoint, over 80% of the $500 million of accruing TDRs secured by residential real estate (Residential Mortgage and Home Equity in Table 13 ) are current on their required payments.  In addition, over 60% of the accruing pool have had no delinquency at all in the past 12 months. There is limited migration from the accruing to non-accruing components, and virtually all of the charge-offs come from the non-accruing TDR balances.

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

Table 13 - Accruing and Nonaccruing Troubled Debt Restructured Loans

(dollar amounts in thousands)

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

Troubled debt restructured loans-accruing:

Commercial and industrial

$

268,373


$

270,372


$

222,303


$

210,119


$

232,740


Commercial real estate

80,272


74,429


81,202


76,844


80,553


Automobile

28,973


28,140


27,968


26,382


27,843


Home equity

264,410


268,731


271,258


269,709


275,601


Residential mortgage

235,191


238,087


239,175


242,901


251,529


RV and marine finance

1,211


950


581


-


-


Other consumer

6,353


4,017


4,128


3,780


4,102


Total troubled debt restructured loans-accruing

884,783


884,726


846,615


829,735


872,368


Troubled debt restructured loans-nonaccruing:

Commercial and industrial

96,248


89,757


88,759


107,087


70,179


Commercial real estate

3,797


3,823


4,357


4,507


5,672


Automobile

4,076


4,291


4,763


4,579


4,437


Home equity

30,753


28,667


29,090


28,128


28,009


Residential mortgage

50,428


55,590


59,773


59,157


62,027


RV and marine finance

309


381


106


-


-


Other consumer

103


109


117


118


142


Total troubled debt restructured loans-nonaccruing

185,714


182,618


186,965


203,576


170,466


Total troubled debt restructured loans

$

1,070,497


$

1,067,344


$

1,033,580


$

1,033,311


$

1,042,834



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

ACL

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

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

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net


23

Table of Contents


deferred loan fees and costs. Acquired loans are those purchased in the FirstMerit acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related ALLL. The difference between acquired contractual balance and estimated fair value at acquisition date was recorded as a purchase premium or discount.

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

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

Table 14 - Allocation of Allowance for Credit Losses (1)

(dollar amounts in thousands)

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

September 30,
2016

Allowance for Credit Losses

Commercial

Commercial and industrial

$

373,821


40

%

$

367,956


41

%

$

380,504


42

%

$

355,424


42

%

$

333,101


42

%

Commercial real estate

100,301


11


106,620


11


99,804


11


95,667


11


98,694


11


Total commercial

474,122


51


474,576


52


480,308


53


451,091


53


431,795


53


Consumer

Automobile

50,382


17


48,322


17


46,402


17


47,970


16


42,584


16


Home equity

57,897


15


62,941


15


64,900


15


65,474


15


69,866


15


Residential mortgage

29,236


13


33,304


12


35,559


12


33,398


12


36,510


12


RV and marine finance

13,018


3


7,665


3


4,022


2


5,311


3


4,289


3


Other consumer

50,831


1


41,188


1


41,389


1


35,169


1


31,854


1


Total consumer

201,364


49


193,420


48


192,272


47


187,322


47


185,103


47


Total allowance for loan and lease losses

675,486


100

%

667,996


100

%

672,580


100

%

638,413


100

%

616,898


100

%

Allowance for unfunded loan commitments

78,566


85,359


91,838


97,879


88,433


Total allowance for credit losses

$

754,052


$

753,355


$

764,418


$

736,292


$

705,331


Total allowance for loan and leases losses as % of:

Total loans and leases

0.98

%

0.98

%

1.00

%

0.95

%

0.93

%

Nonaccrual loans and leases

200


183


168


151


153


Nonperforming assets

175


161


147


133


130


Total allowance for credit losses as % of:

Total loans and leases

1.10

%

1.11

%

1.14

%

1.10

%

1.06

%

Nonaccrual loans and leases

223


207


190


174


174


Nonperforming assets

195


181


167


153


148



(1)

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


2017 Third Quarter versus 2016 Fourth Quarter

At September 30, 2017 , the ALLL was $675 million , compared to $638 million at December 31, 2016 . The $37 million , or 6% , increase in the ALLL relates to an increase in Criticized/Classified assets in the C&I portfolio as well as growth in reserve levels for the Other Consumer portfolio related to growth and seasoning of the portfolio.

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



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Table of Contents


NCOs

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

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

Table 15 - Quarterly Net Charge-off Analysis

Three Months Ended

September 30,

June 30,

September 30,

(dollar amounts in thousands)

2017

2017

2016

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

Commercial:

Commercial and industrial

$

13,317


$

12,870


$

19,225


Commercial real estate:

Construction

(870

)

83


(271

)

Commercial

(3,184

)

(3,638

)

(2,427

)

Commercial real estate

(4,054

)

(3,555

)

(2,698

)

Total commercial

9,263


9,315


16,527


Consumer:

Automobile

9,619


8,318


7,769


Home equity

1,532


1,218


2,624


Residential mortgage

2,057


1,052


1,728


RV and marine finance

3,390


1,875


106


Other consumer

17,031


14,262


11,311


Total consumer

33,629


26,725


23,538


Total net charge-offs

$

42,892


$

36,040


$

40,065


Three Months Ended

September 30,

June 30,

September 30,

2017

2017

2016

Net charge-offs (recoveries)-annualized percentages:

Commercial:

Commercial and industrial

0.19

 %

0.18

 %

0.31

 %

Commercial real estate:

Construction

(0.30

)

0.03


(0.10

)

Commercial

(0.21

)

(0.24

)

(0.19

)

Commercial real estate

(0.22

)

(0.20

)

(0.17

)

Total commercial

0.11


0.11


0.21


Consumer:

Automobile

0.33


0.29


0.27


Home equity

0.06


0.05


0.11


Residential mortgage

0.10


0.05


0.10


RV and marine finance

0.59


0.37


0.05


Other consumer

6.51


5.81


5.54


Total consumer

0.40


0.33


0.32


Net charge-offs as a % of average loans

0.25

 %

0.21

 %

0.26

 %


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Table of Contents


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

2017 Third Quarter versus 2017 Second Quarter

NCOs were an annualized 0.25% of average loans and leases in the current quarter, an increase from 0.21% in the 2017 second quarter , still below our long-term expectation of 0.35% - 0.55%. Commercial - C&I charge-offs were slightly higher for the quarter, but well within our expected performance range. Consumer charge-offs were higher for the quarter, primarily driven by seasonality trends across the consumer portfolio, consistent with our expectations. Given the low level of C&I and CRE NCO's, we have experienced and continue to expect some volatility on a quarter-to-quarter comparison basis.


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Table of Contents



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

Table 16 - Year to Date Net Charge-off Analysis

Nine Months Ended September 30,

(dollar amounts in thousands)

2017

2016

Net charge-offs by loan and lease type:

Commercial:

Commercial and industrial

$

34,283


$

29,441


Commercial real estate:

Construction

(3,924

)

(752

)

Commercial

(5,927

)

(20,095

)

Commercial real estate

(9,851

)

(20,847

)

Total commercial

24,432


8,594


Consumer:

Automobile

30,344


18,859


Home equity

4,412


7,383


Residential mortgage

5,704


4,151


RV and marine finance

7,628


106


Other consumer

45,850


26,279


Total consumer

93,938


56,778


Total net charge-offs

$

118,370


$

65,372


Nine Months Ended September 30,

2017

2016

Net charge-offs - annualized percentages:

Commercial:

Commercial and industrial

0.16

 %

0.18

 %

Commercial real estate:

Construction

(0.44

)

(0.10

)

Commercial

(0.13

)

(0.58

)

Commercial real estate

(0.18

)

(0.50

)

Total commercial

0.09


0.04


Consumer:

Automobile

0.36


0.24


Home equity

0.06


0.11


Residential mortgage

0.09


0.09


RV and marine finance

0.49


0.05


Other consumer

6.13


5.23


Total consumer

0.39


0.29


Net charge-offs as a % of average loans

0.23

 %

0.16

 %


2017 First Nine Months versus 2016 First Nine Months

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




27

Table of Contents


Market Risk

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

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

Interest Rate Risk

Table 17 - Net Interest Income at Risk

Net Interest Income at Risk (%)

Basis point change scenario

-25


+100


+200


Board policy limits

N/A


-2.0

 %

-4.0

 %

September 30, 2017

-0.5

 %

2.5

 %

5.0

 %

December 31, 2016

-1.0

 %

2.7

 %

5.6

 %

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

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

Table 18 - Economic Value of Equity at Risk

Economic Value of Equity at Risk (%)

Basis point change scenario

-25


+100


+200


Board policy limits

N/A


-5.0

 %

-12.0

 %

September 30, 2017

-1.2

 %

3.4

 %

4.9

 %

December 31, 2016

-0.6

 %

0.9

 %

0.2

 %

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

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

MSRs

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

At September 30, 2017 , we had a total of $195 million of capitalized MSRs representing the right to service $19.6 billion in mortgage loans. Of this $195 million , $12 million was recorded using the fair value method and $183 million was recorded using the amortization method.

MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed hedging strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report changes in the MSR value net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in the recorded value of the MSR between reporting dates are recognized as an increase or a decrease in mortgage banking income.


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Table of Contents


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

Price Risk

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

Liquidity Risk

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

Our primary source of liquidity is our core deposit base. Core deposits comprised approximately 95% of total deposits at September 30, 2017 . We also have available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets, and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $13.9 billion as of September 30, 2017 .

Bank Liquidity and Sources of Funding

Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2017 , these core deposits funded 73% of total assets ( 109% of total loans). Other sources of liquidity include non-core deposits, FHLB advances, wholesale debt instruments, and securitizations. Demand deposit overdrafts that have been reclassified as loan balances were $24 million and $23 million at September 30, 2017 and December 31, 2016 , respectively.

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

Table 19 - Deposit Composition

(dollar amounts in millions)

September 30,

June 30,

March 31,

December 31,

September 30,

2017

2017

2017

2016

2016

By Type:

Demand deposits-noninterest-bearing

$

22,225


28

%

$

21,420


28

%

$

21,489


28

%

$

22,836


30

%

$

23,426


30

%

Demand deposits-interest-bearing

18,343


23


17,113


23


18,618


24


15,676


21


15,730


20


Money market deposits

20,553


26


19,423


26


18,664


24


18,407


24


18,604


24


Savings and other domestic deposits

11,441


15


11,758


15


12,043


16


11,975


16


12,418


16


Core certificates of deposit

2,009


3


2,088


3


2,188


3


2,535


3


2,724


4


Total core deposits:

74,571


95


71,802


95


73,002


95


71,429


94


72,902


94


Other domestic deposits of $250,000 or more

418


1


441


1


524


1


394


1


391


1


Brokered deposits and negotiable CDs

3,456


4


3,690


4


3,897


4


3,785


5


3,972


5


Deposits in foreign offices

-


-


-


-


-


-


-


-


140


-


Total deposits

$

78,445


100

%

$

75,933


100

%

$

77,423


100

%

$

75,608


100

%

$

77,405


100

%

Total core deposits:

Commercial

$

35,516


48

%

$

32,201


45

%

$

32,963


45

%

$

31,887


45

%

$

32,936


45

%

Consumer

39,055


52


39,601


55


40,039


55


39,542


55


39,966


55


Total core deposits

$

74,571


100

%

$

71,802


100

%

$

73,002


100

%

$

71,429


100

%

$

72,902


100

%


29

Table of Contents



The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans pledged to the Federal Reserve Discount Window and the FHLB are $32.0 billion and $19.7 billion at September 30, 2017 and December 31, 2016 , respectively.

To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding, asset securitization, or sale. Sources of wholesale funding include other domestic deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, and long-term debt. At September 30, 2017 , total wholesale funding was $14.9 billion , a decrease from $16.2 billion at December 31, 2016 . The decrease from year-end primarily relates to a decrease in short-term borrowings.

Liquidity Coverage Ratio

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

Parent Company Liquidity

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

At September 30, 2017 , the parent company had $1.9 billion in cash and cash equivalents, slightly up from December 31, 2016 .

On October 18, 2017 , the board of directors declared a quarterly common stock cash dividend of $0.11 per common share. The dividend is payable on January 2, 2018 , to shareholders of record on December 18, 2017 . Based on the current quarterly dividend of $0.11 per common share, cash demands required for common stock dividends are estimated to be approximately $119 million per quarter. On October 18, 2017 , the board of directors declared a quarterly Series A, Series B, Series C, and Series D Preferred Stock dividend payable on January 15, 2018 to shareholders of record on January 1, 2018 . Based on the current dividend, cash demands required for Series A, Series B, Series C, and Series D Preferred Stock are estimated to be approximately $8 million , $0.3 million , $1.5 million , and $9 million per quarter, respectively.

During the first nine months of 2017 , the Bank returned capital totaling $426 million . Additionally, the Bank paid a preferred dividend of $34 million and common stock dividend of $100 million to the holding company during the first nine months of 2017 . To meet any additional liquidity needs, the parent company may issue debt or equity securities from time to time.

Off-Balance Sheet Arrangements

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

Operational Risk

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


30

Table of Contents


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

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

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

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

Compliance Risk

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



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Table of Contents


Capital

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

The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the periods presented: 

Table 20 - Regulatory Capital Data

Basel III

(dollar amounts in millions)

September 30,
2017

June 30,
2017

December 31,
2016

Total risk-weighted assets

Consolidated

$

78,631


$

78,366


$

78,263


Bank

78,848


78,489


78,242


Common equity tier I risk-based capital

Consolidated

7,817


7,740


7,486


Bank

8,491


8,367


8,153


Tier 1 risk-based capital

Consolidated

8,886


8,809


8,547


Bank

9,362


9,238


9,086


Tier 2 risk-based capital

Consolidated

1,638


1,640


1,668


Bank

1,706


1,706


1,732


Total risk-based capital

Consolidated

10,524


10,449


10,215


Bank

11,068


10,944


10,818


Tier 1 leverage ratio

Consolidated

8.96

%

8.98

%

8.70

%

Bank

9.44


9.43


9.29


Common equity tier I risk-based capital ratio

Consolidated

9.94


9.88


9.56


Bank

10.77


10.66


10.42


Tier 1 risk-based capital ratio

Consolidated

11.30


11.24


10.92


Bank

11.87


11.77


11.61


Total risk-based capital ratio

Consolidated

13.39


13.33


13.05


Bank

14.04


13.94


13.83



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

Common Equity Tier 1 (CET1) risk-based capital ratio was 9.94% at September 30, 2017 , up from 9.56% at December 31, 2016 . The regulatory Tier 1 risk-based capital ratio was 11.30% compared to 10.92% at December 31, 2016 . All capital ratios were impacted by the repurchase of $123 million of common stock at an average cost of $12.75 per share during the 2017 third quarter.

Shareholders' Equity

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

Shareholders' equity totaled $10.7 billion at September 30, 2017 , an increase of $0.4 billion when compared with December 31, 2016 .

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

On July 19, 2017, the Board authorized the repurchase of up to $308 million of common shares over the four quarters through the 2018 second quarter. During the 2017 third quarter, Huntington purchased $123 million of common stock at an


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average cost of $12.75 per share. Purchases of common stock under the authorization may include open market purchases, privately negotiated transactions, and accelerated repurchase programs.

Dividends

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

Fair Value

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

BUSINESS SEGMENT DISCUSSION

Overview

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

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

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

Revenue Sharing

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

Expense Allocation

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


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Funds Transfer Pricing (FTP)

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

Net Income by Business Segment

Net income by business segment for the nine-month periods ending September 30, 2017 and September 30, 2016 is presented in the following table:

Table 21 - Net Income (Loss) by Business Segment

Nine Months Ended September 30,

(dollar amounts in thousands)

2017

2016

Consumer and Business Banking

$

314,366


$

234,356


Commercial Banking

239,685


133,470


CREVF

162,676


129,802


RBHPCG

66,962


46,529


Treasury / Other

(29,286

)

(71,299

)

Net income

$

754,403


$

472,858


Treasury / Other

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

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

Consumer and Business Banking

Table 22 - Key Performance Indicators for Consumer and Business Banking

Nine Months Ended September 30,

Change

(dollar amounts in thousands unless otherwise noted)

2017

2016

Amount

Percent

Net interest income

$

1,255,617


$

911,706


$

343,911


38

%

Provision for credit losses

74,270


43,474


30,796


71


Noninterest income

544,445


459,732


84,713


18


Noninterest expense

1,242,152


967,417


274,735


28


Provision for income taxes

169,274


126,191


43,083


34


Net income

$

314,366


$

234,356


$

80,010


34

%

Number of employees (average full-time equivalent)

8,696


6,997


1,699


24

%

Total average assets (in millions)

$

25,461


$

19,921


$

5,540


28


Total average loans/leases (in millions)

20,577


16,967


3,610


21


Total average deposits (in millions)

45,478


33,759


11,719


35


Net interest margin

3.79

%

3.69

%

0.10

%

3


NCOs

$

75,064


$

49,873


$

25,191


51


NCOs as a % of average loans and leases

0.48

%

0.39

%

0.09

%

23



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2017 First Nine Months versus 2016 First Nine Months

Consumer and Business Banking , including Home Lending, reported net income of $314 million in the first nine-month period of 2017 , an increase of $80 million , or 34% , compared to the year-ago period. Results were predominantly impacted by the FirstMerit acquisition. Segment net interest income increased $344 million , or 38% , primarily due to an increase in total average loans and deposits. The provision for credit losses increased $31 million , or 71% , driven by increased NCOs as well as an increase in the allowance. Noninterest income increased $85 million , or 18% , due to an increase in card and payment processing income and service charges on deposit accounts, which were driven by higher debit card-related transaction volumes and an increase in the number of households. In addition, SBA loan sales gains contributed to improved noninterest income. Noninterest expense increased $275 million , or 28% , due to an increase in personnel and occupancy expense related to the addition of FirstMerit branches and colleagues. Higher processing costs related to transaction volumes, along with allocated expenses, also contributed to the increase in noninterest expense.

Home Lending, an operating unit of Consumer and Business Banking , reflects the result of the origination and servicing of mortgage loans less referral fees and net interest income for mortgage banking products distributed by the retail branch network and other business segments. Home Lending reported net income of $6 million in the first nine-month period of 2017 , a decrease of $11 million , or 64% , compared to the year-ago period. While total revenues increased $9 million, or 8%, largely due to higher residential loan balances, this increase was offset by an increase in noninterest expenses of $22 million, or 27%, as a result of higher personnel costs related to the FirstMerit acquisition and higher origination volume. Income from lower origination spreads offset higher origination volume.

Commercial Banking

Table 23 - Key Performance Indicators for Commercial Banking

Nine Months Ended September 30,

Change

(dollar amounts in thousands unless otherwise noted)

2017

2016

Amount

Percent

Net interest income

$

514,900


$

355,263


$

159,637


45

 %

Provision for credit losses

21,378


53,212


(31,834

)

(60

)

Noninterest income

176,609


150,228


26,381


18


Noninterest expense

301,385


246,941


54,444


22


Provision for income taxes

129,061


71,868


57,193


80


Net income

$

239,685


$

133,470


$

106,215


80

 %

Number of employees (average full-time equivalent)

1,078


894


184


21

 %

Total average assets (in millions)

$

24,026


$

19,012


$

5,014


26


Total average loans/leases (in millions)

19,051


14,951


4,100


27


Total average deposits (in millions)

19,206


14,976


4,230


28


Net interest margin

3.33

%

2.95

%

0.38

 %

13


NCOs

$

13,420


$

19,951


$

(6,531

)

(33

)

NCOs as a % of average loans and leases

0.09

%

0.18

%

(0.09

)%

(50

)


2017 First Nine Months versus 2016 First Nine Months

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


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Commercial Real Estate and Vehicle Finance

Table 24 - Commercial Real Estate and Vehicle Finance

Nine Months Ended September 30,

Change

(dollar amounts in thousands unless otherwise noted)

2017

2016

Amount

Percent

Net interest income

$

419,556


$

317,704


$

101,852


32

 %

Provision for credit losses

40,047


18,706


21,341


114


Noninterest income

34,750


25,951


8,799


34


Noninterest expense

163,989


125,254


38,735


31


Provision for income taxes

87,594


69,893


17,701


25


Net income

$

162,676


$

129,802


$

32,874


25

 %

Number of employees (average full-time equivalent)

406


330


76


23

 %

Total average assets (in millions)

$

24,121


$

19,520


$

4,601


24


Total average loans/leases (in millions)

23,025


18,433


4,592


25


Total average deposits (in millions)

1,878


1,669


209


13


Net interest margin

2.42

%

2.25

 %

0.17

%

8


NCOs (Recoveries)

$

28,007


$

(2,146

)

$

30,153


(1,405

)

NCOs as a % of average loans and leases

0.16

%

(0.02

)%

0.18

%

(900

)


2017 First Nine Months versus 2016 First Nine Months

CREVF reported net income of $163 million in the first nine-month period of 2017 , an increase of $33 million , or 25% , compared to the year-ago period. Results were positively impacted by the FirstMerit acquisition, offset in part by a higher provision for credit losses reflecting significant commercial real estate recoveries benefiting the year ago period. Segment net interest income increased $102 million or 32% , due to both higher loan balances and a 17 basis point increase in the net interest margin primarily reflecting the purchase accounting impact of the acquired loan portfolios. Noninterest income increased $9 million , or 34% , primarily due to an increase in gains on various equity investments associated with mezzanine lending related activities and an increase in net servicing income on securitized automobile loans . Noninterest expense increased $39 million , or 31% , primarily due to an increase in personnel costs and other allocated costs attributed to higher production and portfolio balance levels.

Regional Banking and The Huntington Private Client Group

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

Nine Months Ended September 30,

Change

(dollar amounts in thousands unless otherwise noted)

2017

2016

Amount

Percent

Net interest income

$

145,089


$

112,473


$

32,616


29

 %

Provision for credit losses

510


490


20


4


Noninterest income

140,610


126,245


14,365


11


Noninterest expense

182,171


166,645


15,526


9


Provision for income taxes

36,056


25,054


11,002


44


Net income

$

66,962


$

46,529


$

20,433


44

 %

Number of employees (average full-time equivalent)

1,027


953


74


8

 %

Total average assets (in millions)

$

5,473


$

4,424


$

1,049


24


Total average loans/leases (in millions)

4,779


3,997


782


20


Total average deposits (in millions)

5,893


5,002


891


18


Net interest margin

3.38

%

3.01

 %

0.37

%

12


NCOs (Recoveries)

$

1,879


$

(2,392

)

$

4,271


(179

)

NCOs as a % of average loans and leases

0.05

%

(0.08

)%

0.13

%

(163

)

Total assets under management (in billions)-eop

$

18.0


$

17.3


$

0.7


4


Total trust assets (in billions)-eop

106.3


98.8


7.5


8


eop - End of Period.


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2017 First Nine Months versus 2016 First Nine Months

RBHPCG reported net income of $67 million in the first nine-month period of 2017 , an increase of $20 million , or 44% , compared to the year-ago period. Results were predominantly impacted by the FirstMerit acquisition. Net interest income increased $33 million , or 29% , due to an increase in average total deposits and loans combined with a 37 basis point increase in net interest margin. The increase in average total loans was due to growth in commercial and portfolio mortgage loans, while the increase in average total deposits was due to growth in interest checking balances. The provision for credit losses was essentially unchanged. Noninterest income increased $14 million , or 11% , primarily reflecting increased trust and investment management revenue as a result of an increase in trust assets and assets under management, largely from the FirstMerit acquisition. Noninterest expense increased $16 million , or 9% , as a result of increased personnel expenses and amortization of intangibles resulting from the FirstMerit acquisition.

ADDITIONAL DISCLOSURES

Forward-Looking Statements

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

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our "Fair Play" banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the possibility that the anticipated benefits of the merger with FirstMerit Corporation are not realized completely or when expected, including as a result of the impact of, or problems arising from, the strength of the economy and competitive factors in the areas where we do business; and other factors that may affect our future results. Additional factors that could cause results to differ materially from those described above can be found in our Annual Report on Form 10-K for the year ended December 31, 2016, and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, which are on file with the Securities and Exchange Commission (the "SEC") and available in the "Investor Relations" section of our website, http://www.huntington.com , under the heading "Publications and Filings" and in other documents we file with the SEC.

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

Non-GAAP Financial Measures

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

Significant Items

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


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other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.

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

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

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

Fully-Taxable Equivalent Basis

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

Non-Regulatory Capital Ratios

In ad dition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utiliz ation and adequacy, including:

Tangible common equity to tangible assets, and

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

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

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

Risk Factors

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

Critical Accounting Policies and Use of Significant Estimates

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

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


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

Recent Accounting Pronouncements and Developments

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




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Item 1: Financial Statements

Huntington Bancshares Incorporated

Condensed Consolidated Balance Sheets

(Unaudited)

(dollar amounts in thousands, except number of shares)

September 30,

December 31,

2017

2016

Assets

Cash and due from banks

$

1,193,738


$

1,384,770


Interest-bearing deposits in banks

50,090


58,267


Trading account securities

88,488


133,295


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

651,734


512,951


Available-for-sale and other securities

15,453,061


15,562,837


Held-to-maturity securities

8,688,399


7,806,939


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

68,587,296


66,961,996


Allowance for loan and lease losses

(675,486

)

(638,413

)

Net loans and leases

67,911,810


66,323,583


Bank owned life insurance

2,459,807


2,432,086


Premises and equipment

853,290


815,508


Goodwill

1,992,849


1,992,849


Other intangible assets

359,844


402,458


Servicing rights

229,746


225,578


Accrued income and other assets

2,055,270


2,062,976


Total assets

$

101,988,126


$

99,714,097


Liabilities and shareholders' equity

Liabilities

Deposits

$

78,445,113


$

75,607,717


Short-term borrowings

1,829,549


3,692,654


Long-term debt

9,200,707


8,309,159


Accrued expenses and other liabilities

1,813,908


1,796,421


Total liabilities

91,289,277


89,405,951


Commitments and contingencies (Note 14)

Shareholders' equity

Preferred stock

1,071,286


1,071,227


Common stock

10,844


10,886


Capital surplus

9,820,600


9,881,277


Less treasury shares, at cost

(35,133

)

(27,384

)

Accumulated other comprehensive loss

(369,963

)

(401,016

)

Retained earnings (deficit)

201,215


(226,844

)

Total shareholders' equity

10,698,849


10,308,146


Total liabilities and shareholders' equity

$

101,988,126


$

99,714,097


Common shares authorized (par value of $0.01)

1,500,000,000


1,500,000,000


Common shares issued

1,084,366,589


1,088,641,251


Common shares outstanding

1,080,946,315


1,085,688,538


Treasury shares outstanding

3,420,274


2,952,713


Preferred stock, authorized shares

6,617,808


6,617,808


Preferred shares issued

2,702,571


2,702,571


Preferred shares outstanding

1,098,006


1,098,006



(1)

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

See Notes to Unaudited Condensed Consolidated Financial Statements



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Table of Contents


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Income

(Unaudited)

(dollar amounts in thousands, except per share amounts)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Interest and fee income:

Loans and leases

$

724,284


$

583,653


$

2,100,056


$

1,516,849


Available-for-sale and other securities

Taxable

74,409


57,572


228,986


138,178


Tax-exempt

18,579


13,687


55,961


40,499


Held-to-maturity securities-taxable

48,743


33,098


138,214


105,307


Other

6,972


6,336


16,554


16,422


Total interest income

872,987


694,346


2,539,771


1,817,255


Interest expense:

Deposits

49,611


26,233


126,688


71,575


Short-term borrowings

5,713


959


16,782


2,770


Federal Home Loan Bank advances

65


66


197


207


Subordinated notes and other long-term debt

59,165


41,698


163,184


108,366


Total interest expense

114,554


68,956


306,851


182,918


Net interest income

758,433


625,390


2,232,920


1,634,337


Provision for credit losses

43,590


63,805


136,206


115,896


Net interest income after provision for credit losses

714,843


561,585


2,096,714


1,518,441


Service charges on deposit accounts

90,681


86,847


261,683


232,722


Cards and payment processing income

53,647


44,320


153,301


119,951


Mortgage banking income

33,615


40,603


97,575


90,737


Trust and investment management services

33,531


28,923


99,633


74,258


Insurance income

13,992


15,865


45,099


48,037


Brokerage income

14,458


14,719


46,510


44,819


Capital markets fees

21,719


14,750


52,755


40,797


Bank owned life insurance income

16,453


14,452


49,317


40,500


Gain on sale of loans

13,877


7,506


38,701


22,166


Net gains on sales of securities

71


1,031


3,781


1,763


Impairment losses on available-for-sale securities

(104

)

-


(3,687

)

(76

)

Other noninterest income

38,157


33,399


123,110


99,720


Total noninterest income

330,097


302,415


967,778


815,394


Personnel costs

377,088


405,024


1,151,085


989,369


Outside data processing and other services

79,586


91,133


241,957


216,047


Equipment

45,458


40,792


135,082


105,173


Net occupancy

55,124


41,460


175,437


103,640


Professional services

15,227


47,075


51,712


82,101


Marketing

16,970


14,438


49,736


41,479


Deposit and other insurance expense

18,514


14,940


59,031


38,335


Amortization of intangibles

14,017


9,046


42,614


16,357


Other noninterest expense

58,444


48,339


175,560


134,487


Total noninterest expense

680,428


712,247


2,082,214


1,726,988


Income before income taxes

364,512


151,753


982,278


606,847


Provision for income taxes

89,944


24,749


227,875


133,989


Net income

274,568


127,004


754,403


472,858


Dividends on preferred shares

18,903


18,537


56,670


46,409


Net income applicable to common shares

$

255,665


$

108,467


$

697,733


$

426,449



41

Table of Contents


Three Months Ended
September 30,

Nine Months Ended
September 30,

(dollar amounts in thousands, except per share amounts)

2017

2016

2017

2016

Average common shares-basic

1,086,038


938,578


1,087,115


844,167


Average common shares-diluted

1,106,491


952,081


1,107,878


856,934


Per common share:

Net income-basic

$

0.24


$

0.12


$

0.64


$

0.51


Net income-diluted

0.23


0.11


0.63


0.50


Cash dividends declared

0.08


0.07


0.24


0.21


OTTI losses for the periods presented:

Total OTTI losses

$

(104

)

$

-


$

(3,693

)

$

(3,809

)

Noncredit-related portion of loss recognized in OCI

-


-


6


3,733


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

$

(104

)

$

-


$

(3,687

)

$

(76

)

See Notes to Unaudited Condensed Consolidated Financial Statements




42

Table of Contents


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

(dollar amounts in thousands)

2017

2016

2017

2016

Net income

$

274,568


$

127,004


$

754,403


$

472,858


Other comprehensive income, net of tax:

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

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

265


1,294


2,391


(388

)

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

(21,968

)

(35,036

)

25,081


47,118


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

(21,703

)

(33,742

)

27,472


46,730


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

1,318


(5,232

)

1,563


4,731


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

779


841


2,018


2,522


Other comprehensive income (loss), net of tax

(19,606

)

(38,133

)

31,053


53,983


Comprehensive income

$

254,962


$

88,871


$

785,456


$

526,841


See Notes to Unaudited Condensed Consolidated Financial Statements



43

Table of Contents


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

Accumulated Other Comprehensive Gain (Loss)

Retained Earnings (Deficit)

(dollar amounts in thousands, except per share amounts)

Preferred Stock

Common Stock

Capital Surplus

Treasury Stock

Amount

Shares

Amount

Shares

Amount

Total

Nine Months Ended September 30, 2016

Balance, beginning of period

$

386,291


796,970


$

7,970


$

7,038,502


(2,041

)

$

(17,932

)

$

(226,158

)

$

(594,067

)

$

6,594,606


Net income

472,858


472,858


Other comprehensive income (loss)

53,983


53,983


FirstMerit Acquisition:

Issuance of common stock

285,425


2,854


2,764,044


2,766,898


Issuance of Series C preferred stock

100,000


4,320


104,320


Net proceeds from issuance of Series D preferred stock

584,936


584,936


Cash dividends declared:

Common ($0.21 per share)

(187,710

)

(187,710

)

Preferred Series A ($63.75 per share)

(23,110

)

(23,110

)

Preferred Series B ($25.08 per share)

(890

)

(890

)

Preferred Series C ($11.59 per share)

(1,159

)

(1,159

)

Preferred Series D ($35.42 per share)

(21,250

)

(21,250

)

Recognition of the fair value of share-based compensation

48,568


48,568


Other share-based compensation activity

5,014


50


4,389


(3,823

)

616


Shares sold to HIP

322


3


3,207


3,210


Other





119


(908

)

(9,001

)

(229

)

(9,111

)

Balance, end of period

$

1,071,227


1,087,731


$

10,877


$

9,863,149


(2,949

)

$

(26,933

)

$

(172,175

)

$

(359,380

)

$

10,386,765


Nine Months Ended September 30, 2017

Balance, beginning of period

$

1,071,227


1,088,641


$

10,886


$

9,881,277


(2,953

)

$

(27,384

)

$

(401,016

)

$

(226,844

)

$

10,308,146


Net income

754,403


754,403


Other comprehensive income (loss)

31,053


31,053


Repurchases of common stock

(9,645

)

(96

)

(123,108

)

(123,204

)

Cash dividends declared:

Common ($0.24 per share)

(260,919

)

(260,919

)

Preferred Series A ($63.75 per share)

(23,110

)

(23,110

)

Preferred Series B ($28.96 per share)

(1,028

)

(1,028

)

Preferred Series C ($44.07 per share)

(4,407

)

(4,407

)

Preferred Series D ($46.88 per share)

(28,125

)

(28,125

)

Recognition of the fair value of share-based compensation

72,747


72,747


Other share-based compensation activity

5,361


53


(11,928

)

(8,499

)

(20,374

)

Other

59


10


1


1,612


(468

)

(7,749

)

(256

)

(6,333

)

Balance, end of period

$

1,071,286


1,084,367


$

10,844


$

9,820,600


(3,421

)

$

(35,133

)

$

(369,963

)

$

201,215


$

10,698,849


See Notes to Unaudited Condensed Consolidated Financial Statements

44

Table of Contents


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended
September 30,

(dollar amounts in thousands)

2017

2016

Operating activities

Net income

$

754,403


$

472,858


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

Provision for credit losses

136,206


115,896


Depreciation and amortization

307,063


299,444


Share-based compensation expense

72,747


48,568


Deferred income tax expense (benefit)

36,244


(18,094

)

Net gains on sales of securities

(3,781

)

(1,763

)

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

3,687


76


Net change in:

Trading account securities

44,807


926


Loans held for sale

(164,405

)

(194,735

)

Accrued income and other assets

(136,485

)

(169,453

)

Accrued expense and other liabilities

42,162


144,496


Other, net

13,647


(12,413

)

Net cash provided by (used for) operating activities

1,106,295


685,806


Investing activities

Change in interest bearing deposits in banks

20,688


33,221


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

-


(133,218

)

Proceeds from:

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

1,081,091


1,266,031


Maturities of held-to-maturity securities

792,996


850,170


Sales of available-for-sale and other securities

1,255,152


3,893,482


Purchases of available-for-sale and other securities

(3,208,608

)

(5,434,332

)

Purchases of held-to-maturity securities

(689,670

)

-


Net proceeds from sales of portfolio loans

427,142


352,277


Net loan and lease activity, excluding sales and purchases

(2,159,966

)

(3,286,238

)

Purchases of premises and equipment

(144,637

)

(63,688

)

Proceeds from sales of other real estate

25,156


21,765


Purchases of loans and leases

(112,859

)

(359,208

)

Other, net

11,556


(249

)

Net cash provided by (used for) investing activities

(2,701,959

)

(2,859,987

)

Financing activities

Increase (decrease) in deposits

2,837,396


853,806


Increase (decrease) in short-term borrowings

(1,865,157

)

363,518


Net proceeds from issuance of long-term debt

1,773,096


2,081,643


Maturity/redemption of long-term debt

(882,977

)

(684,746

)

Dividends paid on preferred stock

(56,632

)

(46,409

)

Dividends paid on common stock

(261,593

)

(168,656

)

Repurchases of common stock

(123,204

)

-


Proceeds from stock options exercised

9,316


6,084


Net proceeds from issuance of preferred stock

-


584,936


Payments related to tax-withholding for share based compensation awards

(25,613

)

-


Other, net

-


(1,212

)

Net cash provided by (used for) financing activities

1,404,632


2,988,964


Increase (decrease) in cash and cash equivalents

(191,032

)

814,783


Cash and cash equivalents at beginning of period

1,384,770


847,156


Cash and cash equivalents at end of period

$

1,193,738


$

1,661,939



45

Table of Contents


Nine Months Ended
September 30,

(dollar amounts in thousands)

2017

2016

Supplemental disclosures:

Interest paid

$

307,493


$

159,357


Income taxes paid

71,165


3,869


Non-cash activities

Loans transferred to held-for-sale from portfolio

446,152


3,204,732


Loans transferred to portfolio from held-for-sale

4,751


92,585


Transfer of loans to OREO

23,691


18,678


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


992,760


-


See Notes to Unaudited Condensed Consolidated Financial Statements


46

Table of Contents


Huntington Bancshares Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

1 . BASIS OF PRESENTATION

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

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

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

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

2 . ACCOUNTING STANDARDS UPDATE

Standard

Summary of guidance

Effects on financial statements

ASU 2014-09 - Revenue from Contracts with Customers (Topic 606):

Issued May 2014

- Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance.


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


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


- Guidance sets forth a five step approach for revenue recognition.

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


- Management's analysis includes:

(a) Identification of all revenue streams included in the financial statements;

(b) Determination of scope exclusions to identify ‘in-scope' revenue streams;

(c) Determination of size, timing, and amount of revenue recognition for in-scope items;

(d) Identification of contracts for further analysis; and

(e) Completion of review of certain contracts to evaluate the potential impact of the new guidance.


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


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


47

Table of Contents


Standard

Summary of guidance

Effects on financial statements

ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities.

Issued January 2016


- Improvements to GAAP disclosures including requiring an entity to:

(a) Measure its equity investments with changes in the fair value recognized in the income statement.

(b) Present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (i.e., FVO liability).

(c) Use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

(d) Assess deferred tax assets related to a net unrealized loss on AFS securities in combination with the entity's other deferred tax assets.

- Effective for the fiscal period beginning after December 15, 2017, including interim periods within those fiscal years.


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


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

ASU 2016-02 - Leases.

Issued February 2016


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


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


- Requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

- Effective for the fiscal period beginning after December 15, 2018, with early application permitted.


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


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


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


ASU 2016-13 - Financial Instruments - Credit Losses.

Issued June 2016

- Eliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost.


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


- Measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.

- Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018.


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


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


- The early stages of this evaluation include a review of existing credit models to identify areas where existing credit models used to comply with other regulatory requirements may be leveraged and areas where new impairment models may be required.

ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments.

Issued August 2016

- Clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows.


- Provides consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows to reduce diversity in practice with respect to several types of cash flows.

- Effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.


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


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


48

Table of Contents


Standard

Summary of guidance

Effects on financial statements

ASU 2017-04 - Simplifying the Test for Goodwill Impairment.

Issued January 2017

- Simplifies the goodwill impairment test by eliminating Step 2 of the goodwill impairment process, which requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities.


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


- Entities will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

- Effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted.


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

ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Periodic Postretirement Benefit Cost.

Issued March 2017

- Requires that an employer report the service cost component of the pension cost and postretirement benefit cost in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period.


- Other components of the net benefit cost should be presented in the income statement separately from the service cost component.

- Effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance.


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

ASU 2017-09 - Stock Compensation Modification Accounting.

Issued May 2017

- Reduces the current diversity in practice and provides explicit guidance pertaining to the provisions of modification accounting.


- Clarifies that an entity should account for effects of modification unless the fair value, vesting conditions and the classification of the modified award are the same as the original awards immediately before the original award is modified.

- Effective prospectively for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Earlier application is permitted.


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

ASU 2017-12 - Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities.

Issued August 2017

- Aligns the entity's risk management activities and financial reporting for hedging relationships.


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


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


- Eliminates the separate measurement and reporting of hedge ineffectiveness.


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


- Eases hedge effectiveness testing including an option to perform qualitative testing.

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


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


3 . LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES

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


49

Table of Contents


Loan and Lease Portfolio Composition

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

(dollar amounts in thousands)

September 30,
2017

December 31,
2016

Loans and leases:

Commercial and industrial

$

27,469,344


$

28,058,712


Commercial real estate

7,206,096


7,300,901


Automobile

11,876,033


10,968,782


Home equity

9,984,728


10,105,774


Residential mortgage

8,616,059


7,724,961


RV and marine finance

2,371,065


1,846,447


Other consumer

1,063,971


956,419


Loans and leases

68,587,296


66,961,996


Allowance for loan and lease losses

(675,486

)

(638,413

)

Net loans and leases

$

67,911,810


$

66,323,583



FirstMerit Purchased Credit-Impaired Loans

The following table presents a rollforward of the accretable yield for purchased credit impaired loans for the three-month and nine-month period ended September 30, 2017 .

Three Months Ended
September 30,

Nine Months Ended
September 30,

(dollar amounts in thousands)

2017

2017

Balance, beginning of period

$

36,509


$

36,669


Accretion

(4,343

)

(13,833

)

Reclassification (to) from nonaccretable difference

3,044


12,374


Balance, end of period

$

35,210


$

35,210


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

September 30, 2017

December 31, 2016

(dollar amounts in thousands)

Ending
Balance

Unpaid Principal
Balance

Ending
Balance

Unpaid Principal
Balance

Commercial and industrial

$

48,606


$

72,117


$

68,338


$

100,031


Commercial real estate

16,383


29,689


34,042


56,320


Total

$

64,989


$

101,806


$

102,380


$

156,351


There was no allowance for loan losses recorded on the purchased credit-impaired loan portfolio at September 30, 2017 and December 31, 2016 .

Nonaccrual and Past Due Loans

Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. See Note 1 "Significant Accounting Policies" to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the accounting policies related to the NALs.


50

Table of Contents


The following table presents nonaccrual loans (NALs) by loan class at September 30, 2017 and December 31, 2016 .

(dollar amounts in thousands)

September 30,
2017

December 31,
2016

Commercial and industrial

$

169,751


$

234,184


Commercial real estate

17,397


20,508


Automobile

4,076


5,766


Home equity

71,353


71,798


Residential mortgage

75,251


90,502


RV and marine finance

309


245


Other consumer

108


-


Total nonaccrual loans

$

338,245


$

423,003



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

September 30, 2017

Past Due

 Loans Accounted for Under the Fair Value Option

Total Loans
and Leases

90 or
more days
past due
and accruing

(dollar amounts in thousands)

30-59
Days

60-89
 Days

90 or 
more days

Total

Current

Purchased Credit

Impaired

Commercial and industrial

$

36,505


$

10,654


$

77,835


$

124,994


$

27,295,744


$

48,606


$

-


$

27,469,344


$

14,083


(2)

Commercial real estate

35,444


2,586


20,010


58,040


7,131,673


16,383


-


7,206,096


9,550


Automobile

79,457


17,167


10,449


107,073


11,767,782


-


1,178


11,876,033


10,239


Home equity

41,748


19,601


63,747


125,096


9,857,359


-


2,273


9,984,728


16,150


Residential mortgage

111,722


45,041


104,167


260,930


8,260,742


-


94,387


8,616,059


62,832


(3)

RV and marine finance

10,303


2,184


2,134


14,621


2,355,309


-


1,135


2,371,065


2,063


Other consumer

10,180


4,394


3,752


18,326


1,045,427


-


218


1,063,971


3,752


Total loans and leases

$

325,359


$

101,627


$

282,094


$

709,080


$

67,714,036


$

64,989


$

99,191


$

68,587,296


$

118,669


December 31, 2016

Past Due

Loans Accounted for Under the Fair Value Option

Total Loans
and Leases

90 or
more days
past due
and accruing

(dollar amounts in thousands)

30-59
Days

60-89
 Days

90 or 
more days

Total

Current

Purchased
Credit Impaired

Commercial and industrial

42,052


20,136


74,174


136,362


27,854,012


68,338


-


28,058,712


18,148


(2)

Commercial real estate

21,187


3,202


29,659


54,048


7,212,811


34,042


-


7,300,901


17,215


Automobile

76,283


17,188


10,442


103,913


10,862,715


-


2,154


10,968,782


10,182


Home equity

38,899


23,903


53,002


115,804


9,986,697


-


3,273


10,105,774


11,508


Residential mortgage

122,469


37,460


116,682


276,611


7,373,414


-


74,936


7,724,961


66,952


(3)

RV and marine finance

10,009


2,230


1,566


13,805


1,831,123


-


1,519


1,846,447


1,462


Other consumer

9,442


4,324


3,894


17,660


938,322


-


437


956,419


3,895


Total loans and leases

$

320,341


$

108,443


$

289,419


$

718,203


$

66,059,094


$

102,380


$

82,319


$

66,961,996


$

129,362



(1)

NALs are included in this aging analysis based on their past due status.

(2)

Amounts include Huntington Technology Finance administrative lease delinquencies.

(3)

Amounts include loans guaranteed by government organizations.



51

Table of Contents


Allowance for Credit Losses

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

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

The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2017 and 2016 .

(dollar amounts in thousands)

Commercial

Consumer

Total

Three-month period ended September 30, 2017:

ALLL balance, beginning of period

$

474,576


$

193,420


$

667,996


Loan charge-offs

(19,278

)

(45,494

)

(64,772

)

Recoveries of loans previously charged-off

10,015


11,865


21,880


Provision for (reduction in allowance) loan and lease losses

8,810


41,573


50,383


Allowance for loans sold or transferred to loans held for sale

(1

)

-


(1

)

ALLL balance, end of period

$

474,122


$

201,364


$

675,486


AULC balance, beginning of period

$

82,827


$

2,532


$

85,359


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

(6,528

)

(265

)

(6,793

)

AULC balance, end of period

$

76,299


$

2,267


$

78,566


ACL balance, end of period

$

550,421


$

203,631


$

754,052


Nine-month period ended September 30, 2017:

ALLL balance, beginning of period

$

451,091


$

187,322


$

638,413


Loan charge-offs

(58,051

)

(133,884

)

(191,935

)

Recoveries of loans previously charged-off

33,619


39,946


73,565


Provision for (reduction in allowance) loan and lease losses

47,539


107,980


155,519


Allowance for loans sold or transferred to loans held for sale

(76

)

-


(76

)

ALLL balance, end of period

$

474,122


$

201,364


$

675,486


AULC balance, beginning of period

$

86,543


$

11,336


$

97,879


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

(10,244

)

(9,069

)

(19,313

)

AULC balance, end of period

$

76,299


$

2,267


$

78,566


ACL balance, end of period

$

550,421


$

203,631


$

754,052



52

Table of Contents



(dollar amounts in thousands)

Commercial

Consumer

Total

Three-month period ended September 30, 2016:

ALLL balance, beginning of period

$

424,507


$

198,557


$

623,064


Loan charge-offs

(24,839

)

(34,429

)

(59,268

)

Recoveries of loans previously charged-off

8,312


10,891


19,203


Provision for (reduction in allowance) loan and lease losses

36,689


16,834


53,523


Allowance for loans sold or transferred to loans held for sale

(12,874

)

(6,750

)

(19,624

)

ALLL balance, end of period

$

431,795


$

185,103


$

616,898


AULC balance, beginning of period

$

63,717


$

10,031


$

73,748


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

9,739


543


10,282


AULC recorded at acquisition

4,403


-


4,403


AULC balance, end of period

$

77,859


$

10,574


$

88,433


ACL balance, end of period

$

509,654


$

195,677


$

705,331


Nine-month period ended September 30, 2016:

ALLL balance, beginning of period

$

398,753


$

199,090


$

597,843


Loan charge-offs

(70,721

)

(91,784

)

(162,505

)

Recoveries of loans previously charged-off

62,127


35,006


97,133


Provision for (reduction in allowance) loan and lease losses

54,510


49,437


103,947


Allowance for loans sold or transferred to loans held for sale

(12,874

)

(6,646

)

(19,520

)

ALLL balance, end of period

$

431,795


$

185,103


$

616,898


AULC balance, beginning of period

$

63,448


$

8,633


$

72,081


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

10,008


1,941


11,949


AULC recorded at acquisition

4,403


-


4,403


AULC balance, end of period

$

77,859


$

10,574


$

88,433


ACL balance, end of period

$

509,654


$

195,677


$

705,331



Credit Quality Indicators

See N ote 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.


53

Table of Contents


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

September 30, 2017

Credit Risk Profile by UCS Classification

(dollar amounts in thousands)

Pass

OLEM

Substandard

Doubtful

Total

Commercial

Commercial and industrial

$

25,447,805


$

803,540


$

1,189,789


$

28,210


$

27,469,344


Commercial real estate

6,934,670


144,122


126,352


952


7,206,096


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

750+

650-749

<650

Other (3)

Total

Consumer

Automobile

$

5,939,409


$

4,278,062


$

1,371,574


$

285,810


$

11,874,855


Home equity

6,359,778


2,985,933


621,817


14,927


9,982,455


Residential mortgage

5,311,993


2,479,820


599,055


130,804


8,521,672


RV and marine finance

1,385,176


853,545


91,302


39,907


2,369,930


Other consumer

404,047


510,804


136,346


12,556


1,063,753


December 31, 2016

Credit Risk Profile by UCS Classification

(dollar amounts in thousands)

Pass

OLEM

Substandard

Doubtful

Total

Commercial

Commercial and industrial

$

26,211,885


$

810,287


$

1,028,819


$

7,721


$

28,058,712


Commercial real estate

7,042,304


96,975


159,098


2,524


7,300,901


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

750+

650-749

<650

Other (3)

Total

Consumer

Automobile

$

5,369,085


$

4,043,611


$

1,298,460


$

255,472


$

10,966,628


Home equity

6,280,328


2,891,330


637,560


293,283


10,102,501


Residential mortgage

4,662,777


2,285,121


615,067


87,060


7,650,025


RV and marine finance

1,064,143


644,039


72,995


63,751


1,844,928


Other consumer

346,867


455,959


133,243


19,913


955,982



(1)

Excludes loans accounted for under the fair value option.

(2)

Reflects most recent customer credit scores.

(3)

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



54

Table of Contents


Impaired Loans

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

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

(dollar amounts in thousands)

Commercial

Consumer

Total

ALLL at September 30, 2017:

Portion of ALLL balance:

Purchased credit-impaired loans

$

-


$

-


$

-


Attributable to loans individually evaluated for impairment

22,838


13,874


36,712


Attributable to loans collectively evaluated for impairment

451,284


187,490


638,774


Total ALLL balance

$

474,122


$

201,364


$

675,486


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

Portion of loan and lease ending balance:

Purchased credit-impaired loans

$

64,989


$

-


$

64,989


Individually evaluated for impairment

566,340


621,808


1,188,148


Collectively evaluated for impairment

34,044,110


33,190,856


67,234,966


Total loans and leases evaluated for impairment

$

34,675,439


$

33,812,664


$

68,488,103


(dollar amounts in thousands)

Commercial

Consumer

Total

ALLL at December 31, 2016

Portion of ALLL balance:

Purchased credit-impaired loans

$

-


$

-


$

-


Attributable to loans individually evaluated for impairment

$

10,525


$

11,021


$

21,546


Attributable to loans collectively evaluated for impairment

440,566


176,301


616,867


Total ALLL balance:

$

451,091


$

187,322


$

638,413


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

Portion of loan and lease ending balances:

Purchased credit-impaired loans

$

102,380


$

-


$

102,380


Individually evaluated for impairment

415,624


457,890


873,514


Collectively evaluated for impairment

34,841,609


31,062,174


65,903,783


Total loans and leases evaluated for impairment

$

35,359,613


$

31,520,064


$

66,879,677



(1)

Excludes loans accounted for under the fair value option.


55

Table of Contents


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

September 30, 2017

Three Months Ended
September 30, 2017

Nine Months Ended
September 30, 2017

(dollar amounts in thousands)

Ending

Balance

Unpaid

Principal

Balance (6)

Related

Allowance

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

With no related allowance recorded:

Commercial and industrial

$

299,349


$

324,474


$

-


$

294,513


$

4,969


$

227,611


$

7,467


Commercial real estate

65,382


92,215


-


71,277


1,825


80,388


5,762


Automobile

-


-


-


-


-


-


-


Home equity

-


-


-


-


-


-


-


Residential mortgage

-


-


-


-


-


-


-


RV and marine finance

-


-


-


-


-


-


-


Other consumer

-


-


-


-


-


-


-


With an allowance recorded:

Commercial and industrial

213,520


245,328


19,958


222,745


1,950


334,297


12,712


Commercial real estate

53,078


60,366


2,880


40,672


468


54,352


1,388


Automobile

33,049


33,049


1,683


32,740


496


32,293


1,576


Home equity

335,763


367,870


14,486


330,784


3,713


326,932


11,639


Residential mortgage

310,440


341,724


8,060


319,745


2,837


329,193


8,851


RV and marine finance

1,520


1,520


88


1,425


23


884


58


Other consumer

6,456


6,456


1,288


6,944


47


7,117


184


Total

Commercial and industrial (3)

512,869


569,802


19,958


517,258


6,919


561,908


20,179


Commercial real estate (4)

118,460


152,581


2,880


111,949


2,293


134,740


7,150


Automobile (2)

33,049


33,049


1,683


32,740


496


32,293


1,576


Home equity (5)

335,763


367,870


14,486


330,784


3,713


326,932


11,639


Residential mortgage (5)

310,440


341,724


8,060


319,745


2,837


329,193


8,851


RV and marine finance (2)

1,520


1,520


88


1,425


23


884


58


Other consumer (2)

6,456


6,456


1,288


6,944


47


7,117


184



56

Table of Contents



December 31, 2016

Three Months Ended
September 30, 2016

Nine Months Ended
September 30, 2016

(dollar amounts in thousands)

Ending

Balance

Unpaid

Principal

Balance (6)

Related

Allowance

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

With no related allowance recorded:

Commercial and industrial

$

299,606



$

358,712



$

-



$

305,956



$

2,235



$

290,163



$

4,858


Commercial real estate

88,817



126,152



-



80,000



907



58,666



2,257


Automobile

-


-


-


-


-


-


-


Home equity

-



-



-



-



-



-



-


Residential mortgage

-



-



-



-



-



-



-


RV and marine finance

-


-


-


-


-


-


-


Other consumer

-



-



-



-



-



-



-


With an allowance recorded:

Commercial and industrial

406,243


448,121


22,259


281,934


1,631


274,262


5,460


Commercial real estate

97,238


107,512


3,434


49,140


521


49,587


1,895


Automobile

30,961


31,298


1,850


31,540


541


31,912


1,643


Home equity

319,404


352,722


15,032


284,512


3,453


267,264


9,382


Residential mortgage

327,753


363,099


12,849


344,237


2,978


353,259


9,041


RV and marine finance

-


-


-


-


-


-


-


Other consumer

3,897


3,897


260


4,454


58


4,627


178


Total

Commercial and industrial (3)

705,849


806,833


22,259


587,890


3,866


564,425


10,318


Commercial real estate (4)

186,055


233,664


3,434


129,140


1,428


108,253


4,152


Automobile (2)

30,961


31,298


1,850


31,540


541


31,912


1,643


Home equity (5)

319,404


352,722


15,032


284,512


3,453


267,264


9,382


Residential mortgage (5)

327,753


363,099


12,849


344,237


2,978


353,259


9,041


RV and marine finance (2)

-


-


-


-


-


-


-


Other consumer (2)

3,897


3,897


260


4,454


58


4,627


178


(1)

These tables do not include loans fully charged-off.

(2)

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

(3)

At September 30, 2017 and December 31, 2016 , commercial and industrial loans of $365 million and $317 million , respectively, were considered impaired due to their status as a TDR.

(4)

At September 30, 2017 and December 31, 2016 , commercial real estate loans of $84 million and $81 million , respectively, were considered impaired due to their status as a TDR.

(5)

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

(6)

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


TDR Loans

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


57

Table of Contents


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

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

September 30, 2017

September 30, 2016

(dollar amounts in thousands)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Commercial and industrial:

Interest rate reduction

6


$

817


$

-


2


$

122


$

6


Amortization or maturity date change

271


138,381


(837

)

246


89,100


(1,450

)

Other

-


-


-


6


711


(2

)

Total Commercial and industrial

277


139,198


(837

)

254


89,933


(1,446

)

Commercial real estate:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

28


17,811


133


30


11,183


(546

)

Other

-


-


-


-


-


-


Total commercial real estate:

28


17,811


133


30


11,183


(546

)

Automobile:

Interest rate reduction

5


72


3


4


26


3


Amortization or maturity date change

487


3,943


124


452


4,438


559


Chapter 7 bankruptcy

305


2,562


69


236


1,840


157


Other

-


-


-


-


-


-


Total Automobile

797


6,577


196


692


6,304


719


Home equity:

Interest rate reduction

8


376


11


14


352


10


Amortization or maturity date change

160


11,676


(1,131

)

110


6,740


(574

)

Chapter 7 bankruptcy

79


2,728


647


70


2,395


1,327


Other

-


-


-


-


-


-


Total Home equity

247


14,780


(473

)

194


9,487


763


Residential mortgage:

Interest rate reduction

-


-


-


2


134


(2

)

Amortization or maturity date change

102


11,282


(272

)

77


7,988


(220

)

Chapter 7 bankruptcy

20


1,656


(2

)

17


1,105


(63

)

Other

1


64


2


3


260


-


Total Residential mortgage

123


13,002


(272

)

99


9,487


(285

)

RV and marine finance:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

10


84


3


-


-


-


Chapter 7 bankruptcy

22


492


15


-


-


-


Other

-


-


-


-


-


-


Total RV and marine finance

32


576


18


-


-


-


Other consumer:

Interest rate reduction

18


52


-


-


-


-


Amortization or maturity date change

677


3,106


1


1


16


-


Chapter 7 bankruptcy

4


24


1


1


6


-


Other

-


-


-


-


-


-


Total Other consumer

699


3,182


2


2


22


-


Total new troubled debt restructurings

2,203


$

195,126


$

(1,233

)

1,271


$

126,416


$

(795

)


58

Table of Contents



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

September 30, 2017

September 30, 2016

(dollar amounts in thousands)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Number of

Contracts

Post-modification

Outstanding

Ending Balance

Financial effects

of modification (2)

Commercial and industrial:

Interest rate reduction

8


$

854


$

6


4


$

161


$

5


Amortization or maturity date change

735


418,924


(8,695

)

629


345,691


(4,368

)

Other

4


380


(27

)

16


1,801


(4

)

Total Commercial and industrial

747


420,158


(8,716

)

649


347,653


(4,367

)

Commercial real estate:

Interest rate reduction

-


-


-


1


84


-


Amortization or maturity date change

71


74,101


(682

)

90


60,995


(1,828

)

Other

-


-


-


4


315


16


Total commercial real estate:

71


74,101


(682

)

95


61,394


(1,812

)

Automobile:

Interest rate reduction

24


308


9


11


132


10


Amortization or maturity date change

1,298


11,097


302


1,159


11,002


981


Chapter 7 bankruptcy

743


5,878


116


797


6,384


386


Other

-


-


-


-


-


-


Total Automobile

2,065


17,283


427


1,967


17,518


1,377


Home equity:

Interest rate reduction

25


1,444


24


43


2,363


103


Amortization or maturity date change

401


25,544


(2,559

)

466


25,031


(2,592

)

Chapter 7 bankruptcy

243


8,764


2,049


215


8,106


2,327


Other

70


4,241


(326

)

-


-


-


Total Home equity

739


39,993


(812

)

724


35,500


(162

)

Residential mortgage:

Interest rate reduction

2


110


(9

)

12


1,195


(17

)

Amortization or maturity date change

282


30,649


(761

)

277


29,388


(1,217

)

Chapter 7 bankruptcy

69


6,328


(139

)

40


3,788


(42

)

Other

22


2,448


19


4


424


-


Total Residential mortgage

375


39,535


(890

)

333


34,795


(1,276

)

RV and marine finance:

Interest rate reduction

-


-


-


-


-


-


Amortization or maturity date change

34


710


19


-


-


-


Chapter 7 bankruptcy

71


1,246


25


-


-


-


Other

-


-


-


-


-


-


Total RV and marine finance

105


1,956


44


-


-


-


Other consumer:

Interest rate reduction

19


130


2


-


-


-


Amortization or maturity date change

681


3,394


8


6


575


24


Chapter 7 bankruptcy

7


36


1


8


72


7


Other

-


-


-


-


-


-


Total Other consumer

707


3,560


11


14


647


31


Total new troubled debt restructurings

4,809


$

596,586


$

(10,618

)

3,782


$

497,507


$

(6,209

)

(1)

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

(2)

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


Pledged Loans and Leases

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



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4 . AVAILABLE-FOR-SALE AND OTHER SECURITIES

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

September 30, 2017

December 31, 2016

(dollar amounts in thousands)

Amortized

Cost

Fair Value

Amortized

Cost

Fair Value

U.S. Treasury and Federal agency securities:

U.S. Treasury:

1 year or less

$

11,256


$

11,260


$

4,978


$

4,988


After 1 year through 5 years

-


-


502


509


After 5 years through 10 years

-


-


-


-


After 10 years

-


-


-


-


Total U.S. Treasury

11,256


11,260


5,480


5,497


Federal agencies: mortgage-backed securities:

1 year or less

-


-


-


-


After 1 year through 5 years

32,749


32,515


46,591


46,762


After 5 years through 10 years

257,032


255,488


173,941


176,404


After 10 years

10,496,277


10,351,747


10,630,929


10,450,176


Total Federal agencies: mortgage-backed securities

10,786,058


10,639,750


10,851,461


10,673,342


Other agencies:

1 year or less

4,201


4,223


4,302


4,367


After 1 year through 5 years

8,892


9,034


5,092


5,247


After 5 years through 10 years

82,692


83,194


63,618


63,928


After 10 years

-


-


-


-


Total other agencies

95,785


96,451


73,012


73,542


Total U.S. Treasury and Federal agency securities

10,893,099


10,747,461


10,929,953


10,752,381


Municipal securities:

1 year or less

163,747


160,032


169,636


166,887


After 1 year through 5 years

905,872


905,075


933,893


933,903


After 5 years through 10 years

1,656,860


1,655,384


1,463,459


1,464,583


After 10 years

703,350


705,618


693,440


684,684


Total municipal securities

3,429,829


3,426,109


3,260,428


3,250,057


Asset-backed securities:

1 year or less

-


-


-


-


After 1 year through 5 years

80,003


80,330


80,700


80,560


After 5 years through 10 years

162,079


163,439


223,352


224,565


After 10 years

326,724


311,422


520,072


488,356


Total asset-backed securities

568,806


555,191


824,124


793,481


Corporate debt:

1 year or less

3,143


3,157


43,223


43,603


After 1 year through 5 years

66,878


68,450


78,430


80,196


After 5 years through 10 years

38,471


39,902


32,523


32,865


After 10 years

13,211


14,120


40,361


42,019


Total corporate debt

121,703


125,629


194,537


198,683


Other:

1 year or less

3,150


3,144


1,650


1,650


After 1 year through 5 years

800


791


2,302


2,283


After 5 years through 10 years

-


-


-


-


After 10 years

-


-


10


10


Nonmarketable equity securities

583,019


583,019


547,704


547,704


Mutual funds

10,416


10,416


15,286


15,286


Marketable equity securities

861


1,301


861


1,302


Total other

598,246


598,671


567,813


568,235


Total available-for-sale and other securities

$

15,611,683


$

15,453,061


$

15,776,855


$

15,562,837



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Other securities at September 30, 2017 and December 31, 2016 include non-marketable equity securities of $287 million and $249 million of stock issued by the FHLB and $296 million and $299 million of Federal Reserve Bank stock, respectively. Non-marketable equity securities are recorded at amortized cost.

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

Unrealized

(dollar amounts in thousands)

Amortized

Cost

Gross

Gains

Gross

Losses

Fair Value

September 30, 2017

U.S. Treasury

$

11,256


$

4


$

-


$

11,260


Federal agencies:

Mortgage-backed securities

10,786,058


5,851


(152,159

)

10,639,750


Other agencies

95,785


722


(56

)

96,451


Total U.S. Treasury, Federal agency securities

10,893,099


6,577


(152,215

)

10,747,461


Municipal securities

3,429,829


31,043


(34,763

)

3,426,109


Asset-backed securities

568,806


2,409


(16,024

)

555,191


Corporate debt

121,703


3,927


(1

)

125,629


Other securities

598,246


439


(14

)

598,671


Total available-for-sale and other securities

$

15,611,683


$

44,395


$

(203,017

)

$

15,453,061


Unrealized

(dollar amounts in thousands)

Amortized

Cost

Gross

Gains

Gross

Losses

Fair Value

December 31, 2016

U.S. Treasury

$

5,480


$

17


$

-


$

5,497


Federal agencies:

Mortgage-backed securities

10,851,461


12,548


(190,667

)

10,673,342


Other agencies

73,012


536


(6

)

73,542


Total U.S. Treasury, Federal agency securities

10,929,953


13,101


(190,673

)

10,752,381


Municipal securities

3,260,428


28,431


(38,802

)

3,250,057


Asset-backed securities

824,124


1,492


(32,135

)

793,481


Corporate debt

194,537


4,161


(15

)

198,683


Other securities

567,813


441


(19

)

568,235


Total available-for-sale and other securities

$

15,776,855


$

47,626


$

(261,644

)

$

15,562,837



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

Less than 12 Months

Over 12 Months

Total

(dollar amounts in thousands)

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

September 30, 2017

Federal agencies:

Mortgage-backed securities

$

8,283,266


$

(125,950

)

$

1,003,097


$

(26,209

)

$

9,286,363


$

(152,159

)

Other agencies

11,607


(56

)

-


-


11,607


(56

)

Total Federal agency securities

8,294,873


(126,006

)

1,003,097


(26,209

)

9,297,970


(152,215

)

Municipal securities

1,293,344


(23,995

)

277,157


(10,768

)

1,570,501


(34,763

)

Asset-backed securities

199,109


(1,471

)

122,568


(14,553

)

321,677


(16,024

)

Corporate debt

200


(1

)

-


-


200


(1

)

Other securities

791


(8

)

1,494


(6

)

2,285


(14

)

Total temporarily impaired securities

$

9,788,317


$

(151,481

)

$

1,404,316


$

(51,536

)

$

11,192,633


$

(203,017

)

Less than 12 Months

Over 12 Months

Total

(dollar amounts in thousands)

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

December 31, 2016

Federal agencies:

Mortgage-backed securities

$

8,908,470


$

(189,318

)

$

41,706


$

(1,349

)

$

8,950,176


$

(190,667

)

Other agencies

924


(6

)

-


-


924


(6

)

Total Federal agency securities

8,909,394


(189,324

)

41,706


(1,349

)

8,951,100


(190,673

)

Municipal securities

1,412,152


(29,175

)

272,292


(9,627

)

1,684,444


(38,802

)

Asset-backed securities

361,185


(3,043

)

178,924


(29,092

)

540,109


(32,135

)

Corporate debt

3,567


(15

)

200


-


3,767


(15

)

Other securities

790


(11

)

1,492


(8

)

2,282


(19

)

Total temporarily impaired securities

$

10,687,088


$

(221,568

)

$

494,614


$

(40,076

)

$

11,181,702


$

(261,644

)


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


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The following table is a summary of realized securities gains and losses for the three-month and nine-month periods ended September 30, 2017 and 2016 , respectively.

Three Months Ended
September 30,

Nine Months Ended
September 30,

(dollar amounts in thousands)

2017

2016

2017

2016

Gross gains on sales of securities

$

4,201


$

3,770


$

8,311


$

7,161


Gross (losses) on sales of securities

(4,130

)

(2,739

)

(4,530

)

(5,398

)

Net gain on sales of securities

$

71


$

1,031


$

3,781


$

1,763


OTTI recognized in earnings

(104

)

-


(3,687

)

(76

)

Net securities gains (losses)

$

(33

)

$

1,031


$

94


$

1,687



Security Impairment

Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment and conducts a comprehensive security-level assessment on all available-for-sale securities. Impairment exists when the present value of the expected cash flows are not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any credit impairment would be recognized in earnings. At the end of the second quarter of 2017, Huntington changed its intent from able and willing to hold to sell sometime in the near future prior to final maturity for the two Reg Diversified CDO securities. Related to this change in intent, Huntington estimated the fair value of these bonds by obtaining bids. As a result of this analysis, Huntington recognized $3.6 million of OTTI on these two securities. In addition, Huntington recognized an additional $0.1 million of OTTI in the 2017 third quarter relating an investment in the Municipal Securities portfolio. For all other securities, Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be at maturity.

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

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


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Table of Contents


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

Collateralized Debt Obligation Securities

(dollar amounts in thousands)

Lowest

Credit

Rating

(2)

# of Issuers

Currently

Performing/

Remaining (3)

Actual

Deferrals

and

Defaults

as a % of

Original

Collateral

Expected

Defaults

as a % of

Remaining

Performing

Collateral

Excess

Subordination

(4)

Deal Name

Par Value

Amortized

Cost

Fair

Value

Unrealized

Loss (1)

MM Comm III

4,509


4,308


3,641


(667

)

BB+

5/8

5

7

34

Reg Diversified

25,500


100


510


410


D


-

-

-

Tropic III

31,000


30,989


19,976


(11,013

)

BB

27/36

16

6

41

Total at September 30, 2017

$

61,009


$

35,397


$

24,127


$

(11,270

)

Total at December 31, 2016

$

137,197


$

101,210


$

76,003


$

(25,207

)


(1)

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

(2)

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

(3)

Includes both banks and/or insurance companies.

(4)

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



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Table of Contents


For the three-month and nine-month periods ended September 30, 2017 and 2016 , the foll