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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, 2016
Commission File Number 1-34073
Huntington Bancshares Incorporated
 
Maryland
31-0724920
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    x  No
There were 1,084,782,727 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2016.



Table of Contents

HUNTINGTON BANCSHARES INCORPORATED
INDEX
 
 
 

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Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
 
ABL
  
Asset Based Lending
 
 
 
ABS
  
Asset-Backed Securities
 
 
ACL
  
Allowance for Credit Losses
 
 
AFCRE
  
Automobile Finance and Commercial Real Estate
 
 
AFS
  
Available-for-Sale
 
 
ALCO
  
Asset-Liability Management Committee
 
 
ALLL
  
Allowance for Loan and Lease Losses
 
 
ARM
  
Adjustable Rate Mortgage
 
 
ASC
  
Accounting Standards Codification
 
 
ASU
  
Accounting Standards Update
 
 
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
 
 
C&I
  
Commercial and Industrial
 
 
Camco Financial
  
Camco Financial Corp.
 
 
CCAR
  
Comprehensive Capital Analysis and Review
 
 
CDI
 
Core Deposit Intangible
 
 
 
CDO
  
Collateralized Debt Obligations
 
 
CDs
  
Certificate of Deposit
 
 
CET1
  
Common equity tier 1 on a transitional Basel III basis
 
 
CFPB
  
Bureau of Consumer Financial Protection
 
 
CFTC
  
Commodity Futures Trading Commission
 
 
CMO
  
Collateralized Mortgage Obligations
 
 
CRE
  
Commercial Real Estate
 
 
Dodd-Frank Act
  
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
 
DTA/DTL
  
Deferred Tax Asset/Deferred Tax Liability
 
 
 
E&P
 
Exploration and Production
 
 
EFT
  
Electronic Fund Transfer
 
 
EPS
  
Earnings Per Share
 
 
EVE
  
Economic Value of Equity
 
 
 
Fannie Mae
  
(see FNMA)
 
 
FASB
  
Financial Accounting Standards Board
 
 
FDIC
  
Federal Deposit Insurance Corporation
 
 
FDICIA
  
Federal Deposit Insurance Corporation Improvement Act of 1991
 
 
FHA
  
Federal Housing Administration
 
 

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FHLB
  
Federal Home Loan Bank
 
 
FHLMC
  
Federal Home Loan Mortgage Corporation
 
 
FICO
  
Fair Isaac Corporation
 
 
 
FirstMerit
  
FirstMerit Corporation
 
 
FNMA
  
Federal National Mortgage Association
 
 
FRB
  
Federal Reserve Bank
 
 
Freddie Mac
  
(see FHLMC)
 
 
FTE
  
Fully-Taxable Equivalent
 
 
FTP
  
Funds Transfer Pricing
 
 
GAAP
  
Generally Accepted Accounting Principles in the United States of America
 
 
GNMA
  
Government National Mortgage Association, or Ginnie Mae
 
 
HAA
 
Huntington Asset Advisors, Inc.
 
 
 
HAMP
  
Home Affordable Modification Program
 
 
 
HARP
  
Home Affordable Refinance Program
 
 
 
HASI
 
Huntington Asset Services, Inc.
 
 
 
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
 
 
 
LTD
 
Long-Term Debt
 
 
 
LTV
  
Loan to Value
 
 
 
Macquarie
  
Macquarie Equipment Finance, Inc. (U.S. operations)
 
 
 
MBS
  
Mortgage-Backed Securities
 
 
 
MD&A
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
MSA
  
Metropolitan Statistical Area
 
 
 
MSR
  
Mortgage Servicing Rights
 
 
 
NAICS
  
North American Industry Classification System
 
 
 
NALs
  
Nonaccrual Loans
 
 
 
NCO
  
Net Charge-off
 
 
 
NII
  
Net Interest Income
 
 
 
NIM
  
Net Interest Margin
 
 
 
NPA
  
Nonperforming Asset
 
 
 
N.R.
  
Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa
 
 
 
OCC
  
Office of the Comptroller of the Currency
 
 
 

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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
 
 
 
Problem Loans
  
Includes nonaccrual loans and leases (Table 14), troubled debt restructured loans (Table 16), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 4), and Criticized commercial loans (credit quality indicators section of Footnote 4).
 
 
 
RBHPCG
  
Regional Banking and The Huntington Private Client Group
 
 
 
RCSA
  
Risk and Control Self-Assessments
 
 
 
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
 
 
 
SERP
  
Supplemental Executive Retirement Plan
 
 
 
SRIP
  
Supplemental Retirement Income Plan
 
 
 
SSFA
  
Simplified Supervisory Formula Approach
 
 
 
TCE
  
Tangible Common Equity
 
 
 
TDR
  
Troubled Debt Restructured Loan
 
 
 
TRUPS
 
Trust Preferred Securities
 
 
 
U.S. Treasury
  
U.S. Department of the Treasury
 
 
 
UCS
  
Uniform Classification System
 
 
 
UDAP
  
Unfair or Deceptive Acts or Practices
 
 
 
Unified
 
Unified Financial Securities, Inc.
 
 
 
UPB
  
Unpaid Principal Balance
 
 
 
USDA
  
U.S. Department of Agriculture
 
 
 
VIE
  
Variable Interest Entity
 
 
 
XBRL
  
eXtensible Business Reporting Language
 
 
 





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PART I. FINANCIAL INFORMATION
When we refer to “we”, “our”, and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
 
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 1,129 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands. 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 2015 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2015 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.
Our discussion is divided into key segments:
Executive Overview - Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters.
Discussion of Results of Operations - Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.
Risk Management and Capital - Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
Business Segment Discussion - Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.
Additional Disclosures - Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, and recent accounting pronouncements and developments.
A reading of each section is important to understand fully the nature of our financial performance and prospects.


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EXECUTIVE OVERVIEW

Business Combinations
On August 16, 2016, Huntington completed its acquisition of FirstMerit Corporation in a stock and cash transaction valued at approximately $3.7 billion. FirstMerit Corporation was a diversified financial services company headquartered in Akron, Ohio, with operations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. Post acquisition, Huntington now operates across an eight-state Midwestern footprint. The acquisition resulted in a combined company with a larger market presence and more diversified loan portfolio, as well as a larger core deposit funding base and economics of scale associated with a larger financial institution.

Summary of 2016 Third Quarter Results Compared to 2015 Third Quarter
For the quarter, we reported net income of $127 million, or $0.11 per common share, compared with $153 million, or $0.18 per common share, in the year-ago quarter (see Table 1). Reported net income was impacted by FirstMerit acquisition-related expenses totaling $159 million pre-tax, or $0.11 per common share.
Fully-taxable equivalent net interest income was $636 million, up $132 million, or 26%. The results reflected the benefit from a $16.4 billion, or 26%, increase in average earning assets and a 2 basis point improvement in the net interest margin to 3.18%. Average earning asset growth included an $11.7 billion, or 24%, increase in average loans and leases, and a $4.4 billion, or 32%, increase in average securities, both of which were impacted by the mid-quarter FirstMerit acquisition. The net interest margin expansion reflected a 10 basis point increase in earning asset yields and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 10 basis point increase in funding costs. The 2016 third quarter net interest margin included 12 basis points of purchase accounting favorable impact.
The provision for credit losses was $64 million, up $41 million, or 184%. Net charge-offs increased $24 million, or 148%, to $40 million. Net charge-offs represented an annualized 0.26% of average loans and leases in the current quarter, up from 0.13% in the year-ago quarter. The increase was a function of higher commercial recoveries in the year-ago quarter combined with higher automobile and other consumer losses primarily based on portfolio growth.  We continue to be pleased with the net charge-off performance within each portfolio and in total. Commercial net charge-offs were positively impacted by continued recoveries in the CRE portfolio and broader continued successful workout strategies, while consumer charge-offs remain within our expected range. Overall consumer credit metrics, led by the residential mortgage and home equity portfolios, continue to show an improving trend, while the commercial portfolios continue to experience some quarter-to-quarter volatility based on the absolute low level of problem loans.
Noninterest income was $302 million, up $49 million, or 19%. Mortgage banking income increased $22 million, or 114%, reflecting a 39% increase in mortgage origination volume and a $10 million impact from net MSR activity. In addition, service charges on deposit accounts increased $12 million, or 16%, reflecting the benefit of new customer acquisition. Also, cards and payment processing income increased $8 million, or 21%, due to higher credit and debit card related income and underlying customer growth.
Noninterest expense was $712 million, up $186 million, or 35%. Reported noninterest expense was impacted by FirstMerit acquisition-related expenses totaling $159 million. Personnel costs increased $119 million, or 41%, primarily reflecting $76 million of acquisition-related personnel expense and an increase in average full-time equivalent employees related to the in-store branch expansion and the addition of colleagues from FirstMerit. In addition, professional services increased $35 million, or 294%, primarily reflecting $34 million of expenses related to the FirstMerit acquisition. Also, outside data processing and other services increased $33 million, or 56%, reflecting $28 million of expenses related to the FirstMerit acquisition, as well as ongoing technology investments. These increases were partially offset by a $33 million, or 41%, decrease in other expense, primarily reflecting litigation reserve adjustments in the year-ago quarter.
The tangible common equity to tangible assets ratio was 7.14%, down 75 basis points. The CET1 risk-based capital ratio was 9.09% at September 30, 2016, down from 9.72% a year ago. The regulatory tier 1 risk-based capital ratio was 10.40% compared to 10.49% at September 30, 2015. All capital ratios were impacted by the $1.3 billion of goodwill created and $2.8 billion of common stock issued as part of the FirstMerit acquisition, as well as to a lesser extent the repurchase of 2.5 million common stock during the 2015 fourth quarter under the repurchase authorization included in the 2015 CCAR capital plan. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of $400 million and $200 million of class D preferred equity during the 2016 first and second quarters, respectively, and the issuance of $100 million of Huntington class C preferred equity in exchange for FirstMerit preferred equity in conjunction with the acquisition during the 2016 third quarter. The total risk-based capital ratio was impacted by the repurchase of $25 million of trust preferred securities during the 2016 third quarter.

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Business Overview
General
Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary relationships across all business segments, (4) continue to strengthen risk management and (5) maintain capital and liquidity positions consistent with our risk appetite. Specifically, we are focused on the successful integration of FirstMerit for the remainder of the year and for 2017.
Economy
Guidance from the Federal Reserve makes an interest rate increase appear likely in the near term, which would be incrementally helpful to our bottom line. In addition, according to the Philadelphia FRB coincident economic indicator, economic activity in Michigan, Ohio and Indiana has grown faster than the U.S. in the economic recovery-to-date. Also, economic activity growth is expected to grow on par within the U.S. in most of the Huntington Footprint states; per capita disposable personal income growth has grown faster than the U.S. during the economic recovery in most Huntington footprint states. Further, unemployment rates were at or below the national average in August in Indiana, Kentucky, Ohio, Michigan and Wisconsin; unemployment rates are near 15 year lows in Ohio and Michigan.
Expectations – 2016
Excluding Significant Items, we expect total revenues for the full year 2016 to increase 16-18%, while we expect noninterest expenses to increase 13%-15%. We expect to deliver positive operating leverage for the fourth consecutive year. We expect the effective tax rate for the full year 2016 to be in the 24%-25% range, excluding Significant Items, which are taxed at an approximate 35% rate.
Overall, asset quality metrics are expected to remain near current levels, with moderate quarterly volatility. We anticipate NCOs for the full year 2016 will remain below our long-term normalized range of 35 to 55 basis points.

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

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Table 1 - Selected Quarterly Income Statement Data (1)
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
Three months ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016
 
2016
 
2016
 
2015
 
2015
Interest income
$
694,346

 
$
565,658

 
$
557,251

 
$
544,153

 
$
538,477

Interest expense
68,956

 
59,777

 
54,185

 
47,242

 
43,022

Net interest income
625,390

 
505,881

 
503,066

 
496,911

 
495,455

Provision for credit losses
63,805

 
24,509

 
27,582

 
36,468

 
22,476

Net interest income after provision for credit losses
561,585

 
481,372

 
475,484

 
460,443

 
472,979

Service charges on deposit accounts
86,847

 
75,613

 
70,262

 
72,854

 
75,157

Cards and payment processing income
44,320

 
39,184

 
36,447

 
37,594

 
36,664

Mortgage banking income
40,603

 
31,591

 
18,543

 
31,418

 
18,956

Trust services
28,923

 
22,497

 
22,838

 
25,272

 
24,972

Insurance income
15,865

 
15,947

 
16,225

 
15,528

 
16,204

Brokerage income
14,719

 
14,599

 
15,502

 
14,462

 
15,059

Capital markets fees
14,750

 
13,037

 
13,010

 
13,778

 
12,741

Bank owned life insurance income
14,452

 
12,536

 
13,513

 
13,441

 
12,719

Gain on sale of loans
7,506

 
9,265

 
5,395

 
10,122

 
5,873

Securities gains
1,031

 
656

 

 
474

 
188

Other income
33,399

 
36,187

 
30,132

 
37,272

 
34,586

Total noninterest income
302,415

 
271,112

 
241,867

 
272,215

 
253,119

Personnel costs
405,024

 
298,949

 
285,397

 
288,861

 
286,270

Outside data processing and other services
91,133

 
63,037

 
61,878

 
63,775

 
58,535

Equipment
40,792

 
31,805

 
32,576

 
31,711

 
31,303

Net occupancy
41,460

 
30,704

 
31,476

 
32,939

 
29,061

Marketing
14,438

 
14,773

 
12,268

 
12,035

 
12,179

Professional services
47,075

 
21,488

 
13,538

 
13,010

 
11,961

Deposit and other insurance expense
14,940

 
12,187

 
11,208

 
11,105

 
11,550

Amortization of intangibles
9,046

 
3,600

 
3,712

 
3,788

 
3,913

Other expense
48,339

 
47,118

 
39,027

 
41,542

 
81,736

Total noninterest expense
712,247

 
523,661

 
491,080

 
498,766

 
526,508

Income before income taxes
151,753

 
228,823

 
226,271

 
233,892

 
199,590

Provision for income taxes
24,749

 
54,283

 
54,957

 
55,583

 
47,002

Net income
127,004

 
174,540

 
171,314

 
178,309

 
152,588

Dividends on preferred shares
18,537

 
19,874

 
7,998

 
7,972

 
7,968

Net income applicable to common shares
$
108,467

 
$
154,666

 
$
163,316

 
$
170,337

 
$
144,620

Average common shares—basic
938,578

 
798,167

 
795,755

 
796,095

 
800,883

Average common shares—diluted
952,081

 
810,371

 
808,349

 
810,143

 
814,326

Net income per common share—basic
$
0.12

 
$
0.19

 
$
0.21

 
$
0.21

 
$
0.18

Net income per common share—diluted
0.11

 
0.19

 
0.20

 
0.21

 
0.18

Cash dividends declared per common share
0.07

 
0.07

 
0.07

 
0.07

 
0.06

Return on average total assets
0.58
%
 
0.96
%
 
0.96
%
 
1.00
%
 
0.87
%
Return on average common shareholders’ equity
5.4

 
9.6

 
10.4

 
10.8

 
9.3

Return on average tangible common shareholders’ equity (2)
7.0

 
11.0

 
11.9

 
12.4

 
10.7

Net interest margin (3)
3.18

 
3.06

 
3.11

 
3.09

 
3.16

Efficiency ratio (4)
75.0

 
66.1

 
64.6

 
63.7

 
69.1

Effective tax rate
16.3

 
23.7

 
24.3

 
23.8

 
23.5

Revenue—FTE
 
 
 
 
 
 
 
 
 
Net interest income
$
625,390

 
$
505,881

 
$
503,066

 
$
496,911

 
$
495,455

FTE adjustment
10,598

 
10,091

 
9,159

 
8,425

 
8,168

Net interest income (3)
635,988

 
515,972

 
512,225

 
505,336

 
503,623

Noninterest income
302,415

 
271,112

 
241,867

 
272,215

 
253,119

Total revenue (3)
$
938,403

 
$
787,084

 
$
754,092

 
$
777,551

 
$
756,742


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(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

 
 
 
 
 
 
 
 
Table 2 - Selected Year to Date Income Statement Data (1)
(dollar amounts in thousands, except per share amounts)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Interest income
$
1,817,255

 
$
1,570,368

 
$
246,887

 
16
 %
Interest expense
182,918

 
116,542

 
66,376

 
57

Net interest income
1,634,337

 
1,453,826

 
180,511

 
12

Provision for credit losses
115,896

 
63,486

 
52,410

 
83

Net interest income after provision for credit losses
1,518,441

 
1,390,340

 
128,101

 
9

Service charges on deposit accounts
232,722

 
207,495

 
25,227

 
12

Cards and payment processing income
119,951

 
105,121

 
14,830

 
14

Mortgage banking income
90,737

 
80,435

 
10,302

 
13

Trust services
74,258

 
80,561

 
(6,303
)
 
(8
)
Insurance income
48,037

 
49,736

 
(1,699
)
 
(3
)
Brokerage income
44,819

 
45,743

 
(924
)
 
(2
)
Capital markets fees
40,797

 
39,838

 
959

 
2

Bank owned life insurance income
40,500

 
38,959

 
1,541

 
4

Gain on sale of loans
22,166

 
22,915

 
(749
)
 
(3
)
Securities gains
1,687

 
270

 
1,417

 
525

Other income
99,720

 
95,442

 
4,278

 
4

Total noninterest income
815,394

 
766,515

 
48,879

 
6

Personnel costs
989,369

 
833,321

 
156,048

 
19

Outside data processing and other services
216,047

 
167,578

 
48,469

 
29

Equipment
105,173

 
93,246

 
11,927

 
13

Net occupancy
103,640

 
88,942

 
14,698

 
17

Marketing
41,479

 
40,178

 
1,301

 
3

Professional services
82,101

 
37,281

 
44,820

 
120

Deposit and other insurance expense
38,335

 
33,504

 
4,831

 
14

Amortization of intangibles
16,357

 
24,079

 
(7,722
)
 
(32
)
Other expense
134,487

 
159,013

 
(24,526
)
 
(15
)
Total noninterest expense
1,726,988

 
1,477,142

 
249,846

 
17

Income before income taxes
606,847

 
679,713

 
(72,866
)
 
(11
)
Provision for income taxes
133,989

 
165,065

 
(31,076
)
 
(19
)
Net income
472,858

 
514,648

 
(41,790
)
 
(8
)
Dividends declared on preferred shares
46,409

 
23,901

 
22,508

 
94

Net income applicable to common shares
$
426,449

 
$
490,747

 
$
(64,298
)
 
(13
)%
Average common shares—basic
844,167

 
805,851

 
38,316

 
5
 %
Average common shares—diluted
856,934

 
819,458

 
37,476

 
5

Net income per common share—basic
$
0.51

 
$
0.61

 
$
(0.10
)
 
(16
)
Net income per common share—diluted
0.50

 
0.60

 
(0.10
)
 
(17
)
Cash dividends declared per common share
0.21

 
0.18

 
0.03

 
17

Revenue—FTE
 
 
 
 
 
 
 
Net interest income
$
1,634,337

 
$
1,453,826

 
$
180,511

 
12
 %
FTE adjustment
29,848

 
23,690

 
6,158

 
26

Net interest income (2)
1,664,185

 
1,477,516

 
186,669

 
13

Noninterest income
815,394

 
766,515

 
48,879

 
6

Total revenue (2)
$
2,479,579

 
$
2,244,031

 
$
235,548

 
10
 %

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


11

Table of Contents

Significant Items
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section (See Non-GAAP Financial Measures) that summarizes key issues important for a complete understanding of performance trends. 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.”
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by the Significant Items summarized below:

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

The 2016 third, second, and first quarters included $159 million, $21 million, and $6 million, respectively, of noninterest expense related to the acquisition of FirstMerit.

During the 2015 third quarter, $5 million of noninterest expense was recorded related to the acquisition of Huntington Technology Finance, the transition of the Huntington Funds and the sale of Huntington Asset Advisors, which were completed during the 2015 fourth quarter.

The 2015 second quarter and first quarter included $2 million and $3 million, respectively, of Huntington Technology Finance merger-related noninterest expense that was not originally reported as a Significant Item. As a result of 2015 third quarter activity, merger related expense was identified as a Significant Item for the 2015 full year and, as such, these amounts are now included as Significant Items.

2. Litigation reserves. During the 2015 third quarter, $38 million of additions to litigation reserves were recorded as noninterest expense.

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, 2016
 
June 30, 2016
 
September 30, 2015
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
Net income
$
127,004

 
 
 
$
174,540

 
 
 
$
152,588

 
 
Earnings per share, after-tax
 
 
$
0.11

 
 
 
$
0.19

 
 
 
$
0.18

 
 
 
 
 
 
 
 
 
 
 
 
Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS
 
Earnings
 
EPS
 
Earnings
 
EPS
Mergers and acquisitions:
 
 
 
 
 
 
 
 
 
 
 
Mergers and acquisitions (1)
$
(158,749
)
 
 
 
$
(20,789
)
 
 
 
$
(4,839
)
 
 
Tax impact
52,033

 
 
 
7,213

 
 
 
1,694

 
 
Mergers and acquisitions, after tax (2)(3)
$
(106,716
)
 
$
(0.11
)
 
$
(13,576
)
 
$
(0.02
)
 
$
(3,145
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Litigation reserves:
 
 
 
 
 
 
 
 
 
 
 
Litigation reserves (1)
$

 
 
 
$

 
 
 
$
(38,186
)
 
 
Tax impact

 
 
 

 
 
 
13,365

 
 
Litigation reserves, after tax (2)(3)
$

 
$

 
$

 
$

 
$
(24,821
)
 
$
(0.03
)
(1)
Pretax unless otherwise noted.
(2)
Based on average outstanding diluted common shares.
(3)
After-tax.


12

Table of Contents

 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
After-tax
 
EPS (2)(3)
 
After-tax
 
EPS (2)(3)
Net income
$
472,858

 
 
 
$
514,648

 
 
Earnings per share, after-tax
 
 
$
0.50

 
 
 
$
0.60

Significant Items—favorable (unfavorable) impact:
Earnings
 
EPS
 
Earnings
 
EPS 
Mergers and acquisitions:
 
 
 
 
 
 
 
Mergers and acquisitions (1)
$
(185,944
)
 
 
 
$
(9,691
)
 
 
Tax impact
61,252

 
 
 
3,392

 
 
Mergers and acquisitions, net of tax (2)(3)
$
(124,692
)
 
$
(0.14
)
 
$
(6,299
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Litigation reserves:
 
 
 
 
 
 
 
Litigation reserves (1)
$

 
 
 
$
(38,186
)
 
 
Tax impact

 
 
 
13,365

 
 
Litigation reserves, net of tax (2)(3)
$

 
$

 
$
(24,821
)
 
$
(0.03
)
(1)
Pretax unless otherwise noted.
(2)
Based on average outstanding diluted common shares.
(3)
After-tax.

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 (3)
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances
 
 
 
 
 
Three Months Ended
 
Change
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
3Q16 vs. 3Q15
 
2016
 
2016
 
2016
 
2015
 
2015
 
Amount
 
Percent
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
95

 
$
99

 
$
98

 
$
89

 
$
89

 
$
6

 
7
 %
Loans held for sale
695

 
571

 
433

 
502

 
464

 
231

 
50

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
9,785

 
6,904

 
6,633

 
8,099

 
8,310

 
1,475

 
18

Tax-exempt
2,854

 
2,510

 
2,358

 
2,257

 
2,136

 
718

 
34

Total available-for-sale and other securities
12,639

 
9,414

 
8,991

 
10,356

 
10,446

 
2,193

 
21

Trading account securities
49

 
41

 
40

 
39

 
52

 
(3
)
 
(6
)
Held-to-maturity securities—taxable
5,487

 
5,806

 
6,054

 
4,148

 
3,226

 
2,261

 
70

Total securities
18,175

 
15,261

 
15,085

 
14,543

 
13,724

 
4,451

 
32

Loans and leases: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
24,957

 
21,344

 
20,649

 
20,186

 
19,802

 
5,155

 
26

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,132

 
881

 
923

 
1,108

 
1,101

 
31

 
3

Commercial
5,227

 
4,345

 
4,283

 
4,158

 
4,193

 
1,034

 
25

Commercial real estate
6,359

 
5,226

 
5,206

 
5,266

 
5,294

 
1,065

 
20

Total commercial
31,316

 
26,570

 
25,855

 
25,452

 
25,096

 
6,220

 
25

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
11,402

 
10,146

 
9,730

 
9,286

 
8,879

 
2,523

 
28

Home equity
9,260

 
8,416

 
8,441

 
8,463

 
8,526

 
734

 
9

Residential mortgage
7,008

 
6,187

 
6,018

 
6,079

 
6,048

 
960

 
16


13

Table of Contents

RV and marine finance
915

 

 

 

 

 
N.R.

 
N.R.

Other consumer
821

 
613

 
574

 
547

 
497

 
324

 
65

Total consumer
29,406

 
25,362

 
24,763

 
24,375

 
23,950

 
5,456

 
23

Total loans and leases
60,722

 
51,932

 
50,618

 
49,827

 
49,046

 
11,676

 
24

Allowance for loan and lease losses
(623
)
 
(616
)
 
(604
)
 
(595
)
 
(609
)
 
(14
)
 
2

Net loans and leases
60,099

 
51,316

 
50,014

 
49,232

 
48,437

 
11,662

 
24

Total earning assets
79,687

 
67,863

 
66,234

 
64,961

 
63,323

 
16,364

 
26

Cash and due from banks
1,325

 
1,001

 
1,013

 
1,468

 
1,555

 
(230
)
 
(15
)
Intangible assets
1,547

 
726

 
730

 
734

 
739

 
808

 
109

All other assets
4,962

 
4,149

 
4,223

 
4,233

 
4,273

 
689

 
16

Total assets
$
86,898

 
$
73,123

 
$
71,596

 
$
70,801

 
$
69,281

 
$
17,617

 
25
 %
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
20,033

 
$
16,507

 
$
16,334

 
$
17,174

 
$
17,017

 
$
3,016

 
18
 %
Demand deposits—interest-bearing
12,362

 
8,445

 
7,776

 
6,923

 
6,604

 
5,758

 
87

Total demand deposits
32,395

 
24,952

 
24,110

 
24,097

 
23,621

 
8,774

 
37

Money market deposits
18,453

 
19,534

 
19,682

 
19,843

 
19,512

 
(1,059
)
 
(5
)
Savings and other domestic deposits
8,889

 
5,402

 
5,306

 
5,215

 
5,224

 
3,665

 
70

Core certificates of deposit
2,285

 
2,007

 
2,265

 
2,430

 
2,534

 
(249
)
 
(10
)
Total core deposits
62,022

 
51,895

 
51,363

 
51,585

 
50,891

 
11,131

 
22

Other domestic time deposits of $250,000 or more
382

 
402

 
455

 
426

 
217

 
165

 
76

Brokered deposits and negotiable CDs
3,904

 
2,909

 
2,897

 
2,929

 
2,779

 
1,125

 
40

Deposits in foreign offices
194

 
208

 
264

 
398

 
492

 
(298
)
 
(61
)
Total deposits
66,502

 
55,414

 
54,979

 
55,338

 
54,379

 
12,123

 
22

Short-term borrowings
1,306

 
1,032

 
1,145

 
524

 
844

 
462

 
55

Long-term debt
8,488

 
7,899

 
7,202

 
6,788

 
6,043

 
2,445

 
40

Total interest-bearing liabilities
56,263

 
47,838

 
46,992

 
45,476

 
44,249

 
12,014

 
27

All other liabilities
1,608

 
1,416

 
1,515

 
1,515

 
1,442

 
166

 
12

Shareholders’ equity
8,994

 
7,362

 
6,755

 
6,636

 
6,573

 
2,421

 
37

Total liabilities and shareholders’ equity
$
86,898

 
$
73,123

 
$
71,596

 
$
70,801

 
$
69,281

 
$
17,617

 
25
 %

14

Table of Contents

Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued) (3)
 
 
 
 
 
 
 
 
 
 
 
Average Yield Rates (2)
 
Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
Fully-taxable equivalent basis (1)
2016
 
2016
 
2016
 
2015
 
2015
Assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
0.64
%
 
0.25
%
 
0.21
%
 
0.08
%
 
0.06
%
Loans held for sale
3.53

 
3.89

 
3.99

 
4.24

 
3.81

Securities:
 
 
 
 
 
 
 
 
 
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
Taxable
2.35

 
2.37

 
2.39

 
2.50

 
2.51

Tax-exempt
3.01

 
3.38

 
3.40

 
3.15

 
3.12

Total available-for-sale and other securities
2.50

 
2.64

 
2.65

 
2.64

 
2.63

Trading account securities
0.58

 
0.98

 
0.50

 
1.09

 
0.97

Held-to-maturity securities—taxable
2.41

 
2.44

 
2.43

 
2.45

 
2.46

Total securities
2.47

 
2.56

 
2.56

 
2.58

 
2.59

Loans and leases: (3)
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
3.68

 
3.49

 
3.52

 
3.47

 
3.58

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
3.76

 
3.70

 
3.51

 
3.45

 
3.52

Commercial
3.54

 
3.35

 
3.59

 
3.31

 
3.43

Commercial real estate
3.58

 
3.41

 
3.57

 
3.34

 
3.45

Total commercial
3.66

 
3.47

 
3.53

 
3.45

 
3.55

Consumer:
 
 
 
 
 
 
 
 
 
Automobile
3.37

 
3.15

 
3.17

 
3.22

 
3.23

Home equity
4.21

 
4.17

 
4.20

 
4.01

 
4.01

Residential mortgage
3.61

 
3.65

 
3.69

 
3.67

 
3.71

RV and marine finance
5.70

 

 

 

 

Other consumer
10.89

 
10.28

 
10.02

 
9.17

 
8.88

Total consumer
3.97

 
3.79

 
3.81

 
3.74

 
3.75

Total loans and leases
3.81

 
3.63

 
3.67

 
3.59

 
3.65

Total earning assets
3.52

 
3.41

 
3.44

 
3.37

 
3.42

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing

 

 

 

 

Demand deposits—interest-bearing
0.11

 
0.09

 
0.09

 
0.08

 
0.07

Total demand deposits
0.04

 
0.03

 
0.03

 
0.02

 
0.02

Money market deposits
0.24

 
0.24

 
0.24

 
0.23

 
0.23

Savings and other domestic deposits
0.21

 
0.11

 
0.13

 
0.14

 
0.14

Core certificates of deposit
0.43

 
0.79

 
0.82

 
0.83

 
0.80

Total core deposits
0.20

 
0.22

 
0.23

 
0.23

 
0.23

Other domestic time deposits of $250,000 or more
0.40

 
0.40

 
0.41

 
0.40

 
0.43

Brokered deposits and negotiable CDs
0.44

 
0.40

 
0.38

 
0.19

 
0.17

Deposits in foreign offices
0.13

 
0.13

 
0.13

 
0.13

 
0.13

Total deposits
0.22

 
0.23

 
0.24

 
0.23

 
0.22

Short-term borrowings
0.29

 
0.36

 
0.32

 
0.09

 
0.09

Long-term debt
1.97

 
1.85

 
1.68

 
1.49

 
1.45

Total interest-bearing liabilities
0.49

 
0.50

 
0.46

 
0.41

 
0.39

Net interest rate spread
3.03

 
2.91

 
2.98

 
2.96

 
3.03

Impact of noninterest-bearing funds on margin
0.15

 
0.15

 
0.13

 
0.13

 
0.13

Net interest margin
3.18
%
 
3.06
%
 
3.11
%
 
3.09
%
 
3.16
%
(1)
FTE yields are calculated assuming a 35% tax rate.

15

Table of Contents

(2)
Loan and lease, and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.
(3)
For purposes of this analysis, NALs are reflected in the average balances of loans.
N.R.—Not relevant.

2016 Third Quarter versus 2015 Third Quarter

FTE net interest income for the 2016 third quarter increased $132 million, or 26%, from the 2015 third quarter. This reflected the benefit from the $16.4 billion, or 26%, increase in average earning assets coupled with a 2 basis point improvement in the FTE net interest margin to 3.18%. Average earning asset growth included an $11.7 billion, or 24%, increase in average loans and leases and a $4.4 billion, or 32%, increase in average securities, both of which were impacted by the mid-quarter FirstMerit acquisition. The NIM expansion reflected a 10 basis point increase in earning asset yields and a 2 basis point increase in the benefit from noninterest-bearing funds, partially offset by a 10 basis point increase in funding costs. The 2016 third quarter NIM included 12 basis points of purchase accounting benefit.
Average earning assets for the 2016 third quarter increased $16.4 billion, or 26%, from the year-ago quarter. The increase was driven by:
$5.2 billion, or 26%, increase in average C&I loans and leases, impacted by the mid-quarter FirstMerit acquisition. This increase also reflects organic growth in equipment finance leases, automobile dealer floorplan lending, and corporate banking.
$4.4 billion, or 32%, increase in average securities, impacted by the mid-quarter FirstMerit acquisition, the reinvestment of cash flows and additional investment in Liquidity Coverage Ratio (LCR) Level 1 qualifying securities, and a $0.8 billion increase in direct purchase municipal instruments in our Commercial Banking segment, offset by sales of certain securities following the closing of the FirstMerit acquisition.
$2.5 billion, or 28%, increase in average automobile loans, impacted by the mid-quarter FirstMerit acquisition. The 2016 third quarter represented the eleventh consecutive quarter of greater than $1.0 billion in automobile loan originations, while maintaining our underwriting consistency and discipline.
$1.1 billion, or 20%, increase in average CRE loans, impacted by the mid-quarter FirstMerit acquisition.
$1.0 billion, or 16%, increase in average residential mortgage loans, impacted by the mid-quarter FirstMerit acquisition as well as increased demand for residential mortgage loans across our footprint.
$0.9 billion increase in RV and marine finance loans, reflecting the acquisition of the product offering in the FirstMerit acquisition.
$0.7 billion, or 9%, increase in average home equity loans, impacted by the mid-quarter FirstMerit acquisition.
While not affecting quarterly average balances, approximately $2.6 billion of total loans and leases, comprised of $1.5 billion of automobile loans, $1.0 billion of predominantly non-relationship C&I loans and leases, and $0.1 billion of predominantly non-relationship CRE loans were moved to Loans held for sale at the end of the 2016 third quarter as part of a continued balance sheet optimization strategy following the closing of the FirstMerit acquisition.
Average total deposits for the 2016 third quarter increased $12.1 billion, or 22%, from the year-ago quarter, impacted by the mid-quarter FirstMerit acquisition, while average total core deposits increased $11.1 billion, or 22%. Average total interest-bearing liabilities increased $12.0 billion, or 27%, from the year-ago quarter, impacted by the mid-quarter FirstMerit acquisition. Changes in total liabilities from the year-ago quarter reflected:
$8.8 billion, or 37%, increase in average demand deposits, impacted by the mid-quarter FirstMerit acquisition. Average interest-bearing demand deposits increased $5.8 billion, or 87%, and average noninterest-bearing demand deposits increased $3.0 billion, or 18%. The increase in average total demand deposits was comprised of a $6.1 billion, or 39%, increase in average commercial demand deposits and a $2.7 billion, or 33%, increase in average consumer demand deposits.
$3.7 billion, or 70%, increase in savings and other domestic deposits, impacted by the mid-quarter FirstMerit acquisition.
$2.9 billion, or 42%, increase in average total debt, primarily reflecting the issuance of $3.3 billion of senior debt over the past five quarters.
$1.1 billion, or 40%, increase in brokered deposits and negotiable CDs, impacted by the mid-quarter FirstMerit acquisition.

16

Table of Contents

Partially offset by:
$1.1 billion, or 5%, decrease in average money market deposits. During the 2016 third quarter, changes to commercial accounts resulted in the reclassification of $2.8 billion of deposits from money market into interest-bearing demand deposits. This decrease was partially offset by the impact of the mid-quarter FirstMerit acquisition.

2016 Third Quarter versus 2016 Second Quarter

Compared to the 2016 second quarter, FTE net interest income increased $120 million, or 23%. Average earning assets increased $11.8 billion, or 17%, sequentially, and the NIM increased 12 basis points. The increase in the NIM reflected an 11 basis point increase in earning asset yields and a 1 basis point decrease in the cost of interest-bearing liabilities.
Compared to the 2016 second quarter, average earning assets increased $11.8 billion, or 17%. On a reported basis, average loans and leases increased $8.8 billion, or 17%, primarily reflecting a $3.6 billion increase in average C&I loans, a $1.1 billion increase in average CRE loans, a $1.3 billion increase in average automobile loans, a $0.8 billion increase in home equity loans, and a $0.8 billion increase in residential mortgage loans, as well as the addition of $0.9 billion in RV and marine finance loans. Average securities increased $2.9 billion, or 19%. These increases primarily reflected the FirstMerit acquisition.
Compared to the 2016 second quarter, average total core deposits increased $10.1 billion, or 20%. The increase primarily reflected a $3.9 billion, or 46%, increase in average interest-bearing demand deposits, a $3.5 billion, or 21%, increase in average noninterest-bearing demand deposits, and a $3.5 billion, or 65%, increase in savings and other domestic deposits, partially offset by a $1.1 billion, or 6%, decrease in money market deposits. These increases primarily reflected the mid-quarter FirstMerit acquisition. Average total debt increased $0.9 billion, or 10%, reflecting the $1.0 billion senior debt issuance during the 2016 third quarter.

 
 
 
 
 
 
 
 
 
 
 
 
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)
2016
 
2015
 
Amount
 
Percent
 
2016
 
2015
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
$
97

 
$
90

 
$
7

 
8
 %
 
0.37
%
 
0.11
%
Loans held for sale
567

 
706

 
(139
)
 
(20
)
 
3.76

 
3.49

Securities:
 
 
 
 


 


 
 
 
 
Available-for-sale and other securities:
 
 
 
 


 


 
 
 
 
Taxable
7,781

 
7,966

 
(185
)
 
(2
)
 
2.37

 
2.54

Tax-exempt
2,576

 
2,014

 
562

 
28

 
3.25

 
3.10

Total available-for-sale and other securities
10,357

 
9,980

 
377

 
4

 
2.59

 
2.65

Trading account securities
43

 
49

 
(6
)
 
(12
)
 
0.68

 
1.06

Held-to-maturity securities—taxable
5,781

 
3,299

 
2,482

 
75

 
2.43

 
2.47

Total securities
16,181

 
13,328

 
2,853

 
21

 
2.53

 
2.60

Loans and leases: (3)
 
 
 
 


 


 
 
 
 
Commercial:
 
 
 
 


 


 
 
 
 
Commercial and industrial
22,326

 
19,581

 
2,745

 
14

 
3.57

 
3.51

Commercial real estate:
 
 
 
 


 


 
 
 
 
Construction
979

 
987

 
(8
)
 
(1
)
 
3.66

 
3.64

Commercial
4,621

 
4,227

 
394

 
9

 
3.50

 
3.47

Commercial real estate
5,600

 
5,214

 
386

 
7

 
3.52

 
3.50

Total commercial
27,926

 
24,795

 
3,131

 
13

 
3.56

 
3.51

Consumer:
 
 
 
 


 


 
 
 
 

17

Table of Contents

Automobile
10,430

 
8,582

 
1,848

 
22

 
3.24

 
3.23

Home equity
8,708

 
8,504

 
204

 
2

 
4.19

 
4.01

Residential mortgage
6,406

 
5,906

 
500

 
8

 
3.65

 
3.72

RV and marine finance
307

 

 
N.R.

 
N.R.

 
5.70

 

Other consumer
670

 
458

 
212

 
46

 
10.46

 
8.53

Total consumer
26,521

 
23,450

 
3,071

 
13

 
3.86

 
3.74

Total loans and leases
54,447

 
48,245

 
6,202

 
13

 
3.71

 
3.62

Allowance for loan and lease losses
(614
)
 
(610
)
 
(4
)
 
1

 
 
 
 
Net loans and leases
53,833

 
47,635

 
6,198

 
13

 
 
 
 
Total earning assets
71,292

 
62,369

 
8,923

 
14

 
3.46
%
 
3.42
%
Cash and due from banks
1,114

 
1,140

 
(26
)
 
(2
)
 
 
 
 
Intangible assets
1,003

 
693

 
310

 
45

 
 
 
 
All other assets
4,446

 
4,212

 
234

 
6

 
 
 
 
Total assets
$
77,241

 
$
67,804

 
$
9,437

 
14
 %
 
 
 
 
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
17,634

 
$
16,061

 
$
1,573

 
10
 %
 
%
 
%
Demand deposits—interest-bearing
9,538

 
6,455

 
3,083

 
48

 
0.10

 
0.06

Total demand deposits
27,172

 
22,516

 
4,656

 
21

 
0.03

 
0.02

Money market deposits
19,220

 
19,228

 
(8
)
 

 
0.24

 
0.22

Savings and other domestic deposits
6,541

 
5,222

 
1,319

 
25

 
0.16

 
0.14

Core certificates of deposit
2,186

 
2,661

 
(475
)
 
(18
)
 
0.67

 
0.78

Total core deposits
55,119

 
49,627

 
5,492

 
11

 
0.21

 
0.22

Other domestic time deposits of $250,000 or more
413

 
199

 
214

 
108

 
0.40

 
0.43

Brokered deposits and negotiable CDs
3,239

 
2,694

 
545

 
20

 
0.41

 
0.17

Deposits in foreign offices
222

 
537

 
(315
)
 
(59
)
 
0.13

 
0.13

Total deposits
58,993

 
53,057

 
5,936

 
11

 
0.23

 
0.22

Short-term borrowings
1,161

 
1,623

 
(462
)
 
(28
)
 
0.32

 
0.12

Long-term debt
7,866

 
5,180

 
2,686

 
52

 
1.84

 
1.40

Total interest-bearing liabilities
50,386

 
43,799

 
6,587

 
15

 
0.48

 
0.36

All other liabilities
1,513

 
1,442

 
71

 
5

 
 
 
 
Shareholders’ equity
7,708

 
6,502

 
1,206

 
19

 
 
 
 
Total liabilities and shareholders’ equity
$
77,241

 
$
67,804

 
$
9,437

 
14
 %
 
 
 
 
Net interest rate spread
 
 
 
 
 
 
 
 
2.98

 
3.06

Impact of noninterest-bearing funds on margin
 
 
 
 
 
 
 
 
0.14

 
0.11

Net interest margin
 
 
 
 
 
 
 
 
3.12
%
 
3.17
%

(1)
FTE yields are calculated assuming a 35% tax rate.
(2)
Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.
(3)
For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.
N.R.—Not relevant.


18

Table of Contents

2016 First Nine Months versus 2015 First Nine Months

FTE net interest income for the first nine-month period of 2016 increased $187 million, or 13%, reflecting the benefit of an $8.9 billion, or 14%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.12% from 3.17%. The increase in average earning assets reflected:
$2.9 billion, or 21%, increase in average securities was impacted by the FirstMerit acquisition during the 2016 third quarter. The increase in average securities also reflects the reinvestment of cash flows and additional investment in Liquidity Coverage Ratio (LCR) Level 1 qualifying securities and an increase in direct purchase municipal instruments in our Commercial Banking segment.
$2.7 billion, or 14%, increase in average C&I loans and leases was impacted by the FirstMerit acquisition during the 2016 third quarter. The increase in average C&I loans and leases also reflects organic growth in equipment finance leases, automobile dealer floorplan lending, and corporate banking.
$1.8 billion, or 22%, increase in average automobile loans was impacted by the FirstMerit acquisition during the 2016 third quarter. The 2016 third quarter represented the eleventh consecutive quarter of greater than $1.0 billion in automobile loan originations, while maintaining our underwriting consistency and discipline.
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 2016 third quarter was $64 million compared with $25 million for the 2016 second quarter and $22 million for the 2015 third quarter. The provision for credit losses for the 2016 third quarter increased $41 million, or 184%, compared to year-ago period. On a year-to-date basis, provision for credit losses for the first nine-month period of 2016 was $116 million, an increase of $52 million, or 83%, compared to year-ago period. The increase from the 2016 second quarter and year-to-date provision for credit losses was the result of a higher level of NCOs, organic growth, and incremental reserves on the FirstMerit portfolio due to the rate mark more than offsetting the credit mark on certain portfolios (See Credit Quality discussion). In addition, there was an incremental provision for credit losses associated with the transfer of certain loans to loans held for sale late in the 2016 third quarter.


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Table of Contents

Noninterest Income
The following table reflects noninterest income for each of the past five quarters: 
Table 6 - Noninterest Income
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
3Q16 vs. 3Q15
 
3Q16 vs. 2Q16
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
Change
 
Change
 
2016
 
2016
 
2016
 
2015
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
Service charges on deposit accounts
$
86,847

 
$
75,613

 
$
70,262

 
$
72,854

 
$
75,157

 
$
11,690

 
16
 %
 
$
11,234

 
15
 %
Cards and payment processing income
44,320

 
39,184

 
36,447

 
37,594

 
36,664

 
7,656

 
21

 
5,136

 
13

Mortgage banking income
40,603

 
31,591

 
18,543

 
31,418

 
18,956

 
21,647

 
114

 
9,012

 
29

Trust services
28,923

 
22,497

 
22,838

 
25,272

 
24,972

 
3,951

 
16

 
6,426

 
29

Insurance income
15,865

 
15,947

 
16,225

 
15,528

 
16,204

 
(339
)
 
(2
)
 
(82
)
 
(1
)
Brokerage income
14,719

 
14,599

 
15,502

 
14,462

 
15,059

 
(340
)
 
(2
)
 
120

 
1

Capital markets fees
14,750

 
13,037

 
13,010

 
13,778

 
12,741

 
2,009

 
16

 
1,713

 
13

Bank owned life insurance income
14,452

 
12,536

 
13,513

 
13,441

 
12,719

 
1,733

 
14

 
1,916

 
15

Gain on sale of loans
7,506

 
9,265

 
5,395

 
10,122

 
5,873

 
1,633

 
28

 
(1,759
)
 
(19
)
Securities gains
1,031

 
656

 

 
474

 
188

 
843

 
448

 
375

 
57

Other income
33,399

 
36,187

 
30,132

 
37,272

 
34,586

 
(1,187
)
 
(3
)
 
(2,788
)
 
(8
)
Total noninterest income
$
302,415

 
$
271,112

 
$
241,867

 
$
272,215

 
$
253,119

 
$
49,296

 
19
 %
 
$
31,303

 
12
 %

2016 Third Quarter versus 2015 Third Quarter

Noninterest income for the 2016 third quarter increased $49 million, or 19%, from the year-ago quarter. The year-over-year increase primarily reflected:
$22 million, or 114%, increase in mortgage banking income, reflecting a 39% increase in mortgage origination volume and a $10 million impact from net MSR activity.
$12 million, or 16%, increase in service charges on deposit accounts, reflecting the benefit of continued new customer acquisition. Of the increase, $8 million was attributable to consumer deposit accounts, while $4 million was attributable to commercial deposit accounts.
$8 million, or 21%, increase in cards and payment processing income, due to higher credit and debit card related income and underlying customer growth.

2016 Third Quarter versus 2016 Second Quarter

Compared to the 2016 second quarter, total noninterest income increased $31 million, or 12%. Service charges on deposit accounts increased $11 million, or 15%, primarily reflecting the benefit of continued new customer acquisition. Of the increase, $7 million was attributable to consumer deposit accounts, while $4 million was attributable to commercial deposit accounts. Mortgage banking income increased $9 million, or 29%, primarily driven by a 9% increase in mortgage origination volume and a $3 million impact from net MSR activity.


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Table of Contents

Table 7 - Noninterest Income—2016 First Nine Months vs. 2015 First Nine Months
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Service charges on deposit accounts
$
232,722

 
$
207,495

 
$
25,227

 
12
 %
Cards and payment processing income
119,951

 
105,121

 
14,830

 
14

Mortgage banking income
90,737

 
80,435

 
10,302

 
13

Trust services
74,258

 
80,561

 
(6,303
)
 
(8
)
Insurance income
48,037

 
49,736

 
(1,699
)
 
(3
)
Brokerage income
44,819

 
45,743

 
(924
)
 
(2
)
Capital markets fees
40,797

 
39,838

 
959

 
2

Bank owned life insurance income
40,500

 
38,959

 
1,541

 
4

Gain on sale of loans
22,166

 
22,915

 
(749
)
 
(3
)
Securities gains
1,687

 
270

 
1,417

 
525

Other income
99,720

 
95,442

 
4,278

 
4

Total noninterest income
$
815,394

 
$
766,515

 
$
48,879

 
6
 %

The $49 million, or 6%, increase in total noninterest income reflected:
$25 million, or 12%, increase service charges on deposit accounts, reflecting the benefit of continued new customer acquisition.
$15 million, or 14%, increase in cards and payment processing income, due to higher card related income and underlying customer growth.
$10 million, or 13%, increase in mortgage banking income, reflecting a 16% increase in mortgage origination volume.
$4 million, or 4% increase in other income, primarily reflecting equipment operating lease income related to Huntington Technology Finance.
Partially offset by:
$6 million, or 8%, decrease in trust services, primarily related to the sale of HAA, HASI, and Unified, and the transition of the remaining Huntington Funds at the end of the 2015 fourth quarter.


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Table of Contents

Noninterest Expense
(This section should be read in conjunction with Significant Items 1 and 2.)
The following table reflects noninterest expense for each of the past five quarters: 
Table 8 - Noninterest Expense
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
3Q16 vs. 3Q15
 
3Q16 vs. 2Q16
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
Change
 
Change
 
2016
 
2016
 
2016
 
2015
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
Personnel costs
$
405,024

 
$
298,949

 
$
285,397

 
$
288,861

 
$
286,270

 
$
118,754

 
41
 %
 
$
106,075

 
35
 %
Outside data processing and other services
91,133

 
63,037

 
61,878

 
63,775

 
58,535

 
32,598

 
56

 
28,096

 
45

Equipment
40,792

 
31,805

 
32,576

 
31,711

 
31,303

 
9,489

 
30

 
8,987

 
28

Net occupancy
41,460

 
30,704

 
31,476

 
32,939

 
29,061

 
12,399

 
43

 
10,756

 
35

Marketing
14,438

 
14,773

 
12,268

 
12,035

 
12,179

 
2,259

 
19

 
(335
)
 
(2
)
Professional services
47,075

 
21,488

 
13,538

 
13,010

 
11,961

 
35,114

 
294

 
25,587

 
119

Deposit and other insurance expense
14,940

 
12,187

 
11,208

 
11,105

 
11,550

 
3,390

 
29

 
2,753

 
23

Amortization of intangibles
9,046

 
3,600

 
3,712

 
3,788

 
3,913

 
5,133

 
131

 
5,446

 
151

Other expense
48,339

 
47,118

 
39,027

 
41,542

 
81,736

 
(33,397
)
 
(41
)
 
1,221

 
3

Total noninterest expense
$
712,247

 
$
523,661

 
$
491,080

 
$
498,766

 
$
526,508

 
$
185,739

 
35
 %
 
$
188,586

 
36
 %
Number of employees (average full-time equivalent)
14,511

 
12,363

 
12,386

 
12,418

 
12,367

 
2,144

 
17
 %
 
2,148

 
17
 %
Impacts of Significant Items:
 
Three Months Ended
 
September 30,
 
June 30,
 
September 30,
 
2016
 
2016
 
2015
Personnel costs
$
76,199

 
$
4,732

 
$
2,806

Outside data processing and other services
27,639

 
3,045

 
1,569

Equipment
4,739

 
3

 

Net occupancy
7,116

 
490

 

Marketing
926

 
241

 

Professional services
33,679

 
10,709

 
273

Other expense
8,451

 
1,569

 
38,377

Total adjusted noninterest expense
$
158,749

 
$
20,789

 
$
43,025

 

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Table of Contents

Adjusted Noninterest Expense (Non-GAAP):
 
Three Months Ended
 
3Q16 vs. 3Q15
 
3Q16 vs. 2Q16
 
September 30,
 
June 30,
 
September 30,
 
Change
 
Change
 
2016
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
Personnel costs
$
328,825

 
$
294,217

 
$
283,464

 
$
45,361

 
16
 %
 
$
34,608

 
12
 %
Outside data processing and other services
63,494

 
59,992

 
56,966

 
6,528

 
11

 
3,502

 
6

Equipment
36,053

 
31,802

 
31,303

 
4,750

 
15

 
4,251

 
13

Net occupancy
34,344

 
30,214

 
29,061

 
5,283

 
18

 
4,130

 
14

Marketing
13,512

 
14,532

 
12,179

 
1,333

 
11

 
(1,020
)
 
(7
)
Professional services
13,396

 
10,779

 
11,688

 
1,708

 
15

 
2,617

 
24

Deposit and other insurance expense
14,940

 
12,187

 
11,550

 
3,390

 
29

 
2,753

 
23

Amortization of intangibles
9,046

 
3,600

 
3,913

 
5,133

 
131

 
5,446

 
151

Other expense
39,888

 
45,549

 
43,359

 
(3,471
)
 
(8
)
 
(5,661
)
 
(12
)
Total adjusted noninterest expense (Non-GAAP)
$
553,498

 
$
502,872

 
$
483,483

 
$
70,015

 
14
 %
 
$
50,626

 
10
 %

2016 Third Quarter versus 2015 Third Quarter

Reported noninterest expense for the 2016 third quarter increased $186 million, or 35%, from the year-ago quarter. Changes in reported noninterest expense primarily reflect:
$119 million, or 41%, increase in personnel costs, primarily reflecting $76 million of acquisition-related personnel expense and a 17% increase in average full-time equivalent employees related to the in-store branch expansion and the addition of colleagues from FirstMerit.
$35 million, or 294%, increase in professional expense, reflecting $34 million of legal and consulting expense related to the FirstMerit acquisition.
$33 million, or 56%, increase in outside data processing and other services expense, reflecting $28 million of Significant Items related to the FirstMerit acquisition as well as ongoing technology investments.
Partially offset by:
$33 million, or 41%, decrease in other expense, primarily reflecting litigation reserve adjustments in the year-ago quarter.
2016 Third Quarter versus 2016 Second Quarter

Reported noninterest expense increased $189 million, or 36%, from the 2016 second quarter. Personnel costs increased $106 million, or 35%, primarily related to $76 million of acquisition-related personnel expense in the 2016 third quarter compared to $5 million in the prior quarter as well as a 17% increase in average full-time equivalent employees related to FirstMerit. Outside data processing and other services increased $28 million, or 45%, primarily reflecting $28 million of acquisition-related expense in the 2016 third quarter compared to $3 million in the prior quarter. Professional services expense increased $26 million, or 119%, primarily reflecting $34 million of acquisition-related expense in the 2016 third quarter compared to $11 million in the prior quarter.

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Table of Contents

Table 9 - Noninterest Expense—2016 First Nine Months vs. 2015 First Nine Months
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Personnel costs
$
989,369

 
$
833,321

 
$
156,048

 
19
 %
Outside data processing and other services
216,047

 
167,578

 
48,469

 
29

Equipment
105,173

 
93,246

 
11,927

 
13

Net occupancy
103,640

 
88,942

 
14,698

 
17

Marketing
41,479

 
40,178

 
1,301

 
3

Professional services
82,101

 
37,281

 
44,820

 
120

Deposit and other insurance expense
38,335

 
33,504

 
4,831

 
14

Amortization of intangibles
16,357

 
24,079

 
(7,722
)
 
(32
)
Other expense
134,487

 
159,013

 
(24,526
)
 
(15
)
Total noninterest expense
$
1,726,988

 
$
1,477,142

 
$
249,846

 
17
 %
Impacts of Significant Items: 
 
Nine months ended September 30,
 
2016
 
2015
Personnel costs
$
81,405

 
$
3,125

Outside data processing and other services
31,047

 
2,375

Equipment
4,743

 

Net occupancy
7,626

 

Marketing
1,180

 
28

Professional services
48,676

 
3,934

Other expense
11,267

 
38,415

Total adjusted noninterest expense
$
185,944

 
$
47,877

Adjusted Noninterest Expense (Non-GAAP):
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Personnel costs
$
907,964

 
$
830,196

 
$
77,768

 
9
 %
Outside data processing and other services
185,000

 
165,203

 
19,797

 
12

Equipment
100,430

 
93,246

 
7,184

 
8

Net occupancy
96,014

 
88,942

 
7,072

 
8

Marketing
40,299

 
40,150

 
149

 

Professional services
33,425

 
33,347

 
78

 

Deposit and other insurance expense
38,335

 
33,504

 
4,831

 
14

Amortization of intangibles
16,357

 
24,079

 
(7,722
)
 
(32
)
Other expense
123,220

 
120,598

 
2,622

 
2

Total adjusted noninterest expense (Non-GAAP)
$
1,541,044

 
$
1,429,265

 
$
111,779

 
8
 %

Reported noninterest expense increased $250 million, or 17%, from the year-ago period. Changes in reported noninterest expense primarily reflect:
$156 million, or 19%, increase in personnel costs, primarily reflecting $81 million of acquisition-related expense and a 7% increase in the number of average full-time equivalent employees largely related to the in-store branch expansion and the addition of colleagues from FirstMerit.
$48 million, or 29%, increase in outside data processing and other services, primarily reflecting $31 million of acquisition-related expense and ongoing technology investments.
$45 million, or 120%, increase in professional services expense, primarily reflecting $49 million of acquisition-related expense.

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Table of Contents

$15 million, or 17%, increase in net occupancy expense, primarily reflecting $8 million of acquisition-related expense and a $4 million increase in lease expense.
$12 million, or 13%, increase in equipment expense, primarily reflecting $5 million of acquisition-related expense, a $4 million increase in depreciation, and a $3 million increase in maintenance.
Partially offset by:
$25 million, or 15%, decrease in other expense, primarily impacted by litigation reserve adjustments in the year-ago period.

Provision for Income Taxes
The provision for income taxes in the 2016 third quarter was $25 million. This compared with a provision for income taxes of $47 million in the 2015 third quarter and $54 million in the 2016 second quarter. The provision for income taxes for the nine-month periods ended September 30, 2016 and September 30, 2015 was $134 million and $165 million, respectively. All periods included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, and capital losses. The effective tax rates for the 2016 third quarter, 2015 third quarter, and 2016 second quarter were 16.3%, 23.5%, and 23.7% respectively.  The effective tax rates for the nine-month periods ended September 30, 2016 and September 30, 2015 were 22.1% and 24.3% respectively.  The variance between the 2016 third quarter compared to the 2015 third quarter and 2016 second quarter and for the nine-month period ended September 30, 2016 compared to the nine-month period ended September 30, 2015 in the provision for income taxes and effective tax rates relates primarily to the Significant Items. The net federal deferred tax asset was $172 million and the net state deferred tax asset was $43 million at September 30, 2016.
We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. The IRS is currently examining our 2010 and 2011 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, 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 identify primary risks, and the sources of those risks, across the Company. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee, Risk Oversight Committee (ROC), and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are regularly reported to the audit committee and board of directors. In addition, our Credit Review group performs ongoing independent testing of our loan portfolio, the results of which are regularly reviewed with our Risk Oversight Committee.
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 2015 Form 10-K and subsequent filings with the SEC. The MD&A included in our 2015 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 2015 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 5 and Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial

25

Table of Contents

counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal.
We continue to focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and solutions for delinquent or stressed borrowers.
Loan and Lease Credit Exposure Mix

Refer to the “Loan and Lease Credit Exposure Mix” section of our 2015 Form 10-K for a brief description of each portfolio segment. As a result of the FirstMerit acquisition, we have added a new portfolio segment.

RV and marine finance - RV and marine finance loans are loans provided to consumers for the purpose of financing recreational vehicles and boats.

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,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Ending Balances by Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
21,025

 
41
%
 
$
21,372

 
41
%
 
$
21,254

 
41
%
 
$
20,560

 
41
%
 
$
20,040

 
40
%
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
934

 
2

 
856

 
2

 
939

 
2

 
1,031

 
2

 
1,110

 
2

Commercial
4,569

 
8

 
4,466

 
7

 
4,343

 
8

 
4,237

 
8

 
4,294

 
9

Commercial real estate
5,503

 
10

 
5,322

 
9

 
5,282

 
10

 
5,268

 
10

 
5,404

 
11

Total commercial
26,528

 
51

 
26,694

 
50

 
26,536

 
51

 
25,828

 
51

 
25,444

 
51

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
9,283

 
18

 
10,381

 
20

 
9,920

 
19

 
9,481

 
19

 
9,160

 
19

Home equity
8,626

 
17

 
8,447

 
17

 
8,422

 
17

 
8,471

 
17

 
8,461

 
17

Residential mortgage
6,591

 
13

 
6,377

 
12

 
6,082

 
12

 
5,998

 
12

 
6,071

 
12

RV and marine finance
78

 

 

 

 

 

 

 

 

 

Other consumer
718

 
1

 
644

 
1

 
579

 
1

 
563

 
1

 
520

 
1

Total consumer
25,296

 
49

 
25,849

 
50

 
25,003

 
49

 
24,513

 
49

 
24,212

 
49

Total originated loans and leases
$
51,824

 
100
%
 
$
52,543

 
100
%
 
$
51,539

 
100
%
 
$
50,341

 
100
%
 
$
49,656

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,643

 
46
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
480

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,273

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

26

Table of Contents

Commercial real estate
1,753

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commercial
8,396

 
59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
1,508

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,494

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
1,074

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RV and marine finance
1,762

 
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other consumer
246

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total consumer
6,084

 
41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total acquired loans and leases
$
14,480

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
27,668

 
42
%
 
$
21,372

 
41
%
 
$
21,254

 
41
%
 
$
20,560

 
41
%
 
$
20,040

 
40
%
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
1,414

 
2

 
856

 
2

 
939

 
2

 
1,031

 
2

 
1,110

 
2

Commercial
5,842

 
9

 
4,466

 
7

 
4,343

 
8

 
4,237

 
8

 
4,294

 
9

Commercial real estate
7,256

 
11

 
5,322

 
9

 
5,282

 
10

 
5,268

 
10

 
5,404

 
11

Total commercial
34,924

 
53

 
26,694

 
50

 
26,536

 
51

 
25,828

 
51

 
25,444

 
51

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
10,791

 
16

 
10,381

 
20

 
9,920

 
19

 
9,481

 
19

 
9,160

 
19

Home equity
10,120

 
15

 
8,447

 
17

 
8,422

 
17

 
8,471

 
17

 
8,461

 
17

Residential mortgage
7,665

 
12

 
6,377

 
12

 
6,082

 
12

 
5,998

 
12

 
6,071

 
12

RV and marine finance
1,840

 
3

 

 

 

 

 

 

 

 

Other consumer
964

 
1

 
644

 
1

 
579

 
1

 
563

 
1

 
520

 
1

Total consumer
31,380

 
47

 
25,849

 
50

 
25,003

 
49

 
24,513

 
49

 
24,212

 
49

Total loans and leases
$
66,304

 
100
%
 
$
52,543

 
100
%
 
$
51,539

 
100
%
 
$
50,341

 
100
%
 
$
49,656

 
100
%
(1)
Represents loans from FirstMerit acquisition.

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Acquired loans are those purchased in the FirstMerit acquisition and are 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. The acquired loan portfolio will show a continuous decline as a result of payments, payoffs, charge-offs or other disposition, unless Huntington acquires additional loans in the future.

Our loan portfolio is composed of consumer and commercial credits. At the corporate level, we manage the 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 limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE primary 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. Currently there are no identified concentrations that exceed the established limit, including the impact of the FirstMerit acquisition. 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.
The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease. The changes in the collateral composition from December 31, 2015 are consistent with the portfolio growth metrics.

27

Table of Contents

 
Table 11 - Loan and Lease Portfolio by Collateral Type
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Secured loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial
$
11,130

 
17
%
 
$
8,071

 
15
%
 
$
8,247

 
16
%
 
$
8,296

 
16
%
 
$
8,470

 
17
%
Real estate—consumer
17,785

 
27

 
14,824

 
28

 
14,504

 
28

 
14,469

 
29

 
14,532

 
29

Vehicles, RV and marine
15,562

 
23

 
12,851

 
24

 
12,374

 
24

 
11,880

 
24

 
11,228

 
23

Receivables/Inventory
6,249

 
9

 
6,030

 
11

 
6,192

 
12

 
5,961

 
12

 
6,010

 
12

Machinery/Equipment
8,820

 
13

 
5,871

 
11

 
5,645

 
11

 
5,171

 
10

 
4,950

 
10

Securities/Deposits
1,279

 
2

 
1,013

 
2

 
969

 
2

 
974

 
2

 
1,054

 
2

Other
2,067

 
4

 
1,011

 
4

 
1,108

 
2

 
987

 
2

 
1,057

 
2

Total secured loans and leases
62,892

 
95

 
49,671

 
95

 
49,039

 
95

 
47,738

 
95

 
47,301

 
95

Unsecured loans and leases
3,412

 
5

 
2,872

 
5

 
2,500

 
5

 
2,603

 
5

 
2,355

 
5

Total loans and leases
$
66,304

 
100
%
 
$
52,543

 
100
%
 
$
51,539

 
100
%
 
$
50,341

 
100
%
 
$
49,656

 
100
%
Commercial Credit
Refer to the “Commercial Credit” section of our 2015 Form 10-K for our commercial credit underwriting and on-going credit management processes.
C&I PORTFOLIO
The C&I portfolio continues to have solid origination activity as evidenced by its growth over the past 12 months and we maintain a focus on high quality originations. The loans added as a result of the FirstMerit acquisition have a very similar risk profile and composition to the legacy Huntington portfolio. The only material new geographic location is the Chicago market. Problem loans had trended downward over the last several years, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. However, in the first quarter of 2016 C&I problem loans began to increase, primarily as a result of oil and gas exploration and production customers and the increase in overall C&I loan portfolio size. We have seen some improvement in the Energy portfolio risk profile in the subsequent six months. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to maximize the potential solutions. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.
We have a dedicated energy lending group that focuses on upstream companies (exploration and production or E&P firms) as well as midstream (pipeline transportation) companies. This lending group is comprised of colleagues with many years of experience in this area of specialized lending, through several economic cycles. The exposure to the E&P companies is centered in broadly syndicated reserve-based loans and is less than 1% of our total loans. All of these loans are secured and in a first-lien position. The customer base consists of larger firms that generally have had access to the capital markets and/or are backed by private equity firms. This lending group has no exposure to oil field services companies. However, we have a few legacy oil field services customers for which the remaining aggregate credit exposure is negligible.
The significant reduction in oil and gas prices over the past year has had a negative impact on the energy industry, particularly exploration and production companies as well as the oil field services providers. The impact of low prices for an extended period of time has had some level of adverse impact on most, if not all, borrowers in this segment. Most of these borrowers have, therefore, had recent downward adjustments to their risk ratings, which has increased our loan loss reserve.
We have other energy related exposures, including utilities, mining, wholesale distributors, transportation companies, gas stations, and pipelines. We continue to monitor these exposures closely. However, these exposures have different factors affecting their performance, and we have not seen the same level of volatility in performance or risk rating migration.
Consumer Credit
Refer to the “Consumer Credit” section of our 2015 Form 10-K for our consumer credit underwriting and on-going credit management processes.

28

Table of Contents

Table 12 - Selected Home Equity and Residential Mortgage Portfolio Data
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
Home Equity
 
Residential Mortgage
 
 
September 30, 2016
 
December 31, 2015
 
September 30,
2016
 
December 31,
2015
Ending balance
 
$
10,120

 
$
8,471

 
$
7,665

 
$
5,998

Portfolio weighted average LTV ratio (1)
 
75
%
 
75
%
 
75
%
 
75
%
Portfolio weighted average FICO score (2)
 
765

 
760

 
750

 
752

 
 
 
 
 
 
 
 
 
 
 
Home Equity
 
Residential Mortgage (3)
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Originations 
 
$
2,517

 
$
1,998

 
$
958

 
$
1,127

Origination weighted average LTV ratio (1)
 
75
%
 
78
%
 
81
%
 
85
%
Origination weighted average FICO score (2)
 
766

 
775

 
755

 
754

 
(1)
The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination.
(2)
Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination.
(3)
Represents only owned-portfolio originations.
We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio.
Within the home equity portfolio, the standard product is a 10-year interest-only draw period with a 20-year fully amortizing term at the end of the draw period. Prior to 2006, the standard product was a 10-year draw period with a balloon payment. In either case, after the 10-year draw period, the borrower must reapply, subject to full underwriting guidelines, to continue with the interest only revolving structure or begin repaying the debt in a term structure. The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in end of draw period risk. Our HELOC risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity acquired from FirstMerit and (2) home equity lines-of-credit with an automatic conversion to a 20-year amortizing loan. We manage this risk based on both the actual maturity date of the line-of-credit structure and at the end of the 10-year draw period. This risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to either maturity of the end of draw period. In certain circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment.

The table below summarizes our home equity line-of-credit portfolio by end of draw period described above:
Table 13 - Draw Schedule of Home Equity Line-of-Credit Portfolio
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
Amortizing
 
1 year or less
 
1 to 2 years
 
2 to 3 years
 
3 to 4 years
 
More than
4 years
 
Total
Current Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
     First Lien
$
83

 
$
86

 
$
251

 
$
171

 
$
140

 
$
3,460

 
$
4,191

     Second Lien
360

 
255

 
285

 
153

 
109

 
2,391

 
3,553

Total Current Balance
$
443

 
$
341

 
$
536

 
$
324

 
$
249

 
$
5,851

 
$
7,744



29

Table of Contents

Credit Quality
(This section should be read in conjunction with Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.
Credit quality performance in the 2016 third quarter, including the FirstMerit acquisition, reflected continued overall positive results with stable delinquencies, an unchanged criticized asset ratio, and a 3% decline in NPAs from the prior quarter to $476 million. The decrease in NPAs was achieved despite an increase in OREO assets associated with the acquired portfolio. Net charge-offs increased by $23 million from the prior quarter, primarily due to an increase in the C&I portfolio, and expected seasonal increases in the consumer portfolio. Total NCOs were $40 million or 0.26% of average total loans and leases. The ACL to total loans and leases ratio declined by 27 basis point to 1.06%, due to the impact of the FirstMerit acquisition as acquired loans are recorded at fair value with no associated ACL on the date of acquisition.
NPAs, NALs, AND TDRs
(This section should be read in conjunction with Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
NPAs and NALs
NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) OREO properties, and (3) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. Also, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the loan is placed on nonaccrual status.
C&I and CRE loans (except for purchased credit impaired loans) are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt.
Of the $242 million of CRE and C&I-related NALs at September 30, 2016, $163 million, or 67%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off prior to the loan reaching 120-days past due.
When loans are placed on nonaccrual status, accrued interest income is reversed with current year accruals charged to interest income and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease could be returned to accrual status.
The following table reflects period-end NALs and NPAs detail for each of the last five quarters:
 
Table 14 - Nonaccrual Loans and Leases and Nonperforming Assets
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Nonaccrual loans and leases (NALs): (1)
 
 
 
 
 
 
 
 
 
Originated NALs
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
211,669

 
$
289,811

 
$
307,824

 
$
175,195

 
$
157,902

Commercial real estate
19,322

 
23,663

 
30,801

 
28,984

 
27,516

Automobile
4,578

 
5,049

 
7,598

 
6,564

 
5,551

Residential mortgage
83,916

 
85,174

 
90,303

 
94,560

 
98,908

RV and marine finance

 

 

 

 


30

Table of Contents

Home equity
62,457

 
56,845

 
62,208

 
66,278

 
66,446

Other consumer

 
5

 

 

 
154

Total nonaccrual loans and leases
381,942

 
460,547

 
498,734

 
371,581

 
356,477

Other real estate, net:
 
 
 
 
 
 
 
 
 
Residential
25,912

 
26,653

 
23,175

 
24,194

 
21,637

Commercial
3,549

 
2,248

 
2,957

 
3,148

 
3,273

Total other real estate, net
29,461

 
28,901

 
26,132

 
27,342

 
24,910

Other NPAs (2)

 
376

 

 

 

Total originated nonperforming assets
$
411,403

 
$
489,824

 
$
524,866

 
$
398,923

 
$
381,387

 
 
 
 
 
 
 
 
 
 
Acquired NALs (5)
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
9,193

 
 
 
 
 
 
 
 
Commercial real estate
1,978

 
 
 
 
 
 
 
 
Automobile
199

 
 
 
 
 
 
 
 
Residential mortgage
4,239

 
 
 
 
 
 
 
 
RV and marine finance
96

 
 
 
 
 
 
 
 
Home equity
6,587

 
 
 
 
 
 
 
 
Other consumer

 
 
 
 
 
 
 
 
Total nonaccrual loans and leases
22,292

 
 
 
 
 
 
 
 
Other real estate, net:
 
 
 
 
 
 
 
 
 
Residential
8,509

 
 
 
 
 
 
 
 
Commercial
33,366

 
 
 
 
 
 
 
 
Total other real estate, net
41,875

 
 
 
 
 
 
 
 
Other NPAs (2)

 
 
 
 
 
 
 
 
Total nonperforming assets
$
64,167

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NALs
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
220,862

 
$
289,811

 
$
307,824

 
$
175,195

 
$
157,902

Commercial real estate
21,300

 
23,663

 
30,801

 
28,984

 
27,516

Automobile
4,777

 
5,049

 
7,598

 
6,564

 
5,551

Residential mortgage
88,155

 
85,174

 
90,303

 
94,560

 
98,908

RV and marine finance
96

 

 

 

 

Home equity
69,044

 
56,845

 
62,208

 
66,278

 
66,446

Other consumer

 
5

 

 

 
154

Total nonaccrual loans and leases
404,234

 
460,547

 
498,734

 
371,581

 
356,477

Other real estate, net:
 
 
 
 
 
 
 
 
 
Residential
34,421

 
26,653

 
23,175

 
24,194

 
21,637

Commercial
36,915

 
2,248

 
2,957

 
3,148

 
3,273

Total other real estate, net
71,336

 
28,901

 
26,132

 
27,342

 
24,910

Other NPAs (2)

 
376

 

 

 

Total nonperforming assets
$
475,570

 
$
489,824

 
$
524,866

 
$
398,923

 
$
381,387

 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases as a % of total loans and leases
0.61
%
 
0.88
%
 
0.97
%
 
0.74
%
 
0.72
%
NPA ratio(3)
0.72

 
0.93

 
1.02

 
0.79

 
0.77

(NPA+90days)/(Loan+OREO)(4)
0.92

 
1.12

 
1.22

 
1.00

 
0.98

 

31

Table of Contents

(1)
Excludes loans transferred to loans held-for-sale.
(2)
Other nonperforming assets includes certain impaired investment securities.
(3)
Nonperforming assets divided by the sum of loans and leases, net other real estate owned, and other NPAs.
(4)
The sum of nonperforming assets and total accruing loans and leases past due 90 days or more divided by the sum of loans and leases and other real estate.
(5)
Represents loans from FirstMerit acquisition.
2016 Third Quarter versus 2016 Second Quarter
Total NPAs decreased by $14 million, or 3% compared with June 30, 2016:
$69 million, or 24%, decline in C&I NALs, primarily the result of resolutions, upgrades, and paydowns during the quarter.
Primarily offset by:
$42 million, or 147%, increase in OREO, predominately associated with an increase in commercial properties from the FirstMerit acquisition.
$12 million, or 21%, increase in home equity NALs, reflecting some additional aging of delinquencies in the portfolio.
2016 Third Quarter versus 2015 Fourth Quarter
The $77 million, or 19%, increase in NPAs compared with December 31, 2015, represents:
$46 million, or 26%, increase in C&I NALs, with the majority of the increase in our energy related E&P and coal portfolios.
$44 million, or 161%, increase in OREO, specifically associated with an increase in commercial properties from the FirstMerit acquisition.
Primarily offset by:
$8 million, or 27%, decline in CRE NALs, reflecting the resolution of one large credit during the year.
$6 million, or 7%, decline in residential mortgage NALs, reflecting the overall improvement in the real estate market and lower delinquencies as compared to prior periods.
TDR Loans
(This section should be read in conjunction with Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. TDRs can be classified as either accruing or nonaccruing loans. Nonaccruing TDRs are included in NALs whereas accruing TDRs are excluded from NALs, as it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers in financial difficulty or to comply with regulatory regulations regarding the treatment of certain bankruptcy filing and discharge situations. Acquired, non-purchased credit impaired loans are only considered for TDR reporting for modifications made subsequent to acquisition. Over the past five quarters, the accruing component of the total TDR balance has been between 80% and 84% indicating there is no identified credit loss and the borrowers continue to make their monthly payments.  In fact, over 80% of the $527 million of accruing TDRs secured by residential real estate (Residential mortgage and Home Equity in Table 15) are current on their required payments.  In addition, over 60% of the accruing pool have had no delinquency at all in the past 12 months. There is very limited migration from the accruing to non-accruing components, and virtually all of the charge-offs as presented in Table 16 come from the non-accruing TDR balances.

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Table of Contents

The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:
Table 15 - Accruing and Nonaccruing Troubled Debt Restructured Loans
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Troubled debt restructured loans—accruing:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
232,740

 
$
232,112

 
$
205,989

 
$
235,689

 
$
241,327

Commercial real estate
80,553

 
85,015

 
108,861

 
115,074

 
103,767

Automobile
27,843

 
25,892

 
25,856

 
24,893

 
24,537

Home equity
275,601
 (1)
 
203,047
 (2)
 
204,244
 (2)
 
199,393
 (2)
 
192,356
 (2)
Residential mortgage
251,529

 
256,859

 
259,750

 
264,666

 
277,154

RV and marine finance

 

 

 

 

Other consumer
4,102

 
4,522

 
4,768

 
4,488

 
4,569

Total troubled debt restructured loans—accruing
872,368

 
807,447

 
809,468

 
844,203

 
843,710

Troubled debt restructured loans—nonaccruing:
Commercial and industrial
70,179

 
77,592

 
83,600

 
56,919

 
54,933

Commercial real estate
5,672

 
6,833

 
14,607

 
16,617

 
12,806

Automobile
4,437

 
4,907

 
7,407

 
6,412

 
5,400

Home equity
28,009
 (1)
 
21,145
 (2)
 
23,211
 (2)
 
20,996
 (2)
 
19,188
 (2)
Residential mortgage
62,027

 
63,638

 
68,918

 
71,640

 
68,577

RV and marine finance

 

 

 

 

Other consumer
142

 
142

 
191

 
151

 
152

Total troubled debt restructured loans—nonaccruing
170,466

 
174,257

 
197,934

 
172,735

 
161,056

Total troubled debt restructured loans
$
1,042,834

 
$
981,704

 
$
1,007,402

 
$
1,016,938

 
$
1,004,766


(1)
Includes TDRs transferred from loans held for sale to loans.
(2)
Excludes TDRs transferred from loans to loans held for sale.
The following table reflects TDR activity for each of the past five quarters:

33

Table of Contents


Table 16 - Troubled Debt Restructured Loan Activity
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Troubled debt restructured loans—accruing:
TDRs, beginning of period
$
807,447

 
$
809,468

 
$
844,203

 
$
843,710

 
$
967,748

New TDRs
97,753

 
153,041

 
159,877

 
144,779

 
200,014

Payments
(41,494
)
 
(72,743
)
 
(51,241
)
 
(51,963
)
 
(86,450
)
Charge-offs
(669
)
 
(574
)
 
(1,100
)
 
(948
)
 
(1,539
)
Sales
(3,881
)
 
(5,316
)
 
(3,631
)
 
(4,074
)
 
(3,332
)
Transfer from (to) held-for-sale
74,424

 

 

 

 
(88,415
)
Transfer to OREO
(125
)
 
(104
)
 
(206
)
 
(30
)
 
(228
)
Restructured TDRs—accruing (1)
(43,536
)
 
(72,188
)
 
(106,012
)
 
(54,082
)
 
(96,336
)
Other (2)
(17,551
)
 
(4,137
)
 
(32,422
)
 
(33,189
)
 
(47,752
)
TDRs, end of period
$
872,368

 
$
807,447

 
$
809,468

 
$
844,203

 
$
843,710

 
 
 
 
 
 
 
 
 
 
Troubled debt restructured loans—nonaccruing:
TDRs, beginning of period
$
174,258

 
$
197,934

 
$
172,735

 
$
161,056

 
$
161,966

New TDRs
28,663

 
23,541

 
34,632

 
48,643

 
31,977

Payments
(18,314
)
 
(24,461
)
 
(20,377
)
 
(20,833
)
 
(31,372
)
Charge-offs
(13,969
)
 
(12,183
)
 
(2,858
)
 
(6,323
)
 
(14,010
)
Sales
(171
)
 
(499
)
 

 

 

Transfer from (to) held-for-sale
6,656

 

 

 

 
(8,371
)
Transfer to OREO
(1,891
)
 
(3,742
)
 
(3,164
)
 
(2,052
)
 
(2,050
)
Restructured TDRs—nonaccruing (1)
(17,649
)
 
(5,855
)
 
(12,314
)
 
(39,771
)
 
(17,398
)
Other (2)
12,883

 
(478
)
 
29,280

 
32,015

 
40,314

TDRs, end of period
$
170,466

 
$
174,257

 
$
197,934

 
$
172,735

 
$
161,056

 
(1)
Represents existing TDRs that were re-underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above.
(2)
Primarily includes transfers between accruing and nonaccruing categories.
ACL
(This section should be read in conjunction with Note 4 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 loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the same quantitative reserve determination process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.


34

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The acquired loans were recorded at their fair value as of the acquisition date and the prior ALLL was eliminated. An ALLL for acquired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.
We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors considered include: the impact of increasing or decreasing residential real estate values; the diversification of CRE loans; the organic development of new products, or expanded Commercial business verticals such as healthcare, ABL, and energy. An aspect not previously incorporated in the quarterly allowance adequacy evaluation involves the evaluation of the acquired FirstMerit portfolio. We were able to identify similar loan products originated by Huntington and utilized our allowance estimation factors in establishing an adequate reserve level for those products. In instances where the product was new to the owned portfolio, we were able to utilize our allowance methodology in establishing product specific probability of default and loss given default factors. A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio as of the balance sheet date.
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.
The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters: 
Table 17 - Allocation of Allowance for Credit Losses (1)
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
333,101

 
41
%
 
$
323,465

 
41
%
 
$
320,367

 
41
%
 
$
298,746

 
41
%
 
$
284,329

 
40
%
Commercial real estate
98,694

 
10

 
101,042

 
9

 
102,074

 
10

 
100,007

 
10

 
109,967

 
11

Total commercial
431,795

 
51

 
424,507

 
50

 
422,441

 
51

 
398,753

 
51

 
394,296

 
51

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
42,584

 
18

 
50,531

 
20

 
48,032

 
19

 
49,504

 
19

 
43,949

 
19

Home equity
69,866

 
17

 
76,482

 
17

 
78,102

 
17

 
83,671

 
17

 
86,838

 
17

Residential mortgage
34,415

 
13

 
42,392

 
12

 
40,842

 
12

 
41,646

 
12

 
42,794

 
12

RV and marine finance
529

 

 

 

 

 

 

 

 

 

Other consumer
30,441

 
1

 
29,152

 
1

 
24,302

 
1

 
24,269

 
1

 
24,061

 
1

Total consumer
177,835

 
49

 
198,557

 
50

 
191,278

 
49

 
199,090

 
49

 
197,642

 
49

Total allowance for loan and lease losses
609,630

 
100
%
 
623,064

 
100
%
 
613,719

 
100
%
 
597,843

 
100
%
 
591,938

 
100
%
Allowance for unfunded loan commitments
84,030

 
 
 
73,748

 
 
 
75,325

 
 
 
72,081

 
 
 
64,223

 
 
Total allowance for credit losses
$
693,660

 
 
 
$
696,812

 
 
 
$
689,044

 
 
 
$
669,924

 
 
 
$
656,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$

 
46
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

35

Table of Contents

Commercial real estate

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commercial

 
59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
2,095

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RV and marine finance
3,760

 
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other consumer
1,413

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total consumer
7,268

 
41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan and lease losses
7,268

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for unfunded loan commitments
4,403

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for credit losses
$
11,671

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
333,101

 
42
%
 
$
323,465

 
41
%
 
$
320,367

 
41
%
 
$
298,746

 
41
%
 
$
284,329

 
40
%
Commercial real estate
98,694

 
11

 
101,042

 
9

 
102,074

 
10

 
100,007

 
10

 
109,967

 
11

Total commercial
431,795

 
53

 
424,507

 
50

 
422,441

 
51

 
398,753

 
51

 
394,296

 
51

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
42,584

 
16

 
50,531

 
20

 
48,032

 
19

 
49,504

 
19

 
43,949

 
19

Home equity
69,866

 
15

 
76,482

 
17

 
78,102

 
17

 
83,671

 
17

 
86,838

 
17

Residential mortgage
36,510

 
12

 
42,392

 
12

 
40,842

 
12

 
41,646

 
12

 
42,794

 
12

RV and marine finance
4,289

 
3

 

 

 

 

 

 

 

 

Other consumer
31,854

 
1

 
29,152

 
1

 
24,302

 
1

 
24,269

 
1

 
24,061

 
1

Total consumer
185,103

 
47

 
198,557

 
50

 
191,278

 
49

 
199,090

 
49

 
197,642

 
49

Total allowance for loan and lease losses
616,898

 
100
%
 
623,064

 
100
%
 
613,719

 
100
%
 
597,843

 
100
%
 
591,938

 
100
%
Allowance for unfunded loan commitments
88,433

 
 
 
73,748

 
 
 
75,325

 
 
 
72,081

 
 
 
64,223

 
 
Total allowance for credit losses
$
705,331

 
 
 
$
696,812

 
 
 
$
689,044

 
 
 
$
669,924

 
 
 
$
656,161

 
 
Total allowance for loan and leases losses as % of:
Total loans and leases
 
 
0.93
%
 
 
 
1.19
%
 
 
 
1.19
%
 
 
 
1.19
%
 
 
 
1.19
%
Nonaccrual loans and leases
 
 
153

 
 
 
135

 
 
 
123

 
 
 
161

 
 
 
166

Nonperforming assets
 
 
130

 
 
 
127

 
 
 
117

 
 
 
150

 
 
 
155

Total allowance for credit losses as % of:
Total loans and leases
 
 
1.06
%
 
 
 
1.33
%
 
 
 
1.34
%
 
 
 
1.33
%
 
 
 
1.32
%
Nonaccrual loans and leases
 
 
174

 
 
 
151

 
 
 
138

 
 
 
180

 
 
 
184

Nonperforming assets
 
 
148

 
 
 
142

 
 
 
131

 
 
 
168

 
 
 
172

 
(1)
Percentages represent the percentage of each loan and lease category to total loans and leases.
(2)
Represents loans from FirstMerit acquisition.

36

Table of Contents

2016 Third Quarter versus 2015 Fourth Quarter
The $35 million, or 5%, increase in the ACL compared with December 31, 2015, was driven by:
$34 million, or 11%, increase in the ALLL of the C&I portfolio was related to an increase in NALs within our energy related E&P and coal portfolios.
$16 million, or 23%, increase in the AULC driven primarily by an increase in criticized unfunded exposures within the energy sector portfolio.
Partially offset by:
$14 million, or 16%, decline in the ALLL of the home equity portfolio. The decline was driven by a reduction in delinquent and nonaccrual loans.
$7 million, or 14%, decline in the ALLL of the automobile portfolio. The decline was driven by a transfer of loans to loans held-for-sale.
The ACL to total loans ratio of 1.06% at September 30, 2016, declined compared to 1.33% at December 31, 2015. The reduction in the ratio can be attributed directly to the acquisition of the FirstMerit loan portfolio. Management believes the ratio is appropriate given the risk profile of our loan portfolio. We continue to focus on early identification of loans with changes in credit metrics and proactive action plans for these loans. Given the combination of these noted positive and negative factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.
NCOs
Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency 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 at the time of discharge.
C&I and CRE loans are either fully or partially charged-off at 90-days past due with the exception of administrative small ticket lease delinquencies. Automobile loans, RV and marine finance loans 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.
All first-lien mortgage loans greater than 150-days past due are charged-down to the estimated value of the collateral, less anticipated selling costs. The remaining balance is in delinquent status until a modification can be completed, or the loan goes through the foreclosure process. For second-lien home equity loans, defaults typically represent full charge-offs, as there is no remaining equity.
Table 18 - Quarterly Net Charge-off Analysis
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
Three months ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016 (1)
 
2016
 
2016
 
2015
 
2015 (1)
Net charge-offs (recoveries) by loan and lease type:
Originated loans
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
18,889

 
$
3,702

 
$
6,514

 
$
2,252

 
$
9,858

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
(271
)
 
(377
)
 
(104
)
 
(296
)
 
(309
)
Commercial
(2,475
)
 
(296
)
 
(17,372
)
 
(3,939
)
 
(13,512
)
Commercial real estate
(2,746
)
 
(673
)
 
(17,476
)
 
(4,235
)
 
(13,821
)
Total commercial
16,143

 
3,029

 
(10,962
)
 
(1,983
)
 
(3,963
)
Consumer:
 
 
 
 
 
 
 
 
 
Automobile
6,589

 
4,320

 
6,770

 
7,693

 
4,908


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Table of Contents

Home equity
2,141

 
1,078

 
3,681

 
4,706

 
5,869

Residential mortgage
1,726

 
776

 
1,647

 
3,158

 
2,010

RV and marine finance

 

 

 

 

Other consumer
11,265

 
7,552

 
7,416

 
8,249

 
7,339

Total consumer
21,721

 
13,726

 
19,514

 
23,806

 
20,126

Total originated net charge-offs
$
37,864

 
$
16,755

 
$
8,552

 
$
21,823

 
$
16,163

 
 
 
 
 
 
 
 
 
 
Acquired loans (2)
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
336

 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction

 
 
 
 
 
 
 
 
Commercial
48

 
 
 
 
 
 
 
 
Commercial real estate
48

 
 
 
 
 
 
 
 
Total commercial
384

 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
Automobile
1,180

 
 
 
 
 
 
 
 
Home equity
483

 
 
 
 
 
 
 
 
Residential mortgage
2

 
 
 
 
 
 
 
 
RV and marine finance
106

 
 
 
 
 
 
 
 
Other consumer
46

 
 
 
 
 
 
 
 
Total consumer
1,817

 
 
 
 
 
 
 
 
Total acquired net charge-offs
$
2,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
19,225

 
$
3,702

 
$
6,514

 
$
2,252

 
$
9,858

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
(271
)
 
(377
)
 
(104
)
 
(296
)
 
(309
)
Commercial
(2,427
)
 
(296
)
 
(17,372
)
 
(3,939
)
 
(13,512
)
Commercial real estate
(2,698
)
 
(673
)
 
(17,476
)
 
(4,235
)
 
(13,821
)
Total commercial
16,527

 
3,029

 
(10,962
)
 
(1,983
)
 
(3,963
)
Consumer:
 
 
 
 
 
 
 
 
 
Automobile
7,769

 
4,320

 
6,770

 
7,693

 
4,908

Home equity
2,624

 
1,078

 
3,681

 
4,706

 
5,869

Residential mortgage
1,728

 
776

 
1,647

 
3,158

 
2,010

RV and marine finance
106

 

 

 

 

Other consumer
11,311

 
7,552

 
7,416

 
8,249

 
7,339

Total consumer
23,538

 
13,726

 
19,514

 
23,806

 
20,126

Total net charge-offs
$
40,065

 
$
16,755

 
$
8,552

 
$
21,823

 
$
16,163

 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016
 
2016
 
2016
 
2015
 
2015
Net charge-offs (recoveries)—annualized percentages:
Commercial:
 
 
 
 
 
 
 
 
 

38

Table of Contents

Commercial and industrial
0.31
 %
 
0.07
 %
 
0.13
 %
 
0.04
 %
 
0.20
 %
Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction
(0.10
)
 
(0.17
)
 
(0.05
)
 
(0.11
)
 
(0.11
)
Commercial
(0.19
)
 
(0.03
)
 
(1.62
)
 
(0.38
)
 
(1.29
)
Commercial real estate
(0.17
)
 
(0.05
)
 
(1.34
)
 
(0.32
)
 
(1.04
)
Total commercial
0.21

 
0.05

 
(0.17
)
 
(0.03
)
 
(0.06
)
Consumer:
 
 
 
 
 
 
 
 
 
Automobile
0.27

 
0.17

 
0.28

 
0.33

 
0.22

Home equity
0.11

 
0.05

 
0.17

 
0.22

 
0.28

Residential mortgage
0.10

 
0.05

 
0.11

 
0.21

 
0.13

RV and marine finance
0.05

 

 

 

 

Other consumer
5.52

 
4.93

 
5.17

 
6.03

 
5.91

Total consumer
0.32

 
0.22

 
0.32

 
0.39

 
0.34

Net charge-offs as a % of average loans
0.26
 %
 
0.13
 %
 
0.07
 %
 
0.18
 %
 
0.13
 %
(1) Amounts presented above exclude $19.6 million in the 2016 third quarter and $5.1 million in the 2015 third quarter of write-downs of loans transferred to loans held for sale.
(2) Represents loans from FirstMerit acquisition.
In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time. The ALLL established is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased based on the updated risk rating. In certain cases, the standard ALLL is determined to not be appropriate, and a specific reserve is established based on the projected cash flow or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds that necessary to satisfactorily resolve the problem loan, a reduction in the overall level of the ALLL could be recognized. Consumer loans are treated in much the same manner as commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are not identified for consumer loans. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.
2016 Third Quarter versus 2016 Second Quarter
NCOs were an annualized 0.26% of average loans and leases in the current quarter, an increase from 0.13% in the 2016 second quarter, but still below our long-term expectation of 0.35% - 0.55%. Commercial charge-offs were positively impacted by continued recoveries in the CRE portfolio and broader continued successful workout strategies, while consumer charge-offs remain within our expected range with a seasonal increase when compared to the prior period. Given the low level of C&I and CRE NCO’s, we expect some volatility on a quarter-to-quarter comparison basis.

The table below reflects NCO detail for the nine-month periods ended September 30, 2016 and 2015:
Table 19 - Year to Date Net Charge-off Analysis
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2016
 
2015
Net charge-offs by loan and lease type: (1)
 
 
 
Originated loans
 
 
 
Commercial:
 
 
 
Commercial and industrial
$
29,105

 
$
25,672

Commercial real estate:
 
 
 
Construction
(752
)
 
(528
)

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Commercial
(20,143
)
 
(11,780
)
Commercial real estate
(20,895
)
 
(12,308
)
Total commercial
8,210

 
13,364

Consumer:
 
 
 
Automobile
17,679

 
12,598

Home equity
6,900

 
15,144

Residential mortgage
4,149

 
6,968

RV and marine finance

 

Other consumer
26,233

 
17,896

Total consumer
54,961

 
52,606

Total originated net charge-offs
$
63,171

 
$
65,970

 
 
 
 
Acquired loans (2)
 
 
 
Commercial:
 
 
 
Commercial and industrial
$
336

 
 
Commercial real estate:
 
 
 
Construction

 
 
Commercial
48

 
 
Commercial real estate
48

 
 
Total commercial
384

 
 
Consumer:
 
 
 
Automobile
1,180

 
 
Home equity
483

 
 
Residential mortgage
2

 
 
RV and marine finance
106

 
 
Other consumer
46

 
 
Total consumer
1,817

 
 
Total acquired net charge-offs
$
2,201

 
 
 
 
 
 
Total loans
 
 
 
Commercial:
 
 
 
Commercial and industrial
$
29,441

 
$
25,672

Commercial real estate:
 
 
 
Construction
(752
)
 
(528
)
Commercial
(20,095
)
 
(11,780
)
Commercial real estate
(20,847
)
 
(12,308
)
Total commercial
8,594

 
13,364

Consumer:
 
 
 
Automobile
18,859

 
12,598

Home equity
7,383

 
15,144

Residential mortgage
4,151

 
6,968

RV and marine finance
106

 

Other consumer
26,279

 
17,896

Total consumer
56,778

 
52,606

Total net charge-offs
$
65,372

 
$
65,970

 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2016
 
2015
Net charge-offs - annualized percentages:
 
 
 

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Commercial:
 
 
 
Commercial and industrial
0.18
 %
 
0.17
 %
Commercial real estate:
 
 
 
Construction
(0.10
)
 
(0.07
)
Commercial
(0.58
)
 
(0.37
)
Commercial real estate
(0.50
)
 
(0.31
)
Total commercial
0.04

 
0.07

Consumer:
 
 
 
Automobile
0.24

 
0.20

Home equity
0.11

 
0.24

Residential mortgage
0.09

 
0.16

RV and marine finance
0.05

 

Other consumer
5.23

 
5.21

Total consumer
0.29

 
0.30

Net charge-offs as a % of average loans
0.16
 %
 
0.18
 %
(1) Amounts presented above exclude $20 million in the 2016 year-to-date period and $5 million in the 2015 year-to-date period of write-downs of loans transferred to loans held for sale.
(2) Represents loans from FirstMerit acquisition.
2016 First Nine Months versus 2015 First Nine Months
NCOs decreased $1 million in the first nine-month period of 2016 to $65 million. 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.

Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from trading securities, securities owned by our broker-dealer subsidiary, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans.
Interest Rate Risk
OVERVIEW
We actively manage interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. ALCO oversees market risk management, establishing risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. According to these policies, responsibility for measuring and the management of interest rate risk resides in the corporate treasury group.
Interest rate risk on our balance sheet consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability portfolios. Option risk arises from embedded options present in the investment portfolio and in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for us. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates. The interest rate risk position is measured and monitored using risk management tools, including earnings simulation modeling and EVE sensitivity analysis, which capture both short-term and long-term interest rate risk exposures. Combining the results from these separate risk measurement processes allows a reasonably comprehensive view of our short-term and long-term interest rate risk.

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Interest rate risk measurement is calculated and reported to the ALCO monthly and ROC at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use two approaches to model interest rate risk: Net interest income at risk (NII at risk) and EVE.
NII at risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. The assumptions used in the models are our best estimates based on studies conducted by the treasury department. The treasury department uses a data warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to refine assumptions continuously. Assumptions and methodologies regarding administered rate liabilities (e.g., savings, money market and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed regularly.
We also have longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses economic value of equity at risk modeling, or EVE, sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE involves discounting present values of all cash flows of on-balance sheet and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow us to measure longer-term repricing and option risk in the balance sheet.
 
Table 20 - 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, 2016
-0.5
 %
 
3.1
 %
 
6.0
 %
December 31, 2015
-0.3
 %
 
0.7
 %
 
0.3
 %
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 board of director's policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The NII at Risk reported shows that our earnings are more asset sensitive at September 30, 2016 than at December 31, 2015, as a result of the $4.2 billion notional value reduction in asset receive-fixed cash flow swaps, the introduction of new non-maturity deposit models in the 2016 first quarter, and the FirstMerit acquisition in the third quarter.
As of September 30, 2016, we had $12.0 billion of notional value in receive-fixed cash flow swaps, which we use for asset and liability management purposes. At September 30, 2016, the following table shows the expected maturity for asset and liability receive-fixed cash flow swaps:

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Table 21 - Expected Maturity for Asset and Liability Receive-Fixed Cash Flow Swaps
 
 
(dollar amounts in thousands)
Asset receive fixed-generic cash flow swaps
 
Liability receive fixed-generic cash flow swaps
2016
$
700,000

 
$
500,000

2017
3,250,000

 
500,000

2018
75,000

 
2,610,000

2019

 
575,000

2020

 
1,300,000

2021

 
990,000

Thereafter

 
1,500,000

Table 22 - 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, 2016
-1.5
 %
 
4.1
 %
 
5.8
 %
December 31, 2015
-0.4
 %
 
-0.5
 %
 
-2.1
 %
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 many assets and liabilities reach zero percent.
We are within 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 reported at September 30, 2016 shows that the economic value of equity position is more asset sensitive compared with December 31, 2015 primarily due to the decline in spot and forward interest rates over the period, which results in a modeled increase in prepayments for mortgage-related assets. EVE asset sensitivity was also driven to a lesser extent by the introduction of new non-maturity deposit models in the 2016 first quarter and adjustments to modeled prepayment for non-mortgage related securities, as well as the FirstMerit acquisition.
MSRs
(This section should be read in conjunction with Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.)
MSRs recorded using the amortization method with a fair value of $15 million were acquired by Huntington as part of the FirstMerit acquisition. At September 30, 2016, we had a total of $157 million of capitalized MSRs representing the right to service $18.6 billion in mortgage loans. Of this $157 million, $12 million was recorded using the fair value method and $144 million was recorded using the amortization method.
MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed hedging strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or a decrease in mortgage banking income.
MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in servicing rights in the Unaudited Condensed Consolidated Financial Statements.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiary, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans. We

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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
Liquidity risk is the possibility of us being unable to meet current and future financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable, and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. We consider core earnings, strong capital ratios, and credit quality essential for maintaining high credit ratings, which allows us cost-effective access to market-based liquidity. We rely on a large, stable core deposit base and a diversified base of wholesale funding sources to manage liquidity risk. The ALCO is appointed by the ROC to oversee liquidity risk management and the establishment of liquidity risk policies and limits. The treasury department is responsible for identifying, measuring, and monitoring our liquidity profile. The position is evaluated daily, weekly, and monthly by analyzing the composition of all funding sources, reviewing projected liquidity commitments by future months, and identifying sources and uses of funds. The overall management of our liquidity position is also integrated into retail and commercial pricing policies to ensure a stable core deposit base. Liquidity risk is reviewed and managed continuously for the Bank and the parent company, as well as its subsidiaries. In addition, liquidity working groups meet regularly to identify and monitor liquidity positions, provide policy guidance, review funding strategies, and oversee the adherence to, and maintenance of, the contingency funding plans.
Our primary source of liquidity is our core deposit base. Core deposits comprised approximately 94% of total deposits at September 30, 2016. 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 $11.3 billion as of September 30, 2016. The treasury department also prepares a contingency funding plan that details the potential erosion of funds in the event of a systemic financial market crisis or institutional-specific stress. An example of an institution specific event would be a downgrade in our public credit rating by a rating agency due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition. Examples of systemic events unrelated to us that could have an effect on our access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about us, or the banking industry in general, may adversely affect the cost and availability of normal funding sources. The liquidity contingency plan therefore outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period. Please see the Liquidity Risk section in Item 1A of our 2015 Form 10-K for more details.
Investment Securities Portfolio
The expected weighted average maturities of our AFS and HTM portfolios are significantly shorter than their contractual maturities as reflected in Note 5 and Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements. Particularly regarding the MBS and ABS, prepayments of principal and interest that historically occur in advance of scheduled maturities will shorten the expected life of these portfolios. The expected weighted average maturities, which take into account expected prepayments of principal and interest under existing interest rate conditions, are shown in the following table:
 
Table 23 - Expected Life of Investment Securities
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
September 30, 2016
 
Available-for-Sale & Other
Securities
 
Held-to-Maturity
Securities
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
1 year or less
$
431,565

 
$
424,963

 
$
23,245

 
$
23,180

After 1 year through 5 years
7,323,183

 
7,401,946

 
3,743,028

 
3,803,114

After 5 years through 10 years (1)
7,147,106

 
7,157,425

 
1,528,740

 
1,556,426

After 10 years
981,832

 
977,602

 
6,374

 
6,373

Other securities
507,993

 
508,438

 

 

Total
$
16,391,679

 
$
16,470,374

 
$
5,301,387

 
$
5,389,093

(1)
A portion of the securities with an average life of 5 years to 10 years, are variable rate; resulting in an average duration of 4.38 years.


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Table of Contents

Bank Liquidity and Sources of Funding
Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2016, these core deposits funded 72% of total assets (110% 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 $38 million and $16 million at September 30, 2016 and December 31, 2015, respectively.
The following tables reflect deposit composition and short-term borrowings detail for each of the last five quarters:
Table 24 - Deposit Composition
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016
 
2016
 
2016
 
2015
 
2015
By Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits—noninterest-bearing
$
23,426

 
30
%
 
$
16,324

 
30
%
 
$
16,571

 
30
%
 
$
16,480

 
30
%
 
$
16,935

 
31
%
Demand deposits—interest-bearing
15,730

 
20

 
8,412

 
15

 
8,174

 
15

 
7,682

 
14

 
6,574

 
12

Money market deposits
18,604

 
24

 
19,480

 
34

 
19,844

 
35

 
19,792

 
36

 
19,494

 
36

Savings and other domestic deposits
12,418

 
16

 
5,341

 
10

 
5,423

 
10

 
5,246

 
9

 
5,189

 
10

Core certificates of deposit
2,724

 
4

 
1,866

 
4

 
2,123

 
4

 
2,382

 
4

 
2,483

 
5

Total core deposits:
72,902

 
94

 
51,423

 
93

 
52,135

 
94

 
51,582

 
93

 
50,675

 
94

Other domestic deposits of $250,000 or more
391

 
1

 
380

 
1

 
424

 
1

 
501

 
1

 
263

 

Brokered deposits and negotiable CDs
3,972

 
5

 
3,017

 
6

 
2,890

 
5

 
2,944

 
5

 
2,904

 
5

Deposits in foreign offices
140

 

 
223

 

 
180

 

 
268

 
1

 
403

 
1

Total deposits
$
77,405

 
100
%
 
$
55,043

 
100
%
 
$
55,629

 
100
%
 
$
55,295

 
100
%
 
$
54,245

 
100
%
Total core deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
32,936

 
45
%
 
$
24,308

 
47
%
 
$
24,543

 
47
%
 
$
24,474

 
47
%
 
$
24,886

 
49
%
Consumer
39,966

 
55

 
27,115

 
53

 
27,592

 
53

 
27,108

 
53

 
25,789

 
51

Total core deposits
$
72,902

 
100
%
 
$
51,423

 
100
%
 
$
52,135

 
100
%
 
$
51,582

 
100
%
 
$
50,675

 
100
%
 
Table 25 - Federal Funds Purchased and Repurchase Agreements
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2016
 
2016
 
2016
 
2015
 
2015
Balance at period-end
 
 
 
 
 
 
 
 
 
Federal Funds purchased and securities sold under agreements to repurchase
$
1,537

 
$
149

 
$
204

 
$
601

 
$
1,051

Federal Home Loan Bank advances
600

 
1,800

 
250

 

 
400

Other short-term borrowings
11

 
8

 
18

 
14

 
3

Weighted average interest rate at period-end
 
 
 
 
 
 
 
 
 
Federal Funds purchased and securities sold under agreements to repurchase
0.18
%
 
0.05
%
 
0.04
%
 
0.13
%
 
0.05
%
Federal Home Loan Bank advances
0.40

 
0.42

 
0.41

 

 
0.19

Other short-term borrowings
3.03

 
4.19

 
2.13

 
0.27

 
0.19

Maximum amount outstanding at month-end during the period
 
 
 
 
 
 
 
 
 

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Federal Funds purchased and securities sold under agreements to repurchase
$
1,537

 
$
258

 
$
401

 
$
601

 
$
1,051

Federal Home Loan Bank advances
600

 
1,800

 
1,575

 

 
400

Other short-term borrowings
34

 
21

 
20

 
14

 
3

Average amount outstanding during the period
 
 
 
 
 
 
 
 
 
Federal Funds purchased and securities sold under agreements to repurchase
$
618

 
$
515

 
$
582

 
$
503

 
$
685

Federal Home Loan Bank advances
668

 
504

 
553

 
13

 
136

Other short-term borrowings
20

 
13

 
9

 
9

 
23

Weighted average interest rate during the period
 
 
 
 
 
 
 
 
 
Federal Funds purchased and securities sold under agreements to repurchase
0.07
%
 
0.25
%
 
0.18
%
 
0.05
%
 
0.05
%
Federal Home Loan Bank advances
0.43

 
0.42

 
0.40

 
0.25

 
0.16

Other short-term borrowings
2.53

 
1.81

 
3.69

 
1.99

 
0.78

The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans and securities pledged to the Federal Reserve Discount Window and the FHLB are $19.2 billion and $17.5 billion at September 30, 2016 and December 31, 2015, respectively.
For further information related to debt issuances, please see Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements.
At September 30, 2016, total wholesale funding was $13.2 billion, an increase from $10.9 billion at December 31, 2015. The increase from prior year-end primarily relates to an increase in short-term borrowings and brokered time deposits and negotiable CDs.
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 increases to 100 percent on January 1, 2017. Huntington expects to be compliant with the Modified LCR requirement within the transition periods established in the Modified LCR rule.
At September 30, 2016, we believe the Bank had sufficient liquidity to meet its cash flow obligations for the foreseeable future.
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, 2016 and December 31, 2015, the parent company had $2.1 billion and $0.9 billion, respectively, in cash and cash equivalents. The increase primarily relates to 2016 issuances of long-term debt and preferred stock.
On October 19, 2016, the board of directors declared a quarterly common stock cash dividend of $0.08 per common share. The dividend is payable on January 2, 2017, to shareholders of record on December 20, 2016. Based on the current quarterly dividend of $0.08 per common share, cash demands required for common stock dividends are estimated to be approximately $87 million per quarter. On October 19, 2016, the board of directors declared a quarterly Series A, Series B, Series C, and Series D Preferred Stock dividend payable on January 16, 2017 to shareholders of record on January 1, 2017.

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Based on the current dividend, cash demands required for Series A Preferred Stock are estimated to be approximately $8 million per quarter. Cash demands required for Series B Preferred Stock are expected to be approximately $300 thousand per quarter. Cash demands required for Series C Preferred Stock are expected to be approximately $1.5 million per quarter. Cash demands required for Series D Preferred Stock are expected to be approximately $9 million per quarter.
During the third quarter, the Bank returned capital totaling $175 million to the holding company. The Bank declared a return of capital to the holding company of $113 million payable in the 2016 fourth quarter. To help meet any additional liquidity needs, the parent company may issue debt or equity securities from time to time. In April 2016, the Bank issued $490 million of preferred stock to the holding company. In the 2016 third and fourth quarter, the Bank declared and paid a preferred dividend of $7 million to the holding company.
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, interest rate swaps, financial guarantees contained in standby letters-of-credit issued by the Bank, and commitments by the Bank to sell mortgage loans.
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature. See Note 18 for more information.

INTEREST RATE SWAPS
Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans. See Note 16 for more information.
STANDBY LETTERS-OF-CREDIT
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years and are expected to expire without being drawn upon. Standby letters-of-credit are included in the determination of the amount of risk-based capital that the parent company and the Bank are required to hold. Through our credit process, we monitor the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, a loss is recognized in the provision for credit losses. See Note 18 for more information.
COMMITMENTS TO SELL LOANS
Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. In addition, we have commitments to sell residential real estate loans. These contracts mature in less than one year. See Note 18 for more information.
We believe that off-balance sheet arrangements are properly considered in our liquidity risk management process.
Operational Risk
Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We actively and continuously monitor cyber-attacks such as attempts related to online deception and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses.

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Our objective for managing cyber security risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate our systems. We work to achieve this objective by hardening networks and systems against attack, and by diligently managing visibility and monitoring controls within our data and communications environment to recognize events and respond before the attacker has the opportunity to execute a cyber attack. 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 is inherently large and complex. Our objective for managing execution risk is to minimize impacts to daily operations. We have an established Integration Management Office led by senior management. Responsibilities include central management, reporting, and escalation of key integration deliverables. In addition, a board level Integration Governance Committee has been established to assist in the oversight of the integration of people, systems, and processes of FirstMerit with Huntington.

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

Compliance Risk
Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. These broad-based laws, rules, and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. Additionally, the volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti-money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and/or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.
Capital
Both regulatory capital and shareholders’ equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Company’s overall capital adequacy. We believe our current levels of both regulatory capital and shareholders’ equity are adequate.
Regulatory Capital
We are subject to the Basel III capital requirements including the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule. The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios, including the CET1 ratio on a transitional Basel III basis, which we use to measure capital adequacy (See Non-GAAP Financial Measures).


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Table 26 - Capital Under Current Regulatory Standards (transitional Basel III basis) (Non-GAAP)
(dollar amounts in millions except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Common equity tier 1 risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity
 
$
10,387

 
$
7,507

 
$
7,158

 
$
6,595

 
$
6,583

Regulatory capital adjustments:
 
 
 
 
 
 
 
 
 
 
Shareholders’ preferred equity
 
(1,076
)
 
(971
)
 
(773
)
 
(386
)
 
(386
)
Accumulated other comprehensive loss (income) offset
 
172

 
134

 
167

 
226

 
140

Goodwill and other intangibles, net of taxes
 
(2,140
)
 
(700
)
 
(703
)
 
(695
)
 
(697
)
Deferred tax assets that arise from tax loss and credit carryforwards
 
(29
)
 
(21
)
 
(29
)
 
(19
)
 
(15
)
Common equity tier 1 capital
 
7,314

 
5,949

 
5,820

 
5,721

 
5,625

Additional tier 1 capital
 
 
 
 
 
 
 
 
 
 
Shareholders’ preferred equity
 
1,076

 
971

 
773

 
386

 
386

Qualifying capital instruments subject to phase-out
 

 

 

 
76

 
76

Other
 
(19
)
 
(14
)
 
(19
)
 
(29
)
 
(22
)
Tier 1 capital
 
8,371

 
6,906

 
6,574

 
6,154

 
6,065

LTD and other tier 2 qualifying instruments
 
1,036


590


611

 
563

 
623

Qualifying allowance for loan and lease losses
 
705


697


689

 
670

 
656

Tier 2 capital
 
1,741

 
1,287

 
1,300

 
1,233

 
1,279

Total risk-based capital
 
$
10,112

 
$
8,193

 
$
7,874

 
$
7,387

 
$
7,344

Risk-weighted assets (RWA)
 
$
80,513

 
$
60,717

 
$
59,798

 
$
58,420

 
$
57,839

Common equity tier 1 risk-based capital ratio
 
9.09
%
 
9.80
%
 
9.73
%
 
9.79
%
 
9.72
%
Other regulatory capital data:
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
9.89

 
9.55

 
9.29

 
8.79

 
8.85

Tier 1 risk-based capital ratio
 
10.40

 
11.37

 
10.99

 
10.53

 
10.49

Total risk-based capital ratio
 
12.56

 
13.49

 
13.17

 
12.64

 
12.70


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Table 27 - Capital Adequacy—Non-Regulatory (Non-GAAP)
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Consolidated capital calculations:
 
 
 
 
 
 
 
 
 
Common shareholders’ equity
$
9,316

 
$
6,536

 
$
6,385

 
$
6,209

 
$
6,197

Preferred shareholders’ equity
1,071

 
971

 
773

 
386

 
386

Total shareholders’ equity
10,387

 
7,507

 
7,158

 
6,595

 
6,583

Goodwill
(2,004
)
 
(677
)
 
(677
)
 
(677
)
 
(677
)
Other intangible assets
(429
)
 
(48
)
 
(51
)
 
(55
)
 
(59
)
Other intangible assets deferred tax liability (1)
150

 
17

 
18

 
19

 
21

Total tangible equity
8,104

 
6,799

 
6,448

 
5,882

 
5,868

Preferred shareholders’ equity
(1,071
)
 
(971
)
 
(773
)
 
(386
)
 
(386
)
Total tangible common equity
$
7,033

 
$
5,828

 
$
5,675

 
$
5,496

 
$
5,482

Total assets
$
100,765

 
$
73,954

 
$
72,645

 
$
71,018

 
$
70,186

Goodwill
(2,004
)
 
(677
)
 
(677
)
 
(677
)
 
(677
)
Other intangible assets
(429
)
 
(48
)
 
(51
)
 
(55
)
 
(59
)
Other intangible assets deferred tax liability (1)
150

 
17

 
18

 
19

 
21

Total tangible assets
$
98,482

 
$
73,246

 
$
71,935

 
$
70,305

 
$
69,471

Tangible equity / tangible asset ratio
8.23
%
 
9.28
%
 
8.96
%
 
8.37
%
 
8.45
%
Tangible common equity / tangible asset ratio
7.14

 
7.96

 
7.89

 
7.82

 
7.89

 
(1)
Calculated assuming a 35% tax rate.

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The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the past five quarters:
 
Table 28 - Regulatory Capital Data
(dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basel III
 
 
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Total risk-weighted assets
Consolidated
 
$
80,513

 
$
60,720

 
$
59,798

 
$
58,420

 
$
57,839

 
Bank
 
80,345

 
60,673

 
59,723

 
58,351

 
57,750

Common equity tier I risk-based capital
Consolidated
 
7,315

 
5,949

 
5,821

 
5,721

 
5,625

 
Bank
 
8,019

 
5,578

 
5,518

 
5,519

 
5,475

Tier 1 risk-based capital
Consolidated
 
8,371

 
6,905

 
6,574

 
6,154

 
6,065

 
Bank
 
8,661

 
6,221

 
5,672

 
5,735

 
5,692

Tier 2 risk-based capital
Consolidated
 
1,741

 
1,287

 
1,300

 
1,233

 
1,279

 
Bank
 
1,600

 
1,331

 
1,119

 
1,115

 
1,101

Total risk-based capital
Consolidated
 
10,112

 
1,294

 
7,874

 
7,387

 
7,344

 
Bank
 
10,261

 
7,552

 
6,791

 
6,851

 
6,793

Tier 1 leverage ratio
Consolidated
 
9.89
%
 
9.55
%
 
9.29
%
 
8.79
%
 
8.85
%
 
Bank
 
10.26

 
8.61

 
8.02

 
8.21

 
8.33

Common equity tier I risk-based capital ratio
Consolidated
 
9.09

 
9.80

 
9.73

 
9.79

 
9.72

 
Bank
 
9.98

 
9.19

 
9.24

 
9.46

 
9.48

Tier 1 risk-based capital ratio
Consolidated
 
10.40

 
11.37

 
10.99

 
10.53

 
10.49

 
Bank
 
10.78

 
10.25

 
9.50

 
9.83

 
9.86

Total risk-based capital ratio
Consolidated
 
12.56

 
13.49

 
13.17

 
12.64

 
12.70

 
Bank
 
12.77

 
12.45

 
11.37

 
11.74

 
11.76

At September 30, 2016, we maintained Basel III transitional capital ratios in excess of the well-capitalized standards established by the FRB.
Shareholders’ Equity
We generate shareholders’ equity primarily through the retention of earnings, net of dividends and share repurchases. Other potential sources of shareholders’ equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities.
Shareholders’ equity totaled $10.4 billion at September 30, 2016, an increase of $3.8 billion when compared with December 31, 2015. In connection with the FirstMerit merger, during the 2016 third quarter, we issued $2.8 billion of common stock and $0.1 billion of preferred stock. During the 2016 first and second quarter, we issued $400 million and $200 million of preferred stock, respectively. Costs of $15 million related to the issuances are reported as a direct deduction from the face amount of the stock.
On June 29, 2016, we announced that the Federal Reserve did not object to our proposed capital actions included in our capital plan submitted to the Federal Reserve in April 2016 as part of the 2016 Comprehensive Capital Analysis and Review (“CCAR”). These actions included a 14% increase in the quarterly dividend per common share to $0.08, starting in the fourth quarter of 2016. Our capital plan also included the issuance of capital in connection with the acquisition of FirstMerit Corporation and continues the previously announced suspension of our share repurchase program.

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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.
On October 19, 2016, our board of directors declared a quarterly cash dividend of $0.08 per common share, payable on January 2, 2017. Also, cash dividends of $0.07 per share were declared on July 20, 2016, April 21, 2016 and January 20, 2016.
On October 19, 2016, our board of directors also declared a quarterly cash dividend on our 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock of $21.25 per share. The dividend is payable on January 16, 2017. Also, cash dividends of $21.25 per share were declared on July 20, 2016, April 21, 2016 and January 20, 2016.

On October 19, 2016, our board of directors also declared a quarterly cash dividend on our Floating Rate Series B Non-Cumulative Perpetual Preferred Stock of $8.95 per share. The dividend is payable on January 16, 2017. Also, cash dividends of $8.45 per share, $8.32 per share and $8.31 per share were declared on July 20, 2016, April 21, 2016 and January 20, 2016, respectively.

On October 19, 2016, our board of directors also declared a quarterly cash dividend on our Series C Non-Cumulative Perpetual Preferred Stock of $14.69 per share. The dividend is payable on January 16, 2017. Also, a cash dividend of $11.59 per share was declared on September 15, 2016.
On October 19, 2016, our board of directors also declared a quarterly cash dividend on our 6.25% Series D Non-Cumulative Perpetual Convertible Preferred Stock of $15.63 per share. The dividend is payable on January 16, 2017. Also, cash dividends of $15.63 and $19.79 per share were declared on July 20, 2016 and April 21, 2016.
Share Repurchases
From time to time the board of directors authorizes the Company to repurchase shares of our common stock. Although we announce when the board of directors authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations. Our capital plan continues the previously announced suspension of our share repurchase program.
Fair Value
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads, and where received quoted prices do not vary widely. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. Inactive markets are characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly. When observable market prices do not exist, we estimate fair value primarily by using cash flow and other financial modeling methods. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Changes in these underlying factors, assumptions, or estimates in any of these areas could materially impact the amount of revenue or loss recorded.
The FASB ASC Topic 820, Fair Value Measurements, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets.

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Level 2 – inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs that are unobservable and significant to the fair value measurement. Financial instruments are considered Level 3 when values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable.
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 15 of the Notes to Unaudited Condensed Consolidated Financial Statements.
BUSINESS SEGMENT DISCUSSION
Overview
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.
On August 16, 2016, we completed our acquisition of FirstMerit Corporation and segment results were impacted by the mid-quarter acquisition.
Revenue Sharing
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to, customers. Results of operations for the business segments reflect these fee sharing allocations.
Expense Allocation
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all five business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the five business segments.
Funds Transfer Pricing (FTP)
We use an active and centralized FTP methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).

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Net Income by Business Segment
The segregation of net income by business segment for the nine-month periods ending September 30, 2016 and September 30, 2015 is presented in the following table:

Table 29 - Net Income (Loss) by Business Segment
(dollar amounts in thousands)
 
 
 
 
Nine months ended September 30,
 
2016
 
2015
Retail and Business Banking
$
221,733

 
$
182,315

Commercial Banking
128,784

 
160,830

AFCRE
128,296

 
117,382

RBHPCG
47,409

 
19,211

Home Lending
15,584

 
(13,647
)
Treasury / Other
(68,948
)
 
48,557

Total net income
$
472,858

 
$
514,648

Treasury / Other
The Treasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the five business segments. Other assets include investment securities and bank owned life insurance. The financial impact associated with our FTP methodology, as described above, is also included.
Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and any investment security and trading asset gains or losses. Noninterest expense includes $185.9 million of FirstMerit acquisition-related expense in the current period, certain corporate administrative, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury / Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the business segments.
Retail and Business Banking
 
 
 
 
 
 
 
 
Table 30 - Key Performance Indicators for Retail and Business Banking
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Net interest income
$
871,727

 
$
764,370

 
$
107,357

 
14
 %
Provision for credit losses
43,887

 
22,840

 
21,047

 
92

Noninterest income
396,020

 
352,585

 
43,435

 
12

Noninterest expense
882,732

 
813,631

 
69,101

 
8

Provision for income taxes
119,395

 
98,169

 
21,226

 
22

Net income
$
221,733

 
$
182,315

 
$
39,418

 
22
 %
Number of employees (average full-time equivalent)
6,064

 
5,615

 
449

 
8
 %
Total average assets (in millions)
$
16,661

 
$
15,514

 
$
1,147

 
7

Total average loans/leases (in millions)
14,362

 
13,573

 
789

 
6

Total average deposits (in millions)
33,533

 
30,058

 
3,475

 
12

Net interest margin
3.55
%
 
3.47
%
 
0.08
 %
 
2

NCOs
$
47,322

 
$
46,565

 
$
757

 
2

NCOs as a % of average loans and leases
0.44
%
 
0.46
%
 
(0.02
)%
 
(4
)
2016 First Nine Months vs. 2015 First Nine Months
Retail and Business Banking reported net income of $222 million in the first nine-month period of 2016. This was an increase of $39 million, or 22%, compared to the year-ago period. Results were impacted by the mid-quarter FirstMerit

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acquisition. Segment net interest income increased $107 million, or 14%, primarily due to an increase in total average loans and deposits. The provision for credit losses increased $21 million, or 92%, primarily as a result of loan growth. Noninterest income increased $43 million, or 12%, 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, improved mortgage banking income and SBA sales gains contributed to the increase. Noninterest expense increased $69 million, or 8%, due to an increase in personnel expense related to the in-store branch expansion, addition of FirstMerit colleagues, and allocated noninterest expense.
Commercial Banking
 
 
 
 
 
 
 
 
Table 31 - Key Performance Indicators for Commercial Banking
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Net interest income
$
339,839

 
$
277,731

 
$
62,108

 
22
 %
Provision for credit losses
53,378

 
12,989

 
40,389

 
311

Noninterest income
192,232

 
191,391

 
841

 

Noninterest expense
280,564

 
208,702

 
71,862

 
34

Provision for income taxes
69,345

 
86,601

 
(17,256
)
 
(20
)
Net income
$
128,784

 
$
160,830

 
$
(32,046
)
 
(20
)%
Number of employees (average full-time equivalent)
1,263

 
1,138

 
125

 
11
 %
Total average assets (in millions)
$
18,892

 
$
15,904

 
$
2,988

 
19

Total average loans/leases (in millions)
14,906

 
12,719

 
2,187

 
17

Total average deposits (in millions)
11,943

 
11,270

 
673

 
6

Net interest margin
2.83
%
 
2.75
%
 
0.08
%
 
3

NCOs
$
19,951

 
$
15,602

 
$
4,349

 
28

NCOs as a % of average loans and leases
0.18
%
 
0.16
%
 
0.02
%
 
13

2016 First Nine Months vs. 2015 First Nine Months
Commercial Banking reported net income of $129 million in the first nine-month period of 2016. This was a decrease of $32 million, or 20%, compared to the year-ago period. Results were impacted by the mid-quarter FirstMerit acquisition. Segment net interest income increased $62 million, or 22%, primarily due to higher earning asset yields related to the Huntington Technology Finance acquisition late in the 2015 first quarter, an increase in average loans/leases, recoveries from previously charged-off loans, and the increase in direct purchase municipal instruments. The provision for credit losses increased $40 million, or 311%, as a result of updated assumptions made to the ACL estimation process beginning in the 2015 fourth quarter, additional reserves for the energy sector portfolio, and an increase in NCOs. Noninterest income increased $1 million, or less than one percent, primarily due to an increase in treasury management related revenue and the late 2015 first quarter acquisition of Huntington Technology Finance, partially offset by mezzanine fees no longer being shared by the Commercial Banking segment, as well as a decline in insurance fees. Noninterest expense increased $72 million, or 34%, primarily due to an increase in allocated noninterest expense, as well as an increase in personnel expense and operating lease expense.

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Automobile Finance and Commercial Real Estate
 
 
 
 
 
 
 
 
Table 32 - Key Performance Indicators for Automobile Finance and Commercial Real Estate
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Net interest income
$
317,624

 
$
286,062

 
$
31,562

 
11
 %
Provision for credit losses
18,727

 
14,692

 
4,035

 
27

Noninterest income
25,787

 
22,021

 
3,766

 
17

Noninterest expense
127,305

 
112,803

 
14,502

 
13

Provision for income taxes
69,083

 
63,206

 
5,877

 
9

Net income
$
128,296

 
$
117,382

 
$
10,914

 
9
 %
Number of employees (average full-time equivalent)
330

 
295

 
35

 
12
 %
Total average assets (in millions)
$
19,521

 
$
16,718

 
$
2,803

 
17

Total average loans/leases (in millions)
18,434

 
15,582

 
2,852

 
18

Total average deposits (in millions)
1,663

 
1,452

 
211

 
15

Net interest margin
2.25
 %
 
2.37
 %
 
(0.12
)%
 
(5
)
NCOs
$
(2,301
)
 
$
(4,857
)
 
$
2,556

 
(53
)
NCOs as a % of average loans and leases
(0.02
)%
 
(0.04
)%
 
0.02
 %
 
(50
)

2016 First Nine Months vs. 2015 First Nine Months

AFCRE reported net income of $128 million in the first nine-month period of 2016. This was an increase of $11 million, or 9%, compared to the year-ago period. Results were impacted by the mid-quarter FirstMerit acquisition. Segment net interest income increased $32 million or 11%, as the benefit from higher loan balances were offset by a 12 basis point decline in the net interest margin. The provision for credit losses increased by $4 million or 27%, primarily due to an increase in loan balances and a decline in recoveries of prior period charge-offs. In addition, there was an incremental provision for credit losses associated with the transfer of $1.5 billion of automobile loans to loans held-for-sale late in the 2016 third quarter. Noninterest income increased $4 million, or 17%, primarily due to a $9 million increase in fee sharing revenue and a $2 million increase in realized and unrealized gains associated with community development equity investments. These increases were partially offset by the year ago $5 million gain on sale of loans from the automobile loan securitization. Noninterest expense increased $15 million, or 13%, primarily due to an increase in personnel costs and other allocated costs attributed to higher production and portfolio balance levels.

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Regional Banking and The Huntington Private Client Group
 
 
 
 
 
 
 
 
Table 33 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Net interest income
$
125,076

 
$
102,377

 
$
22,699

 
22
 %
Provision for credit losses
157

 
7,834

 
(7,677
)
 
(98
)
Noninterest income
84,423

 
84,818

 
(395
)
 

Noninterest expense
136,406

 
149,806

 
(13,400
)
 
(9
)
Provision for income taxes
25,527

 
10,344

 
15,183

 
147

Net income
$
47,409

 
$
19,211

 
$
28,198

 
147
 %
Number of employees (average full-time equivalent)
586

 
639

 
(53
)
 
(8
)%
Total average assets (in millions)
$
4,569

 
$
4,225

 
$
344

 
8

Total average loans/leases (in millions)
4,036

 
3,771

 
265

 
7

Total average deposits (in millions)
7,895

 
6,935

 
960

 
14

Net interest margin
2.16
 %
 
2.00
%
 
0.16
 %
 
8

NCOs
$
(2,393
)
 
$
4,634

 
$
(7,027
)
 
N.R.

NCOs as a % of average loans and leases
(0.08
)%
 
0.16
%
 
(0.24
)%
 
N.R.

Total assets under management (in billions)—eop (1)
$
17.3

 
$
17.8

 
$
(0.5
)
 
(3
)
Total trust assets (in billions)—eop (1)
98.8

 
82.7

 
16.1

 
19

N.R.—Not relevant.
eop—End of Period.
(1)
Includes assets associated with FirstMerit.
2016 First Nine Months vs. 2015 First Nine Months
RBHPCG reported net income of $47 million in the first nine-month period of 2016. This was an increase of $28 million, or 147%, compared to the year-ago period. Results were impacted by the mid-quarter FirstMerit acquisition. Net interest income increased $23 million, or 22%, due to a 14% increase in average total deposits combined with a 7% increase in average total loans and a 16 basis point increase in net interest margin. The increase in average total loans was primarily due to growth in portfolio mortgage loans, while the increase in average total deposits was the result of growth in the new Private Client Account interest checking product and growth in commercial deposit account balances. The provision for credit losses decreased $8 million, or 98%, primarily due to net recoveries in the current period. Noninterest income was unchanged, as increased revenue from the FirstMerit acquisition was offset by the reduction in revenue due to the sale of HASI and HAA at the end of 2015. Noninterest expense decreased $13 million, or 9%, due to reduced expense resulting from the sale of HASI and HAA, and reduced allocated costs, partially offset by increased expenses resulting from the FirstMerit acquisition.

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Home Lending
 
 
 
 
 
 
 
 
Table 34 - Key Performance Indicators for Home Lending
(dollar amounts in thousands unless otherwise noted)
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
Change
 
2016
 
2015
 
Amount
 
Percent
Net interest income
$
42,941

 
$
36,936

 
$
6,005

 
16
 %
Provision (reduction in allowance) for credit losses
(252
)
 
5,132

 
(5,384
)
 
N.R.

Noninterest income
64,158

 
62,273

 
1,885

 
3

Noninterest expense
83,375

 
115,072

 
(31,697
)
 
(28
)
Provision for income taxes
8,392

 
(7,348
)
 
15,740

 
N.R.

Net income (loss)
$
15,584

 
$
(13,647
)
 
$
29,231

 
N.R.

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

 
960

 
67

 
7
 %
Total average assets (in millions)
$
3,237

 
$
3,134

 
$
103

 
3

Total average loans/leases (in millions)
2,607

 
2,536

 
71

 
3

Total average deposits (in millions)
383

 
350

 
33

 
9

Net interest margin
1.87
%
 
1.68
%
 
0.19
 %
 
11

NCOs
$
2,793

 
$
3,729

 
$
(936
)
 
(25
)
NCOs as a % of average loans and leases
0.14
%
 
0.20
%
 
(0.06
)%
 
(30
)
Mortgage banking origination volume (in millions)
$
4,280

 
$
3,693

 
$
587

 
16

N.R.—Not relevant.
2016 First Nine Months vs. 2015 First Nine Months
Home Lending reported net income of $16 million in the first nine-month period of 2016 compared to a net loss of $14 million in the year-ago period. Results were impacted by the mid-quarter FirstMerit acquisition. Net interest income increased $6 million, or 16%, which primarily reflects higher residential mortgage balances and lower FTP costs. The provision (reduction in allowance) for credit losses decreased $5 million, due to factors used in the ACL estimation process in the third quarter of 2016. Noninterest income increased by $2 million, or 3%, primarily due to higher mortgage production partially offset by higher fee sharing to other business segments. Noninterest expense declined $32 million, or 28%, primarily due to lower allocated expenses.

ADDITIONAL DISCLOSURES
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements, which are not historical facts and are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our “Fair Play” banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the possibility that the anticipated benefits of the merger with FirstMerit Corporation are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where we do business; diversion of management’s attention from ongoing business operations and opportunities; potential

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adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger with FirstMerit Corporation; our ability to complete the integration of FirstMerit Corporation successfully; and other factors 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, 2015 and our subsequent Quarterly Reports on Form 10-Q, including for the quarters ended March 31, 2016 and June 30, 2016, each of which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, http://www.huntington.com, under the heading “Publications and Filings” and in other documents we file with the SEC.
All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not assume any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Non-GAAP Financial Measures
This document contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding Huntington’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein.
Significant Items
From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the Company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.
We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.
Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.

Fully-Taxable Equivalent Basis
Interest income, yields, and ratios on a FTE basis are considered non-GAAP financial measures.  Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes.  The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources.  The FTE basis assumes a federal statutory tax rate of 35 percent. We encourage readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.
Non-Regulatory Capital Ratios
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
Tangible common equity to tangible assets, and
Tangible common equity to risk-weighted assets using Basel III definitions.

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These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Company’s capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities, the nature and extent of which varies among different financial services companies. These ratios are not defined in Generally Accepted Accounting Principles (“GAAP”) or federal banking regulations. As a result, these non-regulatory capital ratios disclosed by the Company are considered non-GAAP financial measures.
Because there are no standardized definitions for these non-regulatory capital ratios, the Company’s calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.

Risk Factors
Information on risk is discussed in the Risk Factors section included in Item 1A of our 2015 Form 10-K. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report.

Updates to Risk Factors

Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.

The FASB, regulatory agencies, and other bodies that establish accounting standards periodically change the financial accounting and reporting standards governing the preparation of our financial statements. Additionally, those bodies that establish and interpret the accounting standards (such as the FASB, SEC, and banking regulators) may change prior interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially affect how we record and report our financial condition and results of operations.
On June 16, 2016, the FASB issued Accounting Standard Update 2016-13, Financial Instruments - Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an expected losses approach for calculating credit reserves on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.
For further discussion, see Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements.
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, 2015 Form 10-K, as supplemented by this report, lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that significantly differ from when those estimates were made.
Our most significant accounting estimates relate to our ACL, valuation of financial instruments, contingent liabilities, income taxes, and deferred tax assets. These significant accounting estimates and their related application are discussed in our December 31, 2015 Form 10-K.


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Update to Critical Accounting Policies and Use of Significant Estimates

Goodwill and Intangible Assets
The acquisition method of accounting requires that acquired assets and liabilities are recorded at their fair values at the date of acquisition. This often involves estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received over the economic life, which is also subjective. Acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the acquired goodwill relates.
Recent Accounting Pronouncements and Developments
Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2016 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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Table of Contents

Item 1: Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
(dollar amounts in thousands, except number of shares)
September 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Cash and due from banks
$
1,661,939

 
$
847,156

Interest-bearing deposits in banks
51,113

 
51,838

Trading account securities
36,071

 
36,997

Loans held for sale (includes $517,591 and $337,577 respectively, measured at fair value) (1)
3,414,497

 
474,621

Available-for-sale and other securities
16,470,374

 
8,775,441

Held-to-maturity securities
5,301,387

 
6,159,590

Loans and leases (includes $89,190 and $34,637 respectively, measured at fair value) (1)
66,304,466

 
50,341,099

Allowance for loan and lease losses
(616,898
)
 
(597,843
)
Net loans and leases
65,687,568

 
49,743,256

Bank owned life insurance
2,422,692

 
1,757,668

Premises and equipment
828,440

 
620,540

Goodwill
2,004,348

 
676,869

Other intangible assets
428,774

 
54,978

Servicing rights
180,938

 
189,237

Accrued income and other assets
2,277,271

 
1,630,110

Total assets
$
100,765,412

 
$
71,018,301

Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Deposits
$
77,405,096

 
$
55,294,979

Short-term borrowings
2,148,118

 
615,279

Long-term debt
8,998,571

 
7,041,364

Accrued expenses and other liabilities
1,826,862

 
1,472,073

Total liabilities
90,378,647

 
64,423,695

Shareholders’ equity
 
 
 
Preferred stock
1,071,227

 
386,291

Common stock
10,877

 
7,970

Capital surplus
9,863,149

 
7,038,502

Less treasury shares, at cost
(26,933
)
 
(17,932
)
Accumulated other comprehensive loss
(172,175
)
 
(226,158
)
Retained (deficit) earnings
(359,380
)
 
(594,067
)
Total shareholders’ equity
10,386,765

 
6,594,606

Total liabilities and shareholders’ equity
$
100,765,412

 
$
71,018,301

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

 
1,500,000,000

Common shares issued
1,087,731,489

 
796,969,694

Common shares outstanding
1,084,782,727

 
794,928,886

Treasury shares outstanding
2,948,762

 
2,040,808

Preferred stock, authorized shares
6,617,808

 
6,617,808

Preferred shares issued
2,702,571

 
1,967,071

Preferred shares outstanding
1,098,006

 
398,006

(1)
Amounts represent loans for which Huntington has elected the fair value option.
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,
 
 
2016
 
2015
 
2016
 
2015
Interest and fee income:
 
 
 
 
 
 
 
 
Loans and leases
 
$
583,653

 
$
451,161

 
$
1,516,849

 
$
1,308,339

Available-for-sale and other securities
 
 
 
 
 
 
 
 
Taxable
 
57,572

 
52,141

 
138,178

 
151,522

Tax-exempt
 
13,687

 
10,835

 
40,499

 
30,441

Held-to-maturity securities—taxable
 
33,098

 
19,811

 
105,307

 
61,220

Other
 
6,336

 
4,529

 
16,422

 
18,846

Total interest income
 
694,346

 
538,477

 
1,817,255

 
1,570,368

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
26,233

 
20,964

 
71,575

 
60,396

Short-term borrowings
 
959

 
192

 
2,770

 
1,465

Federal Home Loan Bank advances
 
66

 
69

 
207

 
517

Subordinated notes and other long-term debt
 
41,698

 
21,797

 
108,366

 
54,164

Total interest expense
 
68,956

 
43,022

 
182,918

 
116,542

Net interest income
 
625,390

 
495,455

 
1,634,337

 
1,453,826

Provision for credit losses
 
63,805

 
22,476

 
115,896

 
63,486

Net interest income after provision for credit losses
 
561,585

 
472,979

 
1,518,441

 
1,390,340

Service charges on deposit accounts
 
86,847

 
75,157

 
232,722

 
207,495

Cards and payment processing income
 
44,320

 
36,664

 
119,951

 
105,121

Mortgage banking income
 
40,603

 
18,956

 
90,737

 
80,435

Trust services
 
28,923

 
24,972

 
74,258

 
80,561

Insurance income
 
15,865

 
16,204

 
48,037

 
49,736

Brokerage income
 
14,719

 
15,059

 
44,819

 
45,743

Capital markets fees
 
14,750

 
12,741

 
40,797

 
39,838

Bank owned life insurance income
 
14,452

 
12,719

 
40,500

 
38,959

Gain on sale of loans
 
7,506

 
5,873

 
22,166

 
22,915

Net gains on sales of securities
 
1,031

 
2,628

 
1,763

 
2,710

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

 
(2,440
)
 
(76
)
 
(2,440
)
Other noninterest income
 
33,399

 
34,586

 
99,720

 
95,442

Total noninterest income
 
302,415

 
253,119

 
815,394

 
766,515

Personnel costs
 
405,024

 
286,270

 
989,369

 
833,321

Outside data processing and other services
 
91,133

 
58,535

 
216,047

 
167,578

Equipment
 
40,792

 
31,303

 
105,173

 
93,246

Net occupancy
 
41,460

 
29,061

 
103,640

 
88,942

Marketing
 
14,438

 
12,179

 
41,479

 
40,178

Professional services
 
47,075

 
11,961

 
82,101

 
37,281

Deposit and other insurance expense
 
14,940

 
11,550

 
38,335

 
33,504

Amortization of intangibles
 
9,046

 
3,913

 
16,357

 
24,079

Other noninterest expense
 
48,339

 
81,736

 
134,487

 
159,013

Total noninterest expense
 
712,247

 
526,508

 
1,726,988

 
1,477,142

Income before income taxes
 
151,753

 
199,590

 
606,847

 
679,713

Provision for income taxes
 
24,749

 
47,002

 
133,989

 
165,065

Net income
 
127,004

 
152,588

 
472,858

 
514,648

Dividends on preferred shares
 
18,537

 
7,968

 
46,409

 
23,901

Net income applicable to common shares
 
$
108,467

 
$
144,620

 
$
426,449

 
$
490,747


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Average common shares—basic
 
938,578

 
800,883

 
844,167

 
805,851

Average common shares—diluted
 
952,081

 
814,326

 
856,934

 
819,458

Per common share:
 
 
 
 
 
 
 
 
Net income—basic
 
$
0.12

 
$
0.18

 
$
0.51

 
$
0.61

Net income—diluted
 
0.11

 
0.18

 
0.50

 
0.60

Cash dividends declared
 
0.07

 
0.06

 
0.21

 
0.18

OTTI losses for the periods presented:
 
 
 
 
 
 
 
 
Total OTTI losses
 
$

 
$
(3,144
)
 
$
(3,809
)
 
$
(3,144
)
Noncredit-related portion of loss recognized in OCI
 

 
704

 
3,733

 
704

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

 
$
(2,440
)
 
$
(76
)
 
$
(2,440
)
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements



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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Net income
$
127,004

 
$
152,588

 
$
472,858

 
$
514,648

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale and other securities:
 
 
 
 
 
 
 
Non-credit-related impairment recoveries (losses) on debt securities not expected to be sold
1,294

 
85

 
(388
)
 
12,195

Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains and losses
(35,036
)
 
39,721

 
47,118

 
44,861

Total unrealized gains (losses) on available-for-sale and other securities
(33,742
)
 
39,806

 
46,730

 
57,056

Unrealized gains (losses) on cash flow hedging derivatives, net of reclassifications to income
(5,232
)
 
8,254

 
4,731

 
25,840

Change in accumulated unrealized losses for pension and other post-retirement obligations
841

 
(2,148
)
 
2,522

 
(343
)
Other comprehensive income (loss), net of tax
(38,133
)
 
45,912

 
53,983

 
82,553

Comprehensive income
$
88,871

 
$
198,500

 
$
526,841

 
$
597,201

See Notes to Unaudited Condensed Consolidated Financial Statements


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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Gain (Loss)
 
Retained Earnings (Deficit)
 
 
(All amounts in thousands, except for per share amounts)
Preferred Stock
 
Common Stock
 
Capital Surplus
 
Treasury Stock
 
 
 
 
Amount
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Total
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
386,292

 
813,136

 
$
8,131

 
$
7,221,745

 
(1,682
)
 
$
(13,382
)
 
$
(222,292
)
 
$
(1,052,324
)
 
$
6,328,170

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
514,648

 
514,648

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
82,553

 
 
 
82,553

Repurchase of common stock
 
 
(20,547
)
 
(205
)
 
(222,778
)
 
 
 
 
 
 
 
 
 
(222,983
)
Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.18 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(144,527
)
 
(144,527
)
Preferred Series A ($63.75 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(23,110
)
 
(23,110
)
Preferred Series B ($22.32 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(791
)
 
(791
)
Recognition of the fair value of share-based compensation
 
 
 
 
 
 
39,136

 
 
 
 
 
 
 
 
 
39,136

Other share-based compensation activity
 
 
5,990

 
60

 
14,990

 
 
 
 
 
 
 
(2,220
)
 
12,830

Other
 
 
85

 
1

 
809

 
(322
)
 
(4,082
)
 
 
 
(17
)
 
(3,289
)
Balance, end of period
$
386,292

 
798,664

 
$
7,987

 
$
7,053,902

 
(2,004
)
 
$
(17,464
)
 
$
(139,739
)
 
$
(708,341
)
 
$
6,582,637

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

See Notes to Unaudited Condensed Consolidated Financial Statements

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Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
Operating activities
 
Net income
$
472,858

 
$
514,648

Adjustments to reconcile net income to net cash provided by operating activities:
 
Provision for credit losses
115,896

 
63,486

Depreciation and amortization
299,444

 
262,788

Share-based compensation expense
48,568

 
39,136

Net gain on sales of securities
(1,687
)
 
(270
)
Net change in:
 
 
 
Trading account securities
926

 
3,582

Loans held for sale
(194,735
)
 
(267,494
)
Accrued income and other assets
(169,453
)
 
(215,692
)
Deferred income taxes
(18,094
)
 
10,957

Accrued expense and other liabilities
144,496

 
10,344

Other, net
(12,413
)
 
(20,659
)
Net cash provided by (used for) operating activities
685,806

 
400,826

Investing activities
 
Change in interest bearing deposits in banks
33,221

 
(1,246
)
Cash paid for acquisition of a business, net of cash received
(133,218
)
 
(457,836
)
Proceeds from:
 
 
 
Maturities and calls of available-for-sale and other securities
1,266,031

 
1,477,446

Maturities of held-to-maturity securities
850,170

 
434,192

Sales of available-for-sale and other securities
3,893,482

 
151,326

Purchases of available-for-sale and other securities
(5,434,332
)
 
(3,272,586
)
Purchases of held-to-maturity securities

 
(215,447
)
Net proceeds from securitization

 
780,117

Net proceeds from sales of portfolio loans
352,277

 
307,726

Net loan and lease activity, excluding sales and purchases
(3,286,238
)
 
(2,181,839
)
Purchases of premises and equipment
(63,688
)
 
(69,021
)
Proceeds from sales of other real estate
21,765

 
28,056

Purchases of loans and leases
(359,208
)
 
(241,141
)
Other, net
(249
)
 
581

Net cash provided by (used for) investing activities
(2,859,987
)
 
(3,259,672
)
Financing activities
 
 
 
Increase (decrease) in deposits
853,806

 
2,616,219

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

 
(966,928
)
Sale of deposits

 
(47,521
)
Net proceeds from issuance of long-term debt
2,081,643

 
2,327,041

Maturity/redemption of long-term debt
(684,746
)
 
(895,441
)
Dividends paid on preferred stock
(46,409
)
 
(23,901
)
Dividends paid on common stock
(168,656
)
 
(145,572
)
Repurchases of common stock

 
(222,983
)
Proceeds from stock options exercised
6,084

 
4,647

Net proceeds from issuance of preferred stock
584,936

 

Other, net
(1,212
)
 
17,078

Net cash provided by (used for) financing activities
2,988,964

 
2,662,639


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

 
(196,207
)
Cash and cash equivalents at beginning of period
847,156

 
1,220,565

Cash and cash equivalents at end of period
$
1,661,939

 
$
1,024,358

Supplemental disclosures:
 
Interest paid
$
159,357

 
$
54,409

Income taxes paid (refunded)
3,869

 
117,225

Non-cash activities
 
Loans transferred to held-for-sale from portfolio
3,204,732

 
347,656

Loans transferred to portfolio from held-for-sale
92,585

 
16,425

Transfer of loans to OREO
18,678

 
17,789

See Notes to Unaudited Condensed Consolidated Financial Statements.


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Huntington Bancshares Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying Unaudited Condensed Consolidated Financial Statements of Huntington reflect all adjustments consisting of normal recurring accruals which are, in the opinion of Management, necessary for a fair statement of the consolidated financial position, the results of operations, and cash flows for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These Unaudited Condensed Consolidated Financial Statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s 2015 Form 10-K, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.
For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” which includes amounts on deposit with the Federal Reserve and “Federal funds sold and securities purchased under resale agreements.”
In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Consolidated Financial Statements or disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform to the current year's presentation. Specifically, Huntington reclassified servicing assets from accrued income and other assets to disclose them as a separate line item on the balance sheets. In addition, debt issuance costs were reclassified to long-term debt from accrued income and other assets as part of adopting ASU 2015-03.
2. ACCOUNTING STANDARDS UPDATE
ASU 2014-09 - Revenue from Contracts with Customers (Topic 606): The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach to be utilized for revenue recognition. The amendments were originally effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Subsequently, the FASB issued a one-year deferral for implementation, which results in new guidance being effective for annual and interim reporting periods beginning after December 15, 2017. Entities have the option of using either a full retrospective approach or modified retrospective approach to adopt the amendments in the Update. The FASB, however, permitted early adoption of the new guidance on the original effective date. Management is currently assessing the impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.
ASU 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis. This Update provides a new scope exception for registered money market funds and similar unregistered money market funds, provides targeted amendments to the current consolidation guidance, and ends the deferral granted to investment companies from applying the variable interest entity accounting guidance. The Update was adopted on January 1, 2016 and did not have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2015-03 - Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs. This Update was issued to simplify the presentation of debt issuance costs. The amendments require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction to the carrying amount of that debt liability, consistent with debt discounts. Huntington adopted the Update on January 1, 2016. Amounts reclassified in the prior periods were immaterial to Huntington’s Unaudited Condensed Consolidated Financial Statements. For more information, refer to Note 9 “Long-Term Debt”.
ASU 2015-10 - Technical Corrections and Improvements. This Update sets forth certain technical corrections and improvements issued in June 2015 with an objective to clarify the Accounting Standards Codification (“Codification”), correct unintended application of guidance, or make minor improvements to the ASU, among other things, requires disclosure of fair value for non-recurring items at the relevant measurement date where the fair value is not measured at the end of the reporting period. Also, for nonrecurring measurements estimated at a date during the reporting period other than the end of the reporting period, a reporting entity is required to clearly indicate that the fair value information presented is not as of the period’s end.

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The technical correction for fair value disclosure was effective upon issuance and did not have a significant impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.
ASU 2015-16 - Simplifying the Accounting for Measurement-Period Adjustments. This Update requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Update was adopted on January 1, 2016 and did not have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. This Update sets forth targeted improvements to GAAP including, but not limited to, requiring an entity to recognize the changes in fair value of equity investments in the income statement, requiring public business entities to use the exit price when measuring the fair value of financial instruments for financial statement disclosure purposes, eliminating certain disclosures required by existing GAAP, and providing for additional disclosures. The Update is effective for the fiscal period beginning after December 15, 2017, including interim periods within those fiscal years. A cumulative-effect adjustment to the balance sheet will be required as of the beginning of the fiscal year upon adoption. The Update is not expected to have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-02 - Leases. This Update sets forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting applied by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Update is effective for the fiscal period beginning after December 15, 2018, with early application permitted. Management is currently assessing the impact of the new guidance on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-05 - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This Update provides accounting clarification for changes in the counterparty to a derivative instrument that has been designated as a qualified hedging instrument. Specifically, changes in the derivative counterparty should not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This Update is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early application is permitted. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Management does not believe the new guidance will have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-06 - Contingent Put and Call Options in Debt Instruments. This Update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt instruments. An entity performing the assessment set forth in this Update will be required to assess embedded call (put) options solely in accordance with the four-step decision sequence. This Update is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. An entity should apply this Update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. This Update is not expected to have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-07 - Simplifying the Transition to the Equity Method of Accounting. This Update eliminates the requirement for the retrospective use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence of an investor. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method accounting. This Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments are not expected to have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-09 - Improvements to Employee Share-Based Payment Accounting. This Update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments, among other things, require all tax

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benefits and tax deficiencies related to share-based awards to be recognized in the income statement. Other changes include an election related to the accounting for forfeitures, changes to the cash flow statement presentation for excess tax benefits, as well as for cash paid by an employer when directly withholding shares for tax withholding purposes. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Management is currently assessing the impact of this Update on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-13 - Financial Instruments - Credit Losses. The amendments in this Update eliminate the probable recognition threshold for credit losses on financial assets measured at amortized cost. The Update requires those financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The Update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is currently assessing the impact of this Update on Huntington's Unaudited Condensed Consolidated Financial Statements.
ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Current guidance lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to several types of cash flows. The amendments in this Update are effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on Huntington's Unaudited Condensed Consolidated Financial Statements.

3. ACQUISITION OF FIRSTMERIT CORPORATION

On August 16, 2016, Huntington completed its acquisition of FirstMerit Corporation in a stock and cash transaction valued at approximately $3.7 billion. FirstMerit Corporation was a diversified financial services company headquartered in Akron, Ohio, with operations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. Post merger, Huntington now operates across an eight-state Midwestern footprint. The merger resulted in a combined company with a larger market presence and more diversified loan portfolio, as well as a larger core deposit funding base and economies of scale associated with a larger financial institution.

Under the terms of the agreement, shareholders of FirstMerit Corporation received 1.72 shares of Huntington common stock, and $5.00 in cash, for each share of FirstMerit Corporation common stock. The aggregate purchase price was $3.7 billion, including $0.8 billion of cash, $2.8 billion of common stock, and $0.1 billion of preferred stock. Huntington issued 285 million shares of common stock that had a total fair value of $2.8 billion based on the closing market price of $9.68 per share on August 15, 2016.

The acquisition of FirstMerit constituted a business combination. The FirstMerit merger has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments, which can be updated for up to a year following the acquisition. As of September 30, 2016, Huntington continues to review information relating to events or circumstances existing at the acquisition date. Management anticipates that this review could result in adjustments to the acquisition date valuation amounts presented herein but does not anticipate that these adjustments would be material.

The following table reflects consideration paid for FirstMerit's net assets and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date:


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FirstMerit
(dollar amounts in thousands)
 
UPB
 
Fair Value
Assets acquired:
 
 
 
 
Cash and due from banks
 
 
 
$
703,661

Interest-bearing deposits in banks
 
 
 
32,496

Loans held for sale
 
 
 
150,576

Available for sale and other securities
 
 
 
7,369,967

Loans and leases:
 
 
 
 
Commercial:
 
 
 
 
Commercial and industrial
 
$
7,410,503

 
7,252,692

Commercial real estate
 
1,898,875

 
1,844,150

Total commercial
 
9,309,378

 
9,096,842

Consumer:
 
 
 
 
Automobile
 
1,610,007

 
1,609,145

Home equity
 
1,579,832

 
1,537,791

Residential mortgage
 
1,098,588

 
1,092,050

RV and marine finance
 
1,823,312

 
1,816,575

Other consumer
 
324,350

 
323,512

Total consumer
 
6,436,089


6,379,073

Total loans and leases
 
$
15,745,467


15,475,915

Bank owned life insurance
 
 
 
633,612

Premises and equipment
 
 
 
228,635

Goodwill
 
 
 
1,332,317

Core deposit intangible
 
 
 
309,750

Other intangible assets
 
 
 
94,571

Servicing rights
 
 
 
15,317

Accrued income and other assets
 
 
 
495,079

Total assets acquired
 
 
 
26,841,896

Liabilities assumed:
 
 
 
 
Deposits
 
 
 
21,157,172

Short-term borrowings
 
 
 
1,163,851

Long-term debt
 
 
 
519,971

Accrued expenses and other liabilities
 
 
 
292,805

Total liabilities assumed
 
 
 
23,133,799

Total consideration paid
 
 
 
$
3,708,097

 
 
 
 
 
Consideration:
 
 
 
 
Cash paid
 
 
 
$
836,879

Fair value of common stock issued
 
 
 
2,766,898

Fair value of preferred stock exchange
 
 
 
104,320


In connection with the acquisition, the Company recorded approximately $1.3 billion of goodwill, of which $339 million relates to 15-year tax deductible goodwill from prior acquisitions. Information regarding the allocation of goodwill recorded as a result of the acquisition to the Company’s reportable segments, as well as the carrying amounts and amortization of core deposit and other intangible assets, is provided in Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements.

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented

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above.

Cash and due from banks, interest-bearing deposits in banks, and loans held for sale: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.

Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.

Loans and leases: Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, amortization status and current discount rates. Loans were grouped together according to similar characteristics when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for any liquidity concerns. The discount rate does not include a factor for credit losses as that has been included as a reduction to the estimated cash flows.

CDI: This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits. The CDI is being amortized over 10 years based upon the period over which estimated economic benefits are estimated to be received.

Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.

Debt: The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.

The following table presents financial information regarding the former FirstMerit operations included in our Unaudited Condensed Consolidated Statements of Income from the date of acquisition (August 16, 2016) through September 30, 2016 under the column “Actual from acquisition date”. The following table also presents unaudited pro forma information as if the acquisition of FirstMerit had occurred on January 1, 2015 under the “Unaudited Pro Forma” columns. The pro forma information does not necessarily reflect the results of operations that would have occurred had Huntington acquired FirstMerit on January 1, 2015. Furthermore, cost savings and other business synergies related to the acquisition are not reflected in the pro forma amounts.

 
 
 
Unaudited Pro Forma for
 
Actual from
 
Three months ended
 
Nine months ended
 
acquisition date through
 
September 30,
 
September 30,
(dollar amounts in thousands)
September 30, 2016
 
2016
 
2015
 
2016
 
2015
Net interest income
$
93,256


$
706,671


$
657,730


$
2,053,093


$
1,940,746

Noninterest income
30,556


334,630


323,063


977,153


965,923

Net income
55,353


144,292


191,507


570,180


627,104


This pro forma information combines the historical consolidated results of operations of Huntington and FirstMerit
for the periods presented and gives effect to the following nonrecurring adjustments:

Fair value adjustments: Pro forma adjustment to net interest income of $2 million and $11 million for the three and nine-months ended September 30, 2016, to record estimated amortization of premiums and accretion of discounts on acquired loans, securities, deposits, and long-term debt.  


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FirstMerit accretion /amortization: Pro forma adjustment to net interest income of $7 million and $34 million for the three and nine-months ended September 30, 2016, respectively, to eliminate FirstMerit amortization of premiums and accretion of discounts on previously acquired loans, securities, and deposits.

Amortization of acquired intangibles: Pro forma adjustment to noninterest expense of $6 million and $28 million for the three and nine-months ended September 30, 2016, respectively, to record estimated amortization of acquired intangible assets.

Huntington merger-related costs: Pro forma results include Huntington merger-related costs which primarily included, but were not limited to, severance costs, professional services, data processing fees, marketing and advertising expenses totaling $159 million and $186 million for the three and nine-months ended September 30, 2016, respectively.

Other adjustments: Pro forma results also include adjustments related to branch divestitures, incremental interest expense on the issuance on acquisition debt, elimination of FirstMerit's intangible amortization expense, FirstMerit merger-related costs, and related income-tax effects.

Branch divestiture: On July 27, 2016, Huntington and FirstMerit announced that, in conjunction with the merger, Huntington will sell 13 acquired branches and certain related assets and deposit liabilities to First Commonwealth Bank, the banking subsidiary of First Commonwealth Financial Corporation. The sale is in connection with an agreement reached with the U.S. Department of Justice in order to resolve its competitive concerns about Huntington’s acquisition of FirstMerit. Total deposits and loans to be transferred to First Commonwealth Bank for the transaction totaled $712 million and $112 million, respectively, as of September 30, 2016, with the actual amount to be transferred determined as of the date the transaction closes. These amounts are included in deposits and loans held for sale, respectively, in the Unaudited Condensed Consolidated Balance Sheets. The transaction is expected to close in the fourth quarter of 2016.
4. LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES
Loans and leases for which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Unaudited Condensed Consolidated Balance Sheets as loans and leases. Except for loans which are accounted for at fair value, loans are carried at the principal amount outstanding, net of unamortized premiums and discounts and deferred loan fees and costs, which resulted in a net premium of $74 million and $262 million at September 30, 2016 and December 31, 2015, respectively.
Loans and leases with a fair value of $15.5 billion were acquired by Huntington as part of the FirstMerit acquisition. These loans were recorded at fair value. The fair values of the loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms (Level 3), and reflected an estimate of credit and other risk associated with the loans. Of the total acquired loans and leases, Huntington has elected the fair value option for $56 million of consumer loans. These loans will subsequently be measured at fair value with any changes in fair value recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
Loan and Lease Portfolio Composition
The following table provides a detailed listing of Huntington’s loan and lease portfolio at September 30, 2016 and December 31, 2015:
(dollar amounts in thousands)
September 30,
2016
 
December 31,
2015
Loans and leases:
 
 
 
Commercial and industrial
$
27,667,532

 
$
20,559,834

Commercial real estate
7,255,907

 
5,268,651

Automobile
10,791,351

 
9,480,678

Home equity
10,120,029

 
8,470,482

Residential mortgage
7,665,275

 
5,998,400

RV and marine finance
1,839,706

 

Other consumer
964,666

 
563,054

Loans and leases
66,304,466

 
50,341,099

Allowance for loan and lease losses
(616,898
)
 
(597,843
)
Net loans and leases
$
65,687,568

 
$
49,743,256



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As shown in the table below, the primary loan and lease portfolios are: commercial and consumer. For ACL purposes, these portfolios are further disaggregated into classes. During the 2016 third quarter, in connection with the acquisition of FirstMerit, Huntington enhanced its portfolio and class structure. This structure corresponds with how the ACL is determined. The portfolios, and classes within each portfolio, are now as follows:
Portfolio
Class
Commercial
Commercial and industrial
 
Commercial real estate
 
 
Consumer
Automobile
 
Home equity
 
Residential mortgage
 
RV and marine finance
 
Other consumer
Purchased Credit-Impaired Loans
Purchased loans with evidence of deterioration in credit quality since origination for which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income over the remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income subsequently recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.
The following table reflects the contractually required payments receivable, cash flows expected to be collected, and fair value of the credit impaired FirstMerit loans at acquisition date:
(dollar amounts in thousands)
 
August 16,
2016
Contractually required payments including interest
 
$
283,947

Less: nonaccretable difference
 
(84,315
)
Cash flows expected to be collected
 
199,632

Less: accretable yield
 
(17,717
)
Fair value of loans acquired
 
$
181,915

The following table presents a rollforward of the accretable yield for purchased credit impaired loans for the three-month and nine-month periods ended September 30, 2016: and 2015
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
(dollar amounts in thousands)
September 30,
2016
 
September 30,
2016
FirstMerit
 
 
 
Balance, beginning of period
$

 
$

Impact of acquisition/purchase on August 16, 2016
17,717

 
17,717

Accretion
(1,091
)
 
(1,091
)
Reclassification (to) from nonaccretable difference
3,308

 
3,308

Balance, end of period
$
19,934

 
$
19,934


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There was no allowance for loan losses recorded on the purchased credit-impaired loan portfolio at September 30, 2016. The following table reflects the ending and unpaid balances of all contractually required payments and carrying amounts of the acquired loans by acquisition at September 30, 2016:
 
 
 
 
 
September 30, 2016
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Balance
FirstMerit
 
 
 
Commercial and industrial
$
104,560

 
$
148,243

Commercial real estate
49,135

 
64,146

Total
$
153,695

 
$
212,389


FDIC Acquired Loans Subject to Loss Share Agreements

In connection with the acquisition of FirstMerit, Huntington acquired loans subject to loss share agreements with the FDIC. The loss share agreements stipulate that the FDIC will reimburse Huntington for a portion of any amounts the Bank concludes are uncollectible, resulting in charge-offs. The agreements also stipulate that Huntington must repay the FDIC any related recoveries generated from the acquired loans. The reimbursements to Huntington are recorded as an indemnification asset and is recognized in Accrued income and other assets in the Unaudited Condensed Consolidated Balance Sheets. The obligation to the FDIC is recorded as a loss sharing liability and is recognized in Accrued expenses and other liabilities in the Unaudited Condensed Consolidated Balance Sheets.

The following table presents additional information relating to FDIC acquired loans subject to loss sharing agreements at September 30, 2016:
(dollar amounts in thousands)
 
September 30,
2016
FirstMerit
 
 
Outstanding balance of FDIC acquired loans
 
$
117,316

Indemnification asset
 
7,267

Loss sharing liability
 
5,897


Loan Purchases and Sales
The following table summarizes significant portfolio loan purchase and sale activity for the three-month and nine-month periods ended September 30, 2016 and 2015. The table below excludes mortgage loans originated for sale.

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
 
2015
 
2016
 
 
2015
 
Portfolio loans and leases purchased or transferred from held for sale:
Commercial and industrial
$
16,498

 
 
$
180,036

 
$
354,670

 
 
$
224,532

 
Commercial real estate

 
 

 

 
 

 
Automobile

 
 

 

 
 

 
Home equity
81,080

(1
)
 

 
81,080

(1
)
 

 
Residential mortgage
725

 
 
11,284

 
4,538

 
 
17,921

 
RV and marine finance

 
 

 

 
 

 
Other consumer

 
 

 

 
 

 
Total
$
98,303

 
 
$
191,320

 
$
440,288

 
 
$
242,453

 
 
 
 
 
 
 
 
 
 
 
 
Portfolio loans and leases sold or transferred to loans held for sale:
Commercial and industrial
$
1,140,096

 
 
$
98,117

 
$
1,380,893

 
 
$
284,019

 
Commercial real estate
124,231

 
 

 
124,231

 
 

 
Automobile
1,541,250

 
 

 
1,541,250

 
 
764,158

(2)
Home equity

 
 
96,786

 

 
 
96,786

 
Residential mortgage

 
 

 

 
 

 
RV and marine finance

 
 

 

 
 

 
Other consumer

 
 

 

 
 

 
Total
$
2,805,577

 
 
$
194,903

 
$
3,046,374

 
 
$
1,144,963

 
(1)
Reflects the transfer of approximately $81 million home equity loans transferred back to loans and leases in the 2016 third quarter.
(2)
Reflects the transfer of approximately $1.0 billion automobile loans to loans held for sale at March 31, 2015, net of approximately $262 million of automobile loans transferred back to loans and leases in the 2015 second quarter.
NALs and Past Due Loans
Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.
Any loan in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. When a borrower with debt is discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower, the loan is determined to be collateral dependent and placed on nonaccrual status.
All classes within the Commercial portfolio (except for purchased credit-impaired loans) are placed on nonaccrual status at 90-days past due. Residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government organizations. First-lien home equity loans 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 finance and other consumer loans are generally charged-off when the loan is 120-days past due.
For all classes within all loan portfolios, when a loan is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts are recognized as a credit loss.
For all classes within all loan portfolios, cash receipts received on NALs are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.

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Regarding all classes within the Commercial portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower’s financial condition. When, in Management’s judgment, the borrower’s ability to make required principal and interest payments resumes and collectability is no longer in doubt, supported by sustained repayment history, the loan or lease is returned to accrual status. For these loans that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.
The following table presents NALs by loan class at September 30, 2016 and December 31, 2015:
(dollar amounts in thousands)
September 30,
2016
 
December 31,
2015
Commercial and industrial
$
220,862

 
$
175,195

Commercial real estate
21,300

 
28,984

Automobile
4,777

 
6,564

Home equity
69,044

 
66,278

Residential mortgage
88,155

 
94,560

RV and marine finance
96

 

Other consumer

 

Total nonaccrual loans
$
404,234

 
$
371,581


The following table presents an aging analysis of loans and leases, including past due loans, by loan class at September 30, 2016 and December 31, 2015: (1)
 
September 30, 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
$
34,066

 
$
13,379

 
$
69,766

 
$
117,211

 
$
27,445,761

 
$
104,560

 
$

 
$
27,667,532

 
$
20,188

(2)
Commercial real estate
7,890

 
1,991

 
35,428

 
45,309

 
7,161,463

 
49,135

 

 
7,255,907

 
21,260

 
Automobile loans and leases
64,668

 
15,582

 
8,244

 
88,494

 
10,699,599

 

 
3,258

 
10,791,351

 
7,871

 
Home equity
36,728

 
20,799

 
53,279

 
110,806

 
10,005,280

 

 
3,943

 
10,120,029

 
12,997

 
Residential mortgage
113,184

 
38,867

 
111,540

 
263,591

 
7,322,416

 

 
79,268

 
7,665,275

 
68,329

(3)
RV and marine finance
6,754

 
2,042

 
1,048

 
9,844

 
1,827,721

 

 
2,141

 
1,839,706

 
1,043

 
Other consumer
8,731

 
3,284

 
2,997

 
15,012

 
949,074

 

 
580

 
964,666

 
2,988

 
Total loans and leases
$
272,021

 
$
95,944

 
$
282,302

 
$
650,267

 
$
65,411,314

 
$
153,695

 
$
89,190

 
$
66,304,466

 
$
134,676

 

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December 31, 2015
 
Past Due
 
 
 
 
 
Loans Accounted for Under the Fair Value Option
 
Total Loans
and Leases
 
90 or
more days
past due
and accruing
 
(dollar amounts in thousands)
30-59
Days
 
60-89
 Days
 
90 or 
more days
Total
 
Current
 
Purchased
Credit Impaired
 
 
 
 
Commercial and industrial
44,715

 
13,580

 
46,978

 
105,273

 
20,454,561

 

 

 
20,559,834

 
8,724

(2)
Commercial real estate
9,232

 
5,721

 
21,666

 
36,619

 
5,232,032

 

 

 
5,268,651

 
9,549

 
Automobile loans and leases
69,553

 
14,965

 
7,346

 
91,864

 
9,388,814

 

 

 
9,480,678

 
7,162

 
Home equity
36,477

 
16,905

 
56,300

 
109,682

 
8,360,800

 

 

 
8,470,482

 
9,044

 
Residential mortgage
102,773

 
34,298

 
119,354

 
256,425

 
5,741,975

 

 

 
5,998,400

 
69,917

(4)
RV and marine finance

 

 

 

 

 

 

 

 

 
Other consumer
6,469

 
1,852

 
1,395

 
9,716

 
553,338

 

 

 
563,054

 
1,394

 
Total loans and leases
$
269,219

 
$
87,321

 
$
253,039

 
$
609,579

 
$
49,731,520

 
$

 
$

 
$
50,341,099

 
$
105,790

 
(1)
NALs are included in this aging analysis based on the loan’s past due status.
(2)
Amounts include Huntington Technology Finance administrative lease delinquencies.
(3)
Includes $53 million guaranteed by the U.S. government.
(4)
Includes $56 million guaranteed by the U.S. government.
Allowance for Credit Losses
Huntington maintains two reserves, both of which reflect Management’s judgment regarding the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change.
The appropriateness of the ACL is based on Management’s current judgments about the credit quality of the loan portfolio. These judgments consider on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. Further, Management evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business segments such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. Management’s determinations regarding the appropriateness of the ACL are reviewed and approved by the Company’s board of directors.
The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings, and (2) the general reserve. The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics, and (2) an estimate of loss based on an impairment review of each impaired C&I and CRE loan where obligor balance is greater than $1 million. For the Commercial portfolio, the estimate of loss based on pools of loans and leases with similar characteristics is made by applying a PD factor and a LGD factor to each individual loan based on a regularly updated loan grade, using a standardized loan grading system. The PD factor and an LGD factor are determined for each loan grade using statistical models based on historical performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed and updated periodically based on credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data.
In the case of other homogeneous portfolios, such as automobile loans, home equity loans, residential mortgage, and RV and marine finance loans, the determination of the transaction reserve also incorporates PD and LGD factors. The estimate of loss is based on pools of loans and leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis for understanding the

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borrower’s past and current payment performance, and this information is used to estimate expected losses over the emergence period. The performance of first-lien loans ahead of our junior-lien loans is available to use as part of our updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as required.
The general reserve consists of our risk-profile reserve components, which includes items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the loan portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.
The estimate for the AULC is determined using the same procedures and methodologies as used for the ALLL. The loss factors used in the AULC are the same as the loss factors used in the ALLL while also considering a historical utilization of unused commitments. The AULC is reflected in accrued expenses and other liabilities in the Unaudited Condensed Consolidated Balance Sheet.
The acquired loans were recorded at their fair value as of the acquisition date and the prior ALLL was eliminated. An ALLL for acquired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.
The ACL is increased through a provision for credit losses that is charged to earnings, based on Management’s quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries, and the ACL associated with loans transferred to loans held for sale, securitized or sold.
The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2016 and 2015:

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

 
543

 
10,282

Fair value of acquired AULC
 
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 (reduction in allowance) for 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

Fair value of acquired AULC
 
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


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(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
Three-month period ended September 30, 2015:
ALLL balance, beginning of period
 
$
377,101

 
$
222,441

 
$
599,542

Loan charge-offs
 
(29,992
)
 
(30,883
)
 
(60,875
)
Recoveries of loans previously charged-off
 
33,955

 
10,757

 
44,712

Provision for (reduction in allowance) loan and lease losses
 
13,232

 
392

 
13,624

Allowance for loans sold or transferred to loans held for sale
 

 
(5,065
)
 
(5,065
)
ALLL balance, end of period
 
$
394,296

 
$
197,642

 
$
591,938

AULC balance, beginning of period
 
$
47,627

 
$
7,744

 
$
55,371

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
8,759

 
93

 
8,852

Fair value of acquired AULC
 

 

 

AULC balance, end of period
 
$
56,386

 
$
7,837

 
$
64,223

ACL balance, end of period
 
$
450,682

 
$
205,479

 
$
656,161

Nine-month period ended September 30, 2015:
ALLL balance, beginning of period
 
$
389,834

 
$
215,362

 
$
605,196

Loan charge-offs
 
(77,118
)
 
(85,802
)
 
(162,920
)
Recoveries of loans previously charged-off
 
63,754

 
33,196

 
96,950

Provision for (reduction in allowance) loan and lease losses
 
17,826

 
42,243

 
60,069

Allowance for loans sold or transferred to loans held for sale
 

 
(7,357
)
 
(7,357
)
ALLL balance, end of period
 
$
394,296

 
$
197,642

 
$
591,938

AULC balance, beginning of period
 
$
55,029

 
$
5,777

 
$
60,806

Provision for (reduction in allowance) unfunded loan commitments and letters of credit
 
1,357

 
2,060

 
3,417

Fair value of acquired AULC
 

 

 

AULC balance, end of period
 
$
56,386

 
$
7,837

 
$
64,223

ACL balance, end of period
 
$
450,682

 
$
205,479

 
$
656,161

Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.
Commercial loans are either fully or partially charged-off at 90-days past due. Automobile, RV and marine finance loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.
Credit Quality Indicators
To facilitate the monitoring of credit quality for Commercial loans, and for purposes of determining an appropriate ACL level for these loans, Huntington utilizes the following categories of credit grades:
Pass - Higher quality loans that do not fit any of the other categories described below.
OLEM - The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the loan may weaken or the collateral may be inadequate to protect Huntington’s position in the future. For these reasons, Huntington considers the loans to be potential problem loans.
Substandard - Inadequately protected loans by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely Huntington will sustain some loss if any identified weaknesses are not mitigated.

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Doubtful - Loans that have all of the weaknesses inherent in those loans classified as Substandard, with the added elements of the full collection of the loan is improbable and that the possibility of loss is high.
The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan or lease and subsequently updated as appropriate.
Commercial loans categorized as OLEM, Substandard, or Doubtful are considered Criticized loans. Commercial loans categorized as Substandard or Doubtful are also considered Classified loans.
For all classes within the Consumer loan portfolio, each loan is assigned a specific PD factor that is partially based on the borrower’s most recent credit bureau score, which we update quarterly. A credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality. Future performance of the consumer portfolios is not solely based on the FICO score distribution. Huntington utilizes a custom scorecard in the credit decisioning process for Indirect Auto and Home Equity to provide a proprietary assessment of expected performance at the loan level.
Huntington assesses the risk in the loan portfolio by utilizing numerous risk characteristics. The classifications described above, and also presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management processes.
The following table presents each loan and lease class by credit quality indicator at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
Credit Risk Profile by UCS Classification
(dollar amounts in thousands)
Pass
 
OLEM
 
Substandard
 
Doubtful
 
Total
Commercial and industrial
$
25,922,981

 
$
591,927

 
$
1,128,765

 
$
23,859

 
$
27,667,532

Commercial real estate
6,977,718

 
120,371

 
155,607

 
2,211

 
7,255,907

 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by FICO Score (1), (2)
 
750+
 
650-749
 
<650
 
Other (3)
 
Total
Automobile
$
5,430,033

 
$
3,933,502

 
$
1,229,856

 
$
194,702

 
$
10,788,093

Home equity
6,295,798

 
2,895,693

 
636,889

 
287,706

 
10,116,086

Residential mortgage
4,609,160

 
2,219,426

 
625,144

 
132,277

 
7,586,007

RV and marine finance
1,027,428

 
633,849

 
70,189

 
106,099

 
1,837,565

Other consumer
336,081

 
430,994

 
120,132

 
76,879

 
964,086


 
December 31, 2015
 
Credit Risk Profile by UCS Classification
(dollar amounts in thousands)
Pass
 
OLEM
 
Substandard
 
Doubtful
 
Total
Commercial and industrial
$
19,257,789

 
$
399,339

 
$
895,577

 
$
7,129

 
$
20,559,834

Commercial real estate
5,066,054

 
79,787

 
121,167

 
1,643

 
5,268,651

 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by FICO Score (1), (2)
 
750+
 
650-749
 
<650
 
Other (3)
 
Total
Automobile
$
4,680,684

 
$
3,454,585

 
$
1,086,914

 
$
258,495

 
$
9,480,678

Home equity
5,210,741

 
2,466,425

 
582,326

 
210,990

 
8,470,482

Residential mortgage
3,564,064

 
1,813,779

 
567,984

 
52,573

 
5,998,400

RV and marine finance

 

 

 

 

Other consumer
233,969

 
269,746

 
49,650

 
9,689

 
563,054


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

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(2)
Reflects most recent customer credit scores.
(3)
Reflects deferred fees and costs, loans in process, loans to legal entities, etc.
Impaired Loans
For all classes within the Commercial portfolio, all loans with an obligor balance of $1 million or greater are considered for individual evaluation on a quarterly basis for impairment. Generally, consumer loans within any class are not individually evaluated on a regular basis for impairment. However, certain home equity and residential mortgage loans are measured for impairment based on the underlying collateral value. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Loans acquired with evidence of deterioration of credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired.
Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.
When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium, discount, fees, or costs. A specific reserve is established as a component of the ALLL when a commercial loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve.
When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full (including already charged-off portion), after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.
The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance at September 30, 2016 and December 31, 2015:
(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
ALLL at September 30, 2016:
 
 
 
 
 
 
Portion of ALLL balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$

 
$

 
$

Attributable to loans individually evaluated for impairment
 
17,246

 
11,603

 
28,849

Attributable to loans collectively evaluated for impairment
 
414,549

 
173,500

 
588,049

Total ALLL balance
 
$
431,795

 
$
185,103

 
$
616,898

Loan and Lease Ending Balances at September 30, 2016: (1)
 
 
 
 
 
 
Portion of loan and lease ending balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
153,695

 
$

 
$
153,695

Individually evaluated for impairment
 
470,134

 
476,422

 
946,556

Collectively evaluated for impairment
 
34,299,610

 
30,815,415

 
65,115,025

Total loans and leases evaluated for impairment
 
$
34,923,439

 
$
31,291,837

 
$
66,215,276


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(dollar amounts in thousands)
 
Commercial
 
Consumer
 
Total
ALLL at December 31, 2015
 
 
 
 
 
 
Portion of ALLL balance:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
2,602

 
$
127

 
$
2,729

Attributable to loans individually evaluated for impairment
 
27,428

 
35,008

 
62,436

Attributable to loans collectively evaluated for impairment
 
368,723

 
163,955

 
532,678

Total ALLL balance:
 
$
398,753

 
$
199,090

 
$
597,843

Loan and Lease Ending Balances at December 31, 2015 (1)
 
 
 
 
 
 
Portion of loan and lease ending balances:
 
 
 
 
 
 
Purchased credit-impaired loans
 
$
34,775

 
$
1,506

 
$
36,281

Individually evaluated for impairment
 
626,010

 
651,778

 
1,277,788

Collectively evaluated for impairment
 
25,167,700

 
23,859,330

 
49,027,030

Total loans and leases evaluated for impairment
 
$
25,828,485

 
$
24,512,614

 
$
50,341,099


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


The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for loans and leases individually evaluated for impairment and purchased credit-impaired loans: (1), (2)
 
September 30, 2016
 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Principal
Balance (5)
 
Related
Allowance
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
356,398

 
$
418,304

 
$

 
$
305,956

 
$
2,235

 
$
290,163

 
$
4,858

Commercial real estate
103,705

 
133,670

 

 
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 (3)
255,894

 
270,828

 
25,850

 
281,934

 
1,631

 
274,262

 
5,460

Commercial real estate (4)
46,388

 
57,405

 
3,242

 
49,140

 
521

 
49,587

 
1,895

Automobile
32,279

 
32,644

 
1,802

 
31,540

 
541

 
31,912

 
1,643

Home equity
324,106

 
357,649

 
14,803

 
284,512

 
3,453

 
267,264

 
9,382

Residential mortgage (6)
341,063

 
378,500

 
14,818

 
344,237

 
2,978

 
353,259

 
9,041

RV and marine finance

 

 

 

 

 

 

Other consumer
4,244

 
4,244

 
302

 
4,454

 
58

 
4,627

 
178



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December 31, 2015
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
Ending
Balance
 
Unpaid
Principal
Balance (5)
 
Related
Allowance
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
255,801


$
279,551


$


$
133,022


$
710


$
93,256


$
1,694

Commercial real estate
68,260


125,814




56,927


590


61,767


1,734

Automobile

 

 

 

 

 

 

Home equity













Residential mortgage













RV and marine finance

 

 

 

 

 

 

Other consumer
52


101




50


3


51


11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial (3)
246,249

 
274,203

 
21,916

 
298,417

 
3,420

 
260,987

 
9,688

Commercial real estate (4)
90,475

 
104,930

 
8,114

 
126,694

 
2,695

 
158,621

 
9,612

Automobile
31,304

 
31,878

 
1,779

 
29,371

 
554

 
29,878

 
1,659

Home equity
248,839

 
284,957

 
16,242

 
288,685

 
2,725

 
302,808

 
10,241

Residential mortgage (6)
368,449

 
411,114

 
16,938

 
376,026

 
3,303

 
374,854

 
9,630

RV and marine finance

 

 

 

 

 

 

Other consumer
4,640

 
4,649

 
176

 
4,801

 
64

 
4,683

 
191

(1)
These tables do not include loans fully charged-off.
(2)
All automobile, home equity, residential mortgage, 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, 2016, $111 million of the $256 million commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2015, $91 million of the $246 million commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR.
(4)
At September 30, 2016, $28 million of the $46 million commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2015, $35 million of the $90 million commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR.
(5)
The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.
(6)
At September 30, 2016, $29 million of the $341 million residential mortgages loans with an allowance recorded were guaranteed by the U.S. government. At December 31, 2015, $29 million of the $368 million residential mortgage loans with an allowance recorded were guaranteed by the U.S. government.
TDR Loans
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs. Acquired, non-purchased credit impaired loan are only considered for TDR reporting for modifications made subsequent to acquisition.
TDR Concession Types
The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analyses, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All commercial TDRs are reviewed and approved by our SAD. The types of concessions provided to borrowers include:
Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt.
Amortization or maturity date change beyond what the collateral supports, including any of the following:

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(1)
Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and could increase the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
(2)
Reduces the amount of loan principal to be amortized and increases the amount of the balloon payment at the end of the term of the loan. This concession also reduces the minimum monthly payment. Principal is generally not forgiven.
(3)
Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan.
Chapter 7 bankruptcy: A bankruptcy court’s discharge of a borrower’s debt is considered a concession when the borrower does not reaffirm the discharged debt.
Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest.
Principal forgiveness may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the three-month and nine-month periods ended September 30, 2016 and 2015, was not significant.
Following is a description of TDRs by the different loan types:
Commercial loan TDRs – Commercial accruing TDRs often result from loans receiving a concession with terms that are not considered a market transaction to Huntington. The TDR remains in accruing status as long as the customer is less than 90-days past due on payments per the restructured loan terms and no loss is expected.
Commercial nonaccrual TDRs result from either: (1) an accruing commercial TDR being placed on nonaccrual status, or (2) a workout where an existing commercial NAL is restructured and a concession is given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten based upon our normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to continue a project and allows Huntington to right-size a loan based upon the current expectations for a borrower’s or project’s performance.
Our strategy involving TDR borrowers includes working with these borrowers to allow them time to improve their financial position and remain our customer through refinancing their notes according to market terms and conditions in the future or to refinance elsewhere. A subsequent refinancing or modification of a loan may occur when either the loan matures according to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. The refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation. In order for a TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms of the refinanced loan must not represent a concession.
Consumer loan TDRs – Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. The primary concessions given to residential mortgage borrowers are amortization or maturity date changes and interest rate reductions. Residential mortgages identified as TDRs involve borrowers unable to refinance their mortgages through the Company’s normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be delinquent. The Company may make similar interest rate, term, and principal concessions Automobile, Home Equity, RV and Marine Finance and Other Consumer loan TDRs.
TDR Impact on Credit Quality
Huntington’s ALLL is largely determined by updated risk ratings assigned to commercial loans, updated borrower credit scores on consumer loans, and borrower delinquency history in both the commercial and consumer portfolios. These updated risk ratings and credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is probable that all contractual principal and interest due under the restructured terms will be collected.

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Our TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of our concessions for the Commercial portfolio are the extension of the maturity date.
TDR concessions may also result in the reduction of the ALLL within the Commercial portfolio. This reduction is derived from payments and the resulting application of the reserve calculation within the ALLL. The transaction reserve for non-TDR Commercial loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously discussed. Upon the occurrence of a TDR in our Commercial portfolio, the reserve is measured based on discounted expected cash flows or collateral value, less anticipated selling costs, of the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a lower ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of the modification. The ALLL for Commercial loans may increase as a result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.
TDR concessions on consumer loans may increase the ALLL. The concessions made to these borrowers often include interest rate reductions, and therefore, the TDR ALLL calculation results in a greater ALLL compared with the non-TDR calculation as the reserve is measured based on the estimation of the discounted expected cash flows or collateral value, less anticipated selling costs, on the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a higher estimated loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates a reduction in the present value of expected cash flows or collateral value, less anticipated selling costs. In certain instances, the ALLL may decrease as a result of payments made in connection with the modification.
Commercial loan TDRs – In instances where the bank substantiates that it will collect its outstanding balance in full, the note is considered for return to accrual status upon the borrower showing a sustained period of repayment performance for a minimum six-month period of time. This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the bank’s outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses while the TDR is in nonaccrual status.
Consumer loan TDRs – Modified consumer loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.

Residential mortgage loans not guaranteed by a U.S. government agency such as the FHA, VA, and the USDA, including TDR loans, are reported as accrual or nonaccrual based upon delinquency status. Nonaccrual TDRs are those that are greater than 150-days contractually past due. Loans guaranteed by U.S. government organizations continue to accrue interest on guaranteed rates upon delinquency.
The following tables present by class and by the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month and nine-month periods ended September 30, 2016 an 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
New Troubled Debt Restructurings During The Three-Month Period Ended (1)
 
September 30, 2016
 
September 30, 2015
(dollar amounts in thousands)
Number of
Contracts
 
Post-modification
Outstanding
Ending Balance
 
Financial effects
of modification (2)
 
Number of
Contracts
 
Post-modification
Outstanding
Ending Balance
 
Financial effects
of modification (2)
Commercial and industrial:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
2

 
$
122

 
$
6

 
2

 
$
89

 
$
(7
)
Amortization or maturity date change
246

 
89,100

 
(1,450
)
 
217

 
134,356

 
4,826

Other
6

 
711

 
(2
)
 
2

 
338

 
4

Total Commercial and industrial
254

 
89,933

 
(1,446
)
 
221

 
134,783

 
4,823

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
1

 
356

 
6


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Amortization or maturity date change
30

 
11,183

 
(546
)
 
30

 
35,541

 
383

Other

 

 

 

 

 

Total commercial real estate:
30

 
11,183

 
(546
)
 
31

 
35,897

 
389

Automobile:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
4

 
26

 
3

 
5

 
6

 

Amortization or maturity date change
452

 
4,438

 
559

 
401

 
3,445

 
157

Chapter 7 bankruptcy
236

 
1,840

 
157

 
331

 
2,585

 
84

Other

 

 

 

 

 

Total Automobile
692

 
6,304

 
719

 
737

 
6,036

 
241

Home equity:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
14

 
352

 
10

 
18

 
1,101

 
60

Amortization or maturity date change
110

 
6,740

 
(574
)
 
421

 
18,842

 
(2,176
)
Chapter 7 bankruptcy
70

 
2,395

 
1,327

 
101

 
2,840

 
1,134

Other

 

 

 

 

 

Total Home equity
194

 
9,487

 
763

 
540

 
22,783

 
(982
)
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
2

 
134

 
(2
)
 
3

 
686

 
(4
)
Amortization or maturity date change
77

 
7,988

 
(220
)
 
261

 
27,553

 
(147
)
Chapter 7 bankruptcy
17

 
1,105

 
(63
)
 
37

 
3,888

 
5

Other
3

 
260

 

 
3

 
254

 

Total Residential mortgage
99

 
9,487

 
(285
)
 
304

 
32,381

 
(146
)
RV and marine finance:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change

 

 

 

 

 

Chapter 7 bankruptcy

 

 

 

 

 

Other

 

 

 

 

 

Total RV and marine finance

 

 

 

 

 

Other consumer:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
1

 
96

 
3

Amortization or maturity date change
1

 
16

 

 
1

 
2

 

Chapter 7 bankruptcy
1

 
6

 

 
2

 
13

 

Other

 

 

 

 

 

Total Other consumer
2

 
22

 

 
4

 
111

 
3

Total new troubled debt restructurings
1,271

 
$
126,416

 
$
(795
)
 
1,837

 
$
231,991

 
$
4,328

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

 
 
 
 
 
 
 
 
 
 
 
 
 
New Troubled Debt Restructurings During The Nine-Month Period Ended (1)
 
September 30, 2016
 
September 30, 2015

89

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(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
4

 
$
161

 
$
5

 
10

 
$
759

 
$
1

Amortization or maturity date change
629

 
345,691

 
(4,368
)
 
588

 
417,548

 
(77,877
)
Other
16

 
1,801

 
(4
)
 
11

 
29,463

 
(459
)
Total Commercial and industrial
649

 
347,653

 
(4,367
)
 
609

 
447,770

 
(78,335
)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
1

 
84

 

 
3

 
2,103

 
(4
)
Amortization or maturity date change
90

 
60,995

 
(1,828
)
 
106

 
97,940

 
(990
)
Other
4

 
315

 
16

 
11

 
480

 
(30
)
Total commercial real estate:
95

 
61,394

 
(1,812
)
 
120

 
100,523

 
(1,024
)
Automobile:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
11

 
132

 
10

 
30

 
48

 
2

Amortization or maturity date change
1,159

 
11,002

 
981

 
1,213

 
8,929

 
411

Chapter 7 bankruptcy
797

 
6,384

 
386

 
621

 
4,946

 
245

Other

 

 

 

 

 

Total Automobile
1,967

 
17,518

 
1,377

 
1,864

 
13,923

 
658

Home equity:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
43

 
2,363

 
103

 
47

 
4,029

 
149

Amortization or maturity date change
466

 
25,031

 
(2,592
)
 
1,301

 
63,469

 
(8,355
)
Chapter 7 bankruptcy
215

 
8,106

 
2,327

 
257

 
7,120

 
3,513

Other

 

 

 

 

 

Total Home equity
724

 
35,500

 
(162
)
 
1,605

 
74,618

 
(4,693
)
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
12

 
1,195

 
(17
)
 
12

 
1,423

 
(60
)
Amortization or maturity date change
277

 
29,388

 
(1,217
)
 
454

 
50,827

 
(342
)
Chapter 7 bankruptcy
40

 
3,788

 
(42
)
 
106

 
10,948

 
(126
)
Other
4

 
424

 

 
9

 
962

 

Total Residential mortgage
333

 
34,795

 
(1,276
)
 
581

 
64,160

 
(528
)
RV and marine finance:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 

 

 

Amortization or maturity date change

 

 

 

 

 

Chapter 7 bankruptcy

 

 

 

 

 

Other

 

 

 

 

 

Total RV and marine finance

 

 

 

 

 

Other consumer:
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction

 

 

 
1

 
96

 
3

Amortization or maturity date change
6

 
575

 
24

 
7

 
130

 
6

Chapter 7 bankruptcy
8

 
72

 
7

 
7

 
58

 
9

Other

 

 

 

 

 


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Total Other consumer
14

 
647

 
31

 
15

 
284

 
18

Total new troubled debt restructurings
3,782

 
$
497,507

 
$
(6,209
)
 
4,794

 
$
701,278

 
$
(83,904
)
 
 
 
 
 
 
 
 
(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, 2016, the Bank has access to the Federal Reserve’s discount window and advances from the FHLB – Cincinnati. As of September 30, 2016, these borrowings and advances are secured by $19.2 billion of loans and securities.
On March 31, 2015, Huntington completed its acquisition of Macquarie Equipment Finance, which we have re-branded Huntington Technology Finance. Huntington assumed debt associated with two securitizations. As of September 30, 2016, the debt is secured by $87 million of leases held by the trusts.

5. AVAILABLE-FOR-SALE AND OTHER SECURITIES
Listed below are the contractual maturities (1 year or less, 1-5 years, 6-10 years, and over 10 years) of available-for-sale and other securities at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
(dollar amounts in thousands)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
U.S. Treasury, Federal agency, and other agency securities:
 
 
 
 
 
 
 
U.S. Treasury:
 
 
 
 
 
 
 
1 year or less
$
1,000

 
$
1,000

 
$

 
$

After 1 year through 5 years
5,474

 
5,509

 
5,457

 
5,472

After 5 years through 10 years

 

 

 

After 10 years

 

 

 

Total U.S. Treasury
6,474

 
6,509

 
5,457

 
5,472

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

 

 
51,146

 
51,050

After 1 year through 5 years
112,813

 
114,408

 
111,655

 
113,393

After 5 years through 10 years
268,553

 
274,530

 
254,397

 
257,765

After 10 years
10,427,666

 
10,491,942

 
4,088,120

 
4,099,480

Total Federal agencies: mortgage-backed securities
10,809,032

 
10,880,880

 
4,505,318

 
4,521,688

Other agencies:
 
 
 
 
 
 
 
1 year or less
1,851

 
1,878

 
801

 
805

After 1 year through 5 years
9,806

 
10,132

 
9,101

 
9,395

After 5 years through 10 years
111,561

 
113,761

 
105,174

 
105,713

After 10 years

 

 

 

Total other agencies
123,218

 
125,771

 
115,076

 
115,913

Total U.S. Treasury, Federal agency, and other agency securities
10,938,724

 
11,013,160

 
4,625,851

 
4,643,073

Municipal securities:
 
 
 
 
 
 
 
1 year or less
171,499

 
165,902

 
281,644

 
280,823

After 1 year through 5 years
960,375

 
968,651

 
587,664

 
587,345

After 5 years through 10 years
1,434,758

 
1,440,241

 
1,053,502

 
1,048,550

After 10 years
727,541

 
736,367

 
509,133

 
539,678


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Total municipal securities
3,294,173

 
3,311,161

 
2,431,943

 
2,456,396

Asset-backed securities:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years
174,949

 
175,889

 
110,115

 
109,300

After 5 years through 10 years
292,649

 
295,441

 
128,342

 
128,208

After 10 years
639,277

 
609,852

 
662,602

 
623,905

Total asset-backed securities
1,106,875

 
1,081,182

 
901,059

 
861,413

Corporate debt:
 
 
 
 
 
 
 
1 year or less
79,248

 
80,146

 
300

 
302

After 1 year through 5 years
345,632

 
354,698

 
356,513

 
360,653

After 5 years through 10 years
66,223

 
68,428

 
107,394

 
105,522

After 10 years
48,861

 
49,219

 

 

Total corporate debt
539,964

 
552,491

 
464,207

 
466,477

Other:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years
3,950

 
3,947

 
3,950

 
3,898

After 5 years through 10 years

 

 

 

After 10 years

 

 

 

Non-marketable equity securities
492,080

 
492,080

 
332,786

 
332,786

Mutual funds
2,113

 
2,553

 
10,604

 
10,604

Marketable equity securities
13,800

 
13,800

 
523

 
794

Total other
511,943

 
512,380

 
347,863

 
348,082

Total available-for-sale and other securities
$
16,391,679

 
$
16,470,374

 
$
8,770,923

 
$
8,775,441

Non-marketable equity securities includes $249 million and $157 million of stock issued by the FHLB of Cincinnati and $243 million and $176 million of Federal Reserve Bank stock at September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015:
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
September 30, 2016
 
 
 
 
 
 
 
U.S. Treasury
$
6,474

 
$
35

 
$

 
$
6,509

Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
10,809,032

 
79,940

 
(8,092
)
 
10,880,880

Other agencies
123,218

 
2,553

 

 
125,771

Total U.S. Treasury, Federal agency securities
10,938,724

 
82,528

 
(8,092
)
 
11,013,160

Municipal securities
3,294,173

 
54,452

 
(37,464
)
 
3,311,161

Asset-backed securities
1,106,875

 
5,633

 
(31,326
)
 
1,081,182

Corporate debt
539,964

 
12,838

 
(311
)
 
552,491

Other securities
511,943

 
440

 
(3
)
 
512,380

Total available-for-sale and other securities
$
16,391,679

 
$
155,891

 
$
(77,196
)
 
$
16,470,374


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Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
U.S. Treasury
$
5,457

 
$
15

 
$

 
$
5,472

Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
4,505,318

 
30,078

 
(13,708
)
 
4,521,688

Other agencies
115,076

 
888

 
(51
)
 
115,913

Total U.S. Treasury, Federal agency securities
4,625,851

 
30,981

 
(13,759
)
 
4,643,073

Municipal securities
2,431,943

 
51,558

 
(27,105
)
 
2,456,396

Asset-backed securities
901,059

 
535

 
(40,181
)
 
861,413

Corporate debt
464,207

 
4,824

 
(2,554
)
 
466,477

Other securities
347,863

 
271

 
(52
)
 
348,082

Total available-for-sale and other securities
$
8,770,923

 
$
88,169

 
$
(83,651
)
 
$
8,775,441

At September 30, 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 $6.0 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at September 30, 2016.
The following tables provide detail on investment securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at September 30, 2016 and December 31, 2015:
 
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, 2016
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
2,583,032

 
$
(7,836
)
 
$
30,742

 
$
(256
)
 
$
2,613,774

 
$
(8,092
)
Other agencies

 

 

 

 

 

Total Federal agency securities
2,583,032

 
(7,836
)
 
30,742

 
(256
)
 
2,613,774

 
(8,092
)
Municipal securities
911,170

 
(30,367
)
 
178,540

 
(7,097
)
 
1,089,710

 
(37,464
)
Asset-backed securities
199,279

 
(2,085
)
 
125,304

 
(29,241
)
 
324,583

 
(31,326
)
Corporate debt
23,663

 
(306
)
 
299

 
(5
)
 
23,962

 
(311
)
Other securities

 

 
1,497

 
(3
)
 
1,497

 
(3
)
Total temporarily impaired securities
$
3,717,144

 
$
(40,594
)
 
$
336,382

 
$
(36,602
)
 
$
4,053,526

 
$
(77,196
)
 
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, 2015
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,658,516

 
$
(11,341
)
 
$
84,147

 
$
(2,367
)
 
$
1,742,663

 
$
(13,708
)
Other agencies
37,982

 
(51
)
 

 

 
37,982

 
(51
)
Total Federal agency securities
1,696,498

 
(11,392
)
 
84,147

 
(2,367
)
 
1,780,645

 
(13,759
)
Municipal securities
570,916

 
(15,992
)
 
248,204

 
(11,113
)
 
819,120

 
(27,105
)
Asset-backed securities
552,275

 
(5,791
)
 
207,639

 
(34,390
)
 
759,914

 
(40,181
)
Corporate debt
167,144

 
(1,673
)
 
21,965

 
(881
)
 
189,109

 
(2,554
)
Other securities
772

 
(28
)
 
1,476

 
(24
)
 
2,248

 
(52
)
Total temporarily impaired securities
$
2,987,605

 
$
(34,876
)
 
$
563,431

 
$
(48,775
)
 
$
3,551,036

 
$
(83,651
)

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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, 2016 and 2015:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Gross gains on sales of securities
$
3,770

 
$
6,173

 
$
7,161

 
$
6,256

Gross (losses) on sales of securities
(2,739
)
 
(5,985
)
 
(5,474
)
 
(5,986
)
Net gain on sales of securities
$
1,031

 
$
188

 
$
1,687

 
$
270


Security Impairment
Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment. We conduct a comprehensive security-level assessment on all available-for-sale securities. Impairment would exist when the present value of the expected cash flows are not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be maturity.
The highest risk segment in our investment portfolio is the trust preferred CDO securities which are in the asset-backed securities portfolio. This portfolio is in run off, and we have 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 our analysis, we estimate appropriate default and recovery probabilities for each piece of collateral then estimate 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).
On December 10, 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Volcker Rule prohibits an insured depository institution and its affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading. On July 6, 2016, the Federal Reserve extended the conformance period under section 13 of the BHC Act for all banking entities to conform investments in, and relationships with, legacy covered funds until July 21, 2017.
On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of section 619 of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. At September 30, 2016, we had investments in seven different pools

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of trust preferred securities. Six of our pools are included in the list of non-exclusive issuers. We have analyzed the ICONS pool that was not included on the list and believe that it is more likely than not that we will be able to hold the ICONS security to recovery under the final Volcker Rule regulations.

The following table summarizes the relevant characteristics of our CDO securities portfolio, which are included in asset-backed securities, at September 30, 2016. 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 Data
September 30, 2016
(dollar amounts in thousands)
Deal Name
Par Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Loss (2)
 
Lowest
Credit
Rating
(3)
 
# of Issuers
Currently
Performing/
Remaining (4)
 
Actual
Deferrals
and
Defaults
as a % of
Original
Collateral
 
Expected
Defaults
as a % of
Remaining
Performing
Collateral
 
Excess
Subordination
(5)
ICONS
$
18,912

 
$
18,912

 
$
15,228

 
$
(3,684
)
 
BB
 
19/21
 
7
 
14
 
52
MM Comm III
4,633

 
4,426

 
3,553

 
(873
)
 
BB
 
5/8
 
5
 
6
 
34
Pre TSL IX
5,000

 
3,955

 
3,155

 
(800
)
 
C
 
27/38
 
18
 
10
 
8
Pre TSL XI
25,000

 
19,733

 
15,223

 
(4,510
)
 
C
 
44/53
 
12
 
7
 
14
Pre TSL XIII
27,530

 
19,277

 
16,524

 
(2,753
)
 
C
 
44/54
 
10
 
10
 
28
Reg Diversified (1)
25,500

 
4,610

 
1,749

 
(2,861
)
 
D
 
22/38
 
33
 
7
 
Tropic III
31,000

 
31,000

 
18,377

 
(12,623
)
 
BB
 
28/37
 
16
 
7
 
39
Total at September 30, 2016
$
137,575

 
$
101,913

 
$
73,809

 
$
(28,104
)
 
 
 
 
 
 
 
 
 
 
Total at December 31, 2015
$
179,574

 
$
131,911

 
$
100,338

 
$
(31,654
)
 
 
 
 
 
 
 
 
 
 
(1)
Security was determined to have OTTI. As such, the book value is net of recorded credit impairment.
(2)
The majority of securities have been in a continuous loss position for 12 months or longer.
(3)
For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency.
(4)
Includes both banks and/or insurance companies.
(5)
Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

For the three-month and nine-month periods ended September 30, 2016 and 2015, the following table summarizes by security type the total OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
 
2016
 
2015
 
2016
 
2015
Available-for-sale and other securities:
 
 
 
 
 
 
 
 
Collateralized Debt Obligations
 
$

 
$
2,440

 
$

 
$
2,440

Municipal Securities
 
$

 
$

 
$
76

 
$

Total available-for-sale and other securities
 
$

 
$
2,440

 
$
76

 
$
2,440


The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the three-month and nine-month periods ended September 30, 2016 and 2015 as follows:

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
 
$
9,831

 
$
30,869

 
$
18,368

 
$
30,869

Reductions from sales
 
(76
)
 
(14,941
)
 
(8,689
)
 
(14,941
)
Additional credit losses
 

 
2,440

 
76

 
2,440

Balance, end of period
 
$
9,755

 
$
18,368

 
$
9,755

 
$
18,368

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

During 2015, Huntington transferred $3.0 billion of federal agencies, mortgage-backed securities and other agency securities from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. At the time of the transfer, $6 million of unrealized net gains were recognized in OCI. The amounts in OCI will be recognized in earnings over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of the premium on the same transferred securities, resulting in an immaterial impact on net income.
Listed below are the contractual maturities (1 year or less, 1-5 years, 6-10 years, and over 10 years) of held-to-maturity securities at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
(dollar amounts in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Federal agencies: mortgage-backed securities:
 
 
 
 
 
 
 
1 year or less
$

 
$

 
$

 
$

After 1 year through 5 years

 

 

 

After 5 years through 10 years
42,431

 
43,449

 
25,909

 
25,227

After 10 years
4,677,662

 
4,752,132

 
5,506,592

 
5,484,407

Total Federal agencies: mortgage-backed securities
4,720,093

 
4,795,581

 
5,532,501

 
5,509,634

Other agencies:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years

 

 

 

After 5 years through 10 years
311,223

 
317,298

 
283,960

 
284,907

After 10 years
263,697

 
269,841

 
336,092

 
334,004

Total other agencies
574,920

 
587,139

 
620,052

 
618,911

Total U.S. Government backed agencies
5,295,013

 
5,382,720

 
6,152,553

 
6,128,545

Municipal securities:
 
 
 
 
 
 
 
1 year or less

 

 

 

After 1 year through 5 years

 

 

 

After 5 years through 10 years

 

 

 

After 10 years
6,374

 
6,373

 
7,037

 
6,913

Total municipal securities
6,374

 
6,373

 
7,037

 
6,913

Total held-to-maturity securities
$
5,301,387

 
$
5,389,093

 
$
6,159,590

 
$
6,135,458

The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at September 30, 2016 and December 31, 2015:

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Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
September 30, 2016
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
$
4,720,093

 
$
78,826

 
$
(3,338
)
 
$
4,795,581

Other agencies
574,920

 
12,219

 

 
587,139

Total U.S. Government backed agencies
5,295,013

 
91,045

 
(3,338
)
 
5,382,720

Municipal securities
6,374

 

 
(1
)
 
6,373

Total held-to-maturity securities
$
5,301,387

 
$
91,045

 
$
(3,339
)
 
$
5,389,093

 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
$
5,532,501

 
$
14,637

 
$
(37,504
)
 
$
5,509,634

Other agencies
620,052

 
1,645

 
(2,786
)
 
618,911

Total U.S. Government backed agencies
6,152,553

 
16,282

 
(40,290
)
 
6,128,545

Municipal securities
7,037

 

 
(124
)
 
6,913

Total held-to-maturity securities
$
6,159,590

 
$
16,282

 
$
(40,414
)
 
$
6,135,458

The following tables provide detail on held-to-maturity securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at September 30, 2016 and December 31, 2015:
 
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, 2016
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
273,593

 
$
(1,862
)
 
$
150,218

 
$
(1,476
)
 
$
423,811

 
$
(3,338
)
Other agencies

 

 

 

 

 

Total U.S. Government backed securities
273,593

 
(1,862
)
 
150,218

 
(1,476
)
 
423,811

 
(3,338
)
Municipal securities
6,372

 
(1
)
 

 

 
6,372

 
(1
)
Total temporarily impaired securities
$
279,965

 
$
(1,863
)
 
$
150,218

 
$
(1,476
)
 
$
430,183

 
$
(3,339
)
 
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, 2015
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
3,692,890

 
$
(25,418
)
 
$
519,872

 
$
(12,086
)
 
$
4,212,762

 
$
(37,504
)
Other agencies
425,410

 
(2,689
)
 
6,647

 
(97
)
 
432,057

 
(2,786
)
Total U.S. Government backed securities
4,118,300

 
(28,107
)
 
526,519

 
(12,183
)
 
4,644,819

 
(40,290
)
Municipal securities

 

 
6,913

 
(124
)
 
6,913

 
(124
)
Total temporarily impaired securities
$
4,118,300

 
$
(28,107
)
 
$
533,432

 
$
(12,307
)
 
$
4,651,732

 
$
(40,414
)
Security Impairment

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Huntington evaluates the held-to-maturity securities portfolio on a quarterly basis for impairment. Impairment would exist when the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings. As of September 30, 2016, Management has evaluated held-to-maturity securities with unrealized losses for impairment and concluded no OTTI is required.
7. LOAN SALES AND SECURITIZATIONS
Residential Mortgage Loans
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2016 and 2015:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Residential mortgage loans sold with servicing retained
$
1,204,547

 
$
920,974

 
$
2,552,602

 
$
2,490,070

Pretax gains resulting from above loan sales (1)
32,073

 
22,529

 
64,804

 
64,103

(1)
Recorded in mortgage banking income.
A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At initial recognition, the MSR asset is established at its fair value using assumptions consistent with assumptions used to estimate the fair value of existing MSRs. At the time of initial capitalization, MSRs may be recorded using either the fair value method or the amortization method. The election of the fair value method or amortization method is made at the time each servicing class is established. Subsequently, servicing rights are accounted for based on the methodology chosen for each respective servicing class. Any increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, during the period is recorded as an increase or decrease in mortgage banking income, which is reflected in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month and nine-month periods ended September 30, 2016 and 2015:
Fair Value Method:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Fair value, beginning of period
$
13,105

 
$
20,681

 
$
17,585

 
$
22,786

Change in fair value during the period due to:
 
 
 
 
 
 
 
Time decay (1)
(217
)
 
(324
)
 
(734
)
 
(996
)
Payoffs (2)
(423
)
 
(651
)
 
(1,392
)
 
(2,465
)
Changes in valuation inputs or assumptions (3)
(37
)
 
(1,641
)
 
(3,031
)
 
(1,260
)
Fair value, end of period:
$
12,428

 
$
18,065

 
$
12,428

 
$
18,065

Weighted-average life (years)
5.1

 
4.9

 
5.1

 
4.9

(1)
Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2)
Represents decrease in value associated with loans that paid off during the period.
(3)
Represents change in value resulting primarily from market-driven changes in interest rates and prepayment speeds.

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Amortization Method:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Carrying value, beginning of period
$
121,292

 
$
143,127

 
$
143,133

 
$
132,813

New servicing assets created
12,434

 
9,918

 
25,820

 
26,710

Servicing assets acquired
15,317

 

 
15,317

 

Impairment (charge) / recovery
2,543

 
(12,472
)
 
(21,093
)
 
(7,492
)
Amortization and other
(7,194
)
 
(5,106
)
 
(18,785
)
 
(16,564
)
Carrying value, end of period
$
144,392

 
$
135,467

 
$
144,392

 
$
135,467

Fair value, end of period
$
144,623

 
$
135,499

 
$
144,623

 
$
135,499

Weighted-average life (years)
6.1

 
6.0

 
6.1

 
6.0

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington hedges the value of certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.
For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2016 and December 31, 2015, to changes in these assumptions follows:
 
September 30, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
12.40
%
 
$
(517
)
 
$
(998
)
 
14.70
%
 
$
(864
)
 
$
(1,653
)
Spread over forward interest rate swap rates
553 bps

 
(379
)
 
(736
)
 
539 bps

 
(559
)
 
(1,083
)
For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2016 and December 31, 2015, to changes in these assumptions follows:
 
September 30, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
10.10
%
 
$
(4,935
)
 
$
(9,531
)
 
11.10
%
 
$
(5,543
)
 
$
(10,648
)
Spread over forward interest rate swap rates
1,205 bps

 
(4,083
)
 
(7,924
)
 
875 bps

 
(4,662
)
 
(9,017
)
Total servicing, late and other ancillary fees included in mortgage banking income amounted to $13 million and $12 million for the three-month periods ended September 30, 2016 and 2015, respectively. For the nine-month periods ended September 30, 2016 and 2015, total net servicing fees included in mortgage banking income were $36 million and $35 million, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $18.6 billion and $16.2 billion at September 30, 2016 and December 31, 2015, respectively.
Automobile Loans and Leases
Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of

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the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.
Changes in the carrying value of automobile loan servicing rights for the three-month and nine-month periods ended September 30, 2016 and 2015, and the fair value at the end of each period were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Carrying value, beginning of period
$
5,458

 
$
14,330

 
$
8,771

 
$
6,898

New servicing assets created

 

 

 
11,180

Amortization and other
(1,087
)
 
(2,990
)
 
(4,400
)
 
(6,738
)
Carrying value, end of period
$
4,371

 
$
11,340

 
$
4,371

 
$
11,340

Fair value, end of period
$
4,366

 
$
11,341

 
$
4,366

 
$
11,341

Weighted-average life (years)
3.2

 
3.3

 
3.2

 
3.3

A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at September 30, 2016 and December 31, 2015 follows:
 
September 30, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
18.86
%
 
$
(201
)
 
$
(453
)
 
18.36
%
 
$
(500
)
 
$
(895
)
Spread over forward interest rate swap rates
500 bps

 
(4
)
 
(8
)
 
500 bps

 
(10
)
 
(19
)

Servicing income amounted to $2 million and $4 million for the three-month periods ending September 30, 2016, and 2015, respectively. For the nine-month periods ended September 30, 2016 and 2015, total servicing income was $6 million and $11 million, respectively. The unpaid principal balance of automobile loans serviced for third parties was $0.4 billion and $0.9 billion at September 30, 2016 and December 31, 2015, respectively.
Small Business Administration (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2016 and 2015:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
SBA loans sold with servicing retained
$
62,803

 
$
49,216

 
$
167,321

 
$
145,150

Pretax gains resulting from above loan sales (1)
4,679

 
3,712

 
12,862

 
11,981

(1)
Recorded in gain on sale of loans.
Huntington has retained servicing responsibilities on sold SBA loans and receives annual servicing fees on the outstanding loan balances. SBA loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale using a discounted future cash flow model. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows.
The following tables summarize the changes in the carrying value of the servicing asset for the three-month and nine-month periods ended September 30, 2016 and 2015, and the fair value at the end of each period were as follows:

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Carrying value, beginning of period
$
19,612

 
$
18,272

 
$
19,747

 
$
18,536

New servicing assets created
1,879

 
1,684

 
5,259

 
4,980

Amortization and other
(1,745
)
 
(1,594
)
 
(5,260
)
 
(5,154
)
Carrying value, end of period
$
19,746

 
$
18,362

 
$
19,746

 
$
18,362

Fair value, end of period
$
24,065

 
$
20,906

 
$
24,065

 
$
20,906

Weighted-average life (years)
3.3

 
3.3

 
3.3

 
3.3

A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at September 30, 2016 and December 31, 2015 follows:
 
September 30, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
7.40
%
 
$
(325
)
 
$
(645
)
 
7.60
%
 
$
(313
)
 
$
(622
)
Discount rate
15.00

 
(645
)
 
(1,262
)
 
15.00

 
(610
)
 
(1,194
)
Servicing income amounted to $2 million and $2 million for the three-month periods ending September 30, 2016, and 2015, respectively. For the nine-month periods ended September 30, 2016 and 2015, total servicing income was $7 million and $6 million, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.1 billion and $1.0 billion at September 30, 2016 and December 31, 2015, respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Business segments are based on segment leadership structure, which reflects how segment performance is monitored and assessed. We have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes, along with technology and operations, other unallocated assets, liabilities, revenue, and expense.
A rollforward of goodwill by business segment for the first nine-month period of 2016 is presented in the table below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
Retail &
Business
Banking
 
Commercial
Banking
 
AFCRE
 
RBHPCG
 
Home
Lending
 
Treasury/
Other
 
Huntington
Consolidated
Balance, December 31, 2015
$
368,097

 
$
215,422

 
$

 
$
88,512

 
$

 
$
4,838

 
$
676,869

Goodwill acquired during the period
1,036,240

 
242,096

 

 
53,981

 

 

 
1,332,317

Adjustments

 

 

 

 

 
(4,838
)
 
(4,838
)
Balance, September 30, 2016
$
1,404,337

 
$
457,518

 
$

 
$
142,493

 
$

 
$

 
$
2,004,348

On August 16, 2016, Huntington completed its acquisition of FirstMerit in a stock and cash transaction valued at approximately $3.7 billion. In connection with the acquisition, the Company recorded $1.3 billion of goodwill, $310 million core deposit intangible asset and $95 million of other intangible assets. For additional information on the acquisition, see Acquisition of FirstMerit Corporation footnote.
During the 2016 third quarter, Huntington reclassified $5 million of goodwill in the Treasury/Other segment related to a held for sale disposal group at September 30, 2016.
Goodwill is not amortized but is evaluated for impairment on an annual basis at October 1 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable.
At September 30, 2016 and December 31, 2015, Huntington’s other intangible assets consisted of the following:

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(dollar amounts in thousands)
Gross
Carrying
Amount
 
 
Accumulated
Amortization
 
Net
Carrying
Value
September 30, 2016
 
 
 
 
 
 
Core deposit intangible
$
336,508

 
 
$
(18,340
)
 
$
318,168

Customer relationship
194,956

(1)
 
(84,412
)
 
110,544

Other
794

 
 
(732
)
 
62

Total other intangible assets
$
532,258

 
 
$
(103,484
)
 
$
428,774

December 31, 2015
 
 
 
 
 
 
Core deposit intangible
$
26,758

 
 
$
(11,306
)
 
$
15,452

Customer relationship
114,553

 
 
(75,115
)
 
39,438

Other
794

 
 
(706
)
 
88

Total other intangible assets
$
142,105

 
 
$
(87,127
)
 
$
54,978

(1)
During the 2016 third quarter, certain commercial merchant relationships, which resulted in an intangible of $14 million, were contributed to a joint venture in which Huntington holds a minority interest.
The estimated amortization expense of other intangible assets for the remainder of 2016 and the next five years is as follows:
 
 
 
 
(dollar amounts in thousands)
Amortization
Expense
2016
$
14,416

2017
56,341

2018
53,161

2019
50,446

2020
42,291

2021
39,783

9. LONG-TERM DEBT
Subordinated debt with a fair value of $520 million was acquired by Huntington as part of the FirstMerit acquisition. See Acquisition of FirstMerit Corporation footnote for additional information on the method used to determine fair value.
In August 2016, Huntington issued $1.0 billion of senior notes at 99.849% of face value. The senior notes mature on January 14, 2022 and have a fixed coupon rate of 2.3%. At September 30, 2016, debt issuance costs of $6 million related to the note are reported on the balance sheet as a direct deduction from the face amount of the note.
In March 2016, Huntington issued $1.0 billion of senior notes at 99.803% of face value. The senior notes mature on March 14, 2021 and have a fixed coupon rate of 3.15%. At September 30, 2016, debt issuance costs of $5 million related to the note are reported on the balance sheet as a direct deduction from the face amount of the note.
10. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, were as follows:

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

 
$
(708
)
 
$
1,294

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

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

 
(257
)
 
469

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

 
(33,742
)
Net change in unrealized holding gains (losses) on available-for-sale equity securities

 

 

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

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

 
(44
)
 
79

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

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

 
(452
)
 
841

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

 
$
(38,133
)
 
Three Months Ended
September 30, 2015
 
Tax (Expense)
(dollar amounts in thousands)
Pretax
 
Benefit
 
After-tax
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold
$
131

 
$
(46
)
 
$
85

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
65,398

 
(23,136
)
 
42,262

Less: Reclassification adjustment for net losses (gains) included in net income
(3,732
)
 
1,306

 
(2,426
)
Net change in unrealized holding gains (losses) on available-for-sale debt securities
61,797

 
(21,876
)
 
39,921

Net change in unrealized holding gains (losses) on available-for-sale equity securities
(177
)
 
62

 
(115
)
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
12,770

 
(4,469
)
 
8,301

Less: Reclassification adjustment for net (gains) losses included in net income
(73
)
 
26

 
(47
)
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
12,697

 
(4,443
)
 
8,254

Net change in pension and other post-retirement obligations
(3,305
)
 
1,157

 
(2,148
)
Total other comprehensive income (loss)
$
71,012

 
$
(25,100
)
 
$
45,912


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

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

 
(28,315
)
 
48,322

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

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

 
(27,385
)
 
46,620

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

 
(60
)
 
110

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

 
(2,816
)
 
5,231

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

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

 
(2,547
)
 
4,731

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

 
(1,357
)
 
2,522

Total other comprehensive income (loss)
$
85,332

 
$
(31,349
)
 
$
53,983

 
Nine months ended
September 30, 2015
 
Tax (expense)
(dollar amounts in thousands)
Pretax
 
Benefit
 
After-tax
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold
$
18,866

 
$
(6,671
)
 
$
12,195

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period
73,782

 
(26,240
)
 
47,542

Less: Reclassification adjustment for net losses (gains) included in net income
(3,973
)
 
1,391

 
(2,582
)
Net change in unrealized holding gains (losses) on available-for-sale debt securities
88,675

 
(31,520
)
 
57,155

Net change in unrealized holding gains (losses) on available-for-sale equity securities
(152
)
 
53

 
(99
)
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period
40,088

 
(14,031
)
 
26,057

Less: Reclassification adjustment for net (gains) losses included in net income
(334
)
 
117

 
(217
)
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships
39,754

 
(13,914
)
 
25,840

Net change in pension and other post-retirement obligations
(527
)
 
184

 
(343
)
Total other comprehensive income (loss)
$
127,750

 
$
(45,197
)
 
$
82,553


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The following table presents activity in accumulated other comprehensive income (loss), net of tax, for the nine-month periods ended September 30, 2016 and 2015:
(dollar amounts in thousands)
Unrealized gains
and (losses) on
debt securities
(1)
 
Unrealized
gains and
(losses) on
equity
securities
 
Unrealized
gains and
(losses) on
cash flow
hedging
derivatives
 
Unrealized gains
(losses) for
pension and
other post-
retirement
obligations
 
Total
December 31, 2014
$
15,137

 
$
484

 
$
(12,233
)
 
$
(225,680
)
 
$
(222,292
)
Other comprehensive income before reclassifications
59,737

 
(99
)
 
26,057

 

 
85,695

Amounts reclassified from accumulated OCI to earnings
(2,582
)
 

 
(217
)
 
(343
)
 
(3,142
)
Period change
57,155

 
(99
)
 
25,840

 
(343
)
 
82,553

September 30, 2015
$
72,292

 
$
385

 
$
13,607

 
$
(226,023
)
 
$
(139,739
)
December 31, 2015
$
8,361

 
$
176

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

 
110

 
5,231

 

 
53,275

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

 
(500
)
 
2,522

 
708

Period change
46,620

 
110

 
4,731

 
2,522

 
53,983

September 30, 2016
$
54,981

 
$
286

 
$
783

 
$
(228,225
)
 
$
(172,175
)
(1)
Amounts at September 30, 2016 and December 31, 2015 include $7 million and $9 million, respectively, of net unrealized gains on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized gains will be recognized in earnings over the remaining life of the security using the effective interest method.

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The following table presents the reclassification adjustments out of accumulated OCI included in net income and the impacted line items as listed on the Unaudited Condensed Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2016 and 2015:
 
Reclassifications out of accumulated OCI
Accumulated OCI components
Amounts reclassified from accumulated OCI
 
Location of net gain (loss) reclassified from accumulated OCI into earnings
 
Three Months Ended
 
 
(dollar amounts in thousands)
September 30, 2016
 
September 30, 2015
 
 
Gains (losses) on debt securities:
 
 
 
 
 
Amortization of unrealized gains (losses)
$
(726
)
 
$
69

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

 
6,103

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

 
(2,440
)
 
Noninterest income - net gains (losses) on sale of securities
 
(726
)
 
3,732

 
Total before tax
 
257

 
(1,306
)
 
Tax (expense) benefit
 
$
(469
)
 
$
2,426

 
Net of tax
Gains (losses) on cash flow hedging relationships:
 
 
 
 
 
Interest rate contracts
$
(123
)
 
$
73

 
Interest income - loans and leases
Interest rate contracts

 

 
Noninterest income - other income
 
(123
)
 
73

 
Total before tax
 
44

 
(26
)
 
Tax (expense) benefit
 
$
(79
)
 
$
47

 
Net of tax
Amortization of defined benefit pension and post-retirement items:
 
 
 
 
 
Actuarial gains (losses)
$
(1,785
)
 
$
2,813

 
Noninterest expense - personnel costs
Prior service credit
492

 
492

 
Noninterest expense - personnel costs
 
(1,293
)
 
3,305

 
Total before tax
 
452

 
(1,157
)
 
Tax (expense) benefit
 
$
(841
)
 
$
2,148

 
Net of tax

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Reclassifications out of accumulated OCI
Accumulated OCI components
Amounts reclassified from accumulated OCI
 
Location of net gain (loss) reclassified from accumulated OCI into earnings
 
Nine months ended
 
 
(dollar amounts in thousands)
September 30, 2016
 
September 30, 2015
 
 
Gains (losses) on debt securities:
 
 
 
 
 
Amortization of unrealized gains (losses)
$
478

 
$
269

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

 
6,144

 
Noninterest income - net gains (losses) on sale of securities
OTTI recorded
(76
)
 
(2,440
)
 
Noninterest income - net gains (losses) on sale of securities
Total before tax
2,032

 
3,973

 
 
Tax (expense) benefit
(718
)
 
(1,391
)
 
 
Net of tax
$
1,314

 
$
2,582

 
 
Gains (losses) on cash flow hedging relationships:
 
 
 
 
 
Interest rate contracts
$
770

 
$
323

 
Interest income - loans and leases
Interest rate contracts
(1
)
 
11

 
Noninterest income - other income
Total before tax
769

 
334

 
 
Tax (expense) benefit
(269
)
 
(117
)
 
 
Net of tax
$
500

 
$
217

 
 
Amortization of defined benefit pension and post-retirement items:
 
 
 
 
 
Actuarial gains (losses)
$
(5,355
)
 
$
(949
)
 
Noninterest expense - personnel costs
Prior service credit
1,476

 
1,476

 
Noninterest expense - personnel costs
Total before tax
(3,879
)
 
527

 
 
Tax (expense) benefit
1,357

 
(184
)
 
 
Net of tax
$
(2,522
)
 
$
343

 
 
11. SHAREHOLDERS’ EQUITY
Preferred C Stock issued and outstanding
In connection with the FirstMerit acquisition, during the 2016 third quarter, Huntington issued $100 million of preferred stock. As part of this transaction, Huntington issued 4,000,000 depositary shares, each representing a 1/40th ownership interest in a share of 5.875% Series C Non-Cumulative Perpetual Preferred Stock (Preferred C Stock), par value $0.01 per share, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Each holder of a depositary share, will be entitled to all proportional rights and preferences of the Preferred C Stock (including dividend, voting, redemption, and liquidation rights).
Dividends on the Preferred C Stock will be non-cumulative and payable quarterly in arrears, when, as and if authorized by our board of directors or a duly authorized committee of our board and declared by us, at an annual rate of 5.875% per year on the liquidation preference of $1,000 per share, equivalent to $25 per depositary share. The dividend payment dates will be the fifteenth day of each January, April, July and October, commencing on October 15, 2016, or the next business day if any such day is not a business day.
The Preferred C Stock is perpetual and has no maturity date. Huntington may redeem the Preferred C Stock at our option, (i) in whole or in part, from time to time, on any dividend payment date on or after October 15, 2021 or (ii) in whole but not in part, within 90 days following a regulatory capital treatment event, in each case, at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without regard to any undeclared dividends, on the Series C Preferred Stock prior to the date fixed for redemption. If Huntington redeems the Preferred C Stock, the depositary will redeem a proportional number of depositary shares. Neither the holders of Preferred C Stock nor holders of depositary shares will have the right to require the redemption or repurchase of the Preferred C Stock or the depositary shares.

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Any redemption of the Preferred C Stock is subject to Huntington's receipt of any required prior approval by the Board of Governors of the Federal Reserve System.
Preferred D Stock issued and outstanding
During the 2016 first and second quarter, Huntington issued $400 million and $200 million of preferred stock, respectively. As part of these transactions, Huntington issued 24,000,000 depositary shares, each representing a 1/40th ownership interest in a share of 6.250% Series D Non-Cumulative Perpetual Preferred Stock (Preferred D Stock), par value $0.01 per share, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Each holder of a depositary share, will be entitled to all proportional rights and preferences of the Preferred D Stock (including dividend, voting, redemption, and liquidation rights). Costs of $15 million related to the issuance of the Preferred D Stock are reported as a direct deduction from the face amount of the stock.
Dividends on the Preferred D Stock will be non-cumulative and payable quarterly in arrears, when, as and if authorized by our board of directors or a duly authorized committee of our board and declared by us, at an annual rate of 6.25% per year on the liquidation preference of $1,000 per share, equivalent to $25 per depositary share. The dividend payment dates will be the fifteenth day of each January, April, July and October, commencing on July 15, 2016, or the next business day if any such day is not a business day.
The Preferred D Stock is perpetual and has no maturity date. Huntington may redeem the Preferred D Stock at our option, (i) in whole or in part, from time to time, on any dividend payment date on or after April 15, 2021 or (ii) in whole but not in part, within 90 days following a regulatory capital treatment event, in each case, at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends and, in the case of a redemption following a regulatory capital treatment event, the pro rated portion of dividends, whether or not declared, for the dividend period in which such redemption occurs. Notwithstanding the foregoing, pursuant to a commitment we have made to the Federal Reserve, for at least five years after the date of the issuance of depositary shares offered by the prospectus supplement, we will not redeem or repurchase the Preferred D Stock, whether issued on March 21, 2016 or on the date of the issuance of the depositary shares offered by the prospectus supplement. If Huntington redeems the Preferred D Stock, the depositary will redeem a proportional number of depositary shares. Neither the holders of Preferred D Stock nor holders of depositary shares will have the right to require the redemption or repurchase of the Preferred D Stock or the depositary shares. Any redemption of the Preferred D Stock is subject to Huntington's receipt of any required prior approval by the Board of Governors of the Federal Reserve System.
2016 Comprehensive Capital Analysis and Review (CCAR)
On June 29, 2016, Huntington announced that the Federal Reserve did not object to the proposed capital actions included in Huntington's capital plan submitted to the Federal Reserve in April 2016 as part of the 2016 Comprehensive Capital Analysis and Review (CCAR). These actions included an increase in the quarterly dividend per common share to $0.08, starting in the fourth quarter of 2016. Huntington’s capital plan also included the issuance of capital in connection with the acquisition of FirstMerit Corporation and continues the previously announced suspension of the company’s 2015 share repurchase program.
2015 Share Repurchase Program
During the three-month period ended September 30, 2015, Huntington repurchased a total of 6.8 million shares of common stock at a weighted average share price of $10.66. During the nine-month period ended September 30, 2015 Huntington repurchased a total of 20.5 million shares of common stock at a weighted average share price of $10.76.

12. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of the Company’s convertible preferred. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. For diluted earnings per share, net income available to common shares can be affected by the conversion of the Company’s convertible preferred stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the associated preferred dividends and deemed dividend. The calculation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 2016 and 2015, was as follows:

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Basic earnings per common share:
 
 
 
 
 
 
 
Net income
$
127,004

 
$
152,588

 
$
472,858

 
$
514,648

Preferred stock dividends
(18,537
)
 
(7,968
)
 
(46,409
)
 
(23,901
)
Net income available to common shareholders
$
108,467

 
$
144,620

 
$
426,449

 
$
490,747

Average common shares issued and outstanding
938,578

 
800,883

 
844,167

 
805,851

Basic earnings per common share
$
0.12

 
$
0.18

 
$
0.51

 
$
0.61

Diluted earnings per common share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
108,467

 
$
144,620

 
$
426,449

 
$
490,747

Effect of assumed preferred stock conversion

 

 

 

Net income applicable to diluted earnings per share
$
108,467

 
$
144,620

 
$
426,449

 
$
490,747

Average common shares issued and outstanding
938,578

 
800,883

 
844,167

 
805,851

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options and restricted stock units and awards
10,714

 
11,285

 
10,295

 
11,554

Shares held in deferred compensation plans
2,654

 
1,997

 
2,337

 
1,872

Other
135

 
161

 
135

 
181

Dilutive potential common shares:
13,503

 
13,443

 
12,767

 
13,607

Total diluted average common shares issued and outstanding
952,081

 
814,326

 
856,934

 
819,458

Diluted earnings per common share
$
0.11

 
$
0.18

 
$
0.50

 
$
0.60

For the three-month periods ended September 30, 2016 and 2015, approximately 3.5 million and 1.7 million, respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the nine-month periods ended September 30, 2016 and 2015, approximately 3.3 million and 1.5 million were not included, respectively.
13. SHARE-BASED COMPENSATION
As a result of the FirstMerit Acquisition on August 16, 2016, Huntington assumed 916 thousand outstanding FirstMerit restricted stock awards (RSAs) and 807 thousand outstanding FirstMerit performance share awards (PSAs). Each FirstMerit RSA and PSA granted on or following January 25, 2016 was assumed and converted into a RSA or PSA award relating to shares of Huntington common stock, with the same terms and conditions as were applicable under such award prior to the acquisition.
 
 
 
 
 
 
 
 
The following table summarizes the status of Huntington’s restricted stock awards, restricted stock units, and performance share awards as of September 30, 2016, and activity for the nine-month period ended September 30, 2016:
 
Restricted Stock Awards
 
Restricted Stock Units
 
Performance Share Awards
(amounts in thousands, except per share amounts)
Quantity
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Quantity
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Quantity
 
Weighted-
Average
Grant Date
Fair Value
Per Share
Nonvested at January 1, 2016
7

 
$
9.53

 
12,170

 
$
9.11

 
2,893

 
$
8.99

Granted

 

 
5,415

 
9.66

 
954

 
9.04

Assumed
916

 
9.68

 

 

 
807

 
9.68

Vested
(204
)
 
9.67

 
(3,101
)
 
7.89

 
(1,306
)
 
8.05

Forfeited
(15
)
 
9.68

 
(629
)
 
9.44

 
(47
)
 
9.88

Nonvested at September 30, 2016
704

 
$
9.68

 
13,855

 
$
9.59

 
3,301

 
$
9.63

14. BENEFIT PLANS

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Huntington sponsors the Plan, a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan, which was modified in 2013 and no longer accrues service benefits to participants, provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than the amount deductible under the Internal Revenue Code. There is no required minimum contribution for 2016. During the 2013 third quarter, the board of directors approved, and management communicated, a curtailment of the Company’s pension plan effective December 31, 2013. Although not required, Huntington made a $150 million contribution to the Plan in the third quarter of 2016.
In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For additional information on benefit plans, see the Benefit Plan footnote in our 2015 Form 10-K.
On January 1, 2015, Huntington terminated the Company sponsored retiree health care plan for Medicare eligible retirees and their dependents. Instead, Huntington partnered with a third party to assist the retirees and their dependents in selecting individual policies from a variety of carriers on a private exchange. This plan amendment resulted in a remeasurement of the liability at the approval date and a reduction of expense over the estimated life of plan participants.
As part of the FirstMerit acquisition, Huntington agreed to assume and honor all FirstMerit benefit plans. The FirstMerit Pension Plan was frozen for nonvested employees and closed to new entrants after December 31, 2006. Effective December 31, 2012, the FirstMerit Pension Plan was frozen for vested employees. At the time of acquisition, the benefit obligation was $330 million and the fair value of assets was $280 million. In addition, FirstMerit had a post retirement benefit plan which provided medical and life insurance for retired employees. At the time of acquisition, the benefit obligation was $7 million.
The following table shows the components of net periodic benefit expense for all plans:
 
Pension Benefits
 
Post Retirement Benefits
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
 
Service cost (1)
$
1,425

 
 
$
457

 
$
16

 
 
$

 
 
Interest cost
7,978

 
 
7,984

 
79

 
 
142

 
 
Expected return on plan assets
(12,086
)
 
 
(11,044
)
 

 
 

 
 
Amortization of prior service cost

 
 

 
(492
)
 
 
(492
)
 
 
Amortization of (gain) loss
1,865

 
 
1,984

 
(72
)
 
 
(116
)
 
 
Settlements
3,400

 
 
2,825

 

 
 
(3,090
)
(2)
 
Benefit expense
$
2,582

(3)
 
$
2,206

 
$
(469
)
(3)
 
$
(3,556
)
 
 
 
Pension Benefits
 
Post Retirement Benefits
 
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
 
Service cost (1)
$
3,475

 
 
$
1,372

 
$
16

 
 
$

 
 
Interest cost
21,474

 
 
23,953

 
188

 
 
425

 
 
Expected return on plan assets
(32,533
)
 
 
(33,131
)
 

 
 

 
 
Amortization of prior service credit

 
 

 
(1,476
)
 
 
(1,476
)
 
 
Amortization of (gain) loss
5,594

 
 
5,950

 
(216
)
 
 
(348
)
 
 
Settlements
10,200

 
 
8,475

 

 
 
(3,090
)
(2)
 
Benefit expense
$
8,210

(3)
 
$
6,619

 
$
(1,488
)
(3)
 
$
(4,489
)
 
 
(1)
Since no participants will be earning benefits after December 31, 2013, the 2015 and 2016 service cost represents only administrative expenses.
(2)
During the 2015 third quarter, Huntington transferred the retiree life insurance obligation in a non-participating contract to an insurance carrier.
(3)
Includes expense associated with FirstMerit plans.
Fair value of plan assets consisted of the following investments at September 30, 2016 and December 31, 2015:

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Fair Value
(dollar amounts in thousands)
September 30, 2016 (1)
 
December 31, 2015
Cash equivalents:
 
 
 
 
 
 
 
Federated-money market
$
161,327

 
15
%
 
$
15,590

 
3
%
Fixed income:
 
 
 
 
 
 
 
Corporate obligations
226,857

 
22

 
205,081

 
34

U.S. government obligations
99,956

 
9

 
64,456

 
11

Mutual funds-fixed income
135,092

 
13

 
32,874

 
6

U.S. government agencies
10,844

 
1

 
6,979

 
1

Equities:
 
 
 
 
 
 
 
Mutual funds-equities
198,120

 
19

 
136,026

 
23

Preferred stock
5,195

 
1

 

 

Common stock
181,909

 
17

 
120,046

 
20

Exchange traded funds
18,729

 
2

 
6,530

 
1

Limited partnerships
11,297

 
1

 
6,635

 
1

Fair value of plan assets
$
1,049,326

 
100
%
 
$
594,217

 
100
%
(1)
Includes assets associated with the FirstMerit Pension Plan totaling $279 million.
Investments of the Plan are accounted for at cost on the trade date and are reported at fair value. The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset. At September 30, 2016 and December 31, 2015, equities and money market funds are classified as Level 1; mutual funds-fixed income, corporate obligations, U.S. government obligations, and U.S. government agencies are classified as Level 2; and limited partnerships are classified as Level 3.
In general, investments of the Plan are exposed to various risks such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible changes in the values of investments will occur in the near-term and such changes could materially affect the amounts reported in the Plan assets.
Huntington also sponsors other nonqualified retirement plans, the most significant being the SERP and the SRIP. The SERP provides certain former officers and directors, and the SRIP provides certain current and former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. During the 2013 third quarter, the board of directors approved, and management communicated, a curtailment of the Company’s SRIP plan effective December 31, 2013.
Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions, up to the first 4% of base pay contributed to the defined contribution plan. For 2015, a discretionary profit-sharing contribution equal to 1% of eligible participants’ 2015 base pay was awarded during the 2016 first quarter.
The following table shows the costs of providing the SERP, SRIP, and defined contribution plans:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
SERP & SRIP
$
567

 
$
578

 
$
1,879

 
$
1,735

Defined contribution plan
9,470

 
8,224

 
25,738

 
23,747

Benefit cost
$
10,037

 
$
8,802

 
$
27,617

 
$
25,482


15. FAIR VALUES OF ASSETS AND LIABILITIES
During the 2016 third quarter, management elected the fair value option for consumer loans with deteriorated credit quality acquired from FirstMerit in accordance with ASC 825. Management decided to elect the fair value option on these consumer loans to bring operational efficiencies not normally associated with purchased credit impaired loans. The consumer loans are classified as Level 3. The key assumptions used to determine the fair value of the consumer loans included projections of expected losses, prepayment of the underlying loans in the portfolio, and a market assumption of interest rate spreads.

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See Note 17 “Fair Value of Assets and Liabilities” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2015 for a description of additional valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. There were no such transfers during the three-month and nine-month periods ended September 30, 2016 and 2015.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 are summarized below:
 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
September 30, 2016
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
517,591

 
$

 
$

 
$
517,591

Loans held for investment

 
35,905

 
53,285

 

 
89,190

Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities

 
2,854

 

 

 
2,854

Other securities
32,074

 
1,143

 

 

 
33,217

 
32,074

 
3,997

 

 

 
36,071

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
6,509

 

 

 

 
6,509

Federal agencies: Mortgage-backed

 
10,880,880

 

 

 
10,880,880

Federal agencies: Other agencies

 
125,771

 

 

 
125,771

Municipal securities

 
405,888

 
2,905,273

 

 
3,311,161

Asset-backed securities

 
1,007,363

 
73,819

 

 
1,081,182

Corporate debt

 
552,491

 

 

 
552,491

Other securities
16,353

 
3,947

 

 

 
20,300

 
22,862

 
12,976,340

 
2,979,092

 

 
15,978,294

MSRs

 

 
12,428

 

 
12,428

Derivative assets

 
585,316

 
15,483

 
(172,666
)
 
428,133

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
385,813

 
6,883

 
(278,458
)
 
114,238

Short-term borrowings
822

 

 

 

 
822


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Table of Contents

 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2015
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
337,577

 
$

 
$

 
$
337,577

Loans held for investment

 
32,889

 
1,748

 

 
34,637

Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities

 
4,159

 

 

 
4,159

Other securities
32,475

 
363

 

 

 
32,838

 
32,475

 
4,522

 

 

 
36,997

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
5,472

 

 

 

 
5,472

Federal agencies: Mortgage-backed

 
4,521,688

 

 

 
4,521,688

Federal agencies: Other agencies

 
115,913

 

 

 
115,913

Municipal securities

 
360,845

 
2,095,551

 

 
2,456,396

Asset-backed securities

 
761,076

 
100,337

 

 
861,413

Corporate debt

 
466,477

 

 

 
466,477

Other securities
11,397

 
3,899

 

 

 
15,296

 
16,869

 
6,229,898

 
2,195,888

 

 
8,442,655

MSRs

 

 
17,585

 

 
17,585

Derivative assets

 
429,448

 
6,721

 
(161,297
)
 
274,872

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
287,994

 
665

 
(144,309
)
 
144,350

Short-term borrowings

 
1,770

 

 

 
1,770

(1)
Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties.
The tables below present a rollforward of the balance sheet amounts for the three-month and nine-month periods ended September 30, 2016 and 2015, for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

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

 
$
12,751

 
$
2,237,975

 
$
71,379

 
$
925

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(1,692
)
 

 

 

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

 

 
(249
)
Included in OCI

 

 
(28,272
)
 
2,875

 

Purchases/originations

 

 
953,639

 
10

 
56,469

Sales

 

 

 

 

Repayments

 

 

 

 
(3,860
)
Issues

 

 

 

 

Settlements

 

 
(262,235
)
 
(445
)
 

Closing balance
$
12,428

 
$
8,600

 
$
2,905,273

 
$
73,819

 
$
53,285

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

 
$

 
$

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

 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label
CMO
 
Asset-
backed
securities
 
Loans held for investment
Opening balance
$
20,681

 
$
5,166

 
$
1,716,845

 
$
29,429

 
$
102,071

 
$
3,998

Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3

 

 

 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(2,616
)
 
3,023

 

 
20

 
(2,440
)
 
(142
)
Included in OCI

 

 
3,514

 
1,309

 
1,997

 

Purchases/originations

 

 
426,501

 

 

 

Sales

 

 

 
(30,077
)
 

 

Repayments

 

 

 

 

 
(1,293
)
Issues

 

 

 

 

 

Settlements

 
(405
)
 
(196,304
)
 
(681
)
 
(456
)
 

Closing balance
$
18,065

 
$
7,784

 
$
1,950,556

 
$

 
$
101,172

 
$
2,563

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(2,616
)
 
$
3,023

 
$
3,514

 
$

 
$
1,997

 
$
(142
)

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

 
$
6,056

 
$
2,095,551

 
$
100,337

 
$
1,748

 
Transfers into Level 3

 

 

 

 

 
Transfers out of Level 3 (1)

 
(5,115
)
 

 

 

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

 
4,166

 
2

 
(249
)
 
Included in OCI

 

 
(8,946
)
 
3,549

 

 
Purchases/originations

 

 
1,237,546

 
10

 
56,469

 
Sales

 

 
(36,657
)
 
(27,794
)
 

 
Repayments

 

 

 

 
(4,683
)
 
Issues

 

 

 

 

 
Settlements

 

 
(386,387
)
 
(2,285
)
 

 
Closing balance
$
12,428

 
$
8,600

 
$
2,905,273

 
$
73,819

 
$
53,285

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

 
$

 
$
2

 
$

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

 
Level 3 Fair Value Measurements
Nine months ended September 30, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label
CMO
 
Asset-
backed
securities
 
Loans held for investment
Opening balance
$
22,786

 
$
3,360

 
$
1,417,593

 
$
30,464

 
$
82,738

 
$
10,590

Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3

 

 

 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(4,721
)
 
6,244

 

 
47

 
(2,435
)
 
(497
)
Included in OCI

 

 
2,199

 
1,832

 
23,860

 

Purchases/originations

 

 
768,529

 

 

 

Sales

 

 

 
(30,077
)
 

 

Repayments

 

 

 

 

 
(7,530
)
Issues

 

 

 

 

 

Settlements

 
(1,820
)
 
(237,765
)
 
(2,266
)
 
(2,991
)
 

Closing balance
$
18,065

 
$
7,784

 
$
1,950,556

 
$

 
$
101,172

 
$
2,563

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(4,721
)
 
$
6,244

 
$
2,199

 
$

 
$
23,860

 
$
(497
)

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The tables below summarize the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the three-month and nine-month periods ended September 30, 2016 and 2015:
 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(677
)
 
$
(2,459
)
 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

Interest and fee income

 

 

 

 

Noninterest income

 

 
4,166

 

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

 
$

 
$
(249
)
 
Level 3 Fair Value Measurements
Three Months Ended September 30, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label CMO
 
Asset-
backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(2,616
)
 
$
3,023

 
$

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 
(2,440
)
 

Interest and fee income

 

 

 
20

 

 
(142
)
Noninterest income

 

 

 

 

 

Total
$
(2,616
)
 
$
3,023

 
$

 
$
20

 
$
(2,440
)
 
$
(142
)
 
Level 3 Fair Value Measurements
Nine months ended September 30, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(5,157
)
 
$
7,659

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

Interest and fee income

 

 

 

 

Noninterest income

 

 
4,166

 
2

 
(249
)
Total
$
(5,157
)
 
$
7,659

 
$
4,166

 
$
2

 
$
(249
)
 
Level 3 Fair Value Measurements
Nine months ended September 30, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label CMO
 
Asset-
backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(4,721
)
 
$
6,244

 
$

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 
(2,440
)
 

Interest and fee income

 

 

 
47

 
5

 
(497
)
Noninterest income

 

 

 

 

 

Total
$
(4,721
)
 
$
6,244

 
$

 
$
47

 
$
(2,435
)
 
$
(497
)

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Assets and liabilities under the fair value option
The following table presents the fair value and aggregate principal balance of certain assets and liabilities under the fair value option:
 
September 30, 2016
 
Total Loans
 
Loans that are 90 or more days past due
(dollar amounts in thousands)
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
517,591

 
$
494,092

 
$
23,499

 
$

 
$

 
$

Loans held for investment
89,190

 
100,283

 
(11,093
)
 
11,837

 
15,636

 
(3,799
)

 
December 31, 2015
 
Total Loans
 
Loans that are 90 or more days past due
(dollar amounts in thousands)
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
337,577

 
$
326,802

 
$
10,775

 
$
1,268

 
$
1,294

 
$
(26
)
Loans held for investment
34,637

 
35,385

 
(748
)
 
428

 
497

 
(69
)
The following tables present the net gains (losses) from fair value changes, including net gains (losses) associated with instrument specific credit risk for the three-month and nine-month periods ended September 30, 2016 and 2015:
 
Net gains (losses) from
fair value changes
 
Net gains (losses) from
fair value changes
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Assets
 
 
 
 
 
 
 
Loans held for sale
$
(4,439
)
 
$
6,801

 
$
9,080

 
$
1,244

Loans held for investment

 
(142
)
 

 
(568
)
 
Gains (losses) included
in fair value changes associated
with instrument specific credit risk
 
Gains (losses) included
in fair value changes associated
with instrument specific credit risk
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Assets
 
 
 
 
 
 
 
Loans held for investment
$
68

 
$
37

 
$
255

 
$
108

Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets measured at fair value on a nonrecurring basis were as follows:
 
 
 
Fair Value Measurements Using
 
 
 
 
(dollar amounts in thousands)
Fair Value
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Gains/(Losses)
Three Months Ended
September 30, 2016
 
Total
Gains/(Losses)
Nine months ended
September 30, 2016
MSRs
$
143,289

 
$

 
$

 
$
143,289

 
$
2,543

 
$
(21,093
)
Impaired loans
56,976

 

 

 
56,976

 
(216
)
 
5,606

Other real estate owned
71,336

 

 

 
71,336

 
(768
)
 
(1,988
)

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MSRs accounted for under the amortization method are subject to nonrecurring fair value measurement when the fair value is lower than the carrying amount.
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.
Other real estate owned properties are included in accrued income and other assets and valued based on appraisals and third party price opinions, less estimated selling costs.
The appraisals supporting the fair value of the collateral to recognize loan impairment or unrealized loss on other real estate owned properties may not have been obtained as of September 30, 2016.
Significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis
The table below presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at September 30, 2016 and December 31, 2015:
 
Quantitative Information about Level 3 Fair Value Measurements at September 30, 2016
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
MSRs
$
12,428

 
Discounted cash flow
 
Constant prepayment rate
 
7.0% - 26.5% (12.4%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.0% - 9.2% (5.5%)
Derivative assets
15,483

 
Consensus Pricing
 
Net market price
 
-2.7% - 25.1% (3.0%)
Derivative liabilities
6,883

 
 
 
Estimated Pull through %
 
7.6% - 99.8% (77.7%)
Municipal securities
2,905,273

 
Discounted cash flow
 
Discount rate
 
0.0% - 10.6% (3.6%)
 
 
 
 
 
Cumulative default
 
0.3% - 37.8% (4.8%)
 
 
 
 
 
Loss given default
 
5.0% - 80.0% (24.1%)
Asset-backed securities
73,819

 
Discounted cash flow
 
Discount rate
 
4.9% - 11.9% (6.2%)
 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 73% (7.8%)
 
 
 
 
 
Cumulative default
 
1.2% - 100% (11.1%)
 
 
 
 
 
Loss given default
 
85% - 100% (96.7%)
 
 
 
 
 
Cure given deferral
 
0.0% - 75.0% (31.4%)
Loans held for investment
53,285

 
Discounted cash flow
 
Discount rate
 
5.4% - 16.2% (5.6%)
Impaired loans
56,976

 
Appraisal value
 
NA
 
NA
Other real estate owned
71,336

 
Appraisal value
 
NA
 
NA

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Table of Contents

 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2015
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
MSRs
$
17,585

 
Discounted cash flow
 
Constant prepayment rate
 
7.9% - 25.7% (14.7%)

 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.3% - 9.2% (5.4%)

Derivative assets
6,721

 
Consensus Pricing
 
Net market price
 
-3.2% - 20.9% (1.9%)

Derivative liabilities
665

 
 
 
Estimated Pull through %
 
11.9% - 99.8% (76.7%)

Municipal securities
2,095,551

 
Discounted cash flow
 
Discount rate
 
0.3% - 7.2% (3.1%)

 
 
 
 
 
Cumulative default
 
0.1% - 50.0% (2.1%)

 
 
 
 
 
Loss given default
 
5.0% - 80.0% (20.5%)

Asset-backed securities
100,337

 
Discounted cash flow
 
Discount rate
 
4.6% - 10.9% (6.2%)

 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 100% (9.6%)

 
 
 
 
 
Cumulative default
 
1.6% - 100% (11.1%)

 
 
 
 
 
Loss given default
 
85% - 100% (96.6%)

 
 
 
 
 
Cure given deferral
 
0.0% - 75.0% (36.8%)

Loans held for investment
1,748

 
Discounted cash flow
 
Constant prepayment rate
 
154.2
%
 
 
 
 
 
Discount rate
 
0.2% - 5.0% (2.3%)

 
 
 
 
 
Life of pool cumulative losses
 
2.1
%
Impaired loans
62,029

 
Appraisal value
 
NA
 
NA

Other real estate owned
27,342

 
Appraisal value
 
NA
 
NA

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

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Table of Contents

Fair values of financial instruments
The following table provides the carrying amounts and estimated fair values of Huntington’s financial instruments that are carried either at fair value or cost at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
(dollar amounts in thousands)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash and short-term assets
$
1,713,052

 
$
1,713,052

 
$
898,994

 
$
898,994

Trading account securities
36,071

 
36,071

 
36,997

 
36,997

Loans held for sale
3,414,497

 
3,419,078

 
474,621

 
484,511

Available-for-sale and other securities
16,470,374

 
16,470,374

 
8,775,441

 
8,775,441

Held-to-maturity securities
5,301,387

 
5,389,093

 
6,159,590

 
6,135,458

Net loans and direct financing leases
65,687,568

 
64,235,535

 
49,743,256

 
48,024,998

Derivatives
428,132

 
428,132

 
274,872

 
274,872

Financial Liabilities
 
 
 
 
 
 
 
Deposits
77,405,096

 
78,232,991

 
55,294,979

 
55,299,435

Short-term borrowings
2,148,118

 
2,148,118

 
615,279

 
615,279

Long-term debt
8,998,571

 
9,101,522

 
7,067,614

 
7,043,014

Derivatives
114,239

 
114,239

 
144,350

 
144,350

The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntington’s financial instruments that are not already on the Unaudited Condensed Consolidated Balance Sheets at fair value at September 30, 2016 and December 31, 2015:
 
Estimated Fair Value Measurements at Reporting Date Using
 
September 30, 2016
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
5,389,093

 
$

 
$
5,389,093

Net loans and direct financing leases

 

 
64,235,535

 
64,235,535

Financial Liabilities
 
 
 
 
 
 
 
Deposits

 
74,056,244

 
4,176,747

 
78,232,991

Short-term borrowings
822

 

 
2,147,296

 
2,148,118

Long-term debt

 

 
9,101,522

 
9,101,522

 
Estimated Fair Value Measurements at Reporting Date Using
 
December 31, 2015
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
6,135,458

 
$

 
$
6,135,458

Net loans and direct financing leases

 

 
48,024,998

 
48,024,998

Financial Liabilities

 

 

 
 
Deposits

 
51,869,105

 
3,430,330

 
55,299,435

Short-term borrowings

 
1,770

 
613,509

 
615,279

Long-term debt

 

 
7,043,014

 
7,043,014

The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820.

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Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:
Held-to-maturity securities
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans and Direct Financing Leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of expected losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Long-term debt is based upon quoted market prices, which are inclusive of Huntington’s credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.
16. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded in the Consolidated Balance Sheet as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.
Derivative financial instruments can be designated as accounting hedges under GAAP. Designating a derivative as an accounting hedge allows Huntington to recognize gains and losses, less any ineffectiveness, in the income statement within the same period that the hedged item affects earnings. Gains and losses on derivatives that are not designated to an effective hedge relationship under GAAP immediately impact earnings within the period they occur.
Derivatives used in Asset and Liability Management Activities
Huntington engages in balance sheet hedging activity, principally for asset liability management purposes, to convert fixed rate assets or liabilities into floating rate or vice versa. Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans.

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The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at September 30, 2016, identified by the underlying interest rate-sensitive instruments:
(dollar amounts in thousands)
Fair Value Hedges
 
Cash Flow Hedges
 
Total
Instruments associated with:
 
 
 
 
 
Loans
$

 
$
4,025,000

 
$
4,025,000

Subordinated notes
950,000

 

 
950,000

Long-term debt
7,025,000

 

 
7,025,000

Total notional value at September 30, 2016
$
7,975,000

 
$
4,025,000

 
$
12,000,000


The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at September 30, 2016:
 
 
 
 
 
 
 
Weighted-Average
Rate
(dollar amounts in thousands)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
4,025,000

 
0.7
 
$
3,860

 
0.99
%
 
0.71
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
7,975,000

 
3.2
 
109,511

 
1.44

 
0.74

Total swap portfolio at September 30, 2016
$
12,000,000

 
2.3
 
$
113,371

 
1.29
%
 
0.73
%
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase to net interest income of $18 million and $28 million for the three-month periods ended September 30, 2016, and 2015, respectively. For the nine-month periods ended September 30, 2016, and 2015, the net amounts resulted in an increase to net interest income of $58 million and $79 million, respectively.
In connection with the sale of Huntington’s Class B Visa® shares, Huntington entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B shares resulting from the Visa® litigation. At September 30, 2016, the fair value of the swap liability of $7 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses.
The following table presents the fair values at September 30, 2016 and December 31, 2015 of Huntington’s derivatives that are designated and not designated as hedging instruments. Amounts in the table below are presented gross without the impact of any net collateral arrangements:
Asset derivatives included in accrued income and other assets:
(dollar amounts in thousands)
September 30, 2016
 
December 31, 2015
Interest rate contracts designated as hedging instruments
$
121,600

 
$
80,513

Interest rate contracts not designated as hedging instruments
371,184

 
190,846

Foreign exchange contracts not designated as hedging instruments
25,430

 
37,727

Commodities contracts not designated as hedging instruments
66,817

 
117,894

Total contracts
$
585,031

 
$
426,980

Liability derivatives included in accrued expenses and other liabilities:

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(dollar amounts in thousands)
September 30, 2016
 
December 31, 2015
Interest rate contracts designated as hedging instruments
$
8,229

 
$
15,215

Interest rate contracts not designated as hedging instruments
293,542

 
121,815

Foreign exchange contracts not designated as hedging instruments
23,672

 
35,283

Commodities contracts not designated as hedging instruments
62,590

 
114,887

Total contracts
$
388,033

 
$
287,200

The changes in fair value of the fair value hedges are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item.
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the three-month and nine-month periods ended September 30, 2016, and 2015:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Interest rate contracts
 
 
 
 
 
 
 
Change in fair value of interest rate swaps hedging deposits (1)
$

 
$
(265
)
 
$
(82
)
 
$
(723
)
Change in fair value of hedged deposits (1)

 
259

 
72

 
709

Change in fair value of interest rate swaps hedging subordinated notes (2)
(9,688
)
 
5,328

 
(2,880
)
 
1,196

Change in fair value of hedged subordinated notes (2)
10,400

 
(5,328
)
 
3,591

 
(1,196
)
Change in fair value of interest rate swaps hedging other long-term debt (2)
(45,870
)
 
37,272

 
37,179

 
49,168

Change in fair value of hedged other long-term debt (2)
42,647

 
(36,283
)
 
(38,187
)
 
(48,546
)
(1)
Effective portion of the hedging relationship is recognized in Interest expense—deposits in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
(2)
Effective portion of the hedging relationship is recognized in Interest expense—subordinated notes and other long-term debt in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
The following table presents the gains and (losses) recognized in OCI and the location in the Unaudited Condensed Consolidated Statements of Income of gains and (losses) reclassified from OCI into earnings for derivatives designated as effective cash flow hedges:
Derivatives in cash flow hedging relationships
Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion)
(after-tax)
 
Location of gain or (loss) reclassified from
accumulated OCI into earnings (effective portion)
 
Amount of (gain) or loss
reclassified from
accumulated OCI
into earnings
(effective portion)
 
Three months ended September 30,
 
 
 
Three months ended September 30,
(dollar amounts in thousands)
2016
 
2015
 
 
 
2016
 
2015
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
(5,311
)
 
$
8,301

 
Interest and fee income - loans and leases
 
$
123

 
$
(73
)
Investment Securities

 

 
Noninterest income - other income
 

 

Total
$
(5,311
)
 
$
8,301

 
 
 
$
123

 
$
(73
)

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Derivatives in cash flow hedging relationships
Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion)
(after-tax)
 
Location of gain or (loss) reclassified from
accumulated OCI into earnings (effective portion)
 
Amount of (gain) or loss
reclassified from
accumulated OCI
into earnings
(effective portion)
 
Nine months ended September 30,
 
 
 
Nine months ended September 30,
(dollar amounts in thousands)
2016
 
2015
 
 
 
2016
 
2015
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
5,231

 
$
26,057

 
Interest and fee income - loans and leases
 
$
(770
)
 
$
(323
)
Investment Securities

 

 
Noninterest income - other income
 
1

 
(11
)
Total
$
5,231

 
$
26,057

 
 
 
$
(769
)
 
$
(334
)
Reclassified gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings of $1 million after-tax unrealized gains on cash flow hedging derivatives currently in OCI.
To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Condensed Consolidated Statements of Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.
The following table presents the gains and (losses) recognized in noninterest income on the ineffective portion on interest rate contracts for derivatives designated as cash flow hedges for the three and nine-month periods ended September 30, 2016 and 2015:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2016
 
2015
 
2016
 
2015
Derivatives in cash flow hedging relationships
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
Loans
$
(371
)
 
$
888

 
$
6

 
$
858

Derivatives used in mortgage banking activities
Mortgage loan origination hedging activity

Huntington’s mortgage origination hedging activity is related to the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. The value of a newly originated mortgage is not firm until the interest rate is committed or locked. The interest rate lock commitments are derivative positions offset by forward commitments to sell loans.

Huntington uses two types of mortgage-backed securities in its forward commitment to sell loans. The first type of forward commitment is a “To Be Announced” (or TBA), the second is a “Specified Pool” mortgage-backed security. Huntington uses these derivatives to hedge the value of mortgage-backed securities until they are sold.
The following table summarizes the derivative assets and liabilities used in mortgage banking activities:

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(dollar amounts in thousands)
September 30, 2016
 
December 31, 2015
Derivative assets:
 
 
 
Interest rate lock agreements
$
15,483

 
$
6,721

Forward trades and options
285

 
2,468

Total derivative assets
15,768

 
9,189

Derivative liabilities:
 
 
 
Interest rate lock agreements
(158
)
 
(220
)
Forward trades and options
(4,506
)
 
(1,239
)
Total derivative liabilities
(4,664
)
 
(1,459
)
Net derivative asset (liability)
$
11,104

 
$
7,730

MSR hedging activity
Huntington’s MSR economic hedging activity uses securities and derivatives to manage the value of the MSR asset and to mitigate the various types of risk inherent in the MSR asset, including risks related to duration, basis, convexity, volatility, and yield curve. The hedging instruments include forward commitments, interest rate swaps, and options on interest rate swaps.
The total notional value of these derivative financial instruments at September 30, 2016 and December 31, 2015, was $0.2 billion and $0.5 billion, respectively. The total notional amount at September 30, 2016, corresponds to trading assets with a fair value of $8 million and trading liabilities with a fair value of $1 million. Net trading gains and (losses) related to MSR hedging for the three-month periods ended September 30, 2016 and 2015, were $(1) million and $6 million, and $17 million and $2 million for the nine-month periods ended September 30, 2016 and 2015, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements of Income.
Derivatives used in trading activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consisted of commodity, interest rate, and foreign exchange contracts. The derivative contracts grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Huntington may enter into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies in order to economically hedge significant exposure related to derivatives used in trading activities.
The interest rate risk of customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value. Foreign currency derivatives help the customer hedge risk and reduce exposure to fluctuations in exchange rates. Transactions are primarily in liquid currencies with Canadian dollars and Euros comprising a majority of all transactions.
The net fair values of these derivative financial instruments, for which the gross amounts are included in accrued income and other assets or accrued expenses and other liabilities at September 30, 2016 and December 31, 2015, were $76 million and $76 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $19.6 billion and $14.6 billion at September 30, 2016 and December 31, 2015, respectively. Huntington’s exposure to credit risk from interest rate swaps used for trading purposes was $391 million and $224 million at the same dates, respectively.
Share Swap Economic Hedge
Huntington acquires and holds shares of Huntington common stock in a Rabbi Trust for the Executive Deferred Compensation Plan. Huntington common stock held in the Rabbi Trust is recorded at cost and the corresponding deferred compensation liability is recorded at fair value using Huntington's share price as a significant input.
During the second quarter of 2016, Huntington entered into an economic hedge with a $20 million notional amount to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. The economic hedge is recorded at fair value within other assets or liabilities. Changes in the fair value are recorded directly through other noninterest expense in the Unaudited Condensed Consolidated Statements of Income. At September 30, 2016, the fair value of the share swap was $2 million.

Risk Participation Agreements

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Huntington periodically enters into risk participation agreement in order to manage credit risk of its derivative positions. These agreements transfer counterparty credit risk related to interest rate swaps to and from other financial institutions. Huntington can mitigate exposure to certain counterparties or take on exposure to generate additional income. Huntington’s notional exposure for interest rate swaps originated by other financial institutions was $560 million and $344 million at September 30, 2016 and December 31, 2015, respectively. Huntington will make payments under these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. The amount Huntington will have to pay if all counterparties defaulted on their swap contracts is the fair value of these risk participations, which was $12 million and $6 million at September 30, 2016 and December 31, 2015, respectively. These contracts mature between 2016 and 2043 and are deemed investment grade.
Financial assets and liabilities that are offset in the Unaudited Condensed Consolidated Balance Sheets
Huntington records derivatives at fair value as further described in Note 15. Huntington records these derivatives net of any master netting arrangement in the Unaudited Condensed Consolidated Balance Sheets. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate counterparty credit risk.
All derivatives are carried on the Unaudited Condensed Consolidated Balance Sheets at fair value. Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups: broker-dealers and banks, and Huntington’s customers. Different methods are utilized for managing counterparty credit exposure and credit risk for each of these groups.
Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. Huntington enters into bilateral collateral and master netting agreements with these counterparties, and routinely exchange cash and high quality securities collateral with these counterparties. Huntington enters into transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions generally are low dollar volume. Huntington generally enters into master netting agreements with customer counterparties, however collateral is generally not exchanged with customer counterparties.
At September 30, 2016 and December 31, 2015, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $28 million and $15 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements with broker-dealers and banks.
At September 30, 2016, Huntington pledged $251 million of investment securities and cash collateral to counterparties, while other counterparties pledged $115 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.
The following tables present the gross amounts of these assets and liabilities with any offsets to arrive at the net amounts recognized in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015:
Offsetting of Financial Assets and Derivative Assets
 
 
 
 
 
 
 
 
Gross amounts not offset in
the condensed consolidated
balance sheets
 
 
(dollar amounts in thousands)
 
Gross amounts
of recognized
assets
 
Gross amounts
offset in the
condensed
consolidated
balance sheets
 
Net amounts of
assets
presented in
the condensed
consolidated
balance sheets
 
Financial
instruments
 
Cash collateral
received
 
Net amount
Offsetting of Financial Assets and Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
Derivatives
$
600,799

 
$
(172,666
)
 
$
428,132

 
$
(50,680
)
 
$
(4,749
)
 
$
372,703

December 31, 2015
Derivatives
436,169

 
(161,297
)
 
274,872

 
(39,305
)
 
(3,462
)
 
232,105


Offsetting of Financial Liabilities and Derivative Liabilities

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Gross amounts not offset in
the condensed consolidated
balance sheets
 
 
(dollar amounts in thousands)
 
Gross amounts
of recognized
liabilities
 
Gross amounts
offset in the
condensed
consolidated
balance sheets
 
Net amounts of
liabilities
presented in
the condensed
consolidated
balance sheets
 
Financial
instruments
 
Cash collateral
delivered
 
Net amount
Offsetting of Financial Liabilities and Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
Derivatives
$
392,696

 
$
(278,458
)
 
$
114,239

 
$
(73,830
)
 
$
(12,465
)
 
$
27,945

December 31, 2015
Derivatives
288,659

 
(144,309
)
 
144,350

 
(62,460
)
 
(20
)
 
81,870

17. VIEs
Consolidated VIEs
Consolidated VIEs at September 30, 2016, consisted of certain loan and lease securitization trusts. Huntington has determined the trusts are VIEs. Huntington has concluded that it is the primary beneficiary of these trusts because it has the power to direct the activities of the entity that most significantly affect the entity’s economic performance and it has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. During the 2015 first quarter, Huntington acquired two securitization trusts with its acquisition of Huntington Technology Finance. During the 2016 first quarter, Huntington canceled the Series 2012A Trust. As a result, any remaining assets at the time of the cancellation were no longer part of the trust.
The following tables present the carrying amount and classification of the consolidated trusts’ assets and liabilities that were included in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
Huntington Technology
Funding Trust
 
Other Consolidated VIEs
 
Total
(dollar amounts in thousands)
 
Series 2014A
 
 
Assets:
 
 
 
 
 
 
Cash
 
$
1,562

 
$

 
$
1,562

Net loans and leases
 
86,510

 

 
86,510

Accrued income and other assets
 

 
219

 
219

Total assets
 
$
88,072

 
$
219

 
$
88,291

Liabilities:
 
 
 
 
 
 
Other long-term debt
 
$
70,857

 
$

 
$
70,857

Accrued interest and other liabilities
 

 
219

 
219

Total liabilities
 
70,857

 
219

 
71,076

Equity:
 
 
 
 
 
 
Beneficial Interest owned by third party
 
17,215

 

 
17,215

Total liabilities and equity
 
$
88,072

 
$
219

 
$
88,291


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December 31, 2015
 
Huntington Technology
Funding Trust
 
Other Consolidated VIEs
 
Total
(dollar amounts in thousands)
Series 2012A
 
Series 2014A
 
 
Assets:
 
 
 
 
 
 
 
Cash
$
1,377

 
$
1,561

 
$

 
$
2,938

Net loans and leases
32,180

 
152,331

 

 
184,511

Accrued income and other assets

 

 
229

 
229

Total assets
$
33,557

 
$
153,892

 
$
229

 
$
187,678

Liabilities:
 
 
 
 
 
 
 
Other long-term debt
$
27,153

 
$
123,577

 
$

 
$
150,730

Accrued interest and other liabilities

 

 
229

 
229

Total liabilities
27,153

 
123,577

 
229

 
150,959

Equity:
 
 
 
 
 
 
 
Beneficial Interest owned by third party
6,404

 
30,315

 

 
36,719

Total liabilities and equity
$
33,557

 
$
153,892

 
$
229

 
$
187,678

The loans and leases were designated to repay the securitized notes. Huntington services the loans and leases and uses the proceeds from principal and interest payments to pay the securitized notes during the amortization period. Huntington has not provided financial or other support that was not previously contractually required.
Unconsolidated VIEs
The following tables provide a summary of the assets and liabilities included in Huntington’s Unaudited Condensed Consolidated Financial Statements, as well as the maximum exposure to losses, associated with its interests related to unconsolidated VIEs for which Huntington holds an interest, but is not the primary beneficiary, to the VIE at September 30, 2016, and December 31, 2015:

September 30, 2016
(dollar amounts in thousands)
Total Assets

Total Liabilities

Maximum Exposure to Loss
2015-1 Automobile Trust
$
4,298


$


$
4,298

Trust Preferred Securities
13,919


292,544



Low Income Housing Tax Credit Partnerships
568,182


298,679


568,182

Other Investments
80,480


33,493


80,480

Total
$
666,879


$
624,716


$
652,960

 
December 31, 2015
(dollar amounts in thousands)
Total Assets
 
Total Liabilities
 
Maximum Exposure to Loss
2015-1 Automobile Trust
$
7,695

 
$

 
$
7,695

2012-1 Automobile Trust
94

 

 
94

2012-2 Automobile Trust
771

 

 
771

Trust Preferred Securities
13,919

 
317,106

 

Low Income Housing Tax Credit Partnerships
425,500

 
196,001

 
425,500

Other Investments
68,746

 
25,762

 
68,746

Total
$
516,725


$
538,869


$
502,806

2015-1, 2012-1 and 2012-2 AUTOMOBILE TRUST
During the 2015 second quarter, 2012 fourth quarter and 2012 first quarter, we transferred automobile loans totaling $0.8 billion, $1.0 billion and $1.3 billion, respectively, to trusts in securitization transactions. The securitizations and the resulting sale of all underlying securities qualified for sale accounting. The interest Huntington holds in the VIEs relates to servicing rights which are included within accrued income and other assets of Huntington’s Unaudited Condensed Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the servicing asset.

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During the 2016 first quarter, Huntington canceled the 2012-1 Automobile Trust. As a result, any remaining assets at the time of the cancellation were no longer part of the trust. During the 2016 third quarter, Huntington canceled the 2012-2 Automobile Trust. As a result, any remaining assets at the time of the cancellation were no longer part of the trust.
TRUST PREFERRED SECURITIES
Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included within Huntington’s Unaudited Condensed Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing trust-preferred securities, from which the proceeds are then invested in Huntington junior subordinated debentures, which are reflected in Huntington’s Unaudited Condensed Consolidated Balance Sheets as subordinated notes. The trust securities are the obligations of the trusts, and as such, are not consolidated within Huntington’s Unaudited Condensed Consolidated Financial Statements. A list of trust preferred securities outstanding at September 30, 2016 follows:
(dollar amounts in thousands)
Rate
 
Principal amount of
subordinated note/
debenture issued to trust (1)
 
Investment in
unconsolidated
subsidiary
Huntington Capital I
1.46
%
(2)
$
92,230

 
$
6,186

Huntington Capital II
1.48

(3)
49,593

 
3,093

Sky Financial Capital Trust III
2.24

(4)
72,165

 
2,165

Sky Financial Capital Trust IV
2.05

(4)
74,320

 
2,320

Camco Financial Trust
3.32

(5)
4,236

 
155

Total
 
 
$
292,544

 
$
13,919

(1)
Represents the principal amount of debentures issued to each trust, including unamortized original issue discount.
(2)
Variable effective rate at September 30, 2016, based on three-month LIBOR +0.70%.
(3)
Variable effective rate at September 30, 2016, based on three-month LIBOR +0.625%.
(4)
Variable effective rate at September 30, 2016, based on three-month LIBOR +1.40%.
(5)
Variable effective rate (including impact of purchase accounting accretion) at September 30, 2016, based on three-month LIBOR +1.33%.
Each issue of the junior subordinated debentures has an interest rate equal to the corresponding trust securities distribution rate. Huntington has the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the trust securities will also be deferred and Huntington’s ability to pay dividends on its common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to trust securities are guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all indebtedness of the Company to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by Huntington.
LOW INCOME HOUSING TAX CREDIT PARTNERSHIPS
Huntington makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
Huntington uses the proportional amortization method to account for a majority of its investments in these entities. These investments are included in accrued income and other assets. Investments that do not meet the requirements of the proportional amortization method are recognized using the equity method. Investment gains/losses related to these investments are included in noninterest-income in the Unaudited Condensed Consolidated Statements of Income.
The following table presents the balances of Huntington’s affordable housing tax credit investments and related unfunded commitments at September 30, 2016 and December 31, 2015:

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(dollar amounts in thousands)
September 30,
2016
 
December 31,
2015
Affordable housing tax credit investments
$
854,077

 
$
674,157

Less: amortization
(285,895
)
 
(248,657
)
Net affordable housing tax credit investments
$
568,182

 
$
425,500

Unfunded commitments
$
298,679

 
$
196,001

The following table presents other information relating to Huntington’s affordable housing tax credit investments for the three-month and nine-month periods ended September 30, 2016 and 2015:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
 
2016
 
2015
 
2016
 
2015
Tax credits and other tax benefits recognized
 
$
21,200

 
$
16,412

 
$
57,634

 
$
46,592

Proportional amortization method
 
 
 
 
 
 
 
 
Tax credit amortization expense included in provision for income taxes
 
13,608

 
10,942

 
38,513

 
33,235

Equity method
 
 
 
 
 
 
 
 
Tax credit investment (gains) losses included in non-interest income
 
132

 
(86
)
 
396

 
208

Huntington recognized immaterial impairment losses on tax credit investments during the three-month and nine-month periods ended September 30, 2016 and 2015. The impairment losses recognized related to the fair value of the tax credit investments that were less than carrying value.
OTHER INVESTMENTS
Other investments determined to be VIE’s include investments in Historic Tax Credit Investments, Small Business Investment Companies, Rural Business Investment Companies, certain equity method investments and other miscellaneous investments.
18. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to extend credit
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the Unaudited Condensed Consolidated Financial Statements. The contract amounts of these financial agreements at September 30, 2016 and December 31, 2015, were as follows:
(dollar amounts in thousands)
September 30,
2016

December 31,
2015
Contract amount represents credit risk:



Commitments to extend credit



Commercial
$
14,421,804


$
11,448,927

Consumer
11,955,680


8,574,093

Commercial real estate
1,707,958


813,271

Standby letters-of-credit
644,470


511,706

Commercial letters-of-credit
14,440


56,119

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

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Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $8 million and $7 million at September 30, 2016 and December 31, 2015, respectively.
Through the Company’s credit process, Huntington monitors the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At September 30, 2016, Huntington had $644 million of standby letters-of-credit outstanding, of which 81% were collateralized. Included in this $644 million total are letters-of-credit issued by the Bank that support securities that were issued by customers and remarketed by The Huntington Investment Company, the Company’s broker-dealer subsidiary.
Huntington uses an internal grading system to assess an estimate of loss on its loan and lease portfolio. This same loan grading system is used to monitor credit risk associated with standby letters-of-credit. Under this risk rating system as of September 30, 2016, approximately $142 million of the standby letters-of-credit were rated strong with sufficient asset quality, liquidity, and good debt capacity and coverage; approximately $502 million were rated average with acceptable asset quality, liquidity, and modest debt capacity; and $0 million were rated substandard with negative financial trends, structural weaknesses, operating difficulties, and higher leverage.
Commercial letters-of-credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The goods or cargo being traded normally secures these instruments.
Commitments to sell loans
Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. At September 30, 2016 and December 31, 2015, Huntington had commitments to sell residential real estate loans of $1.0 billion and $659 million, respectively. These contracts mature in less than one year.
Litigation
The nature of Huntington’s business ordinarily results in a certain amount of pending as well as threatened claims, litigation, investigations, regulatory and legal and administrative cases, matters and proceedings, all of which are considered incidental to the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company considers settlement of cases when, in Management’s judgment, it is in the best interests of both the Company and its shareholders to do so.
On at least a quarterly basis, Huntington assesses its liabilities and contingencies in connection with threatened and outstanding legal cases, matters and proceedings, utilizing the latest information available. For cases, matters and proceedings where it is both probable the Company will incur a loss and the amount can be reasonably estimated, Huntington establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For cases, matters or proceedings where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
In certain cases, matters and proceedings, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate range of reasonably possible losses, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $50 million at September 30, 2016. For certain other cases, and matters, Management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, Management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.
While the final outcome of legal cases, matters, and proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Company’s legal cases, matters, or proceedings will not have a material negative adverse effect on the Company’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters, and proceedings, if unfavorable, may be material to the Company’s consolidated financial position in a particular period.

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Cyberco Litigation. Huntington has been named a defendant in two lawsuits, arising from Huntington’s commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), based in Grand Rapids, Michigan. In November 2004, an equipment leasing fraud was uncovered, whereby Cyberco sought financing from equipment lessors and financial institutions, including Huntington, allegedly to purchase computer equipment from Teleservices Group, Inc. (Teleservices). Cyberco created fraudulent documentation to close the financing transactions when, in fact, no computer equipment was ever purchased or leased from Teleservices, which later proved to be a shell corporation. Bankruptcy proceedings for both Cyberco and Teleservices later ensued.
On March 30, 2012, the U.S. Bankruptcy Court for the Western District of Michigan issued an opinion determining Huntington was the initial transferee of the certain payments made payable to it and was a subsequent transferee of all deposits into Cyberco’s accounts. The Bankruptcy Court ruled Cyberco’s deposits were themselves transfers to Huntington under the Bankruptcy Code, and Huntington was liable for both the payments and the deposits, totaling approximately $73 million.
On September 28, 2015, the U.S. District Court for the Western District of Michigan entered a judgment against Huntington in the amount of $72 million plus costs and pre- and post-judgment interest. While Huntington has appealed the decision to the U.S. Sixth Circuit Court of Appeals and plans to continue to aggressively contest the claims of this complex case, Huntington increased its legal reserves by approximately $38 million in the 2015 third quarter to fully accrue for the amount of the judgment. Oral argument was held in Huntington’s appeal on September 29, 2016, and Huntington awaits a decision.

Powell v. Huntington National Bank. Huntington is a defendant in a putative class action filed on October 15, 2013. The plaintiffs filed the action in West Virginia state court on behalf of themselves and other West Virginia mortgage loan borrowers who allege they were charged late fees in violation of West Virginia law and the loan documents. Plaintiffs seek statutory civil penalties, compensatory damages and attorney’s fees. Huntington removed the case to federal court, answered the complaint, and, on January 17, 2014, filed a motion for judgment on the pleadings, asserting that West Virginia law is preempted by federal law and therefore does not apply to Huntington. Following further briefing by the parties, the federal district court denied Huntington’s motion for judgment on the pleadings on September 26, 2014. On June 8, 2015, the Fourth Circuit Court of Appeals granted Huntington’s motion for an interlocutory appeal of the district court’s decision. The matter was briefed and oral argument held, but after the oral argument, the Fourth Circuit dismissed the appeal as improvidently granted and remanded the case back to the district court for further proceedings. The matter is moving forward in the trial court and Huntington has filed an early motion for summary judgment. The discovery stay has been lifted, and the parties have engaged in discovery. Trial is now set for January 24, 2017.

FirstMerit Merger Shareholder Litigation. Huntington is a defendant in five lawsuits filed in February and March of 2016 in state and federal courts in Ohio relating to the FirstMerit merger. The plaintiffs in each case are FirstMerit shareholders and have filed class action and derivative claims seeking to enjoin the merger. The plaintiffs also claim that the registration statement filed regarding the merger contained material omissions and/or misrepresentations and seek the filing of a revised registration statement, as well as money damages. Specifically as to Huntington, the plaintiffs claim Huntington aided and abetted in alleged breaches of fiduciary duties by the FirstMerit board of directors in approving the merger, and in one complaint, allege that Huntington had direct involvement in making omissions and/or misrepresentations in the registration statement. Huntington is preparing its defense to the complaints. The state court cases have been consolidated and stayed pending the outcome of the federal court cases, and plaintiffs' motion for expedited discovery was denied. The federal court cases have been consolidated and the defendants filed a joint motion to dismiss on numerous grounds. The court stayed discovery pending the outcome of the defendants' motion to dismiss. The plaintiffs filed a motion for preliminary injunction to delay the shareholder vote scheduled for June 13, 2016 on the basis that supplemental disclosures should be provided to the shareholders. A hearing took place on the preliminary injunction motion for Friday, June 10. The parties in the federal court cases have entered into a tentative settlement. The defendants made agreed supplemental disclosures in advance of the shareholder vote in exchange for which plaintiffs agreed to withdraw their preliminary injunction motion and agreed to a release of all claims in the federal and state actions. The parties have jointly moved for approval of the settlement by the federal court. The plaintiffs in the state court cases did not join in the settlement, and one of them filed a motion to be appointed the lead plaintiff in the state cases, which the federal court has denied. Should the settlement be approved, however, the claims in the state court cases will be released.

FirstMerit Overdraft Litigation. Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against FirstMerit. The complaints were brought as putative class actions on behalf of Ohio residents who maintained a checking account at FirstMerit and who incurred one or more overdraft fees as a result of the alleged re-sequencing of debit transactions. The lawsuit that had been filed in Summit County Court of Common Pleas was dismissed without prejudice on July 11, 2011. The remaining suit in Lake County seeks actual damages, disgorgement of overdraft fees, punitive damages, interest, injunctive relief, and attorney fees. In December

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2012, the trial court issued an order certifying a proposed class and FirstMerit appealed the order to the Eleventh District Court of Appeals. In September 2013, the Eleventh District Court of Appeals affirmed in part and reversed in part the trial court's class certification order, and remanded the case back to the trial court for further consideration, in particular with respect to the class definition. The Ohio Supreme Court declined to accept jurisdiction. In August 2014, FirstMerit filed a motion asking the trial court to stay the lawsuit pending arbitration of claims subject to an arbitration agreement. On August 25, 2014, the parties stipulated to a revised class definition (without affecting the pending motion to stay). An order approving the stipulated revised class was entered on June 3, 2016. The trial court denied FirstMerit’s motion to compel arbitration in August 2016 and FirstMerit filed a notice of appeal of that decision.
19. SEGMENT REPORTING
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. The Treasury / Other function includes our technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.
The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures result in changes in reported segment
financial data. Accordingly, certain amounts have been reclassified to conform to the current period presentation.
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations.
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all five business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the five business segments.
We use an active and centralized Funds Transfer Pricing (FTP) methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).
Retail and Business Banking - The Retail and Business Banking segment provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans. Other financial services available to consumer and small business customers include investments, insurance, interest rate risk protection, foreign exchange, and treasury management. Business Banking is defined as serving companies with revenues up to $20 million and consists of approximately 165,000 businesses.
Commercial Banking - Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, and government public sector customers located primarily within our geographic footprint. The segment is divided into seven business units: middle market, large corporate, specialty banking, asset finance, capital markets, treasury management, and insurance.

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Automobile Finance and Commercial Real Estate - This segment provides lending and other banking products and services to customers outside of our traditional retail and commercial banking segments. Our products and services include providing financing for the purchase of automobiles, light-duty trucks, recreational vehicles and marine craft at franchised dealerships, financing the acquisition of new and used vehicle inventory of franchised automotive dealerships, and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. Products and services are delivered through highly specialized relationship-focused bankers and product partners.
Regional Banking and The Huntington Private Client Group - Regional Banking and The Huntington Private Client Group is closely aligned with our eleven regional banking markets. The Huntington Private Client Group is organized into units consisting of The Huntington Private Bank, The Huntington Trust, and wealth investment advisors. Our private banking, trust, and investment functions focus their efforts in our Midwest footprint and Florida.
Home Lending - Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Retail and Business Banking segment, as well as through commissioned loan originators. Home Lending earns interest on loans held in the warehouse and portfolio, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination and servicing of mortgage loans across all segments.
Listed below is certain operating basis financial information reconciled to Huntington’s September 30, 2016, December 31, 2015, and September 30, 2015, reported results by business segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
Income Statements
Retail & Business Banking
 
Commercial Banking
 
AFCRE
 
RBHPCG
 
Home Lending
 
Treasury/Other
 
Huntington Consolidated
(dollar amounts in thousands)
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
334,752

 
$
137,216

 
$
126,468

 
$
46,838

 
$
15,508

 
$
(35,392
)
 
$
625,390

Provision for credit losses
10,142

 
23,816

 
25,616

 
1,657

 
2,573

 
1

 
63,805

Noninterest income
146,973

 
68,733

 
7,946

 
31,612

 
30,187

 
16,964

 
302,415

Noninterest expense
317,092

 
98,007

 
44,772

 
48,654

 
31,311

 
172,411

 
712,247

Income taxes
54,072

 
29,444

 
22,409

 
9,849

 
4,134

 
(95,159
)
 
24,749

Net income
$
100,419

 
$
54,682

 
$
41,617

 
$
18,290

 
$
7,677

 
$
(95,681
)
 
$
127,004

2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
260,059

 
$
100,939

 
$
95,858

 
$
36,200

 
$
13,045

 
$
(10,646
)
 
$
495,455

Provision (reduction in allowance) for credit losses
(3,829
)
 
9,322

 
12,599

 
3,547

 
838

 
(1
)
 
22,476

Noninterest income
124,138

 
65,906

 
5,774

 
26,411

 
11,639

 
19,251

 
253,119

Noninterest expense
282,180

 
75,589

 
38,770

 
41,092

 
39,871

 
49,006

 
526,508

Income taxes
37,046

 
28,677

 
17,592

 
6,290

 
(5,609
)
 
(36,994
)
 
47,002

Net income
$
68,800

 
$
53,257

 
$
32,671

 
$
11,682

 
$
(10,416
)
 
$
(3,406
)
 
$
152,588


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Nine Months Ended September 30,
Income Statements
Retail & Business Banking
 
Commercial Banking
 
AFCRE
 
RBHPCG
 
Home Lending
 
Treasury/Other
 
Huntington Consolidated
(dollar amounts in thousands)
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
871,727

 
$
339,839

 
$
317,624

 
$
125,076

 
$
42,941

 
$
(62,870
)
 
$
1,634,337

Provision (reduction in allowance) for credit losses
43,887

 
53,378

 
18,727

 
157

 
(252
)
 
(1
)
 
115,896

Noninterest income
396,020

 
192,232

 
25,787

 
84,423

 
64,158

 
52,774

 
815,394

Noninterest expense
882,732

 
280,564

 
127,305

 
136,406

 
83,375

 
216,606

 
1,726,988

Income taxes
119,395

 
69,345

 
69,083

 
25,527

 
8,392

 
(157,753
)
 
133,989

Net income
$
221,733

 
$
128,784

 
$
128,296

 
$
47,409

 
$
15,584

 
$
(68,948
)
 
$
472,858

2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
764,370

 
$
277,731

 
$
286,062

 
$
102,377

 
$
36,936

 
$
(13,650
)
 
$
1,453,826

Provision (reduction in allowance) for credit losses
22,840

 
12,989

 
14,692

 
7,834

 
5,132

 
(1
)
 
63,486

Noninterest income
352,585

 
191,391

 
22,021

 
84,818

 
62,273

 
53,427

 
766,515

Noninterest expense
813,631

 
208,702

 
112,803

 
149,806

 
115,072

 
77,128

 
1,477,142

Income taxes
98,169

 
86,601

 
63,206

 
10,344

 
(7,348
)
 
(85,907
)
 
165,065

Net income
$
182,315

 
$
160,830

 
$
117,382

 
$
19,211

 
$
(13,647
)
 
$
48,557

 
$
514,648

 
Assets at
 
Deposits at
(dollar amounts in thousands)
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Retail & Business Banking
$
21,953,770

 
$
15,746,086

 
$
45,082,371

 
$
30,875,607

Commercial Banking
25,407,115

 
17,022,387

 
16,434,367

 
11,424,778

AFCRE
24,961,203

 
17,856,368

 
1,772,332

 
1,651,702

RBHPCG
5,522,867

 
4,291,403

 
8,705,359

 
7,690,581

Home Lending
3,520,201

 
3,080,690

 
500,198

 
361,881

Treasury / Other
19,400,256

 
13,021,367

 
4,910,469

 
3,290,430

Total
$
100,765,412

 
$
71,018,301

 
$
77,405,096

 
$
55,294,979

Item 3: Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in Huntington’s 2015 Form 10-K.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
Huntington maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntington’s Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntington’s disclosure controls and procedures were effective.
There have not been any changes in Huntington’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Huntington’s internal controls over financial reporting.

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PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported.
Item 1: Legal Proceedings
Information required by this item is set forth in Note 18 of the Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this report and incorporated herein by reference.
Item 1A: Risk Factors
Information required by this item is set forth in Part 1 Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and incorporated herein by reference.

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Table of Contents

Item 6. Exhibits
Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by us with the SEC are also available at our Internet web site. The address of the site is http://www.huntington.com. Except as specifically incorporated by reference into this Quarterly Report on Form 10-Q, information on those web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.
 
Exhibit
Number
 
Document Description
 
Report or Registration Statement
 
SEC File or
Registration
Number
 
Exhibit
Reference
 
2.1
 
Agreement and Plan of Merger, dated as of January 25, 2016, by and among Huntington Bancshares Incorporated, FirstMerit Corporation, and West Subsidiary Corporation.
 
Current Report on Form 8-K dated January 28, 2016.

 
001-34073
 
2.1

 
 
 
 
 
 
 
 
 
 
 
3.1
 
Articles of Restatement of Charter.
 
Annual Report on Form 10-K for the year ended December 31, 1993
 
000-02525
 
3

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

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

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

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

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

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

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

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

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

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

 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

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

 
 
 
 
 
 
 
 
 
 
 
3.13
 
Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of July 16, 2014.
 
Current Report on Form 8-K dated July 17, 2014
 
001-34073
 
3.1

 
 
 
 
 
 
 
 
 
 
 
4.1
 
Instruments defining the Rights of Security Holders—reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
* FirstMerit Corporation 2008 Supplemental Executive Retirement Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
* Amendment to the FirstMerit Corporation 2008 Supplemental Executive Retirement Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3
 
* FirstMerit Corporation 2011 Equity Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4
 
* FirstMerit Corporation 2011 Equity Incentive Plan Time-Based Restricted Stock Unit Award Agreement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5
 
* Retention Award for Sandy Pierce - Restricted Stock Unit (RSU) - Key Terms and Conditions - 2015 Long Term Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
**Rule 13a-14(a) Certification – Chief Executive Officer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
**Rule 13a-14(a) Certification – Chief Financial Officer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
***Section 1350 Certification – Chief Executive Officer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
***Section 1350 Certification – Chief Financial Officer.
 
 
 
 
 
 
 
101
 
**The following material from Huntington’s Form 10-Q Report for the quarterly period ended September 30, 2016, formatted in XBRL: (1) Unaudited Condensed Consolidated Balance Sheets, (2) Unaudited Condensed Consolidated Statements of Income, (3) Unaudited Condensed Consolidated Statements of Comprehensive Income (4) Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
*
Denotes management contract or compensatory plan or arrangement
**
Filed herewith
***
Furnished herewith

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Huntington Bancshares Incorporated
(Registrant)
 
 
 
 
 
Date:
November 8, 2016
 
/s/ Stephen D. Steinour
 
 
 
Stephen D. Steinour
 
 
 
Chairman, Chief Executive Officer and President
 
 
 
Date:
November 8, 2016
 
/s/ Howell D. McCullough III
 
 
 
Howell D. McCullough III
 
 
 
Chief Financial Officer


139