Edgar Filing: HUNTINGTON BANCSHARES INC/MD

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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 June 30, 2018

Commission File Number 1-34073

Huntington Bancshares Incorporated



Maryland	31-0724920
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

Registrant’s telephone number, including area code: (614) 480-2265

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

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

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



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)
		Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

There were 1,104,226,603 shares of the Registrant’s common stock ($0.01 par value) outstanding on June 30, 2018.

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HUNTINGTON BANCSHARES INCORPORATED

INDEX



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	37
Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017	38
Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2018 and 2017	39
Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2018 and 2017	41
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2018 and 2017	42
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	43
Notes to Unaudited Condensed Consolidated Financial Statements	45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Executive Overview	5
Discussion of Results of Operations	6
Risk Management and Capital:	18
Credit Risk	18
Market Risk	27
Liquidity Risk	28
Operational Risk	29
Compliance Risk	30
Capital	30
Business Segment Discussion	31
Additional Disclosures	35
Item 3. Quantitative and Qualitative Disclosures about Market Risk	93
Item 4. Controls and Procedures	93
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	93
Item 1A. Risk Factors	93
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 6. Exhibits	93
Signatures	96

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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:



ACL		Allowance for Credit Losses
AFS		Available-for-Sale
ALLL		Allowance for Loan and Lease Losses
AOCI		Accumulated Other Comprehensive Income
ASC		Accounting Standards Codification
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
CCAR		Comprehensive Capital Analysis and Review
CDs		Certificates of Deposit
CET1		Common equity tier 1 on a transitional Basel III basis
CFPB		Bureau of Consumer Financial Protection
CMO		Collateralized Mortgage Obligations
CRE		Commercial Real Estate
EPS		Earnings Per Share
EVE		Economic Value of Equity
FDIC		Federal Deposit Insurance Corporation
FHLB		Federal Home Loan Bank
FICO		Fair Isaac Corporation
FirstMerit		FirstMerit Corporation
FRB		Federal Reserve Bank
FTE		Fully-Taxable Equivalent
FTP		Funds Transfer Pricing
FVO		Fair Value Option
GAAP		Generally Accepted Accounting Principles in the United States of America
HTM		Held-to-Maturity
IRS		Internal Revenue Service
LCR		Liquidity Coverage Ratio
LIBOR		London Interbank Offered Rate
MBS		Mortgage-Backed Securities
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSR		Mortgage Servicing Right
NAICS		North American Industry Classification System
NALs		Nonaccrual Loans
NCO		Net Charge-off
NII		Noninterest Income
NIM		Net Interest Margin
NPAs		Nonperforming Assets
NSF		Non-sufficient funds
OCC		Office of the Comptroller of the Currency
OCI		Other Comprehensive Income (Loss)
OCR		Optimal Customer Relationship
OLEM		Other Loans Especially Mentioned
OREO		Other Real Estate Owned
OTTI		Other-Than-Temporary Impairment

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Plan		Huntington Bancshares Retirement Plan
RBHPCG		Regional Banking and The Huntington Private Client Group
ROC		Risk Oversight Committee
SAD		Special Assets Division
SBA		Small Business Administration
SEC		Securities and Exchange Commission
TCJA		H.R. 1, Originally known as the Tax Cuts and Jobs Act
TDR		Troubled Debt Restructuring
U.S. Treasury		U.S. Department of the Treasury
UCS		Uniform Classification System
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”, "Huntington," and "the Company" in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have over 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. Our 968 branches and private client group offices are located in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2017 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2017 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.

EXECUTIVE OVERVIEW

Summary of 2018 Second Quarter Results Compared to 2017 Second Quarter

For the quarter, we reported net income of $355 million, or $0.30 per common share, compared with $272 million, or $0.23 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent (FTE) net interest income was $791 million, up $34 million, or 4%. The results reflected the benefit from a $4.6 billion, or 5%, increase in average earning assets, partially offset by a two basis point decrease in the FTE net interest margin (NIM) to 3.29%. Average earning asset growth included a $4.5 billion, or 7%, increase in average loans and leases. Average earning asset yields increased 32 basis points year-over-year, driven by a 34 basis point improvement in loan yields. Average funding costs increased 44 basis points, although interest-bearing deposit costs only increased 28 basis points. The cost of short-term borrowings and long-term debt increased 104 basis points and 126 basis points, respectively. Embedded within these yields and costs, FTE net interest income during the 2018 second quarter included $19 million, or approximately 8 basis points, of purchase accounting impact compared to $34 million, or approximately 15 basis points, in the year-ago quarter.

The provision for credit losses increased $31 million year-over-year to $56 million in the 2018 second quarter. NCOs decreased $8 million to $28 million. NCOs represented an annualized 0.16% of average loans and leases, down from 0.21% in the year ago quarter.

Non-interest income was $336 million, up $11 million, or 3%, reflecting ongoing household / relationship acquisition and execution of our Optimal Customer Relationship (OCR) strategy. Trust and investment management services increased $5 million, or 14%, reflecting strong equity market performance. Other income decreased $5 million, or 10%, primarily reflecting a $3 million unfavorable Visa Class B derivative fair value adjustment.

Non-interest expense was $652 million, down $42 million, or 6%, due to the $50 million of acquisition-related Significant Items in the year-ago quarter compared with no Significant Items in the current quarter. Personnel costs increased $4 million, or 1%, primarily reflecting increased incentive compensation and benefits costs, partially offset by an $18 million decrease in acquisition-related Significant Items. Other expense decreased $10 million, or 17%, primarily reflecting a decrease in franchise taxes and $4 million of acquisition-related Significant Items in the year-ago quarter.

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The tangible common equity to tangible assets ratio was 7.78%, up 37 basis points from a year-ago. The CET1 risk-based capital ratio was 10.53% at June 30, 2018, compared to 9.88% a year ago. The regulatory Tier 1 risk-based capital ratio was 11.99% compared to 11.24% at June 30, 2017.

The Company did not repurchase any common stock during the 2018 second quarter. Under the 2017 CCAR capital plan executed over the past four quarters, the Company repurchased $308 million of common stock at an average cost of $13.71 per share.

Business Overview

General

Our general business objectives are:

1.Grow organic revenue across all business segments.

2.Invest in our businesses, particularly technology and risk management.

3.Deliver positive operating leverage.

4.Manage capital and liquidity positions consistent with our risk appetite.

Economy

The economies in our footprint continue to perform well, with strength across geographies, industries, and business stratifications. We are encouraged by the outlook for continued loan and deposit growth in coming quarters. While pipelines are steady and customer sentiment remains strong, some of our customers are monitoring international trade agreements and tariffs that could have a dampening effect on economic growth.

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 millions, except per share amounts)
	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2018			2018			2017			2017			2017
Interest income	$	972		$	914		$	894		$	873		$	846
Interest expense	188			144			124			115			101
Net interest income	784			770			770			758			745
Provision for credit losses	56			66			65			43			25
Net interest income after provision for credit losses	728			704			705			715			720
Service charges on deposit accounts	91			86			91			91			88
Cards and payment processing income	56			53			53			54			52
Trust and investment management services	42			44			41			39			37
Mortgage banking income	28			26			33			34			32
Insurance income	21			21			21			18			22
Capital markets fees	21			19			23			22			17
Bank owned life insurance income	17			15			18			16			15
Gain on sale of loans	15			8			17			14			12
Securities gains (losses)	—			—			(4		)	—			—
Other income	45			42			47			42			50
Total noninterest income	336			314			340			330			325
Personnel costs	396			376			373			377			392
Outside data processing and other services	69			73			71			80			75
Net occupancy	35			41			36			55			53
Equipment	38			40			36			45			43
Deposit and other insurance expense	18			18			19			19			20
Professional services	15			11			18			15			18
Marketing	18			8			10			17			19
Amortization of intangibles	13			14			14			14			14
Other expense	50			52			56			58			60
Total noninterest expense	652			633			633			680			694
Income before income taxes	412			385			412			365			351
Provision (benefit) for income taxes	57			59			(20		)	90			79
Net income	355			326			432			275			272
Dividends on preferred shares	21			12			19			19			19
Net income applicable to common shares	$	334		$	314		$	413		$	256		$	253

Average common shares—basic	1,103,337			1,083,836			1,077,397			1,086,038			1,088,934
Average common shares—diluted	1,122,612			1,124,778			1,130,117			1,106,491			1,108,527
Net income per common share—basic	$	0.30		$	0.29		$	0.38		$	0.24		$	0.23
Net income per common share—diluted	0.30			0.28			0.37			0.23			0.23
Cash dividends declared per common share	0.11			0.11			0.11			0.08			0.08
Return on average total assets	1.36		%	1.27		%	1.67		%	1.08		%	1.09		%
Return on average common shareholders’ equity	13.2			13.0			17.0			10.5			10.6
Return on average tangible common shareholders’ equity (2)	17.6			17.5			22.7			14.1			14.4
Net interest margin (3)	3.29			3.30			3.30			3.29			3.31
Efficiency ratio (4)	56.6			56.8			54.9			60.5			62.9
Effective tax rate	13.8			15.3			(4.8		)	24.7			22.4

Revenue—FTE
Net interest income	$	784		$	770		$	770		$	758		$	745
FTE adjustment	7			7			12			13			12
Net interest income (3)	791			777			782			771			757
Noninterest income	336			314			340			330			325
Total revenue (3)	$	1,127		$	1,091		$	1,122		$	1,101		$	1,082

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

	Six Months Ended June 30,				Change
(dollar amounts in millions, except per share amounts)	2018		2017		Amount			Percent
Interest income	$	1,886	$	1,667	$	219		13	%
Interest expense	332		192		140			73
Net interest income	1,554		1,475		79			5
Provision for credit losses	122		93		29			31
Net interest income after provision for credit losses	1,432		1,382		50			4
Service charges on deposit accounts	177		171		6			4
Cards and payment processing income	109		100		9			9
Trust and investment management services	86		76		10			13
Mortgage banking income	54		64		(10		)	(16	)
Insurance income	42		42		—			—
Capital markets fees	40		31		9			29
Bank owned life insurance income	32		33		(1		)	(3	)
Gain on sale of loans	23		25		(2		)	(8	)
Securities gains (losses)	—		—		—			—
Other noninterest income	87		96		(9		)	(9	)
Total noninterest income	650		638		12			2
Personnel costs	772		774		(2		)	—
Outside data processing and other services	142		162		(20		)	(12	)
Net occupancy	76		120		(44		)	(37	)
Equipment	78		90		(12		)	(13	)
Deposit and other insurance expense	36		41		(5		)	(12	)
Professional services	26		36		(10		)	(28	)
Marketing	26		33		(7		)	(21	)
Amortization of intangibles	27		29		(2		)	(7	)
Other noninterest expense	102		117		(15		)	(13	)
Total noninterest expense	1,285		1,402		(117		)	(8	)
Income before income taxes	797		618		179			29
Provision for income taxes	116		138		(22		)	(16	)
Net income	681		480		201			42
Dividends declared on preferred shares	33		38		(5		)	(13	)
Net income applicable to common shares	$	648	$	442	$	206		47	%

Average common shares—basic	1,093,587		1,087,654		5,933			1	%
Average common shares—diluted	1,123,646		1,108,572		15,074			1
Net income per common share—basic	$	0.59	$	0.41	$	0.18		44
Net income per common share—diluted	0.58		0.40		0.18			45
Cash dividends declared per common share	0.22		0.16		0.06			38

Revenue—FTE
Net interest income	$	1,554	$	1,475	$	79		5	%
FTE adjustment	14		24		(10		)	(42	)
Net interest income (3)	1,568		1,499		69			5
Noninterest income	650		638		12			2
Total revenue (3)	$	2,218	$	2,137	$	81		4	%


(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 21% tax rate and a 35% tax rate for periods prior to December 31, 2017.


(3)	On a fully-taxable equivalent (FTE) basis assuming a 21% tax rate and a 35% tax rate for periods prior to January 1, 2018.


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

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Significant Items

There were no Significant Items in the 2018 second quarter.

Earnings comparisons are impacted by the Significant Items summarized below:

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


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

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



Table 3 - Significant Items Influencing Earnings Performance Comparison
	Three Months Ended
	June 30, 2018				March 31, 2018				June 30, 2017
(dollar amounts in millions, except per share amounts)	Amount		EPS (1)		Amount		EPS (1)		Amount			EPS (1)
Net income	$	355			$	326			$	272
Earnings per share, after-tax			$	0.30			$	0.28				$	0.23

Significant Items—favorable (unfavorable) impact:	Earnings		EPS (1)		Earnings		EPS (1)		Earnings			EPS (1)
Mergers and acquisitions, net expenses	$	—			$	—			$	(50	)
Tax impact	—				—				17
Mergers and acquisitions, after-tax	$	—	$	—	$	—	$	—	$	(33	)	$	(0.03	)


(1)	Based upon the quarterly average outstanding diluted common shares.



	Six Months Ended
	June 30, 2018				June 30, 2017
(dollar amounts in millions, except per share amounts)	Amount		EPS (1)		Amount			EPS (1)
Net income	$	681			$	480
Earnings per share, after-tax			$	0.58				$	0.40

Significant Items—favorable (unfavorable) impact:	Earnings		EPS (1)		Earnings			EPS (1)
Mergers and acquisitions, net expenses	$	—			$	(121	)
Tax impact	—				42
Mergers and acquisitions, after-tax	$	—	$	—	$	(79	)	$	(0.07	)


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

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Net Interest Income / Average Balance Sheet

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



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

	Average Balances
	Three Months Ended															Change
	June 30,			March 31,			December 31,			September 30,			June 30,			2Q18 vs. 2Q17
(dollar amounts in millions)	2018			2018			2017			2017			2017			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	84		$	90		$	90		$	102		$	102		$	(18	)	(18	)%
Securities:
Trading account securities	82			87			87			92			91			(9		)	(10	)
Available-for-sale securities:
Taxable	10,832			11,158			11,154			11,680			12,570			(1,738		)	(14	)
Tax-exempt	3,554			3,633			3,404			3,160			3,103			451			15
Total available-for-sale securities	14,386			14,791			14,558			14,840			15,673			(1,287		)	(8	)
Held-to-maturity securities—taxable	8,706			8,877			9,066			8,264			7,426			1,280			17
Other securities	599			605			598			597			566			33			6
Total securities	23,773			24,360			24,309			23,793			23,756			17			—
Loans held for sale	619			478			598			678			525			94			18
Loans and leases: (3)
Commercial:
Commercial and industrial	28,863			28,243			27,445			27,643			27,992			871			3
Commercial real estate:
Construction	1,126			1,189			1,199			1,152			1,130			(4		)	—
Commercial	6,233			6,142			5,997			6,064			5,940			293			5
Commercial real estate	7,359			7,331			7,196			7,216			7,070			289			4
Total commercial	36,222			35,574			34,641			34,859			35,062			1,160			3
Consumer:
Automobile	12,271			12,100			11,963			11,713			11,324			947			8
Home equity	9,941			10,040			10,027			9,960			9,958			(17		)	—
Residential mortgage	9,624			9,174			8,809			8,402			7,979			1,645			21
RV and marine finance	2,667			2,481			2,405			2,296			2,039			628			31
Other consumer	1,162			1,115			1,095			1,046			983			179			18
Total consumer	35,665			34,910			34,299			33,417			32,283			3,382			10
Total loans and leases	71,887			70,484			68,940			68,276			67,345			4,542			7
Allowance for loan and lease losses	(742		)	(709		)	(688		)	(672		)	(672		)	(70		)	(10	)
Net loans and leases	71,145			69,775			68,252			67,604			66,673			4,472			7
Total earning assets	96,363			95,412			93,937			92,849			91,728			4,635			5
Cash and due from banks	1,283			1,217			1,226			1,299			1,287			(4		)	—
Intangible assets	2,318			2,332			2,346			2,359			2,373			(55		)	(2	)
All other assets	5,599			5,596			5,481			5,455			5,405			194			4
Total assets	$	104,821		$	103,848		$	102,302		$	101,290		$	100,121		$	4,700		5	%
Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	20,382			20,572			21,745			21,723			21,599			$	(1,217	)	(6	)%
Demand deposits—interest-bearing	19,121			18,630			18,175			17,878			17,445			1,676			10
Total demand deposits	39,503			39,202			39,920			39,601			39,044			459			1
Money market deposits	20,943			20,678			20,731			20,314			19,212			1,731			9
Savings and other domestic deposits	11,146			11,219			11,348			11,590			11,889			(743		)	(6	)
Core certificates of deposit	3,794			2,293			1,947			2,044			2,146			1,648			77
Total core deposits	75,386			73,392			73,946			73,549			72,291			3,095			4
Other domestic time deposits of $250,000 or more	243			247			400			432			479			(236		)	(49	)
Brokered deposits and negotiable CDs	3,661			3,307			3,391			3,563			3,783			(122		)	(3	)
Total deposits	79,290			76,946			77,737			77,544			76,553			2,737			4
Short-term borrowings	3,082			5,228			2,837			2,391			2,687			395			15
Long-term debt	9,225			8,958			9,232			8,949			8,730			495			6
Total interest-bearing liabilities	71,215			70,560			68,061			67,161			66,371			4,844			7
All other liabilities	1,891			1,861			1,819			1,661			1,557			334			21
Shareholders’ equity	11,333			10,855			10,677			10,745			10,594			739			7
Total liabilities and shareholders’ equity	$	104,821		$	103,848		$	102,302		$	101,290		$	100,121		$	4,700		5	%

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

	Average Yield Rates (2)
	Three Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,
Fully-taxable equivalent basis (1)	2018		2018		2017		2017		2017
Assets:
Interest-bearing deposits in banks	1.95	%	1.97	%	1.92	%	1.77	%	1.53	%
Securities:
Trading account securities	0.23		0.15		0.21		0.16		0.25
Available-for-sale securities:
Taxable	2.63		2.51		2.45		2.38		2.35
Tax-exempt	3.35		3.18		3.76		3.62		3.71
Total available-for-sale securities	2.81		2.67		2.75		2.64		2.62
Held-to-maturity securities—taxable	2.42		2.45		2.41		2.36		2.38
Other securities	4.58		3.98		3.86		3.35		3.18
Total securities	2.71		2.62		2.64		2.55		2.55
Loans held for sale	4.17		3.82		3.68		3.83		3.73
Loans and leases: (3)
Commercial:
Commercial and industrial	4.52		4.28		4.17		4.05		4.04
Commercial real estate:
Construction	5.26		4.73		4.47		4.55		4.26
Commercial	4.58		4.24		4.03		4.08		3.97
Commercial real estate	4.68		4.32		4.10		4.16		4.02
Total commercial	4.55		4.29		4.15		4.07		4.04
Consumer:
Automobile	3.63		3.56		3.61		3.60		3.55
Home equity	5.09		4.90		4.71		4.72		4.61
Residential mortgage	3.69		3.66		3.66		3.65		3.66
RV and marine finance	5.11		5.11		5.25		5.43		5.57
Other consumer	11.90		11.78		11.53		11.59		11.47
Total consumer	4.43		4.34		4.31		4.32		4.27
Total loans and leases	4.49		4.32		4.23		4.20		4.15
Total earning assets	4.07		3.91		3.83		3.78		3.75
Liabilities:
Deposits:
Demand deposits—noninterest-bearing	—		—		—		—		—
Demand deposits—interest-bearing	0.38		0.29		0.26		0.23		0.20
Total demand deposits	0.18		0.14		0.12		0.10		0.09
Money market deposits	0.60		0.45		0.40		0.36		0.31
Savings and other domestic deposits	0.21		0.20		0.20		0.20		0.21
Core certificates of deposit	1.56		1.01		0.75		0.73		0.56
Total core deposits	0.51		0.36		0.32		0.30		0.26
Other domestic time deposits of $250,000 or more	1.01		0.69		0.54		0.61		0.49
Brokered deposits and negotiable CDs	1.81		1.47		1.21		1.16		0.95
Total deposits	0.59		0.43		0.37		0.35		0.31
Short-term borrowings	1.82		1.47		1.15		0.95		0.78
Long-term debt	3.75		2.92		2.73		2.65		2.49
Total interest-bearing liabilities	1.05		0.82		0.73		0.68		0.61
Net interest rate spread	3.02		3.09		3.10		3.10		3.14
Impact of noninterest-bearing funds on margin	0.27		0.21		0.20		0.19		0.17
Net interest margin	3.29	%	3.30	%	3.30	%	3.29	%	3.31	%


(1)	FTE yields are calculated assuming a 21% tax rate and a 35% tax rate for periods prior to January 1, 2018.


(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.

Table of Contents

2018 Second Quarter versus 2017 Second Quarter

FTE net interest income for the 2018 second quarter increased $34 million, or 4%, from the 2017 second quarter. This reflected the benefit from the $4.6 billion, or 5%, increase in average earning assets, partially offset by a two basis point decrease in the FTE NIM to 3.29%. Average earning asset growth reflected a $4.5 billion, or 7%, increase in average loans and leases. Average earning asset yields increased 32 basis points year-over-year, driven by a 34 basis point improvement in loan yields. Average funding costs increased 44 basis points, although interest-bearing deposit costs only increased 28 basis points. The cost of short-term borrowings and long-term debt increased 104 basis points and 126 basis points, respectively. Embedded within these yields and costs, FTE net interest income during the 2018 second quarter included $19 million, or approximately 8 basis points, of purchase accounting impact compared to $34 million, or approximately 15 basis points, in the year-ago quarter.

Average earning assets for the 2018 second quarter increased $4.6 billion, or 5%, from the year-ago quarter, primarily reflecting a $4.5 billion, or 7%, increase in average loans and leases. Average residential mortgage loans increased $1.6 billion, or 21%, driven by an increase in lending officers and expansion into the Chicago market. Average automobile loans increased $0.9 billion, or 8%, driven by $6.2 billion of new production over the past year. Average commercial and industrial (C&I) loans increased $0.9 billion, or 3%, reflecting growth in middle market, asset finance, energy, and corporate banking. Average RV and marine finance loans increased $0.6 billion, or 31%, reflecting the success of the well-managed expansion of the acquired business into 17 new states over the past two years.

Average total interest-bearing liabilities increased $4.8 billion, or 7%, from the year-ago quarter. Average total deposits for the 2018 second quarter increased $2.7 billion, or 4%, from the year-ago quarter, while average total core deposits increased $3.1 billion, or 4%. Average money market deposits increased $1.7 billion, or 9%, primarily reflecting growth in certain specialty commercial deposits and continued shifting commercial customer preferences for higher yielding deposit products. Average core CDs increased $1.6 billion, or 77%, reflecting initiatives to grow fixed-rate, term consumer deposits in light of the rising interest rate environment. Average demand deposits increased $0.5 billion, or 1%, primarily driven by a $0.3 billion, or 1%, increase in average commercial demand deposits. Average long-term debt increased $0.5 billion, or 6%, reflecting the issuance of $2.0 billion and maturity of $1.3 billion of senior debt over the past four quarters. Partially offsetting these increases, average savings and other domestic deposits decreased $0.7 billion, or 6%, reflecting consumer migration into higher yielding deposit products, such as money market and CDs.

2018 Second Quarter versus 2018 First Quarter

Compared to the 2018 first quarter, FTE net interest income increased $14 million, or 2%, primarily reflecting growth in average earning assets and the impact of day count. Average earning assets increased $1.0 billion, or 1%, sequentially, driven by a $1.4 billion or 2%, increase in average loans, partially offset by a $0.6 billion, or 2%, decrease in average securities. The NIM decreased 1 basis point. Average earning asset yields increased 16 basis points sequentially, driven by a 17 basis point increase in loan yields. Average funding costs increased 23 basis points, primarily driven by higher cost of long-term debt (up 83 basis points) and short-term borrowings (up 35 basis points). The increase in long-term debt is primarily driven by higher rates on variable rate hedges against fixed rate debt, some of which were terminated in the quarter, as well as derivative hedging ineffectiveness recognized during the 2018 second quarter. Average interest-bearing deposit costs increased 16 basis points, while noninterest-bearing funding improved 6 basis points. Day count negatively impacted the NIM by 1 basis point on a linked quarter basis. The purchase accounting impact on the net interest margin was approximately 8 basis points in the 2018 second quarter, unchanged from the prior quarter.

Compared to the 2018 first quarter, average earning assets increased $1.0 billion, or 1%, reflecting the $1.4 billion, or 2%, increase in average loans and leases. Average C&I loans increased $0.6 billion, or 2%, reflecting broad-based growth in middle market, asset finance, energy, and specialty. Average residential mortgage loans increased $0.5 billion, or 5%, driven by seasonality and the expansion of our home lending business. Average securities decreased $0.6 billion, or 2%, primarily due to runoff in the portfolio.

Compared to the 2018 first quarter, average total core deposits increased $2.0 billion, or 3%, primarily reflecting a $1.5 billion, or 65%, increase in average core CDs. Average demand deposits increased $0.3 billion, or 1%, primarily driven by a $0.2 billion, or 2%, increase in average consumer demand deposits. Average short-term borrowings decreased $2.1 billion, or 41%, as continued growth in core deposits reduced reliance on wholesale funding.

Table of Contents




Table 5 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
(dollar amounts in millions)
	YTD Average Balances											YTD Average Rates (2)
	Six months ended June 30,						Change					Six months ended June 30,
Fully-taxable equivalent basis (1)	2018			2017			Amount			Percent		2018		2017
Assets:
Interest-bearing deposits in banks	$	87		$	101		$	(14	)	(14	)%	1.96	%	1.31	%
Securities:
Trading account securities	84			114			(30		)	(26	)	0.19		0.17
Available-for-sale securities:
Taxable	10,994			12,401			(1,407		)	(11	)	2.57		2.34
Tax-exempt	3,593			3,075			518			17		3.26		3.74
Total available-for-sale securities	14,587			15,476			(889		)	(6	)	2.74		2.62
Held-to-maturity securities—taxable	8,791			7,541			1,250			17		2.44		2.37
Other securities	602			569			33			6		4.28		3.23
Total securities	24,064			23,700			364			2		2.67		2.55
Loans held for sale	549			470			79			17		4.02		3.76
Loans and leases: (3)
Commercial:
Commercial and industrial	28,555			27,957			598			2		4.40		4.01
Commercial real estate:
Construction	1,157			1,221			(64		)	(5	)	4.99		4.09
Commercial	6,188			5,990			198			3		4.41		3.83
Commercial real estate	7,345			7,211			134			2		4.50		3.88
Total commercial	35,900			35,168			732			2		4.42		3.98
Consumer:
Automobile	12,186			11,194			992			9		3.60		3.55
Home equity	9,986			9,994			(8		)	—		4.99		4.54
Residential mortgage	9,401			7,879			1,522			19		3.68		3.65
RV and marine finance	2,574			1,957			617			32		5.11		5.60
Other consumer	1,143			972			171			18		11.80		11.49
Total consumer	35,290			31,996			3,294			10		4.39		4.25
Total loans and leases	71,190			67,164			4,026			6		4.41		4.11
Allowance for loan and lease losses	(726		)	(654		)	(72		)	11
Net loans and leases	70,464			66,510			3,954			6
Total earning assets	95,890			91,435			4,455			5		4.00	%	3.73	%
Cash and due from banks	1,250			1,647			(397		)	(24	)
Intangible assets	2,325			2,380			(55		)	(2	)
All other assets	5,598			5,424			174			3
Total assets	$	104,337