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 March 31, 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) 480-8300

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 1,101,795,768 shares of the Registrant’s common stock ($0.01 par value) outstanding on March 31, 2018.

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HUNTINGTON BANCSHARES INCORPORATED

INDEX



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	32
Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017	33
Condensed Consolidated Statements of Income for the three months ended March 31, 2018 and 2017	34
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017	36
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2018 and 2017	37
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	38
Notes to Unaudited Condensed Consolidated Financial Statements	40
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:	14
Credit Risk	14
Market Risk	21
Liquidity Risk	22
Operational Risk	24
Compliance Risk	24
Capital	25
Fair Value	26
Business Segment Discussion	26
Additional Disclosures	30
Item 3. Quantitative and Qualitative Disclosures about Market Risk	83
Item 4. Controls and Procedures	83
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	84
Item 1A. Risk Factors	84
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	84
Item 6. Exhibits	84
Signatures	87

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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		Consumer Financial Protection Bureau
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 Rights
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)
OLEM		Other Loans Especially Mentioned
OREO		Other Real Estate Owned
OTTI		Other-Than-Temporary Impairment
Plan		Huntington Bancshares Retirement Plan

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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 Restructured Loan
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 966 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 First Quarter Results Compared to 2017 First Quarter

For the quarter, we reported net income of $326 million, or $0.28 per common share, compared with $208 million, or $0.17 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent (FTE) net interest income was $777 million, up $34 million, or 5%. The results reflected the benefit from a $4.3 billion, or 5%, increase in average earning assets, while the FTE net interest margin (NIM) remained unchanged at 3.30%. Average earning asset growth included a $3.5 billion, or 5%, increase in average loans and leases, and a $0.7 billion, or 3%, increase in average securities. The net interest margin stability reflected a 21 basis point increase in earning asset yields and a 7 basis point increase in the benefit from noninterest-bearing funds, offset by a 28 basis point increase in funding costs. Embedded within these yields and costs, FTE net interest income during the 2018 first quarter included $19 million, or approximately 8 basis points, of purchase accounting impact compared to $37 million, or approximately 16 basis points, in the year-ago quarter.

The provision for credit losses decreased $2 million year-over-year to $66 million in the 2018 first quarter. NCOs decreased $1 million to $38 million. NCOs represented an annualized 0.21% of average loans and leases, which remains below our long-term expectation of 35 to 55 basis points.

Non-interest income was $314 million, up $2 million, or 1%. Card and payment processing income increased $6 million, or 13%, due to higher credit and debit card related income and underlying customer growth. Trust and investment management services increased $5 million, or 13%, reflecting an increase in trust assets and assets under management. Capital markets fees increased $5 million, or 36%, reflecting increased foreign exchange and interest rate derivative activity. These increases were partially offset by a $6 million, or 19%, decrease in mortgage banking income, driven by lower spreads on origination volume, and a $5 million, or 38%, decrease in gain on sale of loans, primarily reflecting the sale of an equipment finance loan in the year ago quarter.

Non-interest expense was $633 million, down $74 million, or 10%, due to the $73 million of acquisition-related Significant Items in the year-ago quarter compared with no Significant Items in the current quarter.

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The tangible common equity to tangible assets ratio was 7.70%, up 42 basis points from a year-ago. The CET1 risk-based capital ratio was 10.52% at March 31, 2018, compared to 9.74% a year ago. The regulatory Tier 1 risk-based capital ratio was 12.00% compared to 11.11% at March 31, 2017.

Over the past three quarters, the Company repurchased $308 million of common stock at an average cost of $13.71 per share, including $48 million at an average cost of $15.83 during the 2018 first quarter. In addition, during the 2018 first quarter, $363 million of 8.5% Series A preferred equity was converted into common equity, and subsequently $500 million of 5.7% Series E preferred equity was issued.

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

Aided by federal tax reform enacted late last year and continued strong local economies across our footprint, our commercial and consumer customers continue to exhibit confidence. Our loan pipelines remain solid. We are encouraged by the outlook for further growth through new and expanded customer relationships.

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
	March 31,			December 31,			September 30,			June 30,			March 31,
	2018			2017			2017			2017			2017
Interest income	$	914		$	894		$	873		$	846		$	820
Interest expense	144			124			115			101			90
Net interest income	770			770			758			745			730
Provision for credit losses	66			65			43			25			68
Net interest income after provision for credit losses	704			705			715			720			662
Service charges on deposit accounts	86			91			91			88			83
Cards and payment processing income	53			53			54			52			47
Trust and investment management services	44			41			39			37			39
Mortgage banking income	26			33			34			32			32
Insurance income	21			21			18			22			20
Capital markets fees	19			23			22			17			14
Bank owned life insurance income	15			18			16			15			18
Gain on sale of loans	8			17			14			12			13
Securities gains (losses)	—			(4		)	—			—			—
Other Income	42			47			42			50			46
Total noninterest income	314			340			330			325			312
Personnel costs	376			373			377			392			382
Outside data processing and other services	73			71			80			75			87
Net occupancy	41			36			55			53			68
Equipment	40			36			45			43			47
Deposit and other insurance expense	18			19			19			20			20
Professional services	11			18			15			18			18
Marketing	8			10			17			19			14
Amortization of intangibles	14			14			14			14			14
Other expense	52			56			58			60			57
Total noninterest expense	633			633			680			694			707
Income before income taxes	385			412			365			351			267
Provision (benefit) for income taxes	59			(20		)	90			79			59
Net income	326			432			275			272			208
Dividends on preferred shares	12			19			19			19			19
Net income applicable to common shares	$	314		$	413		$	256		$	253		$	189

Average common shares—basic	1,083,836			1,077,397			1,086,038			1,088,934			1,086,374
Average common shares—diluted	1,124,778			1,130,117			1,106,491			1,108,527			1,108,617
Net income per common share—basic	$	0.29		$	0.38		$	0.24		$	0.23		$	0.17
Net income per common share—diluted	0.28			0.37			0.23			0.23			0.17
Cash dividends declared per common share	0.11			0.11			0.08			0.08			0.08
Return on average total assets	1.27		%	1.67		%	1.08		%	1.09		%	0.84		%
Return on average common shareholders’ equity	13.0			17.0			10.5			10.6			8.2
Return on average tangible common shareholders’ equity (2)	17.5			22.7			14.1			14.4			11.3
Net interest margin (3)	3.30			3.30			3.29			3.31			3.30
Efficiency ratio (4)	56.8			54.9			60.5			62.9			65.7
Effective tax rate	15.3			(4.8		)	24.7			22.4			22.2

Revenue—FTE
Net interest income	$	770		$	770		$	758		$	745		$	730
FTE adjustment	7			12			13			12			13
Net interest income (3)	777			782			771			757			743
Noninterest income	314			340			330			325			312
Total revenue (3)	$	1,091		$	1,122		$	1,101		$	1,082		$	1,055


(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 first quarter.

Earnings comparisons are impacted by the Significant Items summarized below:

Federal tax reform-related tax benefit. Significant events relating to federal tax reform-related tax benefits, and the impacts of those events on our reported results, were as follows:


•	During the 2017 fourth quarter, $123 million of tax benefit related to federal tax reform was recorded as provision for income taxes. This resulted in a positive impact of $0.11 per common share.

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


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

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



Table 2 - Significant Items Influencing Earnings Performance Comparison
	Three Months Ended
(dollar amounts in millions, except per share amounts)	March 31, 2018				December 31, 2017				March 31, 2017
	Amount		EPS (1)		Amount		EPS (1)		Amount			EPS (1)
Net income	$	326			$	432			$	208
Earnings per share, after-tax			$	0.28			$	0.37				$	0.17

Significant Items—favorable (unfavorable) impact:	Earnings		EPS (1)		Earnings		EPS (1)		Earnings			EPS (1)
Federal tax reform-related tax benefit	$	—			$	—			$	—
Tax impact	—				123				—
Federal tax reform-related tax benefit, after-tax	$	—	$	—	$	123	$	0.11	$	—		$	—

Mergers and acquisitions, net expenses	$	—			$	—			$	(71	)
Tax impact	—				—				25
Mergers and acquisitions, after-tax	$	—	$	—	$	—	$	—	$	(46	)	$	(0.04	)


(1)	Based upon the quarterly 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 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis

	Average Balances
(dollar amounts in millions)	Three Months Ended															Change
	March 31,			December 31,			September 30,			June 30,			March 31,			1Q18 vs. 1Q17
	2018			2017			2017			2017			2017			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	90		$	90		$	102		$	102		$	100		$	(10	)	(10	)%
Securities:
Trading account securities	87			87			92			91			137			(50		)	(36	)
Available-for-sale securities:
Taxable	11,158			11,154			11,680			12,570			12,234			(1,076		)	(9	)
Tax-exempt	3,633			3,404			3,160			3,103			3,048			585			19
Total available-for-sale securities	14,791			14,558			14,840			15,673			15,282			(491		)	(3	)
Held-to-maturity securities—taxable	8,877			9,066			8,264			7,426			7,656			1,221			16
Other securities:
Taxable	604			597			596			565			567			37			7
Tax-exempt	1			1			1			1			1			—			—
Total other securities	605			598			597			566			568			37			7
Total securities	24,360			24,309			23,793			23,756			23,643			717			3
Loans held for sale	478			598			678			525			415			63			15
Loans and leases: (1)
Commercial:
Commercial and industrial	28,243			27,445			27,643			27,992			27,923			320			1
Commercial real estate:
Construction	1,189			1,199			1,152			1,130			1,314			(125		)	(10	)
Commercial	6,142			5,997			6,064			5,940			6,039			103			2
Commercial real estate	7,331			7,196			7,216			7,070			7,353			(22		)	—
Total commercial	35,574			34,641			34,859			35,062			35,276			298			1
Consumer:
Automobile	12,100			11,963			11,713			11,324			11,063			1,037			9
Home equity	10,040			10,027			9,960			9,958			10,072			(32		)	—
Residential mortgage	9,174			8,809			8,402			7,979			7,777			1,397			18
RV and marine finance	2,481			2,405			2,296			2,039			1,874			607			32
Other consumer	1,115			1,095			1,046			983			919			196			21
Total consumer	34,910			34,299			33,417			32,283			31,705			3,205			10
Total loans and leases	70,484			68,940			68,276			67,345			66,981			3,503			5
Allowance for loan and lease losses	(709		)	(688		)	(672		)	(672		)	(636		)	(73		)	(11	)
Net loans and leases	69,775			68,252			67,604			66,673			66,345			3,430			5
Total earning assets	95,412			93,937			92,849			91,728			91,139			4,273			5
Cash and due from banks	1,217			1,226			1,299			1,287			2,011			(794		)	(39	)
Intangible assets	2,332			2,346			2,359			2,373			2,387			(55		)	(2	)
All other assets	5,596			5,481			5,455			5,405			5,442			154			3
Total assets	$	103,848		$	102,302		$	101,290		$	100,121		$	100,343		$	3,505		3	%
Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	20,572			21,745			21,723			21,599			21,730			$	(1,158	)	(5	)%
Demand deposits—interest-bearing	18,630			18,175			17,878			17,445			16,805			1,825			11
Total demand deposits	39,202			39,920			39,601			39,044			38,535			667			2
Money market deposits	20,678			20,731			20,314			19,212			18,653			2,025			11
Savings and other domestic deposits	11,219			11,348			11,590			11,889			11,970			(751		)	(6	)
Core certificates of deposit	2,293			1,947			2,044			2,146			2,342			(49		)	(2	)
Total core deposits	73,392			73,946			73,549			72,291			71,500			1,892			3
Other domestic time deposits of $250,000 or more	247			400			432			479			470			(223		)	(47	)
Brokered deposits and negotiable CDs	3,307			3,391			3,563			3,783			3,969			(662		)	(17	)
Total deposits	76,946			77,737			77,544			76,553			75,939			1,007			1
Short-term borrowings	5,228			2,837			2,391			2,687			3,792			1,436			38
Long-term debt	8,958			9,232			8,949			8,730			8,529			429			5
Total interest-bearing liabilities	70,560			68,061			67,161			66,371			66,530			4,030			6
All other liabilities	1,861			1,819			1,661			1,557			1,661			200			12
Shareholders’ equity	10,855			10,677			10,745			10,594			10,422			433			4
Total liabilities and shareholders’ equity	$	103,848		$	102,302		$	101,290		$	100,121		$	100,343		$	3,505		3	%

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

	Average Yield Rates (2)
	Three Months Ended
	March 31,		December 31,		September 30,		June 30,		March 31,
Fully-taxable equivalent basis (1)	2018		2017		2017		2017		2017
Assets:
Interest-bearing deposits in banks	1.97	%	1.92	%	1.77	%	1.53	%	1.09	%
Securities:
Trading account securities	0.15		0.21		0.16		0.25		0.11
Available-for-sale securities:
Taxable	2.51		2.45		2.38		2.35		2.34
Tax-exempt	3.18		3.76		3.62		3.71		3.77
Total available-for-sale securities	2.67		2.75		2.64		2.62		2.63
Held-to-maturity securities—taxable	2.45		2.41		2.36		2.38		2.36
Other securities:
Taxable	3.98		3.86		3.35		3.18		3.31
Tax-exempt	2.88		3.89		3.89		2.22		2.86
Total other securities	3.98		3.86		3.35		3.18		3.31
Total securities	2.62		2.64		2.55		2.55		2.54
Loans held for sale	3.82		3.68		3.83		3.73		3.82
Loans and leases: (3)
Commercial:
Commercial and industrial	4.28		4.17		4.05		4.04		3.98
Commercial real estate:
Construction	4.73		4.47		4.55		4.26		3.95
Commercial	4.24		4.03		4.08		3.97		3.69
Commercial real estate	4.32		4.10		4.16		4.02		3.74
Total commercial	4.29		4.15		4.07		4.04		3.93
Consumer:
Automobile	3.56		3.61		3.60		3.55		3.55
Home equity	4.90		4.71		4.72		4.61		4.45
Residential mortgage	3.66		3.66		3.65		3.66		3.63
RV and marine finance	5.11		5.25		5.43		5.57		5.63
Other consumer	11.78		11.53		11.59		11.47		12.05
Total consumer	4.34		4.31		4.32		4.27		4.23
Total loans and leases	4.32		4.23		4.20		4.15		4.07
Total earning assets	3.91		3.83		3.78		3.75		3.70
Liabilities:
Deposits:
Demand deposits—noninterest-bearing	—		—		—		—		—
Demand deposits—interest-bearing	0.29		0.26		0.23		0.20		0.15
Total demand deposits	0.14		0.12		0.10		0.09		0.07
Money market deposits	0.45		0.40		0.36		0.31		0.26
Savings and other domestic deposits	0.20		0.20		0.20		0.21		0.22
Core certificates of deposit	1.01		0.75		0.73		0.56		0.39
Total core deposits	0.36		0.32		0.30		0.26		0.22
Other domestic time deposits of $250,000 or more	0.69		0.54		0.61		0.49		0.45
Brokered deposits and negotiable CDs	1.47		1.21		1.16		0.95		0.72
Total deposits	0.43		0.37		0.35		0.31		0.26
Short-term borrowings	1.47		1.15		0.95		0.78		0.63
Long-term debt	2.92		2.73		2.65		2.49		2.33
Total interest-bearing liabilities	0.82		0.73		0.68		0.61		0.54
Net interest rate spread	3.09		3.10		3.10		3.14		3.16
Impact of noninterest-bearing funds on margin	0.21		0.20		0.19		0.17		0.14
Net interest margin	3.30	%	3.30	%	3.29	%	3.31	%	3.30	%


(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.

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2018 First Quarter versus 2017 First Quarter

FTE net interest income for the 2018 first quarter increased $34 million, or 5%, from the 2017 first quarter. This reflected the benefit from the $4.3 billion, or 5%, increase in average earning assets, while the FTE NIM remained unchanged at 3.30%. Average earning asset growth included a $3.5 billion, or 5%, increase in average loans and leases and a $0.7 billion, or 3%, increase in average securities. The NIM stability reflected a 21 basis point increase in earning asset yields and a 7 basis point increase in the benefit from noninterest-bearing funds, offset by a 28 basis point increase in funding costs. Embedded within these yields and costs, FTE net interest income during the 2018 first quarter included $19 million, or approximately 8 basis points, of purchase accounting impact compared to $37 million, or approximately 16 basis points, in the year-ago quarter.

Average earning assets for the 2018 first quarter increased $4.3 billion, or 5%, from the year-ago quarter, primarily reflecting a $3.5 billion, or 5%, increase in average loans and leases. Average residential mortgage loans increased $1.4 billion, or 18%, as we continue to see the benefits associated with the ongoing expansion of our home lending business. Average automobile loans increased $1.0 billion, or 9%, driven by $6.2 billion of new production over the past year. Average RV and marine finance loans increased $0.6 billion, or 32%, reflecting the expansion of the acquired business into 17 new states. Average securities increased $0.7 billion, or 3%, which included a $0.3 billion increase in direct purchase municipal instruments in our commercial banking segment.

Average total interest-bearing liabilities increased $4.0 billion, or 6%, from the year-ago quarter. Average total deposits for the 2018 first quarter increased $1.0 billion, or 1%, from the year-ago quarter, while average total core deposits increased $1.9 billion, or 3%. Average money market deposits increased $2.0 billion, or 11%, reflecting continued new customer acquisition and shifting customer preferences for higher yielding deposit products. Average demand deposits increased $0.7 billion, or 2%, comprised of a $0.4 billion, or 2%, increase in average commercial demand deposits and a $0.2 billion, or 2%, increase in average consumer demand deposits. Partially offsetting these increases, average savings deposits decreased $0.6 billion, or 5%, reflecting customer migration into higher yielding deposit products, such as money market and CDs.

2018 First Quarter versus 2017 Fourth Quarter

Compared to the 2017 fourth quarter, FTE net interest income decreased $5 million, or 1%, primarily reflecting the impact of federal tax reform on the FTE adjustment. Average earning assets increased $1.5 billion, or 2%, sequentially, while the NIM remained unchanged. The stable NIM reflected an 8 basis point increase in earning asset yields and a 1 basis point increase in the benefit from noninterest-bearing funds, offset by a 9 basis point increase in the cost of interest-bearing liabilities. The purchase accounting impact on the net interest margin was approximately 8 basis points in the 2018 first quarter compared to approximately 10 basis points in the prior quarter.

Compared to the 2017 fourth quarter, average earning assets increased $1.5 billion, or 2%, reflecting the $1.5 billion, or 2%, increase in average loans and leases. Average C&I loans increased $0.8 billion, or 3%, reflecting growth in specialty, corporate, and middle market banking. The remainder of the increase primarily reflected modest increases across most consumer categories.

Compared to the 2017 fourth quarter, average total core deposits decreased $0.6 billion, or 1%, primarily reflecting a $0.7 billion, or 2%, decrease in average demand deposits. Average commercial demand deposits decreased $0.9 billion, or 3%, while average consumer demand deposits increased $0.2 billion, or 2%.

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 inherent in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision for credit losses for the 2018 first quarter was $66 million, which decreased $2 million, or 3%, compared to the first quarter 2017. NCOs decreased $1 million to $38 million compared with the same period in the prior year reflecting a decrease in commercial net charge-offs, partially offset by an increase in consumer net charge-offs. Net charge-offs represented an annualized 0.21% of average loans and leases, which remains below our long-term expectation of 35 to 55 basis points.

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Noninterest Income

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



Table 4 - Noninterest Income
	Three Months Ended							1Q18 vs. 1Q17					1Q18 vs. 4Q17
	March 31,		December 31,			March 31,		Change					Change
(dollar amounts in millions)	2018		2017			2017		Amount			Percent		Amount			Percent
Service charges on deposit accounts	$	86	$	91		$	83	$	3		4	%	$	(5	)	(5	)%
Cards and payment processing income	53		53			47		6			13		—			—
Trust and investment management services	44		41			39		5			13		3			7
Mortgage banking income	26		33			32		(6		)	(19	)	(7		)	(21	)
Insurance income	21		21			20		1			5		—			—
Capital markets fees	19		23			14		5			36		(4		)	(17	)
Bank owned life insurance income	15		18			18		(3		)	(17	)	(3		)	(17	)
Gain on sale of loans	8		17			13		(5		)	(38	)	(9		)	(53	)
Securities gains (losses)	—		(4		)	—		—			—		4			(100	)
Other Income	42		47			46		(4		)	(9	)	(5		)	(11	)
Total noninterest income	$	314	$	340		$	312	$	2		1	%	$	(26	)	(8	)%

2018 First Quarter versus 2017 First Quarter

Noninterest income for the 2018 first quarter increased $2 million, or 1%, from the year-ago quarter. Card and payment processing income increased $6 million, or 13%, due to higher credit and debit card related income and underlying customer growth. Trust and investment management services increased $5 million, or 13%, reflecting the increase in trust assets and assets under management. Capital markets fees increased $5 million, or 36%, reflecting increased foreign exchange and interest rate derivative activity. These increases were partially offset by a $6 million, or 19%, decrease in mortgage banking income, driven by lower spreads on origination volume, and a $5 million, or 38%, decrease in gain on sale of loans, primarily reflecting the sale of an equipment finance loan in the year ago quarter.

2018 First Quarter versus 2017 Fourth Quarter

Compared to the 2017 fourth quarter, total noninterest income decreased $26 million, or 8%. Gain on sale of loans decreased $9 million, or 53%, reflecting seasonality in SBA lending. Mortgage banking income decreased $7 million, or 21%, reflecting reduced spreads and seasonally lower origination volume. Service charges on deposit accounts decreased $5 million, or 5%, primarily reflecting seasonality. Other income decreased $5 million, or 11%, primarily reflecting lower syndication fees and asset finance lease sales.

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Noninterest Expense

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

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



Table 5 - Noninterest Expense
	Three Months Ended						1Q18 vs. 1Q17					1Q18 vs. 4Q17
	March 31,		December 31,		March 31,		Change					Change
(dollar amounts in millions)	2018		2017		2017		Amount			Percent		Amount			Percent
Personnel costs	$	376	$	373	$	382	$	(6	)	(2	)%	$	3		1	%
Outside data processing and other services	73		71		87		(14		)	(16	)	2			3
Net occupancy	41		36		68		(27		)	(40	)	5			14
Equipment	40		36		47		(7		)	(15	)	4			11
Deposit and other insurance expense	18		19		20		(2		)	(10	)	(1		)	(5	)
Professional services	11		18		18		(7		)	(39	)	(7		)	(39	)
Marketing	8		10		14		(6		)	(43	)	(2		)	(20	)
Amortization of intangibles	14		14		14		—			—		—			—
Other noninterest expense	52		56		57		(5		)	(9	)	(4		)	(7	)
Total noninterest expense	$	633	$	633	$	707	$	(74	)	(10	)%	$	—		—	%
Number of employees (average full-time equivalent)	15,599		15,375		16,331		(732		)	(4	)%	224			1	%

Impacts of Significant Items:



	Three Months Ended
	March 31,		December 31,		March 31,
(dollar amounts in millions)	2018		2017		2017
Personnel costs	$	—	$	—	$	20
Outside data processing and other services	—		—		14
Net occupancy	—		—		23
Equipment	—		—		6
Professional services	—		—		4
Marketing	—		—		1
Other noninterest expense	—		—		5
Total noninterest expense adjustments	$	—	$	—	$	73

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



	Three Months Ended						1Q18 vs. 1Q17					1Q18 vs. 4Q17
	March 31,		December 31,		March 31,		Change					Change
(dollar amounts in millions)	2018		2017		2017		Amount			Percent		Amount			Percent
Personnel costs	$	376	$	373	$	362	$	14		4	%	$	3		1	%
Outside data processing and other services	73		71		73		—			—		2			3
Net occupancy	41		36		45		(4		)	(9	)	5			14
Equipment	40		36		41		(1		)	(2	)	4			11
Deposit and other insurance expense	18		19		20		(2		)	(10	)	(1		)	(5	)
Professional services	11		18		14		(3		)	(21	)	(7		)	(39	)
Marketing	8		10		13		(5		)	(38	)	(2		)	(20	)
Amortization of intangibles	14		14		14		—			—		—			—
Other noninterest expense	52		56		52		—			—		(4		)	(7	)
Total adjusted noninterest expense (Non-GAAP)	$	633	$	633	$	634	$	(1	)	—	%	$	—		—	%

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2018 First Quarter versus 2017 First Quarter

Reported noninterest expense for the 2018 first quarter decreased $74 million, or 10%, from the year-ago quarter, primarily due to $73 million of acquisition-related Significant Items in the year-ago quarter compared with no Significant Items in the current quarter.

2018 First Quarter versus 2017 Fourth Quarter

Reported noninterest expense remained unchanged from the 2017 fourth quarter. Professional services decreased $7 million, or 39%, reflecting lower consulting expense. Net occupancy expense increased $5 million, or 14%, due to seasonality.

Provision for Income Taxes

The provision for income taxes in the 2018 first quarter was $59 million. This compared with a provision for income taxes of $59 million in the 2017 first quarter and a benefit of $20 million in the 2017 fourth quarter. All periods included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, excess tax deductions for stock-based compensation, and capital losses. The 2018 first quarter also included expense for nondeductible FDIC insurance premiums. The 2017 fourth quarter included a $123 million tax benefit related to the federal tax reform enacted on December 22, 2017, which is primarily attributed to the revaluation of net deferred tax liabilities at the lower statutory federal income tax rate. The effective tax rates for the 2018 first quarter, 2017 first quarter, and 2017 fourth quarter were 15.3%, 22.2%, and (4.8)%, respectively. The variance between the 2018 first quarter compared to the 2017 first quarter and 2017 fourth quarter in the provision for income taxes and effective tax rates relates primarily to the impact of the TCJA. The net federal deferred tax liability was $111 million and the net state deferred tax asset was $27 million at March 31, 2018.

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. The IRS is currently examining our 2010 and 2011 consolidated federal income tax returns. While the statute of limitations remains open for tax years 2012 through 2016, the IRS has advised that tax years 2012 through 2014 will not be audited, and has requested to begin the examination of the 2015 federal income tax return during 2018. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.

RISK MANAGEMENT AND CAPITAL

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

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2017 Form 10-K and subsequent filings with the SEC. 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 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 2017 Form 10-K.

Credit Risk

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

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

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Loan and Lease Credit Exposure Mix

Refer to the “Loan and Lease Credit Exposure Mix” section of our 2017 Form 10-K for a brief description of each portfolio segment.

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



Table 6 - Loan and Lease Portfolio Composition

(dollar amounts in millions)	March 31, 2018				December 31, 2017				September 30, 2017				June 30, 2017				March 31, 2017
Commercial:
Commercial and industrial	$	28,622	40	%	$	28,107	40	%	$	27,469	40	%	$	27,969	41	%	$	28,176	42	%
Commercial real estate: