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 September 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 every Interactive Data File required to be submitted 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 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.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨
		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 1,061,529,259 shares of the Registrant’s common stock ($0.01 par value) outstanding on September 30, 2018.

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HUNTINGTON BANCSHARES INCORPORATED

INDEX



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	38
Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017	38
Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2018 and 2017	39
Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2018 and 2017	41
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2018 and 2017	42
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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	94
Item 1A. Risk Factors	94
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	94
Item 6. Exhibits	94
Signatures	97

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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
ALCO		Asset-Liability Management Committee
ALLL		Allowance for Loan and Lease Losses
AOCI		Accumulated Other Comprehensive Income
ASC		Accounting Standards Codification
ASR		Accelerated Share Repurchase
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
FASB		Financial Accounting Standards Board
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

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OLEM		Other Loans Especially Mentioned
OREO		Other Real Estate Owned
OTTI		Other-Than-Temporary Impairment
Plan		Huntington Bancshares Retirement Plan
RBHPCG		Regional Banking and The Huntington Private Client Group
ROC		Risk Oversight Committee
SAB		Staff Accounting Bulletin
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 financing, investment management, trust services, brokerage services, insurance products and services, and other financial products and services. Our 970 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 Third Quarter Results Compared to 2017 Third Quarter

For the quarter, we reported net income of $378 million, or $0.33 per common share, compared with $275 million, or $0.23 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent (FTE) net interest income was $810 million, up $39 million, or 5%. The results reflected the benefit from a $3.9 billion, or 4%, increase in average earning assets and a three basis point increase in the FTE net interest margin (NIM) to 3.32%. Average earning asset growth included a $4.5 billion, or 7%, increase in average loans and leases. Average earning asset yields increased 38 basis points year-over-year, driven by a 40 basis point improvement in loan yields. Average funding costs increased 45 basis points, although interest-bearing deposit costs only increased 38 basis points. The cost of short-term borrowings and long-term debt increased 103 basis points and 113 basis points, respectively. Embedded within these yields and costs, FTE net interest income during the 2018 third quarter included $17 million, or approximately seven basis points, of purchase accounting impact compared to $27 million, or approximately 12 basis points, in the year-ago quarter.

The provision for credit losses increased $10 million year-over-year to $53 million in the 2018 third quarter. NCOs decreased $14 million to $29 million. The decrease was a direct result of lower charge-off activity in the commercial portfolio resulting in a net recovery position in the 2018 third quarter. Consumer charge-offs have remained consistent over the past year. NCOs represented an annualized 0.16% of average loans and leases, down from 0.25% in the year ago quarter.

Non-interest income was $342 million, up $12 million, or 4%, from the year ago quarter. The growth represents ongoing household / relationship acquisition and execution of our strategies including our Optimal Customer Relationship (OCR) strategy.

Non-interest expense was $651 million, down $29 million, or 4%, from the year-ago quarter, primarily reflecting $31 million of acquisition-related Significant Items in the year-ago quarter compared with no Significant Items in the current quarter. Outside data processing and other services decreased $11 million, or 14%, reflecting the $4 million decrease in acquisition-related Significant Items and the benefit of a debit card-related vendor migration completed in the year-ago quarter. Marketing expense decreased $5 million, or 29%, reflecting the timing of marketing campaigns and deposit promotions. Personnel costs increased $11 million, or 3%, primarily reflecting performance-based incentive compensation and increased benefits costs, partially offset by a $4 million decrease in acquisition-related Significant Items.

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The tangible common equity to tangible assets ratio was 7.25%, down 17 basis points from a year-ago. The CET1 risk-based capital ratio was 9.89% at September 30, 2018, compared to 9.94% a year-ago. The regulatory Tier 1 risk-based capital ratio was 11.33% compared to 11.30% at September 30, 2017.

Consistent with the 2018 CCAR capital plan, the Company repurchased $691 million of common stock during the 2018 third quarter at an average cost of $15.82 per share. Included in the quarter's share repurchase activity, the Company completed the previously announced $400 million ASR. As contemplated in our 2018 CCAR capital plan, the ASR effectively offset the impact of the $363 million Series A preferred equity conversion in the 2018 first quarter.

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.

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)

	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
(dollar amounts in millions, share amounts in thousands)	2018			2018			2018			2017			2017
Interest income	$	1,007		$	972		$	914		$	894		$	873
Interest expense	205			188			144			124			115
Net interest income	802			784			770			770			758
Provision for credit losses	53			56			66			65			43
Net interest income after provision for credit losses	749			728			704			705			715
Service charges on deposit accounts	93			91			86			91			91
Cards and payment processing income	57			56			53			53			54
Trust and investment management services	43			42			44			41			39
Mortgage banking income	31			28			26			33			34
Insurance income	19			21			21			21			18
Capital markets fees	22			21			19			23			22
Bank owned life insurance income	19			17			15			18			16
Gain on sale of loans and leases	16			15			8			17			14
Securities gains (losses)	(2		)	—			—			(4		)	—
Other income	44			45			42			47			42
Total noninterest income	342			336			314			340			330
Personnel costs	388			396			376			373			377
Outside data processing and other services	69			69			73			71			80
Net occupancy	38			35			41			36			55
Equipment	38			38			40			36			45
Deposit and other insurance expense	18			18			18			19			19
Professional services	17			15			11			18			15
Marketing	12			18			8			10			17
Amortization of intangibles	13			13			14			14			14
Other expense	58			50			52			56			58
Total noninterest expense	651			652			633			633			680
Income before income taxes	440			412			385			412			365
Provision (benefit) for income taxes	62			57			59			(20		)	90
Net income	378			355			326			432			275
Dividends on preferred shares	18			21			12			19			19
Net income applicable to common shares	$	360		$	334		$	314		$	413		$	256

Average common shares—basic	1,084,536			1,103,337			1,083,836			1,077,397			1,086,038
Average common shares—diluted	1,103,740			1,122,612			1,124,778			1,130,117			1,106,491
Net income per common share—basic	$	0.33		$	0.30		$	0.29		$	0.38		$	0.24
Net income per common share—diluted	0.33			0.30			0.28			0.37			0.23
Cash dividends declared per common share	0.14			0.11			0.11			0.11			0.08
Return on average total assets	1.42		%	1.36		%	1.27		%	1.67		%	1.08		%
Return on average common shareholders’ equity	14.3			13.2			13.0			17.0			10.5
Return on average tangible common shareholders’ equity (2)	19.0			17.6			17.5			22.7			14.1
Net interest margin (3)	3.32			3.29			3.30			3.30			3.29
Efficiency ratio (4)	55.3			56.6			56.8			54.9			60.5
Effective tax rate	14.1			13.8			15.3			(4.8		)	24.7

Revenue—FTE
Net interest income	$	802		$	784		$	770		$	770		$	758
FTE adjustment	8			7			7			12			13
Net interest income (3)	810			791			777			782			771
Noninterest income	342			336			314			340			330
Total revenue (3)	$	1,152		$	1,127		$	1,091		$	1,122		$	1,101

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

	Nine Months Ended September 30,					Change
(dollar amounts in millions, share amounts in thousands)	2018			2017		Amount			Percent
Interest income	$	2,893		$	2,539	$	354		14	%
Interest expense	537			306		231			75
Net interest income	2,356			2,233		123			6
Provision for credit losses	175			136		39			29
Net interest income after provision for credit losses	2,181			2,097		84			4
Service charges on deposit accounts	270			262		8			3
Cards and payment processing income	166			153		13			8
Trust and investment management services	129			115		14			12
Mortgage banking income	85			98		(13		)	(13	)
Insurance income	61			60		1			2
Capital markets fees	62			53		9			17
Bank owned life insurance income	51			49		2			4
Gain on sale of loans	39			39		—			—
Securities gains (losses)	(2		)	—		(2		)	(100	)
Other noninterest income	131			138		(7		)	(5	)
Total noninterest income	992			967		25			3
Personnel costs	1,160			1,151		9			1
Outside data processing and other services	211			242		(31		)	(13	)
Net occupancy	114			176		(62		)	(35	)
Equipment	116			135		(19		)	(14	)
Deposit and other insurance expense	54			59		(5		)	(8	)
Professional services	43			51		(8		)	(16	)
Marketing	38			50		(12		)	(24	)
Amortization of intangibles	40			42		(2		)	(5	)
Other noninterest expense	160			176		(16		)	(9	)
Total noninterest expense	1,936			2,082		(146		)	(7	)
Income before income taxes	1,237			982		255			26
Provision for income taxes	178			228		(50		)	(22	)
Net income	1,059			754		305			40
Dividends declared on preferred shares	51			57		(6		)	(11	)
Net income applicable to common shares	$	1,008		$	697	$	311		45	%

Average common shares—basic	1,090,570			1,087,115		3,455			—	%
Average common shares—diluted	1,116,978			1,107,878		9,100			1
Net income per common share—basic	$	0.92		$	0.64	$	0.28		44
Net income per common share—diluted	0.90			0.63		0.27			43
Cash dividends declared per common share	0.36			0.24		0.12			50

Revenue—FTE
Net interest income	$	2,356		$	2,233	$	123		6	%
FTE adjustment	22			38		(16		)	(42	)
Net interest income (3)	2,378			2,271		107			5
Noninterest income	992			967		25			3
Total revenue (3)	$	3,370		$	3,238	$	132		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 third 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 third quarter, $31 million of noninterest expense was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.02 per common share.


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


•	During the 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 3 - Significant Items Influencing Earnings Performance Comparison
	Three Months Ended
	September 30, 2018				June 30, 2018				September 30, 2017
(dollar amounts in millions, except per share amounts)	Amount		EPS (1)		Amount		EPS (1)		Amount			EPS (1)
Net income	$	378			$	355			$	275
Earnings per share, after-tax			$	0.33			$	0.30				$	0.23

Significant Items—favorable (unfavorable) impact:	Earnings		EPS (1)		Earnings		EPS (1)		Earnings			EPS (1)
Mergers and acquisitions, net expenses	$	—			$	—			$	(31	)
Tax impact	—				—				11
Mergers and acquisitions, after-tax	$	—	$	—	$	—	$	—	$	(20	)	$	(0.02	)


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



	Nine Months Ended
	September 30, 2018				September 30, 2017
(dollar amounts in millions, except per share amounts)	Amount		EPS (1)		Amount			EPS (1)
Net income	$	1,059			$	754
Earnings per share, after-tax			$	0.90				$	0.63

Significant Items—favorable (unfavorable) impact:	Earnings		EPS (1)		Earnings			EPS (1)
Mergers and acquisitions, net expenses	$	—			$	(152	)
Tax impact	—				53
Mergers and acquisitions, after-tax	$	—	$	—	$	(99	)	$	(0.09	)


(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
	September 30,			June 30,			March 31,			December 31,			September 30,			3Q18 vs. 3Q17
(dollar amounts in millions)	2018			2018			2018			2017			2017			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	83		$	84		$	90		$	90		$	102		$	(19	)	(19	)%
Securities:
Trading account securities	82			82			87			87			92			(10		)	(11	)
Available-for-sale securities:
Taxable	10,469			10,832			11,158			11,154			11,680			(1,211		)	(10	)
Tax-exempt	3,496			3,554			3,633			3,404			3,160			336			11
Total available-for-sale securities	13,965			14,386			14,791			14,558			14,840			(875		)	(6	)
Held-to-maturity securities—taxable	8,560			8,706			8,877			9,066			8,264			296			4
Other securities	567			599			605			598			597			(30		)	(5	)
Total securities	23,174			23,773			24,360			24,309			23,793			(619		)	(3	)
Loans held for sale	745			619			478			598			678			67			10
Loans and leases: (3)
Commercial:
Commercial and industrial	28,870			28,863			28,243			27,445			27,643			1,227			4
Commercial real estate:
Construction	1,132			1,126			1,189			1,199			1,152			(20		)	(2	)
Commercial	6,019			6,233			6,142			5,997			6,064			(45		)	(1	)
Commercial real estate	7,151			7,359			7,331			7,196			7,216			(65		)	(1	)
Total commercial	36,021			36,222			35,574			34,641			34,859			1,162			3
Consumer:
Automobile	12,368			12,271			12,100			11,963			11,713			655			6
Home equity	9,873			9,941			10,040			10,027			9,960			(87		)	(1	)
Residential mortgage	10,236			9,624			9,174			8,809			8,402			1,834			22
RV and marine finance	3,016			2,667			2,481			2,405			2,296			720			31
Other consumer	1,237			1,162			1,115			1,095			1,046			191			18
Total consumer	36,730			35,665			34,910			34,299			33,417			3,313			10
Total loans and leases	72,751			71,887			70,484			68,940			68,276			4,475			7
Allowance for loan and lease losses	(759		)	(742		)	(709		)	(688		)	(672		)	(87		)	(13	)
Net loans and leases	71,992			71,145			69,775			68,252			67,604			4,388			6
Total earning assets	96,753			96,363			95,412			93,937			92,849			3,904			4
Cash and due from banks	1,330			1,283			1,217			1,226			1,299			31			2
Intangible assets	2,305			2,318			2,332			2,346			2,359			(54		)	(2	)
All other assets	5,726			5,599			5,596			5,481			5,455			271			5
Total assets	$	105,355		$	104,821		$	103,848		$	102,302		$	101,290		$	4,065		4	%
Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	20,230			20,382			20,572			21,745			21,723			$	(1,493	)	(7	)%
Demand deposits—interest-bearing	19,553			19,121			18,630			18,175			17,878			1,675			9
Total demand deposits	39,783			39,503			39,202			39,920			39,601			182			—
Money market deposits	21,547			20,943			20,678			20,731			20,314			1,233			6
Savings and other domestic deposits	11,434			11,146			11,219			11,348			11,590			(156		)	(1	)
Core certificates of deposit	4,916			3,794			2,293			1,947			2,044			2,872			141
Total core deposits	77,680			75,386			73,392			73,946			73,549			4,131			6
Other domestic time deposits of $250,000 or more	285			243			247			400			432			(147		)	(34	)
Brokered deposits and negotiable CDs	3,533			3,661			3,307			3,391			3,563			(30		)	(1	)
Total deposits	81,498			79,290			76,946			77,737			77,544			3,954			5
Short-term borrowings	1,732			3,082			5,228			2,837			2,391			(659		)	(28	)
Long-term debt	8,915			9,225			8,958			9,232			8,949			(34		)	—
Total interest-bearing liabilities	71,915			71,215			70,560			68,061			67,161			4,754			7
All other liabilities	2,054			1,891			1,861			1,819			1,661			393			24
Shareholders’ equity	11,156			11,333			10,855			10,677			10,745			411			4
Total liabilities and shareholders’ equity	$	105,355		$	104,821		$	103,848		$	102,302		$	101,290		$	4,065		4	%

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

	Average Yield Rates (2)
	Three Months Ended
	September 30,		June 30,		March 31,		December 31,		September 30,
Fully-taxable equivalent basis (1)	2018		2018		2018		2017		2017
Assets:
Interest-bearing deposits in banks	1.95	%	1.95	%	1.97	%	1.92	%	1.77	%
Securities:
Trading account securities	0.26		0.23		0.15		0.21		0.16
Available-for-sale securities:
Taxable	2.61		2.63		2.51		2.45		2.38
Tax-exempt	3.53		3.35		3.18		3.76		3.62
Total available-for-sale securities	2.84		2.81		2.67		2.75		2.64
Held-to-maturity securities—taxable	2.43		2.42		2.45		2.41		2.36
Other securities	4.58		4.58		3.98		3.86		3.35
Total securities	2.73		2.71		2.62		2.64		2.55
Loans held for sale	4.45		4.17		3.82		3.68		3.83
Loans and leases: (3)
Commercial:
Commercial and industrial	4.64		4.52		4.28		4.17		4.05
Commercial real estate:
Construction	5.31		5.26		4.73		4.47		4.55
Commercial	4.63		4.58		4.24		4.03		4.08
Commercial real estate	4.74		4.68		4.32		4.10		4.16
Total commercial	4.66		4.55		4.29		4.15		4.07
Consumer:
Automobile	3.75		3.63		3.56		3.61		3.60
Home equity	5.21		5.09		4.90		4.71		4.72
Residential mortgage	3.78		3.69		3.66		3.66		3.65
RV and marine finance	5.06		5.11		5.11		5.25		5.43
Other consumer	12.16		11.90		11.78		11.53		11.59
Total consumer	4.54		4.43		4.34		4.31		4.32
Total loans and leases	4.60		4.49		4.32		4.23		4.20
Total earning assets	4.16		4.07		3.91		3.83		3.78
Liabilities:
Deposits:
Demand deposits—noninterest-bearing	—		—		—		—		—
Demand deposits—interest-bearing	0.45		0.38		0.29		0.26		0.23
Total demand deposits	0.22		0.18		0.14		0.12		0.10
Money market deposits	0.77		0.60		0.45		0.40		0.36
Savings and other domestic deposits	0.24		0.21		0.20		0.20		0.20
Core certificates of deposit	1.82		1.56		1.01		0.75		0.73
Total core deposits	0.65		0.51		0.36		0.32		0.30
Other domestic time deposits of $250,000 or more	1.40		1.01		0.69		0.54		0.61
Brokered deposits and negotiable CDs	1.98		1.81		1.47		1.21		1.16
Total deposits	0.73		0.59		0.43		0.37		0.35
Short-term borrowings	1.98		1.82		1.47		1.15		0.95
Long-term debt	3.78		3.75		2.92		2.73		2.65
Total interest-bearing liabilities	1.13		1.05		0.82		0.73		0.68
Net interest rate spread	3.03		3.02		3.09		3.10		3.10
Impact of noninterest-bearing funds on margin	0.29		0.27		0.21		0.20		0.19
Net interest margin	3.32	%	3.29	%	3.30	%	3.30	%	3.29	%


(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 Third Quarter versus 2017 Third Quarter

FTE net interest income for the 2018 third quarter increased $39 million, or 5%, from the 2017 third quarter. This reflected the benefit from the $3.9 billion, or 4%, increase in average earning assets and a three basis point increase in the FTE NIM to 3.32%. Average earning asset yields increased 38 basis points year-over-year, driven by a 40 basis point improvement in loan yields. Average funding costs increased 45 basis points, although interest-bearing deposit costs only increased 38 basis points. The cost of short-term borrowings and long-term debt increased 103 basis points and 113 basis points, respectively. The benefit from noninterest-bearing funds increased 10 basis points versus the year-ago quarter. Embedded within these yields and costs, FTE net interest income during the 2018 third quarter included $17 million, or approximately seven basis points, of purchase accounting impact compared to $27 million, or approximately 12 basis points, in the year-ago quarter.

Average earning assets for the 2018 third quarter increased $3.9 billion, or 4%, from the year-ago quarter, primarily reflecting a $4.5 billion, or 7%, increase in average loans and leases. Average residential mortgage loans increased $1.8 billion, or 22%, driven by an increase in lending officers and expansion into the Chicago market. Average C&I loans increased $1.2 billion, or 4%, reflecting growth in middle market, asset finance, energy, and corporate banking. Average RV and marine finance loans increased $0.7 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 automobile loans increased $0.7 billion, or 6%, driven by continued strong originations while consistently increasing pricing over the past year. Average securities decreased $0.6 billion, or 3%, primarily due to runoff in the portfolio partially offset by continued growth in direct purchase municipal instruments in our commercial banking segment.

Average total interest-bearing liabilities increased $4.8 billion, or 7%, from the year-ago quarter. Average total deposits for the 2018 third quarter increased $4.0 billion, or 5%, from the year-ago quarter, while average total core deposits increased $4.1 billion, or 6%. Average core certificates of deposit (CDs) increased $2.9 billion, or 141%, reflecting initiatives during the past three quarters to grow fixed-rate, term consumer deposits in light of the rising interest rate environment. Average money market deposits increased $1.2 billion, or 6%, primarily reflecting growth in consumer balances and continued shifting commercial customer preferences for higher yielding deposit products. Average demand deposits increased $0.2 billion, or less than 1%, primarily driven by a $0.2 billion, or 5% increase in average consumer noninterest-bearing demand deposits. Average short-term borrowings decreased $0.7 billion, or 28%, as continued growth in core deposits reduced reliance on wholesale funding.

2018 Third Quarter versus 2018 Second Quarter

Compared to the 2018 second quarter, FTE net interest income increased $19 million, or 2%, primarily reflecting a three basis point increase in FTE NIM. Average earning asset yields increased nine basis points sequentially, driven by an 11 basis point increase in loan yields. Average funding costs increased eight basis points. Average interest-bearing deposit costs increased 14 basis points linked quarter, while the benefit of noninterest-bearing funding improved two basis points. The purchase accounting impact on the net interest margin was approximately seven basis points in the 2018 third quarter, down one basis point from the prior quarter.

Compared to the 2018 second quarter, average earning assets increased $0.4 billion, or less than 1%, primarily reflecting the $0.9 billion, or 1%, increase in average loans and leases. Average residential mortgage loans increased $0.6 billion, or 6%, driven by seasonality and the expansion of our home lending business. Average securities decreased $0.6 billion, or 3%, due to runoff in the portfolio.

Compared to the 2018 second quarter, average total core deposits increased $2.3 billion, or 3%. Average core CDs increased $1.1 billion, or 30%, as a result of continued initiatives to grow fixed-rate, term consumer deposits in light of the rising interest rate environment. Average money market deposits increased $0.6 billion, or 3%, primarily driven by a $0.5 billion, or 4%, increase in average consumer money market deposits. Average short-term borrowings decreased $1.4 billion, or 44%, as continued growth in core deposits reduced reliance on wholesale funding.

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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)	2018			2017			Amount			Percent		2018		2017
Assets:
Interest-bearing deposits in banks	$	86		$	102		$	(16	)	(16	)%	1.95	%	1.46	%
Securities:
Trading account securities	84			107			(23		)	(21	)	0.21		0.17
Available-for-sale securities:
Taxable	10,817			12,157			(1,340		)	(11	)	2.58		2.36
Tax-exempt	3,561			3,105			456			15		3.35		3.70
Total available-for-sale securities	14,378			15,262			(884		)	(6	)	2.77		2.63
Held-to-maturity securities—taxable	8,713			7,785			928			12		2.43		2.37
Other securities	590			578			12			2		4.38		3.28
Total securities	23,765			23,732			33			—		2.69		2.55
Loans held for sale	615			540			75			14		4.19		3.79
Loans and leases: (3)
Commercial:
Commercial and industrial	28,661			27,852			809			3		4.48		4.03
Commercial real estate:
Construction	1,149			1,198			(49		)	(4	)	5.09		4.24
Commercial	6,131			6,014			117			2		4.49		3.92
Commercial real estate	7,280			7,212			68			1		4.58		3.97
Total commercial	35,941			35,064			877			3		4.50		4.01
Consumer:
Automobile	12,247			11,369			878			8		3.65		3.57
Home equity	9,948			9,983			(35		)	—		5.07		4.60
Residential mortgage	9,682			8,055			1,627			20		3.71		3.65
RV and marine finance	2,723			2,071			652			31		5.09		5.54
Other consumer	1,175			997			178			18		11.91		11.53
Total consumer	35,775			32,475			3,300			10		4.44		4.27
Total loans and leases	71,716			67,539			4,177			6		4.47		4.14
Allowance for loan and lease losses	(737		)	(660		)	(77		)	(12	)
Net loans and leases	70,979			66,879			4,100			6
Total earning assets	96,182			91,913			4,269			5		4.05	%	3.75	%
Cash and due from banks	1,277			1,530			(253		)	(17	)
Intangible assets	2,318			2,373			(55		)	(2	)
All other assets	5,640			5,433			207			4
Total assets	$	104,680		$	100,589		$	4,091