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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.



Table of Contents

HUNTINGTON BANCSHARES INCORPORATED
INDEX
 
 
 

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Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
 
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.


10

Table of Contents

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.

11

Table of Contents

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.

12

Table of Contents

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
)
 
 %
 
$

 
 %

13

Table of Contents

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.

14

Table of Contents

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: