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
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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):
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Large accelerated filer | x | | Accelerated filer | ¨ |
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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.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
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| | |
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 |
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.
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 |
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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 |
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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 |
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(1) | Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors. |
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(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. |
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(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. |
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(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. |
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:
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• | 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:
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• | 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:
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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 | ) |
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(1) | Based upon the quarterly average outstanding diluted common shares. |
Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin: |
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Table 3 - Consolidated Average Balance Sheet and Net Interest Margin Analysis |
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| 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 | % |
|
| | | | | | | | | | | | | | |
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. |
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.
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.
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 | ) | | — | % | | $ | — |
| | — | % |
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.
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: | | | | | | | |