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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED June 30, 2018

Commission File Number 1-34073

Huntington Bancshares Incorporated

 

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

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

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

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

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

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

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

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

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

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

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HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

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

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Glossary of Acronyms and Terms

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

 

ACL		Allowance for Credit Losses
AFS		Available-for-Sale
ALLL		Allowance for Loan and Lease Losses
AOCI		Accumulated Other Comprehensive Income
ASC		Accounting Standards Codification
AULC		Allowance for Unfunded Loan Commitments
Basel III		Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
C&I		Commercial and Industrial
CCAR		Comprehensive Capital Analysis and Review
CDs		Certificates of Deposit
CET1		Common equity tier 1 on a transitional Basel III basis
CFPB		Bureau of Consumer Financial Protection
CMO		Collateralized Mortgage Obligations
CRE		Commercial Real Estate
EPS		Earnings Per Share
EVE		Economic Value of Equity
FDIC		Federal Deposit Insurance Corporation
FHLB		Federal Home Loan Bank
FICO		Fair Isaac Corporation
FirstMerit		FirstMerit Corporation
FRB		Federal Reserve Bank
FTE		Fully-Taxable Equivalent
FTP		Funds Transfer Pricing
FVO		Fair Value Option
GAAP		Generally Accepted Accounting Principles in the United States of America
HTM		Held-to-Maturity
IRS		Internal Revenue Service
LCR		Liquidity Coverage Ratio
LIBOR		London Interbank Offered Rate
MBS		Mortgage-Backed Securities
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSR		Mortgage Servicing Right
NAICS		North American Industry Classification System
NALs		Nonaccrual Loans
NCO		Net Charge-off
NII		Noninterest Income
NIM		Net Interest Margin
NPAs		Nonperforming Assets
NSF		Non-sufficient funds
OCC		Office of the Comptroller of the Currency
OCI		Other Comprehensive Income (Loss)
OCR		Optimal Customer Relationship
OLEM		Other Loans Especially Mentioned
OREO		Other Real Estate Owned
OTTI		Other-Than-Temporary Impairment

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Plan		Huntington Bancshares Retirement Plan
RBHPCG		Regional Banking and The Huntington Private Client Group
ROC		Risk Oversight Committee
SAD		Special Assets Division
SBA		Small Business Administration
SEC		Securities and Exchange Commission
TCJA		H.R. 1, Originally known as the Tax Cuts and Jobs Act
TDR		Troubled Debt Restructuring
U.S. Treasury		U.S. Department of the Treasury
UCS		Uniform Classification System
VIE		Variable Interest Entity
XBRL		eXtensible Business Reporting Language

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PART I. FINANCIAL INFORMATION

When we refer to “we”, “our”, and “us”, "Huntington," and "the Company" in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

 

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

INTRODUCTION

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

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

EXECUTIVE OVERVIEW

Summary of 2018 Second Quarter Results Compared to 2017 Second Quarter

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

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

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

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

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

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

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

Business Overview

General

Our general business objectives are:

1.Grow organic revenue across all business segments.

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

3.Deliver positive operating leverage.

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

Economy

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

DISCUSSION OF RESULTS OF OPERATIONS

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion”.

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Table 1 - Selected Quarterly Income Statement Data (1)
(dollar amounts in millions, except per share amounts)
	Three Months Ended
	June 30,				March 31,				December 31,				September 30,				June 30,
	2018				2018				2017				2017				2017
Interest income	$	972			$	914			$	894			$	873			$	846
Interest expense	188				144				124				115				101
Net interest income	784				770				770				758				745
Provision for credit losses	56				66				65				43				25
Net interest income after provision for credit losses	728				704				705				715				720
Service charges on deposit accounts	91				86				91				91				88
Cards and payment processing income	56				53				53				54				52
Trust and investment management services	42				44				41				39				37
Mortgage banking income	28				26				33				34				32
Insurance income	21				21				21				18				22
Capital markets fees	21				19				23				22				17
Bank owned life insurance income	17				15				18				16				15
Gain on sale of loans	15				8				17				14				12
Securities gains (losses)	—				—				(4		)		—				—
Other income	45				42				47				42				50
Total noninterest income	336				314				340				330				325
Personnel costs	396				376				373				377				392
Outside data processing and other services	69				73				71				80				75
Net occupancy	35				41				36				55				53
Equipment	38				40				36				45				43
Deposit and other insurance expense	18				18				19				19				20
Professional services	15				11				18				15				18
Marketing	18				8				10				17				19
Amortization of intangibles	13				14				14				14				14
Other expense	50				52				56				58				60
Total noninterest expense	652				633				633				680				694
Income before income taxes	412				385				412				365				351
Provision (benefit) for income taxes	57				59				(20		)		90				79
Net income	355				326				432				275				272
Dividends on preferred shares	21				12				19				19				19
Net income applicable to common shares	$	334			$	314			$	413			$	256			$	253
Average common shares—basic	1,103,337				1,083,836				1,077,397				1,086,038				1,088,934
Average common shares—diluted	1,122,612				1,124,778				1,130,117				1,106,491				1,108,527
Net income per common share—basic	$	0.30			$	0.29			$	0.38			$	0.24			$	0.23
Net income per common share—diluted	0.30				0.28				0.37				0.23				0.23
Cash dividends declared per common share	0.11				0.11				0.11				0.08				0.08
Return on average total assets	1.36		%		1.27		%		1.67		%		1.08		%		1.09		%
Return on average common shareholders’ equity	13.2				13.0				17.0				10.5				10.6
Return on average tangible common shareholders’ equity (2)	17.6				17.5				22.7				14.1				14.4
Net interest margin (3)	3.29				3.30				3.30				3.29				3.31
Efficiency ratio (4)	56.6				56.8				54.9				60.5				62.9
Effective tax rate	13.8				15.3				(4.8		)		24.7				22.4
Revenue—FTE
Net interest income	$	784			$	770			$	770			$	758			$	745
FTE adjustment	7				7				12				13				12
Net interest income (3)	791				777				782				771				757
Noninterest income	336				314				340				330				325
Total revenue (3)	$	1,127			$	1,091			$	1,122			$	1,101			$	1,082

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Table 2 - Selected Year to Date Income Statements (1)
	Six Months Ended June 30,								Change
(dollar amounts in millions, except per share amounts)	2018				2017				Amount				Percent
Interest income	$	1,886			$	1,667			$	219			13	%
Interest expense	332				192				140				73
Net interest income	1,554				1,475				79				5
Provision for credit losses	122				93				29				31
Net interest income after provision for credit losses	1,432				1,382				50				4
Service charges on deposit accounts	177				171				6				4
Cards and payment processing income	109				100				9				9
Trust and investment management services	86				76				10				13
Mortgage banking income	54				64				(10		)		(16	)
Insurance income	42				42				—				—
Capital markets fees	40				31				9				29
Bank owned life insurance income	32				33				(1		)		(3	)
Gain on sale of loans	23				25				(2		)		(8	)
Securities gains (losses)	—				—				—				—
Other noninterest income	87				96				(9		)		(9	)
Total noninterest income	650				638				12				2
Personnel costs	772				774				(2		)		—
Outside data processing and other services	142				162				(20		)		(12	)
Net occupancy	76				120				(44		)		(37	)
Equipment	78				90				(12		)		(13	)
Deposit and other insurance expense	36				41				(5		)		(12	)
Professional services	26				36				(10		)		(28	)
Marketing	26				33				(7		)		(21	)
Amortization of intangibles	27				29				(2		)		(7	)
Other noninterest expense	102				117				(15		)		(13	)
Total noninterest expense	1,285				1,402				(117		)		(8	)
Income before income taxes	797				618				179				29
Provision for income taxes	116				138				(22		)		(16	)
Net income	681				480				201				42
Dividends declared on preferred shares	33				38				(5		)		(13	)
Net income applicable to common shares	$	648			$	442			$	206			47	%
Average common shares—basic	1,093,587				1,087,654				5,933				1	%
Average common shares—diluted	1,123,646				1,108,572				15,074				1
Net income per common share—basic	$	0.59			$	0.41			$	0.18			44
Net income per common share—diluted	0.58				0.40				0.18				45
Cash dividends declared per common share	0.22				0.16				0.06				38
Revenue—FTE
Net interest income	$	1,554			$	1,475			$	79			5	%
FTE adjustment	14				24				(10		)		(42	)
Net interest income (3)	1,568				1,499				69				5
Noninterest income	650				638				12				2
Total revenue (3)	$	2,218			$	2,137			$	81			4	%

(1)	Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

(2)

Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 21% tax rate and a 35% tax rate for periods prior to December 31, 2017.

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

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

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Significant Items

There were no Significant Items in the 2018 second quarter.

Earnings comparisons are impacted by the Significant Items summarized below:

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

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

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

Table 3 - Significant Items Influencing Earnings Performance Comparison
	Three Months Ended
	June 30, 2018								March 31, 2018								June 30, 2017
(dollar amounts in millions, except per share amounts)	Amount				EPS (1)				Amount				EPS (1)				Amount				EPS (1)
Net income	$	355							$	326							$	272
Earnings per share, after-tax					$	0.30							$	0.28							$	0.23
Significant Items—favorable (unfavorable) impact:	Earnings				EPS (1)				Earnings				EPS (1)				Earnings				EPS (1)
Mergers and acquisitions, net expenses	$	—							$	—							$	(50	)
Tax impact	—								—								17
Mergers and acquisitions, after-tax	$	—			$	—			$	—			$	—			$	(33	)		$	(0.03	)

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

	Six Months Ended
	June 30, 2018								June 30, 2017
(dollar amounts in millions, except per share amounts)	Amount				EPS (1)				Amount				EPS (1)
Net income	$	681							$	480
Earnings per share, after-tax					$	0.58							$	0.40
Significant Items—favorable (unfavorable) impact:	Earnings				EPS (1)				Earnings				EPS (1)
Mergers and acquisitions, net expenses	$	—							$	(121	)
Tax impact	—								42
Mergers and acquisitions, after-tax	$	—			$	—			$	(79	)		$	(0.07	)

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

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Net Interest Income / Average Balance Sheet

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

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

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Table 4 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)
	Average Yield Rates (2)
	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
Fully-taxable equivalent basis (1)	2018			2018			2017			2017			2017
Assets:
Interest-bearing deposits in banks	1.95	%		1.97	%		1.92	%		1.77	%		1.53	%
Securities:
Trading account securities	0.23			0.15			0.21			0.16			0.25
Available-for-sale securities:
Taxable	2.63			2.51			2.45			2.38			2.35
Tax-exempt	3.35			3.18			3.76			3.62			3.71
Total available-for-sale securities	2.81			2.67			2.75			2.64			2.62
Held-to-maturity securities—taxable	2.42			2.45			2.41			2.36			2.38
Other securities	4.58			3.98			3.86			3.35			3.18
Total securities	2.71			2.62			2.64			2.55			2.55
Loans held for sale	4.17			3.82			3.68			3.83			3.73
Loans and leases: (3)
Commercial:
Commercial and industrial	4.52			4.28			4.17			4.05			4.04
Commercial real estate:
Construction	5.26			4.73			4.47			4.55			4.26
Commercial	4.58			4.24			4.03			4.08			3.97
Commercial real estate	4.68			4.32			4.10			4.16			4.02
Total commercial	4.55			4.29			4.15			4.07			4.04
Consumer:
Automobile	3.63			3.56			3.61			3.60			3.55
Home equity	5.09			4.90			4.71			4.72			4.61
Residential mortgage	3.69			3.66			3.66			3.65			3.66
RV and marine finance	5.11			5.11			5.25			5.43			5.57
Other consumer	11.90			11.78			11.53			11.59			11.47
Total consumer	4.43			4.34			4.31			4.32			4.27
Total loans and leases	4.49			4.32			4.23			4.20			4.15
Total earning assets	4.07			3.91			3.83			3.78			3.75
Liabilities:
Deposits:
Demand deposits—noninterest-bearing	—			—			—			—			—
Demand deposits—interest-bearing	0.38			0.29			0.26			0.23			0.20
Total demand deposits	0.18			0.14			0.12			0.10			0.09
Money market deposits	0.60			0.45			0.40			0.36			0.31
Savings and other domestic deposits	0.21			0.20			0.20			0.20			0.21
Core certificates of deposit	1.56			1.01			0.75			0.73			0.56
Total core deposits	0.51			0.36			0.32			0.30			0.26
Other domestic time deposits of $250,000 or more	1.01			0.69			0.54			0.61			0.49
Brokered deposits and negotiable CDs	1.81			1.47			1.21			1.16			0.95
Total deposits	0.59			0.43			0.37			0.35			0.31
Short-term borrowings	1.82			1.47			1.15			0.95			0.78
Long-term debt	3.75			2.92			2.73			2.65			2.49
Total interest-bearing liabilities	1.05			0.82			0.73			0.68			0.61
Net interest rate spread	3.02			3.09			3.10			3.10			3.14
Impact of noninterest-bearing funds on margin	0.27			0.21			0.20			0.19			0.17
Net interest margin	3.29	%		3.30	%		3.30	%		3.29	%		3.31	%

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

(2)	Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees.

(3)	For purposes of this analysis, NALs are reflected in the average balances of loans.

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2018 Second Quarter versus 2017 Second Quarter

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

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

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

2018 Second Quarter versus 2018 First Quarter

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

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

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

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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)
	Six months ended June 30,								Change							Six months ended June 30,
Fully-taxable equivalent basis (1)	2018				2017				Amount				Percent			2018			2017
Assets:
Interest-bearing deposits in banks	$	87			$	101			$	(14	)		(14	)%		1.96	%		1.31	%
Securities:
Trading account securities	84				114				(30		)		(26	)		0.19			0.17
Available-for-sale securities:
Taxable	10,994				12,401				(1,407		)		(11	)		2.57			2.34
Tax-exempt	3,593				3,075				518				17			3.26			3.74
Total available-for-sale securities	14,587				15,476				(889		)		(6	)		2.74			2.62
Held-to-maturity securities—taxable	8,791				7,541				1,250				17			2.44			2.37
Other securities	602				569				33				6			4.28			3.23
Total securities	24,064				23,700				364				2			2.67			2.55
Loans held for sale	549				470				79				17			4.02			3.76
Loans and leases: (3)
Commercial:
Commercial and industrial	28,555				27,957				598				2			4.40			4.01
Commercial real estate:
Construction	1,157				1,221				(64		)		(5	)		4.99			4.09
Commercial	6,188				5,990				198				3			4.41			3.83
Commercial real estate	7,345				7,211				134				2			4.50			3.88
Total commercial	35,900				35,168				732				2			4.42			3.98
Consumer:
Automobile	12,186				11,194				992				9			3.60			3.55
Home equity	9,986				9,994				(8		)		—			4.99			4.54
Residential mortgage	9,401				7,879				1,522				19			3.68			3.65
RV and marine finance	2,574				1,957				617				32			5.11			5.60
Other consumer	1,143				972				171				18			11.80			11.49
Total consumer	35,290				31,996				3,294				10			4.39			4.25
Total loans and leases	71,190				67,164				4,026				6			4.41			4.11
Allowance for loan and lease losses	(726		)		(654		)		(72		)		11
Net loans and leases	70,464				66,510				3,954				6
Total earning assets	95,890				91,435				4,455				5			4.00	%		3.73	%
Cash and due from banks	1,250				1,647				(397		)		(24	)
Intangible assets	2,325				2,380				(55		)		(2	)
All other assets	5,598				5,424				174				3
Total assets	$	104,337			$	100,232			$	4,105