Huntington Bancshares Inc (HBAN) 2010 Q3 法說會逐字稿

Good morning.

My name is Christopher and I will be your conference operator today.

At this time, I would like to welcome everyone to the Huntington third quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions).

I would now like to turn the call over to Mr.

Jay Gould, you may begin your conference.

Thank you, Chris, good morning everyone, I am Jay Gould Director for Investor Relations for Huntington.

Copies of the slides we will be using can be found at Huntington.com and as usual this call is being recorded and will be available as a rebroadcast starting one hour from the close of the call.

Please call Investor Relations at 614-480-5676 for more information on how to access the recording or playback or should you have a difficulty getting copies of the slides.

Slides two through four note several aspects of the basis of today's presentation.

I encourage you as always to read these but let me point out one key disclosure.

This presentation contains both GAAP and non-GAAP financial measures where we believe it's helpful to understanding Huntington's results from operation or financial position.

Where non-GAAP financial measures are used the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in this appendix in the press release and the quarterly financial review supplement to today's earnings release or in the related Form 8K filed today, all of which can be found on our website.

Turning to slide five, today's discussion including Q and A period may contain forward-looking statements.

Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent forms 10-K, 10-Q and 8-K.

Now turning to today's presentation, as noted on slide six, participating today are Steve Steinour, Chairman, President and Chief Executive Officer, Don Kimble, Senior Executive Vice President and Chief Financial Officer and Dan Neumeyer, Senior Executive Vice President and Chief Credit Officer.

Also present is Mary Navarro, Senior Executive Vice President and Retail and Business Banking Director, and Todd Beekman, Senior Vice President and Assistant Director of Investor Relations.

Let's get started and turn to slide number seven and Steve, take it away.

Thank you, Jay.

Welcome everyone.

I'll begin with a review of the third quarter performance highlights, after my overview Don will follow with his usual overview of our financial performance, Dan will provide an update on credit, I'll then return with a discussion of our near-term outlook and key messages to investors.

I want to repeat some key points that we made in our September investor day that are critical in understanding what is driving this Company and our financial performance.

First, we have -- we're in a period of continued economic weakness.

It is not going to get back to what we all will remembered for years.

Economic growth will be slow and choppy.

Second, is the permanent change in consumer and business behavior.

Consumers and businesses are deleveraging and will be reluctant to releverage.

There is a new appreciation for savings and cash accumulation.

And there's an intense focus on value.

And for spending lower absolute amounts and while convenience has always been important to customers, today it's more important than ever.

Third, the impact of increased regulation, this means pressure on revenue, higher compliance costs and an increase in prospective capital requirements.

So to position Huntington to win in this type of environment we first needed to get our credit issues addressed.

We believe the aggressive actions taken last year to identify and resolve credit issues accomplished this objective.

The continued credit improvement in the third quarter, and our ability to maintain strong reserves, while also reducing provision expense, is evidence of our success on this run.

Next we needed to develop and implement a strategic plan that would position Huntington to grow core revenues and win in this type of new environment.

Our strategic plan was developed and launched last year, and it continues to be implemented and will evolve.

And while it has many aspects, two are worth noting.

First, was the decision to make significant investments to organically grow revenue.

This included increasing our cross-sell capabilities, as well as making investments and developing new revenue streams, distribution channels and the talent to manage this expansion.

The most recent example was our announcement of a 15-year agreement with Giant Eagle to roll out 103 in-store branches over the next few years.

We also, this week, announced the hiring of Jeff Dennis, a nationally recognized leader in online mobile and payments industry, and Jeff will be our Director of Online and Mobile Services.

Second, and in response to the environmental and customer attitude, and behavior behavioral changes just mentioned we adopted our fair-play banking philosophy discussed last month.

One aspect was last month's introduction of 24-hour grace on personal overdraft fees.

This is creating significant market buzz.

Customers are noticing and responding.

We believe that the benefits of accelerated customer acquisition and the revenue we will generate will more than offset the fees given up both voluntarily, as well as those that are regulatory driven through Reg.

E and otherwise.

The implementation of our strategic initiatives creates an earnings dynamic where expense growth precedes related revenue gains.

Usually in this situation earnings growth slows down or plateaus.

And some of that is evident in our third quarter performance.

Our aggressive handling of credit issues last year is enabling us to reduce provision expense this year, translating to earnings growth.

Importantly, any plateauing is expected to be short-lived as we're already experiencing increased revenues from our strategic initiatives.

This growth is evident in net interest income growth, that's reflected strong growth in auto loans and two consecutive quarters now of C&I loan growth.

Given all of this -- this, and what's going on in the environment, you can understand why we're pleased that for three consecutive quarters we've reported higher net income.

In sum, the third quarter represented another meaningful step forward to stronger financial performance and for breaking away from some of our competition.

Now let's begin more detailed discussion, turning to slide eight.

We reported net income of $100.9 million or $0.10 a share and the performance drives were lower provision expense and higher net interest income.

We believe these trend also continue.

Our pretax pre-provision income was $265 million, down $5 million or 2% from the second quarter.

On one hand, given the revenue and economic environment challenges, this is not unexpected.

But we are not satisfied with this performance.

The primary driver of growth in our pre-tax income was a $74 million decline in provision for credit losses as we continued to see significant credit quality improvement.

Such as 18% decline in non-accrual loans and a 7% decrease in net charge-offs, excluding Franklin-related impacts in the second quarter.

Even though our allowance for credit losses as a percentage of period-end loans declined, as Dan will elaborate, are non-accrual loan coverage increased to 140% from 120%, and we believe our key credit metrics such as reserve coverage and non-performing loan and NPA ratios now fall within the top quartile of performance.

While also showing a clear and sustained trend line.

Also contributing growth and pretax income was $7.9 million or 1% increase in fully tax equivalent revenue, which was driven by a $10.4 million or 3% increase in fully taxable equivalent net interest income.

Our net interest margin was 3.45%, down one basis point and we posted a 1% increase annualized in average -- or in total average loans and leases, reflecting the auto growth and the C&I growth mentioned earlier.

Fee income declined $2.5 million or 1% primarily driven by lower service charges on deposit accounts.

Now partially offsetting these benefits was a $13.5 million increase in non-interest expense, primarily reflecting the ongoing implementation of our strategic initiatives.

Turning to slide nine, all of our period-end capital ratios improved.

Regulatory Tier one and total risk-based ratios are $2.9 billion and $2.2 billion above well-capitalized regulatory thresholds, our tangible equity increased to eight bips to 6.2% and our Tier 1 common risk based capital ratio improved 30 basis points to 7.36%.

Lastly our liquidity position remains strong.

We saw a 2% annualized core deposit growth with the period-end loan to deposit ratio of 91%.

As shown on slide 10, we continue to move forward with our positioning for growth with the implementation of strategic initiatives designed to grow future revenue, and these included increasing the investment in our brand.

This was evidenced by higher marketing expenses.

By retail and business banking introduction of fair play banking philosophy and our launch of 24-hour grace, and that product or that feature gives our retail customers one business day to cover an account overdraft with no penalty, with no charge.

Additionally, our auto finance group continues its expansion eastward by complementing an earlier expansion into eastern Pennsylvania, with now an expansion into five New England states.

Each of these initiatives is specifically targeted to grow revenue.

The appendix of slides showing all other initiatives since the first quarter of 2009.

We have -- we have and are very excited -- we are very excited about the cumulative impact and opportunities these represent.

So let me turn the presentation over to Don to review the details.

Don?

Thanks, Steve.

Slide 11 provide as summary of our quarterly earnings trends, many of the performance metrics will be discussed later in the presentation so let's move on.

Slide 12 is a summary income statement and shows that the $68.6 million increase in pretax income reflected the benefits of a $74.2 million decline in provision expense and $10.3 million increase in net interest income, which were partially offset by a $13.5 million increase in expenses, and a $2.5 million decrease in non-interest income.

I'll detail these changes in subsequent slides.

I think point -- a point Steve made earlier bears repeating, this section actually the dynamic that we were expecting by addressing our credit issues last year we are seeing a quick improvement in credit costs.

This allows us to fund our strategic initiatives while not interrupting our net income growth.

Further as benefits of our strategic initiatives continue to build, our objective is to continue earnings growth once credit costs return to more normal levels.

Turning to slide 13, we show the trends in our revenues in our pretax and pre-provision income on the left-hand side of the slide.

Revenues have continued to grow throughout the last seven quarters.

Revenue for the third quarter are up 9% over the third quarter of last year.

Our pretax, pre-provision earnings are up 11% from the last year, despite a 2% decline from the previous quarter.

This decline was caused by several factors including a drop in deposit service charge revenues of $10 million.

We expect pretax, pre-provision levels to remain relatively stable, even taking into account the remaining impact of Reg.

E, our fair play banking philosophy and lower than expected mortgage revenues.

Slide 14 depicts the trends of our net interest income and margin.

During the third quarter our forward-tax equivalent net interest income increased by $10.4 million, reflect -- reflecting an one basis point decline in our net interest margin to 3.45% and a $0.9 billion increase to our average earning asset base.

The marked change reflects several impacts.

First was a favorable impact of our deposit mix and pricing changes.

The mix shift from our (inaudible) deposit to more transaction based core deposits both reduced our costs but also result in a more stable deposit base for us as well.

Offsetting this deposit impact was the $7.5 million or six basis point margin reduction coming from the Franklin related loans.

During the third quarter, we completed the sale of the Franklin related loans regarding our reduction to net interest income.

This loss of revenue will be more than offset by the reduction in servicing related costs incurred for the Franklin related loans.

We would expect Franklin related expenses to decline by $4 million next quarter to the sale.

Other items impacting the quarter included lower interest income on our interest rate derivatives.

Also the day count negatively impacted the third quarter margin.

Continuing on to slide 15, we show the change in our deposit mix over the last five quarters.

The shift from 40% of our deposits in time and non-core to 29% has improved our margin by 22 basis points.

Turning to slide 16, we showed a 1% growth in total core deposits, which was driven by strong growth in money market accounts as interest bearing demand deposits declined.

Slide 17 shows the trends in our loan and lease portfolio.

Total commercial loans were down $0.1 billion or 1%, the decline reflected the anticipated decline in commercial real estate balances.

The $0.1 billion increase to C&I loans reflected in premium customer acquisition resulting from some of early benefits of our strategic initiatives including growth in our equipment finance area.

These increases were not impacted by increasing utilization rates as they remained at historic low levels of 42%.

Consumer loans were up $0.3 billion or 2% from the prior quarter.

The $0.5 billion increase in average automobile loans and leases reflected record originations of over $1 billion this past quarter.

These originations continue to reflect very high credit quality and reasonable returns.

Slide 18 shows the trends in our non-interest income categories.

Our non-interest income decreased by $2.5 million from the prior quarter.

Our deposit services charges were down by $10 million reflecting the adoption of the changes to Reg, E and the early stage impact of our fair play banking philosophy.

We would expect a similar decline in deposit service charges over the next quarter.

Mortgage banking revenues increased by $6.5 million, reflecting a 81% increase in origination and secondary marketing income on $1.6 billion of originations.

This increase was offset by a $7.9 million decrease to MSR hedging income.

In the second quarter the MSR hedging income reflected a change to the underlining prepayment assumptions for the MSR asset, which contributed a $12.2 million benefit to income last quarter.

The next slide is a summary of our expense trends, total expenses were up $13.5 million from the prior quarter.

This reflected a $13.4 million increase in personnel costs.

This increase was due to a 1.5% increase in staffing levels attributed to the strategic initiatives implemented over the last several quarters, higher production related incentives of $5.6 million and higher pension and 401 K related costs of $3.2 million.

OREO and foreclosure expenses were up $7.1 million from the second quarter, as a prior quarter included a $3.7 million OREO gain and the current quarter included a $2 million Franklin related OREO loss.

We're continuing to manage down our OREO portfolio.

Marketing costs were also up $3.2 million attributed to the brand advertising campaign.

To the client and professional services of $3.7 million reflects reduction in servicing costs for the Franklin related loans.

Continued reduction in these costs should be reflected in the fourth quarter.

Slide 20 is a summary of our capital trends.

The current quarter's net income resulted in an increase to our tangible common equity ration to 6.2% from 6.12% despite a $1.4 billion increase to our asset base.

Reflecting even stronger improvement -- improvement were our Tier 1 capital ratio which increased to 7.36% from 7.06% and our Tier 1 ratio which increased to 12.76% from 12.51%.

These increases not only benefited from the capital accretive earnings but also from a decrease in the total disallowed deferred tax asset for regulatory capital purposes from $191 million at June 30th to $113 million as of September 30th.

Deferred tax asset realization for regulatory capital purposes improved the ratios by about 18 basis points.

Turning to slide 21, our initial review of the Basel III capital guidelines would suggest a minimal impact on regulatory capital ratios of less than 10 basis points.

This is after adjusting our Tier one ratio for the trust preferred securities which currently adds about 133 basis points to this ratio.

Related to our TARP repayment plans our message is basically the same.

We recognize that our earnings are returning to more core levels and that's a positive, yet the economy remains fragile.

Also additional clarity is needed from the regulators on the interpretation of the Basel III accord.

As we've said previously, our objective is to repay when we believe it is prudent to do so.

Let me turn the presentation over to Dan Neumeyer to review credit trends.

Thanks Don.

Slide 22 provides an overview of our credit quality trends.

We continue to make very good progress in improving our credit quality metrics, both the non-accrual loan ratio and the non-performing asset ratio showed significant improvement in the quarter, the latter aided by the sale of Franklin assets that were moved to held for sale in the second quarter and disposed of in the third quarter.

We continue to see continued meaningful reductions in our non-performers in the coming quarters, criticized loan levels also continued to decline despite unsettled economic conditions.

The net charge-off ratio fell to 1.98% on an annualized basis, a further reduction from the prior quarter.

90-day loans past due and accruing interests saw a very slight uptick in the quarter, not unexpected given seasonal patterns and consumer behavior.

The ACL ratio moved from 3.67% from 3.9%, although coverage ratios on both non-accrual loans and non-performing assets continued to show very healthy improvement given significantly lower non-performing asset levels.

The ACL to criticize asset ratio also showed stronger coverage, an indication that we are adequately reserved against emerging problem loans.

We continue to work to rebalance the portfolio with an emphasis on reducing non-core commercial real estate exposure, while continuing to grow C&I and consumer categories, indirect auto is originating record volumes with excellent credit quality metrics.

Slide 23 provides a graphic presentation of the non-accrual loans and non-performing asset trends on the left side of the slide and the non-accrual loan inflow on the right side.

The overall trend in non-accrual loans and non-performing assets continues to be very positive and exhibits very meaningful improvement in the last four quarters.

Non-accrual inflows did experience an increase in the quarter, reflecting a continued fragile economy.

Several larger credits contributed much of the increased and were placed on non-accrual in line with our continued conservative posture of early recognition and resolution of emerging problem loans.

30% of our total commercial loans on non-accrual remain current on principal and interest.

Turning to slide 24 we can review the entire non-performing asset flow analysis.

As mentioned, we did see an increase in new NPA's in the third quarter, reflecting continued economic stress and the uneven nature of the commercial portfolio recovery.

However, we also saw an increase in loans returning to accruing status and an increase in payments.

These factors, along with asset sales contributed to a 30% reduction in NPA's for the quarter, the most significant reduction in some time.

Slide 25 continues our disclosure around the level of criticized commercial loans.

Criticized commercial loans fell 11% for the second consecutive quarter, showing sustained sustain momentum in the level of problem loan resolution.

The fragility of the economic environment remains apparent as we continue to see an inflow of new watch-list loans.

However, we also continue to see a healthy level of loans moving back to the past category via risk rating upgrades and an increase in the level of paydowns on these criticized loans.

It is our expectation that despite a challenging economic outlook, we'll continue to make good progress in reducing our overall level of criticized loans in the coming quarters.

Reflecting the unevenness of the recovery our total commercial loans 30-day delinquencies increased to 1.08% from 0.95% at the end of the second quarter.

Almost all of these loans are managed by our special assets department and receive the highest level of scrutiny and attention.

90 day past dues remain at zeros for the fourth consecutive quarter, again reflecting our aggressive treatment of developing problem loans.

Slide 27 demonstrates the improved credit quality associated with the consumer portfolios, overall consumer delinquencies in the 30-day category continued to exhibit an improving trend.

Residential mortgage and auto continued to show improvement from the prior quarter while home equity loans and lines exhibited a small increase.

In the 90-day category, auto and home equity held fairly steady from the prior quarter, while residential delinquencies demonstrated an increase.

Although some seasonal upticks are anticipated we continue to manage our delinquency levels very closely and expect the overall positive trend to continue.

Delinquency measures in all consumer categories were better than at 9/30, one year ago.

Our consumer portfolio consists primarily of loans within our foot print and it is relationship based.

We continue to originate high quality assets with high FICO scores and reasonable loan to values.

Turning to slide 28, commercial net charge-offs continue to show an improving trend, falling 10% from the prior quarter.

Lower levels of NPAs should allow us to show continued declines in commercial chargeoffs.

Consumer loan charge-offs were flat in dollar terms but as a percentage of loans fell due to additional loan growth primarily in auto.

While high unemployment rates and economic malaise continued to present challenges in the consumer portfolio, the relationship nature of our portfolio coupled with early intervention in managing delinquencies should allow us to exhibit continued positive momentum in the consumer book.

Turning to slide 29, the loan loss provision for the third quarter of $119 million was less than charge-offs of $184 million.

This resulted in an ACL to loans of 3.67%, down from 3.9% at June 30th.

Importantly the coverage ratio of ACL to NAL's increased significantly from 120% at June 30th to 140% at September 30th.

Also the coverage ratio relative to criticized assets continued to increase and overall credit quality remains much improved.

We believe this level of coverage is very healthy and quite strong relative to our pier group and we also believe it is appropriate given the difficult economic environment that remains before us.

Overall, we remain very pleased with our progress on the credit front and all of our portfolios.

We are cognizant of the challenges that remain before us and our confident in our ability to navigate through them while demonstrating continued improvement in our credit metrics.

Let me turn the presentation back to Steve.

Thanks.

I'd like to use slide 30 to recap our current thinking regarding current near-term expectations.

The time period covered by these expectations is beyond the fourth quarter but to some extent determined by what happens in the economy.

And so here is our thinking.

It is going to remain generally weak, no meaningful change is expected.

Confidence continues to be a -- a challenge, as it is at very low levels.

We are not anticipating, however, a double-dip recession.

We do, believe, however that any recovery is getting pushed further and further out.

And so the key drivers of net income growth are expected to be from net interest income and lower provision for credit losses reflecting our expectation for continued improvement in our key credit metrics, including reductions in non-performing assets and lower charge-offs which you saw in the third quarter again.

Pretax pre-provision earnings will likely repair comparable to our 2010 year-to-date performance with similar dynamics as that seen in the third quarter performance.

We anticipate modest loan growth driven by continued strong growth in autos and some growth in C&I loans partially offset by continued declines in commercial real estate loans, we still do not anticipate much if any growth in home equity loans.

Residential mortgage refinancing activity will likely remain above historical trends due to continued low interest rates but since most of our loans originate at fixed-rate loans which we sell we're not likely to see much growth if any in this category.

We continue to expect growth in demand deposit and savings accounts and although we may choose to manage that growth differently if we continue to see limited investment options.

Fee income growth we expect will be mixed, we anticipate improvements in our strategic initiatives as they gain further traction yet much of the growth near-term may be mitigated by lower mortgage banking income and declines in service charges on deposits.

Non-interest expense is expected to remain relatively stable with third quarter performance, with growth from strategic initiatives mitigated by lower credit related and to some extent some lower marketing expenses, taking all of this together we anticipate continued modest growth in net income.

On slide 31, in closing, I want to remind all of our investors and customers of several key messages, our balance sheet is strong and our capital levels are sufficient and getting stronger with each passing profitable quarter.

Our substantially improved credit quality performance positions us to attain top quartile performance.

Our strategic initiatives continue to gain traction and while the environment is challenging, every day we are making progress.

We are clearly on the move.

We are growing and getting stronger.

So thank you for your the interest in Huntington.

Operator, we'll now take questions.

(Operator Instructions).

Your first question comes from the line of Paul Miller from FBR capital market.

Your line is now open.

Paul?

Again, Mr.

Miller, from FBR Capital Market, your line is now open.

Paul, are you on mute?

Your next question comes from the line of Ken Zerbe from Morgan Stanley.

Your line is now open.

Great, thanks.

In terms of the initiatives, I understand you're -- you are doing a lot to grow revenue and I think that is great, but can you just talk a little bit about the costs associated with that, more from -- and I did hear your comments that you are trying to -- that a lot of the expenses are being offset currently but maybe once those initiatives get up and running, how much of those additional incremental expense build gets pulled out of earnings, or does it just remain in earnings going forward?

Ken, this is Don.

I think that everyone else in the room is pointing my way and so I think that I will take a crack at this question but as far as the initiatives many of them have a six to nine-month payback period as far as some of investments in the people and so the challenge we've had is that we've been compounding many of these on top of one another and so we did see some expense growth this past quarter that was an outlier compared to the revenue growth but I'd -- I'd say that we are expecting to see the returns there, that the expense increases this past quarter reflected not only some of the initiatives but also the benefit from some of the higher levels of mortgage production which resulted in higher incentive costs for us as well and so each one of these would have a different defined payback period but that's just a -- a general guideline.

Okay, all right.

And then the other question that I had was on the DTA or the disallowed DTA for reg capital, rough math I get something like 66 basis points still left to be recognized, I may be off a couple points.

But can you just talk about the timing of when you do expect to ultimately receive all the benefit from the DTA and the other thing is do regulators view that as actually legitimate capital when they think about you guys repaying TARP?

Ken, as far as the DTA, we've got about $113 million left.

And so it's probably a little different than the 68 basis points type of calculation, I think, on -- on roughly $43 billion.

And risk weighted assets.

But -- but we would expect that to be realized throughout the next several quarters, up through 2011.

And so I think that we -- we will see that come back.

As far as how the regulators would treat that in connection with any TARP repayment, it is recognized for GAAP purposes and regulatory capital purposes, so I do not know that there would be any differentiation as far as that type of asset, I think that even the new Basel III requirements take a look at what level of DTA and certain other more intangible assets are in terms of total tier one capital and we would be below that threshold as well.

Alright, great, thank you.

Thanks, Ken.

Your next question comes from the line of Tony Davis from Stifel Nicholas.

Your line is now open.

Good morning, Steve, Don.

I hate to ask this but I wonder if you could just address the repurchase exposure on the -- on -- on loan sales to the GSE's and private label.

Sure.

Dan, do you want to go ahead and take a crack there.

Sure, Tony obviously we have seen an increase in those costs, year-to-date we have about 4.3 of -- of actual losses paid out compared to 1.8 last year, so that activity is up, not stunning numbers but clearly more activity there.

Okay.

While I've got you, Dan -- is there any --

Tony what we're reading about, it feels fairly modest and, again, we didn't offer exotic products and other things and so this will be with us probably for a while but we do not see this as a big area of exposure from anything that we've seen to date.

Okay.

Good.

Dan, back to you.

Was there any common segment or geographical theme to the -- to the NPL inflows?

There were -- there were several large transactions but in terms of a theme, no.

We had one real estate transaction, we had a metal fabricator, we had one large building supply provider and so I think that goes along with the general theme of what we've been seeing in economy, those are troubled areas, very lumpy and in this quarter it just so happened that we had three larger ones, that was quite atypical actually.

Why don't you embellish on that a little bit for their benefit about how forward-reaching we were in our views on those.

Yes.

So these have been obviously targeted areas for us for, you know, 18 months or longer in terms of getting our arms around those and so forth and so the -- in that instance we had three loans totaling about $100 million but overall we have been looking very hard at -- at commercial real estate and have taken significant credit marks on the portfolio while reserved and, again, home builder supply and manufacturing segments particularly auto related have been on our -- our target lists and so, those have been quickly identified and dealt with for about the last 18 months.

Yes, okay.

Final question for Don, there was a rundown in interest bearing DDA in the quarter.

I -- do you sense that any of that was related maybe as a precursor to a pickup in CNI loan demand?

Has there been any change on that front in terms of utilization rate or any of that.

Great question, Tony.

I think that actually more of that was related to the expiration of tag P for us, that expired as of June 30th.

We did see an increase in some of our sweep balances and other short-term borrowings, we saw an increase there of about $700 million and so what -- what growth may have normally come in that interest bearing deposits over the last couple of quarters was coming through that suite product.

Thank you, guys.

Thank you.

Thanks, Tony.

Your next question comes from the line of Heather Wolf of UBS.

Your line is now open.

Hi, this is actually [Aleina Kim] stepping in for Heather Wolf.

Hi, Aleina.

Hi, just a quick question.

So, I noticed that the end of period investment securities balance increased significantly but the yield did not and so is it safe to assume that you are reinvesting in the same duration, similar assets?

Good question again that we are investing in very similar type of assets that most of growth this past quarter came in agency mortgage backs and agency CMO's and so it is a very short-term duration, a two to three-year type of level and so we're intentionally keeping that fairly short.

We don't think it's prudent to be extending that duration in this low rate environment.

Great.

And good job on the C&I and auto loan growth but I just had a quick question on the new yield that you are putting on your balance sheet, I notice that the overall yield for those two portfolios went down as the volumes went up and so I want to know what the reinvestment risk is for those two buckets.

Sure.

As far as the growth in indirect auto, the yield came down this past quarter, was mainly attributed to the fact that we had an adjustment in the second quarter related to the amortization of certain fee income categories there and that had a $3 million or $4 million lift which artificially increased the yield compared to previous quarters before that second quarter.

As far as the new yield going on the books for indirect auto it's in the 5% to 5.5% average yield for that category and, as you noted, we have very strong growth there with over $1 billion of origination and so we are still very pleased with the credit quality and also with the absolute level of return for that asset class.

As far as the commercial growth, we are seeing some nice growth and some fairly lower risk categories compared to historic portfolios, and so I'd say that the average spreads are fairly consistent there with the new yields for new originations but, Dan, have you seen anything from your side as far as the differences, as far as the type of loan?

Well, I think we have seen a little bit more in the large corporate area where we are concentrated on local large corporate accounts where we have cross sale opportunities and given the higher quality there, some of the yields may be a little bit lower.

Also in our equipment finance area in terms of the new business priorities are kind of more up market and so very high quality but would also result in slightly lower yields.

Great.

That's good color.

And then just one -- one last question in terms of funding, I note that you guys had mentioned earlier in the call that you increased your short term borrowings significantly and I also saw a slight uptick in brokered CD's, could you give some color in terms of how you -- your strategy for funding?

Great.

As you mentioned, as far as the earlier comments on the short-term borrowings, that really related to our customer suite product as the tag P expired, we no longer provided FDIC insurance for those interest bearing checking accounts and so we did see more growth in that suite product than what we would have historically seen in that interest bearing checking.

As far as brokered deposits, we did access the market a little bit this past quarter.

We saw some fairly low rates as far as 18-month type of CD's, and we did book a little bit there but not much of any size that we have historically over the last four quarters prior to that been allowing that book just to go ahead and mature.

But, we think that it is appropriate just to continue to try to access that market occasion little, just to test the waters, so to speak.

Okay, great.

Thanks for your -- thanks for your time.

Thank you.

Your next question comes from the line of Terry McEvoy from Oppenheimer and Company.

Your line is now open.

Hi, thanks, good morning.

Hi, Terry.

Hey, Terry.

Hi.

Just getting back to the fair-play banking philosophy, are there certain things that you are looking at that you are going to share with us over the coming quarters and years to make sure that strategy was a success, household growth, core deposit growth, et cetera, so we -- we are -- we on this side of the table could also make our own opinion whether that was the right move?

Mary, you want to take that?

Yes, please.

Terry, this is Mary, I think yes, the answer is, we will be looking at other opportunities to demonstrate to customers and future customers that we are trying to be more fair and do things right and there will be other things that we do.

So, the next thing that we're looking at is our checking account lineup, consumer checking and so you'll probably hear about that one next and so far we're very happy with what we've done with 24-hour grace, which was one of the things that we talked about at the investor day in September and those numbers look right on track as far as what we said we'd have with fee give-ups for Reg.

E, other overdrafts, and 24-hour grace.

So we're thrilled with what customers are saying about it and the number of customers that are coming to us because of this account feature.

Terry, we made a commitment in the investor conference to use our Q's and K with a -- some metrics, and you can anticipate getting some of those with this quarter's filing prospectively.

Great.

And just a second question, looking at the $609 million of C&I originations, up almost double from last quarter, could you just talk about -- and it may be in the presentation and so I apologize but just geography, industry and talk a little bit about what was behind that growth.

Hey, Terry, this is Dan.

I would say it is very broad-based.

I wouldn't say it's limited to any particular geography within our footprint.

It is middle market, it is business banking, it's large corporate, equipment, finance.

I think -- I think we've seen very equal representation from -- from all areas.

And obviously our -- our focus is on generating high quality assets right now and I think that we are benefiting from being able to move some market share in a -- in a low-growth economy.

So I -- I'm real pleased with the -- the breakdown of the -- the types of additions we're adding to the portfolio.

And looking at the pipeline, would you expect that number to grow in the fourth quarter?

Our pipeline is very strong.

And I -- I think what we're see something not atypical from what others are seeing, is that, the people are -- are requesting credit and getting approved for credit.

What we're not seeing as much of is the line utilization on the draw downs for capital investment.

So pipeline, very strong, in fact I think it may be at a high point right now.

And so we're very encouraged by that.

Thanks, Dan.

Your next question comes from the line of David Long from Raymond James.

Your line is now open.

Thanks, good morning, everyone.

Hi, David.

Two questions, the first one for Dan and a bit of a follow-up to Tony's question, looking at slide 24, with the inflow to non-performing assets, and you talked about there are a few larger carts there that contributed to that, does that same -- commentary also go for slide 25 when we're looking at the criticized loan flow and there seemed to be a pretty good increase in the additions there, was that the same large credits that we should be thinking about.

Yes, first, your first question on the inflows, I do want to stress that, again, we're pretty aggressive when we put loans on non-accrual, one of the large new NPA's is current on principal and interest.

So, we think that we're taking a very aggressive and proactive posture in placing those on non-accrual.

We certainly are not waiting until they are -- there are no options left on those credits.

In terms of the criticized asset flow, that was fairly broad-based.

We saw actually more in terms of dollars in the C&I world and in business banking, and actually less in commercial real estate.

And when you look at the inflows, it is very diversified, again, amongst geographies given this economy there are a lot of under-capitalized companies that are still struggling.

Many have made great advances in cutting their cost structure and are surviving and others are struggling a bit and so I think it's -- given the -- kind of the slowdown that we've seen in the last quarter, which began with, kind of the European disruption and the effects of that, we have seen a lagged effect on the -- on that slowdown, and I think an increase in the third quarter.

We're not necessarily anticipating that same level of inflow in the fourth quarter, but it's kind of too early to tell.

Okay.

And then a question, the second question for Steve, and, Steve, with your -- one of your concluding slides on your expectations, you talked about managing demand deposit based upon your opportunities to -- to reinvest that.

How do you manage that with your initiative to really take share and with your whole fair play banking initiative?

Well, we have -- we think we have pricing levers on both time and money market that, as we're growing core households, give us a -- some pricing flexibility.

We're very focused on core households and cross-sell ratios.

And as we look at our deposit book and the rate environment, the competitive dynamics in the Midwest have changed, they've abated substantially over the last couple of years.

We think that we -- we can -- we think that we have some opportunity there over time.

All right, great.

Thanks, guys.

Thanks, David.

Thanks, Dave.

Your next question comes from the line of Paul Miller from FBR Capital Market.

Your line is now open.

Yes.

Sorry about before.

I could not get my headset to work.

That's okay, Paul.

Going back to slide 26 and you have your total commercial loans where you have the 30 days going up but nothing in your 90 day clause, is that because you are moving everything into -- straight into a non-accrual, non-performing asset status when it gives 90 days.

Yes.

And just out of curiosity do you disclose what your cure rates are in this 30-day plus stuff.

I do not know if we've discussed our cure rates for 30-day delinquency on what we talked about historically, though, is that the level of NPAs we have are still current and performing, which is roughly 30% of the commercial non-performing, but I don't know that we've talked about that.

That you are aware of, Jay?

No, I don't think we've given that one.

And then the other issue is -- you guys have some pretty decent loan growth relative to your peer group.

But, there was -- the fed I think was last month reported that credit is easing, which is a good thing for the economy, but I'm just wondering are you easing some of your underwriting standards or are you seeing better credits coming in the door?

I would say that we are not easing our credit standards at all.

We are certainly taking into account what businesses have been going through and those that are indicating a turnaround, we are -- we are taking that into full account and we may not see the -- the string of historical profitability that we normally would have.

We may have to rely on some turnaround stories but we underwrite that very well and look at industry business models, management capability, et cetera, to do that.

So, we have not eased our standards.

There's certainly been some competitive pressure with respect to price, because everyone is going after that same quality customer.

But in terms of our underwriting, I -- I feel real good about what we're originating.

And when you say string of -- when you say turnaround stories, can you elaborate on that a little bit?

Well, sure, obviously again this last cycle there's probably, in some cases a majority of certain industries where customers would have been losing money and normally when you are looking at approving credit.

You like to see a nice string of consistent earnings and debt service coverage where, in a turn around situation, when someone is coming out of it, they are generating new contracts or they are cutting costs.

You have to analyze a shorter earnings history and track record than we might normally do and that is what we're spending a lot of time on in trying to help businesses that have credit needs.

Okay, hey, guys, thank you very much.

Thank you.

Your next question comes from the line Jack Micenko with [Sam Indigo Gulf] SIG.

That's one way to put it.

Thank you for taking the questions.

Two questions.

Don, you had talked about the formal introduction of Franklin on the professional C line -- service line item on the cost side, is that an ongoing sort of regular $4 million number or is that an one-timer in the fourth quarter, and then a couple of follow-ups.

Great.

In the fourth quarter we should see a $4 million reduction for the total Franklin related expenses, and that should be permanent.

That is essentially the servicing related costs and other costs associated with the Franklin assets that were sold and those should be zero going forward.

Okay, great.

And then on the auto growth side was there any of the volume.

Nice growth there.

Any volume out of the eastern Pennsylvania or Massachusetts dealership teams that you brought on or are they still being worked in.

Massachusetts is very early, so, there wouldn't have been much of an impact there at all in the third quarter and very little impact as far as eastern Pennsylvania.

So, we think that those are our opportunities for us prospectively.

Okay.

So, probably too soon to ask you about pricing on those loans relative to the core franchise?

I don't know that we have any specific area pricing but I would say that our pricing models are fairly consistent across the footprint and again they focus on very high FICO Score originations and very low expected credit costs.

Okay, great, appreciate it, thank you.

Thank you.

Your next question comes from the line of Bob Patten from Morgan Keegan, your line is now open.

Good morning, guys.

Hey, Bob.

A quick, fast-paced morning.

Yes.

Just a -- just a couple of questions, nobody has really asked about acquisition activity, I wanted to get an update, Steve, on your thoughts, we've seen a couple of deals happen, small banks seem to be a little more aggressive about trying to pick partners your view there would be helpful.

And also I noticed (inaudible) -- expense slide on page 153 that your ratings for Moody's and Fitch are about a year old, any update on meeting with the rating agencies and what is going on there?

On the acquisition front first, there's -- there's more activity for sure.

But I -- our stand on this has not changed.

We're -- we're looking to -- to drive our core.

Number five in sort of our -- the way we think about things, and it's reflected on one of the pages, is acquisition.

And something interesting is available, then we would pursue it.

But this -- this is a lot of -- from what we've seen so far, it is -- nothing is -- is compelling.

As far as the rating agencies agencies, they still have acknowledged that they tend to be very incremental in their approach as far as changing ratings, we did have S&P take us from a negative outlook to a positive outlook and so we hope that is a good sign for us going forward.

It relates to their rating and we continue to talk to all three of our rating agencies that we report into and hopefully we'll start to see some reaction over time but no commitments at this point.

With our view on the economy we don't plan on sort of rushing in any fashion and again, we've made a lot of investments in building capacity to drive core revenue, we're really focused on that.

And we don't intend to get distracted.

Okay, thanks, guys.

Thank you.

There are no further questions at this time.

I'd turn the call back over to the presenters.

Thank you, Chris, and everybody for participating in today's call, if you have follow-up questions you can reach Todd and I at our usual numbers.

Thank you again.

We know that you have a very busy day ahead of you.

See you next quarter.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.