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Huntington Bancshares Inc (NASDAQ:HBAN)

Q3 2010 Earnings Call

October 21, 2010; 10:00 am ET

Executives

Steve Steinour - Chairman, President & Chief Executive Officer

Don Kimble - Senior Executive Vice President & Chief Financial Officer

Dan Neumeyer - Senior Executive Vice President & Chief Credit Officer

Mary Navarro - Senior Executive Vice President on Retail & Business Banking Director and Todd Beekman - Senior Vice President, Assistant Director of Investor Relations

Jay Gould - Director of Investor Relations

Analysts

Ken Zerbe – Morgan Stanley

Tony Davis – Stifel Nicolaus

Aleina Kim – UBS

Terry McEvoy – Oppenheimer & Company

David Long – Raymond James

Paul Miller – FBR Capital Markets

Jack Micenko – Sam Indigo Gulf

Robert Patten – Morgan Keegan

Operator

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’s Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be question and answer session. (Operator Instructions)

I now would like to turn the call over to Mr. Jay Gould. You may begin your conference.

Jay Gould

Thank you, Chris, and good morning everybody. I am Jay Gould, Director of Investor Relations for Huntington. The copies of the slides we will be reviewing can be found on our website, www.huntington.com and as usual, this call is being recorded and will be available as rebroadcast starting about one hour from the close of the call. Please call investor relations at 614-480-5676 for more information on how to access these recordings or playback, or should you have difficulty getting a copy of the slides.

Slide 2, 3, 4, notes 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 that’s helpful to understanding Huntington’s results of operations or financial position, where non-GAAP financial measures are used to comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentations and it’s appendix and the press release and the quarterly financial review supplement to today’s earnings release or in the related Form 8-K filed today, all of which can be found on our website.

Turning to slide 5, today’s discussion including the Q-&-A period may contain forward-looking statements. Such statements are based on the information and assumptions available at this time and are subjected 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 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 6, participating today, our Steve Steinour, Chairman, President, 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 on Retail & Business Banking Director and Todd Beekman, Senior Vice President, Assistant Director of Investor Relations.

Let’s get started and turn to slide number 7, and Steve, take it away.

Steve Steinour

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 and then we’ll turn with the discussion of our near-term outlook and key messages to our investors.

I want to repeat some key points we made in our September Investor Day that are critical for understanding what is driving this company and our financial performance. First we have, we are in a period of continued economic weakness, I’m going to get back to what we all remembered for years. Economic growth will be slowly and choppy, second is the permanent change in consumer and business behavior. Consumers and businesses are deleveraging and will be reluctant to relevarage.

There is a new appreciation for savings and cash accumulation, and there is an intense focus on value, and for spending lower absolute amount. And while convince is always been important to customers today it’s more important than ever, third the impact of increased regulation, this means pressure on revenue, higher compliances cost 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, but continued credit improvement in the third quarter and our ability to maintain strong reserves while also reducing provision expense is evidence of our success from this front.

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 lounged 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 increase in 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 rollout a 103 in-store branches over the next two years. We also, this week announced the hiring of Jeff Dennes 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 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’s the benefit 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 plateaus is expected to be short lived as we are already experiencing increased revenues from our strategic initiatives.

This growth is evident and net interest income growth that’s reflected strong growth in auto loans in two consecutive quarters now of C&I loan growth. Given all of 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 in moving Huntington to stronger financial performance and for breaking away from some of our competition.

Now let’s begin more detailed discussion turning to Slide 8. We reported net income of $100.9 million or $0.10 and the performance drivers with lover provision expense and higher net interest income, and we believe these trends will continue.

Our pre-tax, 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 our growth in pre-tax income was the $74 million data decline in provision for credit losses as we continue to see significant credit quality improvement, such as an 18% decline in non-accrual loans and a 7% decrease in net charge-off, excluding Franklin-related impacts in the second quarter.

Even though our allowance for credit loss as a percentage of period-end loans declined, as Dan will elaborate our non-accrual loan coverage increased to 140% from 120% and we believe our key credit metrics such as reserved coverage and non-performing loan and NPL ratio now fall within the top quartile performance, while also showing a clear and sustained trend line.

Also contributing growth in pre-tax income was $7.9 million or 1% increase in fully tax equivalent revenue, which was driven by $10.4 million or a 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 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 and partially offsetting these benefits was the $13.5 million increase in non-interest expense primarily reflecting the ongoing implementation of our strategic initiatives.

Turning to slide 9, all of our period-end capital ratios improved. Regulatory Tier 1 and total risk-based capital ratio are $2.9 billion and $2.2 billion above well capitalized regulatory thresholds. Our tangible common equity ratio improved 8 bps 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 without positioning for growth with the implementation of strategic initiatives designed to grow future revenue, and these included increasing the investment in our brand, this is evidenced by higher marketing expenses, by retail and business banking introduction of Fair Play banking philosophy and our launch of 24-Hour Grace net product over 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 in the Eastern Pennsylvania with now an expansion into five New England States.

Each of these initiatives is specifically targeted to grow revenue, the appendix of slide showing all other initiatives since the first quarter of 2009. 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?

Don Kimble

Thanks Steve. Slide 11 provides the summary of our quarterly earning trends. Many of the performance metrics will be discussed later in the presentation. Let’s move on. Slide 12 is a summary income statement and shows that the $68.6 million increase in pre-tax 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 noninterest income. I’ll detail these changes and such enquiries.

I think a point Steve made earlier -- this is exactly the dynamic that we were expecting, by addressing our credit issues last year we have seen a quick improvement in credit cost. This allows us to fund our strategic initiatives while not interrupting our net income growth. Further as the benefits of our strategic initiatives, continue to grow our objective is to continued earnings growth, once credit cost return to more normal levels.

Turning to slide 13, we show the trends and our revenues in our pre-tax, pre-provision income on the left hand side of the slide. Revenues have continued to grow throughout the last seven quarters. Revenues for the third quarter were up 9% over the third quarter of last year. Our pre-tax, 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 dispositive service charge revenues of $10 million.

We expect pre-tax, pre-provision levels to remain relatively stable, even taken into account the remaining impact of Reg E, our Fair Play banking philosophy and lower expected mortgage banking revenues.

Slide 14 depicts the trends of our net interest income and margin. During the third quarter, our fully-taxable equivalent net interest income increased by $10.4 million reflecting a 1 basis point decline in our net interest margin to 3.45% and a 0.9 billion increase to our average earning asset base.

The margin change reflected several impacts. First was a favorable impact of our deposit mix and pricing changes. The mix shift from our time deposit for more transaction based core deposits both reduced our cost, but also result in a more stable deposit base for us as well.

Offsetting this positive impact was a $7.5 million or 6 basis points reduction to margin coming from the Franklin-related loans. During the third quarter, we completed the sale of Franklin-related loans resulting in a reduction to net interest income. This loss of revenue will be more than offset by the reduction and servicing related costs encouraged for the Franklin-related loans. We would expect Franklin-related expenses declined by $4 million next quarter due 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 margins. 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 noncore to 29% has improved our margin by 22 basis points.

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

Slide 17 shows the trends on 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 the C&I loans reflected improving customer acquisition resulting from some of the 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 noninterest income category. Our noninterest income decreased by $2.5 million from the prior quarter. Our deposit service charges were down by $10 million reflecting am option 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.

OREO’s banking revenues increased by $6.5 million reflecting an 81% increase in origination in secondary marketing income on $1.6 billion of origination. This increase was offset by a $7.9 million decreased to MSR hedging income. In the second quarter of the MSR hedging income reflected a change to the underlined prepayment assumption for MSR asset, which contribute a $12.2 million benefit to income last quarter.

The next slide is the summary of our expense trend. Total expenses were up $13.5 million from the prior quarter. This reflected a $13.4 million increase in personnel cost. This increase was due to a 1.5% increase in staffing levels attributed to the strategic initiative implemented over the last several quarters, higher production related incentives of $5.6 million and higher pension in 401(k) related cost was $3.2 million.

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

We are continuing to manage down our OREO portfolio. Marking costs were also up $3.2 million attributed to the brand advertising campaign. The decline of professional services of $3.7 million reflects the reduction in the servicing cost for the Franklin-related loans. Continued reduction in this cost should be reflected in the fourth quarter.

Slide 20 is a summary of our capital trend. The current quarter’s net income resulted in an increase to our tangible common equity ratio to 6.2% from 6.12%, despite a $1.4 billion increase to our asset base, reflecting even stronger improvement 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 a regulatory capital purposes from a $191 million at June 30, to $113 million as of September 30. The first tax asset realization for regulatory capital purposes improved the ratio by about 18 basis points.

Turning to slide 21, our initial review of deposal free capital guidelines would suggest a minimal impact on regulatory capital ratios less than 10 basis points. This is after adjusting our Tier 1 ratio for the Trust preferred securities, which currently adds about 133 basis points with this ratio.

Related to our TARP repayment plan, our message is based for the same. We recognized that our earnings are returning to our core level, 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 Daniel Neumeyer to review credit trends. Dan?

Dan Neumeyer

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 nonaccrual loan ratio and the nonperforming asset ratio showed significant improvement in the quarter, the later aided by the sale of Franklin-assets that removed to help for sale in the second quarter and disposed in the third quarter. We continue to see continued meaningful reductions in our nonperformers in the coming quarter.

Criticized loan levels also continued to decline despite unsettled economic conditions. The net charge-off ratio sold to 1.98% on an annualized basis, a further reduction from the prior quarter. 90 day loans past due and accruing interest saw a very slight up-tick 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 nonaccrual loans and nonperforming assets continue to show very healthy improvement given significantly lower nonperforming asset levels.

The ACL to criticized asset ratio also showed stronger coverage, an indication that we are adequately reserved against emerging problem loans. We continue to work to rebound the portfolio with an emphasis on reducing noncore commercial real estate exposure while continue to grow C&I and consumer categories. Indirect auto is originating record volumes with excellent credit quality metrics.

Slide 23 provides the graphic presentation of the nonaccrual loan and nonperforming asset trends on the left side of the slide and the nonaccrual loan inflow on the right side.

The overall trend and nonaccrual loans and nonperforming assets continue to be very positive and exhibits very meaningful improvement in the last four quarters. Nonaccrual inflows did experience an increase in the quarter reflecting a continued fragile economy. Several larger credits contributed much of the increase and we’re placed on nonaccrual in line with our continued conservative posture of early recognition and resolution of emerging problem loan. 30% of our total commercial loans are nonaccrual remain current on principal and interest.

Turning to slide 24, we can review the entire nonperforming asset flow analysis. As mentioned, we did see an increase in new NPAs 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 NPAs 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 at 11% for the second consecutive quarter showing sustained 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 loan.

However, we also continue to see a healthy level of loans moving back to the past category by a risk rating upgrade and an increase in the level of paid-on’s 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 these loans are managed by our Special Assets Department and received the highest level of scrutiny and attention. 90 days past dues remain at zero for the fourth consecutive quarter, again reflecting our aggressive treatment of developing problem loans.

Slide 27 demonstrates the improved credit quality associated with consumer portfolios. Overall consumer delinquencies in the 30-day category continue to exhibit an improving trend. Residential Mortgage and Auto continue 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 holds 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 930 one year ago. Our consumer portfolio consists primarily of loans within our footprint and in a relationship base. We continue to originate high-quality assets with high FICO scores and reasonable loan to value.

Turning to slide 28, commercial net charge-offs continues to show an improving trend falling 10% from the prior quarter. Lower levels of NPA should allow us to – show continued declines in commercial charge-offs.

Consumer loan charge-offs were flat in dollar terms, but as the percentage of loans fell due to additional loan growth primarily in auto. While high employment rates and economic malaise continue 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 ACL to loan of 3.67 down from 3.9 at June 30th. Importantly, the coverage ratio of ACL to NAL increased significantly from 120% at June 30th to 140% at September 30th. Also, the coverage ratio relative to criticized assets continue to increase and overall credit quality remained much improved.

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

Overall, we remain very pleased with our progress on the credit front and all our portfolios. We are cognizant of the challenges that remain before us and are confident in our ability to navigate through them while demonstrating continued improvement in our credit metrics.

Let me turn the presentation back to Steve.

Steve Steinour

Thanks, I’d like to use slide 30 to recap the current thinking regarding near-term expectations. The time period covered by these expectations is beyond the fourth quarter, which to some extent is driven by what happens in the economy. So here is our thinking, it’s going to remain generally weak, no meaningful change is expected, confidence continues to be a challenge 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.

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 nonperforming assets and lower charge-offs which we saw in the third quarter.

Again, pre-tax, pre-provision earnings will likely remain comparable to a 2010 year-to-date performance with similar dynamics of that seen in the third quarter performance. We anticipate modest loan growth driven by continued strong growth in Auto and some growth in C&I loans partially offset by continued decline in commercial real estate loans. We still do not anticipate much if any growth to home equity loans.

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

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

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

Net 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 similar 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 with 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 position for us to obtain top hostile performance.

Our strategic initiatives continue to gain traction and while the environment is challenging everyday, we are making progress. We are clearly on the move, we are growing and getting stronger. So, thank you for your interest in Huntington.

Operator, we’ll now take questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paul Miller from FBR Capital Market. Your line is now open. Again, Mr. Miller from FBR Capital Market, your line is now open.

Steve Steinour

Paul, you’re on mute.

Operator

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

Ken Zerbe - Morgan Stanley

Great, thanks. In terms of the initiatives, I understand you are doing a lot to grow revenue and I think that’s great. But can you just talk a little bit about the cost associated with that more from? And I did hear your comments that you are trying – that lots of the expenses are being offset currently, but maybe once those initiatives get up and running, how much of those additional incremental bills [Inaudible] gets pulled out of earnings or does it just remain in earnings going forward?

Don Kimble

Ken, this is Don. I think it will out, and the room is pointed my way, so I guess I will take a crack at this question. But as far as the initiative, many of them have a six to nine-month type of a payback period as far as from the investments and the people and so the challenge we’ve had is we have been compounding many of these on top of one another. So we did see some expense growth this past quarter that was an outlier compared to the revenue growth.

But I would say that we are expecting us to see the returns later this year, expense increases this past quarter reflected not only from the initiatives, but also there is a benefit from some of the higher levels of mortgage production, which resulted in higher incentive cost for us as well. So each one these will have a different defined payback period, that’s a general guideline.

Ken Zerbe – Morgan Stanley

Okay, alright. And then the other concern I had was on the DTA, the disallowed DTA for Reg capital, rough math I guess something like 66 basis point is still left to be recognized, but I may be off a couple points, you used to 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?

Don Kimble

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 point type of calculation. I think on roughly $43 billion and risk weighted asset, but we would expect that to be realized throughout the next several quarters of through 2011. So, I think that we will see that come back.

As far as how the regulators would view that in connection with any TARP repayment, it is recognized for GAAP purposes and for regulatory capital purposes, but I don’t know there will be any differentiation as far as that type of asset. I think even though new Basel III requirement, take a look at what level of details in other more intangible assets are compared to total Tier1 capital and we will be below that threshold as well.

Ken Zerbe – Morgan Stanley

Alright, great thank you.

Don Kimble

Thanks, Ken.

Operator

Your next question comes from the line Tony Davis from Stifel Nicolaus. Your line is now open.

Tony Davis – Stifel Nicolaus

Good morning Steve. Don, I hate to ask this, but I wonder if you could just address the repurchase exposure on loan sales to the GSEs and private label?

Don Kimble

Sure, Dan you want to go ahead and take a crack there?

Dan Neumeyer

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

Tony Davis - Stifel Nicolaus

Okay. Well I got you Dan, is there any –?

Steve Steinour

Tony, what we are reading about, it feels fairly modest. And again we didn’t offer exotic products and other things. So this will be with this probably for awhile, but we do not see this as a big area of exposure from anything that we are seeing today.

Tony Davis - Stifel Nicolaus

Okay. Dan, back to you. Was there any common segment or geographical theme to the NPL inflows?

Dan Neumeyer

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. So, I think that goes along with the general theme of what we’ve been seeing in the academy. Those are troubled areas and very lumpy, and I think in this quarter it just so happened that we had three larger ones that was quite atypical actually.

Steve Steinour

Why don’t you – just a little bit o that a little bit for the benefit about how forward reaching we were and our views on them.

Dan Neumeyer

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

Tony Davis - Stifel Nicolaus

Final question for Don, there was a run down in interest rate and DDA in the quarter and do you say that any of that was related maybe as a precursor to a pickup in C&I loan to me and has there been any change on that front in terms of utilization rate or anything like that?

Don Kimble

Great question, Tony. I think more of that was actually related to the expiration of TAGP for, but that expired for us as of June 30th. We did see an increase in some of our sweep balances. So, in than other short-term borrowing, just one increase there of about $700 million, and so what growth may have normally come in or that interest during deposit over the last couple quarters was coming through that fleet process.

Tony Davis - Stifel Nicolaus

Thank you guys.

Don Kimble

Thank you.

Dan Neumeyer

Thanks Tony

Operator

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

Aleina Kim - UBS

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

Don Kimble

Hi, Elena.

Aleina Kim - UBS

Hi, just a quick question. So, I noticed that the end-of-period investment securities balance increased significantly, but the yield did not, so is it safe to assume that you are reinvesting in the same duration with more asset?

Steve Steinour

Good question. Again, that we are investing in very similar type of assets that most of the growth this past quarter came in agency mortgage-backed and agency CMOs with very short-term duration two to three-year type of level. So we are intentionally keeping that fairly short, but we don’t think it’s prudent to be extending that duration in a slow rate environment.

Aleina Kim - UBS

On the C&I and auto loan growth, but I just have a quick question on the new yield that you’re putting on to your balance sheet. So, I just notice that the overall yields for those two portfolios went down as volumes went up. So, I want to know what’s the sort of reinvestment risk is for those two buckets?

Steve Steinour

Sure. As far as the growth and indirect auto that 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 book for indirect auto, it’s another 5% to 5.5% average yield for that category. And as you know that we had very strong growth there with over $1 billion of origination. 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 that we are seeing some nice growth in some fairly low-risk categories compared to historic portfolios, and so I’d say that the average spreads are fairly consistent there with the new yield for new origination. But, Dan, have you seen anything from your side as far as differences, as far as the type of loan?

Dan Neumeyer

Well, I think we have seen a little bit more in the large corporate area where we are concentrating on local large corporate accounts where we have full cost flow 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 yield.

Aleina Kim - UBS

Great, that’s a good color, and then just one last question in terms of funding. I know that you guys have mentioned earlier on the call that you increased your short-term borrowing significantly; I also saw a slight uptick in broker CD. Can you kind of give some color in terms of how you describe the funding?

Steve Steinour

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

As far as broker deposit, we did access the market a little bit this past quarter that we saw some fairly low rate as far as 18-month type of CDs and a little bit there, but not much of any size that we have historically over the last four quarter prior to that allowing that book just to go ahead and mature, that we think it’s appropriate to continue to try to access that market occasionally just to test the waters, so to speak.

Aleina Kim - UBS

Okay, great thanks for your time.

Steve Steinour

Thank you.

Operator

Your next question comes from the line of Terry McEvoy from Oppenheimer & Company. Your line is now open.

Terry McEvoy – Oppenheimer & Company

Hi, thanks, good morning.

Steve Steinour

Hi Terry.

Don Kimble

Hi Terry.

Terry McEvoy – Oppenheimer & Company

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 that strategy was a success household growth – core deposit growth, et cetera. So, we on this side of the table could also make our own opinion whether that was the right move?

Steve Steinour

Mary you want to-- yeah please.

Mary Navarro

Terry, this is Mary. I think, yeah 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 we are looking at is our checking account line up, consumer checking, and so you will probably hear about that one next, and so far we’re very happy with what we have done with 24-Hour Grace which is one of the things 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 what we give up for Reg-E other overdrafts and 24-Hour Grace.

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

Steve Steinour

Terry, we made a commitment in the investor conference to use our Qs and Ks for metrics and you can anticipate getting some of those with this quarter’s filing and perceptively.

Terry McEvoy – Oppenheimer & Company

Great, and just a second question looking at the 609 million of C&I origination upon what double from last quarter, could you just talk about and it may be in the presentation, so I apologize, just geography, industry and talk a little bit about what was behind that growth?

Dan Neumeyer

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’s business banking, it’s large corporate equipment finance. I think we have seen very equal representation from all areas, and obviously our focus is on generating high quality assets right now. And I think we are benefiting from being able to move some market share in a low growth, the economy. So I am real pleased with the breakdown of the types of additions right in the portfolio

Terry McEvoy – Oppenheimer & Company

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

Don Kimble

Our pipeline is very strong and I think what we were seeing is not a typical from what others are seeing is that, the people are requesting credit and getting approved for credit. What we were not seeing as much of is the line utilization on the draw downs for capital investment. So our pipeline is very strong in fact that I think it maybe at a high point right now, so we are very encouraged by that.

Terry McEvoy – Oppenheimer

Thanks, Don.

Operator

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

David Long – Raymond James

Thanks, good morning everyone.

Don Kimble

Hi, Dave.

David Long – Raymond James

Two questions, first one for Dan and a bit of follow-up to Tony’s question looking at slide 24 the inflow to non-performing assets. You talked about the, there are fewer larger credits there that contributed to that, is that thing commentary also go for slide 25 and we were looking at the criticized loan flow and there is -- a pretty good increase in addition to there and was that the same large credits that we should be thinking about?

Dan Neumeyer

First, your question on the inflows I do want to stress that, again, we are pretty aggressive when we put ones on nonaccrual, one of the large new NPA is current and principle and interest. So we think we’re taking a very aggressive and proactive pastor in placing those on nonaccrual.

We’re certainly out leading until there are no options left on those credit in terms of the criticized asset flow that was 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 then economy there are a lot of under capitalized companies that are still struggling. Many have, made great advances in cutting their cost structure and our surviving, others are struggling at this.

So I think it’s, given, kind of a slow down that we’ve seen in the last quarter which began with, kind of the European disruption and the effects of that, we’ve seen a lagged effect on that slow down 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 fully related though.

David Long – Raymond James

Okay, and then a question, second question for a Steve. And Steve with your in one of your concluding slides and your expectations, you talk about managing demand deposit based on your opportunities to reinvest that. How do you manage that with your initiatives to really take share and with your whole Fair Play banking initiative?

Steve Steinour

We think we have pricing both bond and money market and as we are growing core household give us some pricing flexibility. We are very focused on core households and cross-sale ratios, and as we look at our deposit booking the rate environment, the competitive dynamic in the Midwest have changed and made them substantially over the last couple of years. We think we had some opportunities there over time.

David Long – Raymond James

Alright, great thanks guys.

Steve Steinour

Thanks David.

Dan Neumeyer

Thanks Dave.

Operator

Your next question come from the line of Paul Miller from FBR Capital Markets. Your line is now open.

Paul Miller – FBR Capital Markets

I am sorry about, before I couldn’t get my headset to work. Hey, going back to the slide 26 and you have your total commercial loans we the 30 days going up at nothing in your 90 days process is that because you’re moving everything in straight into nonaccrual, nonperforming assets status, you had give us 90 days?

Steve Steinour

Yes

Paul Miller – FBR Capital Markets

And just out of curiosity, disclose what your Tier rates on this 30 day plus stuff?

Steve Steinour

I don’t know, we’ve disclosed our Tier rate for 30 days delinquency and what we talked about historically though is the level of NPAs that we’ve are still current performing which is roughly 30% of commercial nonperforming, but I don’t know if we talked about that today.

Don Kimble

No, we didn’t know.

Paul Miller – FBR Capital Markets

And then the other issue is, I mean you guys having some pretty decent long words development to your peer group, but there was -- they said I think it was the last month reported that the credit is easing which is a good thing for the economy. But I was just wondering you’re easing some of your under riding standards or you’re just seeing is better credits into the door?

Steve Steinour

I would say we’re 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 taking that into full account and we may not see 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 capabilities such to do that.

So we have not eased our standards, there is certainly being some competitive pressure, with respective to the price because everyone is going after that same quality customer, but in terms of underwriting I feel really good about what we’re originating.

Paul Miller – FBR Capital Markets

I mean you say – when you turnaround stories. Can you elaborate on that a little bit?

Steve Steinour

Well sure obviously getting this last cycle, there is probably in some cases a majority of certain industries were customers would have been loosing money and normally when you are looking at approving credit you like to see a nice string of the consistence earnings and that’s where the coverage where in a turnaround situation once some one is come out of it they’re generating new contract, further cutting cost, you have to analyze a shorter earnings history in track record than we might normal do and that’s where we’re spending lot of time on, in trying to help those business that have credit needs.

Paul Miller – FBR Capital Markets

Okay, thank you very much.

Steve Steinour

Thank you.

Don Kimble

Thanks Paul.

Operator

Your next question comes from the line of Jack Micenko from [Sam Indigo Gulf]. Your line is now open.

Jack Micenko – Sam Indigo Gulf

That’s one way to play it. Thanks for taking the question. I have two questions, Don you talked about the $4million reduction on Franklin and other professional feel line our professional service line on the cost side, is that an ongoing sort of regular $4 million number is that one timer in the fourth quarter and then the [Inaudible] follow-up.

Don Kimble

Great, in the fourth quarter we should see a $4 million reduction before total Franklin related expenses and that should be permanent that essentially the servicing related cost and other cost associated with the Franklin assets that where sold so those should be going forward.

Jack Micenko – Sam Indigo Gulf

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 terms you brought on, yet are they still they worked in.

Don Kimble

Massachusetts is still very early for us, when and much of an impact there on in the third quarter and very little impact as far as the Eastern Pennsylvania, so we think those are our opportunities for us respectively.

Jack Micenko – Sam Indigo Gulf

Okay, so probably -- you and ask you about pricing on those own derivative to those core franchise?

Don Kimble

I don’t know that we have any specific area pricing but I expect that our pricing models are fairly consistent across the entire footprint again they focus on very high on the score originations and very well excepted credit loss.

Jack Micenko – Sam Indigo Gulf

Thanks great, I appreciate it. Thank you.

Don Kimble

Thank you.

Operator

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

Robert Patten – Morgan Keegan

Good morning guys, quick question this morning just a couple of questions nobody really asked about acquisition activity, I want to get your, so an update Steve and your thoughts we’ve seen a couple deal happens small banks, seems to be lower, but trying to pick partners, so you -- they would be helpful in offline noticed and MJs and kind of expense slide deck on page 153, that your rating from Moody’s and Fitch show about a year old. Any update on the meeting with the rating industries or what’s going on there?

Steve Steinour

The acquisition front – there is more activities for sure, but I understand from the federal [ph] change we’re looking to drive our core number 5 and sort of the way we think about and it’s reflected on one the pages is acquisition and something interesting is available then we pursue about this there is a lot of from what we have seen so far its nothing is [Audio Gap] part of the rating agencies that, they still have the knowledge they tend to be very incremental and their approach as far as changing rating at, we did have S&P take some negative outlook to a positive outlook and so we hope that a good time for going forward as it relates today’s rating and we continued to talk to all three of our rating agencies that we report into and hopefully we’ll start to see some reaction overtime but no commitment at this point.

Don Kimble

With our view on the economy, we don’t play on sort of rushing in any cash and then again we’ve made a lot investments in building capacity to drive core revenue we are really focused on that and we don’t intend to get distracted.

Robert Patten – Morgan Keegan

Okay, thanks guys.

Steve Steinour

Thank you.

Operator

There are no further questions at this time. I’ll turn the call back over to the presenter.

Jay Gould

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. I thank you again we know you got a very busy day ahead of you. See you next quarter.

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