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Executives

John Koelmel - Chief Executive Officer

Greg Norwood - Chief Financial Officer

Analysts

Bob Ramsey - FBR Capital Markets & Co

Dave Rochester - Deutsche Bank Securities

Damon DelMonte - Keefe, Bruyette & Woods

Erika Penala - BofA Merrill Lynch

Tom Alonso - Macquarie Research Equities

Joe Fenech - Sandler O'Neill & Partners L.P.

Matt Kelley - Sterne, Agee & Leach

David Darst - Guggenheim Securities LLC

John Pancari - Evercore Partners

First Niagara Financial Group Inc. (FNFG) Q3 2012 Earnings Call October 19, 2012 10:30 AM ET

Operator

This presentation contains forward-looking information for First Niagara Financial Group Incorporated. Such information constitutes forward looking statement within the meaning of Private Securities Litigation Reform Act of 1995, which involve significant risks and uncertainties. Actual results may differ materially from results discussed on this forward-looking statement.

Welcome and thank you for standing by. All lines have been placed in listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to your host, Mr. John Koelmel, President and Chief Executive Officer. Sir, you may now begin.

John Koelmel

Thank you very much, [Nova] and good morning, everyone.

I am very pleased to report another quarter of solid operating results and very strong business fundamental outcomes. As a matter, how you evaluate the last three months whether it'd be the continuing strength in industry leading commercial loan growth or the number of checking account customers, we continue to acquire with the success of the HSBC transition, and integration of our overall market profile and position, our best-in-class team continues to make it happen across the footprint.

For those that missed our presentation at the Barclays Conference in September, let me again make it very clear, that our organization top to bottom, is 100% focused on running the business we have built with no distractions. And that starts with me. Totally engaged, head down, full time in the business. Leading the charge, employing the hand that we hold today, which is one we very much like to ensure that we make the most of a solid franchise we have built and we do that by, once again, smartly rotating our balance sheet, increasing our focus on fee-generating products services and relationships, driving efficiency gains and continuing to win more customer and community hearts and minds, which in turn enables us to take additional share of wallet in the market.

And while that singular focus has long been the norm for most in the industry, this is the first time in my tenure that the entire organization and team have been 100% focused on running the business of the day. For all of us, it's only about effective and efficient execution of our business plan.

While I am proud of the consistently solid operating results we've delivered over the last few years, I know we need to be even better over the next several to affirm our position as a winner in the sector as the world around us settles down and sorts itself out, which is why we are focused on doing even more with what we already have, pulling more from our talent and relationship-driven business model, increasing the return on our product and service capabilities, and fully leveraging our market profile and position. Be assured we'll do that with pace and consistency in 2013 to provide all of us with a relevant baseline from which we can look ahead to '14, '15 and beyond.

The key to our success always starts with talent and culture. The passion, knowledge and commitment of our team make a real difference for our customers and communities each and every day. And as you are consistently seeing over the last few years a progressively bigger and better team working with an increasingly bigger and better suite of products and services has enabled us to consistently take a bigger and better slice of the customer pie. And now with a full fire power of the entire organization behind them, our team is all more energized to win even more of the daily customer battles to efficiently and effectively grow the business.

I referenced fee income earlier. We need to again push our sources of non-interest income north of 30% of total revenue, we will do that by better executing with the customer base we already have today, further aligning our product and service suite well as our fee structure given today's market realities, sharpening our focus on fee-driven relationships both, in terms of commercial and consumer, better executing other fee-based businesses whether it would be wealth, insurance or private client services.

We are well above that 30% level before our growth spurt. That's a priority focus as we now will be able to leverage a much, much better platform in the years ahead. We've clearly demonstrated over the last five years, our core competency in growing the commercial lending business, all while being smart and disciplined with our underwriting. That's why we are very confident in our ability to once again opportunistically rotate the balance sheet now with even more options and whatever the economic environment.

Our target loan-to-deposit ratio was 95%, and we'll give there in a way that optimizes returns even in this low rate environment, which means overall asset growth is not a top metric for us, much more of our redeploying our already invested dollars to improve returns. We also do need to be more effective and efficient in all that we do, I said in a response to a question in last quarter's call that an efficiency ratio with a fixed handle will never excite me in a positive way and that we haven't lost sight of our promise of a sub-55 ratio when we announced the HSBC transaction last summer. That's still where we're going, operational excellence.

It doesn't imply an efficiency initiative, per se, also it's not about flashing expenses and just taking cost out, we've been pretty disciplined in our build-up as we've grown. But doing things more effectively and efficiently across the organization, front, middle and back, people process, systems and infrastructure, and then leveraging that stronger platform to create consistently positive operating leverage.

That said, at the end of the quarter, we did further right size the people to compliment for the business we have today and eliminate any bloat coming out of the string of M&A transactions. We took those actions to ensure we have the right people and the right seats on the bus to most effectively execute our organic growth strategy. While always challenging and difficult to make those decisions were necessary to better position us to most efficiently execute our plan.

You also see us continue to consolidate branch location, streamline processes and effect systemic change whatever it takes to make us better, and as that suggests, we are also continuing to investment in people, process, systems and infrastructure. Not at all. We always look to further improve what we do and how we make that happen.

As you've heard from us in the past, we'll continue to self fund as much of that near-term investment as possible for efficiency and operating improvements, and incrementally invest only in our highest invest return opportunities. We look ahead to '13, we want to ensure we have the best position foundation to drive better returns from what we've already invested.

So, to repeat one last time, we are all about running the business we have built. Singular focus, no distractions, first time in a long time and we make that happen by being even better and rotating the securities work through more optimal mix of commercial and consumer loans, creating sustainable fee income momentum, better executing with current customers emphasizing fee-driven relationships and growing our fee based businesses, doing more with what we already have to create efficiency, operating leverage and operational excellence, continuing to invest some of those product services, processes and systems to make us even better and continuing to enable and empower the best team in the business doing even more hearts and minds across the footprint. Now I'm looking forward to a solid finish in 2012 and really excited to make a strong and steady run in '13.

With that, let me turn it over to Greg to have him run you through the quarter.

Greg Norwood

Thanks, John. Good morning, everybody. Before I get into the numbers, let me provide some high level observations.

We continue to be very pleased with the ongoing simulation of the HSBC branches. Deposit retention continues to perform in line with our expectations as we noted last quarter and customer engagement continues to pleasantly surprise us.

The few remaining divestitures we had this quarter were completed without any interruptions whatsoever. Let me move to QE3. As John and I had said on prior calls, we have been operating as a premise that lower interest rates will be here for some time.

Certainly, the indefinite nature of QE3 was a bit surprising to all of us, the exact nature of that impact going forward remains to be seen and needs to be analyzed in the context of other issues that play the election fiscal cliff we hear so much about.

Clearly, we are not surprised of the continuing uncertainty caused by these events. In fact, our actions back in June to sell the mortgage-backed securities portfolio anticipated the very trend in mortgage-backed security prepayments. And on that point, we feel good about our portfolio and our level of estimated future prepayments. Additionally, as you can see in the GAAP financial statements, we structured our transaction in a way that we share in the upside that resulted from the final sale of those securities by our counterparty, and as you all know the mortgage-backed security markets rallied and that resulted in additional $5.3 million pretax gain, this past quarter, for total gain of roughly $21 million on the $3.1 billion sale.

Let me now talk about what we are focused on. I will restate what you heard from John. Given the current realities, we are all about operational excellence. Rain in expenses make prudent investment within the franchise that have quicker paybacks, and continue to focus on delivering more with what we have already built.

You will see us invest more in commercial treasury management services, our digital online capability and credit cards to drive more profitable growth. For digital and credit cards, we will further expand the significant enhancements we made as part of the HSBC transaction.

Let me also emphasize what we are not going to do. We are not stretching for growth or short-term earnings. In our investment securities portfolio, we are not going longer to grab higher yields today, we are sticking to the investment strategy we have laid out for you and we will not be taking any real incremental market duration risk.

On the loan side, the competition is reacting and resorting to aggressive pricing, larger hold positions and weaker structures. We are certainly seeing more of that today. From our perspective, we will continue to remain disciplined in our underwriting.

Honestly, we don't need to do these types of transactions to grow given our track record an all the opportunity our team continues to create each day to get more than our fair share in the markets and we've proven this for several years now.

With that overview, let me move to quarter.

Operating net income available to common shareholders was $0.19 per diluted share versus 17% in the second quarter, as you all know this was the first full quarter of operation with the acquired HSBC branches.

Our commercial banking franchise extended its streak of double-digit originated loan growth to 11 quarters, increasing an annualized 17% over the prior quarter. Of note, our most penetrated New York State footprint performed very well with a 15% increase in commercial loan growth over the prior quarter.

Overall if you exclude our residential real estate, which as you know is managed from the treasury balance sheet management perspective, our average loan book increased by an annualized of 21%, sequentially, excluding the acquired HSBC portfolio.

So, now that we are not growing loans by retaining the mortgage production and putting on duration risks, as we see multiple opportunities in other businesses to grow loans. Overall, one of the best if not the best, loan growth performance stories in the sector.

Our core deposit franchise continued its strong pace of new checking account openings per branch, which were up 10% annualized over the second quarter and 36% over a year ago. Our deposit mix continues to improve. Today's transactional deposits are roughly a third of our deposit base versus 25% a year ago.

Fee income growth was another highlight this quarter driven by mortgage revenue, strong activity in capital markets and growth in deposit, service fee, and merchant card fees led by the HSBC branch acquisition. I will dive into credit later but the real story here is charge-offs dropped to 30 basis points.

Let me talk about the key loan takeaways on slides four through six. The growth in commercial loan platform continues across all geographies and all product lines.

From a loan demand perspective, the market hasn't materially improved from last quarter given the current uncertainties. Nonetheless, our commercial pipelines across the franchise remained strong and consistent with second quarter.

On the consumer side, again, positive momentum. An increase of 5% annualized as our indirect book growth more than offset the decline in the resi book, while the home equity portfolio was essentially flat quarter-over-quarter.

Today, we have about $420 million in new auto loans that are yielding a net 3.5% at an average FICO score of 740. We are well on pace to achieve the target of $600 million in loans by year end and at even higher FICO scores than anticipated.

On the mortgage side, the pipeline for refinancing remained strong. And like many others have said, we are increasing our processing capacity and believe there is positive operating leverage to be had by increasing this capacity.

Headed into the fourth quarter, our application volumes are strong and consistent with the prior quarters. In the third quarter, the mix of originations improved toward the retail channel. Retail production increased an annualized 14% over the prior quarter and was more than 85% of total volume. As a result, our gain on sale margin increased about 70 basis points over the prior quarter.

Next, the credit card platform, another good story here driven by the HSBC transaction. If you recall, we significantly enhanced our card offering in conjunction with the acquisition of the former HSBC branches and customers and the HSBC customers are very engaged with their cards and the activity levels are strong with $250 million in purchase volume this past quarter.

Moving to the retail deposit story. Average non-interest bearing and interest bearing balances increased 17% and 5%, respectively, in the third quarter. Again, excluding the increase due to HSBC. This was driven by strong checking account production at the branches. In fact, our upstate New York market continues to be a very key component of this momentum as our enhanced penetration coupled with increased brand awareness continues to generate very strong customer activity.

In New York, new checking accounts sold per branch increased over 30% year-over-year. Additionally, the traction in our Eastern Pennsylvania markets and our New England markets also continued as these markets saw significant customer checking account production.

Turning to credit. We have a very good and very simple credit quarter. First, the originated book. Total originated loans increased roughly $840 million and was the primary driver of the $12 million excess provision over charge-offs versus the $10 million in prior quarters.

Net charge-off on that portfolio totaled $9.1 million, or as I said, 30 basis points of total originated loans versus 55 basis points last quarter and in line with first quarter. Non-performing loans to originated loans and classified and criticized loans also declined. Finally, overall migration trends remain positive.

For the acquired book, not much of a story, but I will highlight the change in accretable yield. In the third quarter, we reserved about $10 million of credit marks into accretable yield as credit performance continues to outperform original expectations, but as required by accounting rules, the absorption into net interest income will be amortized over the remaining three year life of the loans, so there was no immediate benefit to margin or earnings in 3Q. Acquired NPL loans increased modestly quarter-over-quarter.

Now, let me give some color on the income statement line items.

Our third quarter net interest margin averaged 3.54%, or 28 basis points better than second quarter levels and consistent with the guidance that we provided last quarter. Net interest income increased to $270 million from $259 million last quarter. There are a couple of drivers behind the sequential increase in NII.

First is the residual effect of the HSBC transaction completed midway through last quarter. Second, we had lower mortgage-backed security premium amortization quarter-over-quarter as we recognized $20 million less of premium amortization this quarter compared to last. Offsetting these benefits, the sale of securities at the end of last quarter resulted in a loss of approximately $20 million in revenue.

Now let me breakdown the key drivers of NIM, compared to prior quarter. Average earning assets increased 19 basis points quarter-over-quarter to 3.96% helped by the lower premium amortization, which more than offset 12-basis point decline in stated loan yields. As with everybody in the industry, the decline in loan yields continues to be driven by elevated refi and prepayment activity in both, commercial and residential real estate books and growth in new loans with lower current yields.

Our commercial spreads also continue to contract, but very much in line with our expectations. Pricing on new commercial production is approximately LIBOR plus 250 and about 40 to 50 basis points higher on the business banking side. Looking at the liability side, deposit cost decreased 2 basis points quarter-over-quarter driven primarily by favorable mix shift and our continued actions to price deposits lower.

On non-interest income. Overall, another strong quarter led by 53% increase in mortgage banking revenue. Capital markets revenue while down slightly, sequentially, was our second best quarter in this business as we completed 86 swap transactions and four syndications during the quarter.

Merchant and card fees increased with the benefit of the HSBC acquisition. As I noted earlier, these customers are more engaged with card products from a utilization perspective. Finally, insurance agency commissions were strong consistent with seasonal patterns.

Let me round out our P&L discussion by discussing operating expenses, which excluding merger and restructuring charges were roughly $237 million for the third quarter, in line with our expectations. The sequential increase was driven by the full impact of the branch acquisitions from HSBC and higher incentive compensation expenses tied to strong production volumes. Quarter-over-quarter, incentive compensation increased $2.5 million.

The operating efficiency ratio increased by 250 basis points to roughly 64.7%, all else being equal the loss of $20 million in interest income from the MBS sale alone drove a 350-basis point increase in the efficiency ratio, so on an apples-to-apples basis, we started to see some of the expected operating improvements.

On a GAAP basis, pre-tax merger and acquisition expenses totaled $29.4 million including severance expenses associated with the workforce efficiency and effectiveness efforts John referenced earlier.

Before I get into the outlook for the fourth quarter of this year, let me expand my opening comment on the HSBC transactions given that we've been operating the business now for roughly 135 days.

Overall, really pleased with the conversion and business execution today. What we are seeing now validates what we have been providing you with guidance and updates throughout 2012. Let me recap. Again, deposit retention continues to track in line with our expectations.

On net interest income, we completed the pre-buy purchases of about $3.5 billion at yields approximating 3.35%. We on boarded $1.6 billion of loan at yields around 6%, and used the deposits proceeds to pay down $5 billion in wholesale funds generating a positive spread of about 90 basis points.

Deposit costs were 29 basis points, slightly better than anticipated. Based on HSBC fee income metrics we are seeing, our performance are at levels consistent with the original assumptions of about 80 to 90 basis points of acquired deposits.

As we see it now, the incremental HSBC expenses are right where we said about $150 million incremental annual cost excluding amortization of intangibles. Finally, back in July of last year, we believed increasing our market density was a key driver in assessing the HSBC opportunity. Then, we estimated we would have a number one retail market share tier across upstate New York.

The FDIC deposit market share data released earlier this month reaffirmed our number one ranking with a 16% share of retail market in upstate New York, including the top rank in Buffalo. While rankings are a good quantitative measure, the density and reach reported to us by the HSBC opportunity is the real key and is what makes us a clear market leader.

Now, let me look ahead to year end. Slide 11 is a view of the street expectations for the fourth quarter relative to the median estimates of all analysts. Overall the street median numbers are really pretty good indicators of what we are thinking which is a steady quarter-over-quarter performance.

Let me give some color on a couple of items. The Street median NII of $271 million is consistent with what we expect. On NIM, consistent with others have reported, we would expect some pressure given the cash flows and lower reinvestment yields and expect fourth quarter NIM to range between 3.45% and 3.5%. We think this compression will be offset by asset growth resulting in NII roughly flat quarter-over-quarter. Fee income is a pretty close indicator as mortgage and capital markets are expected to continue strong performance offset by a dip in insurance given the third quarter seasonal high.

When looking at the provision, I would remind you to consider originated loan allowance at 1.2% coverage for the newly originated loans in the fourth quarter. As you can see, operating expenses are really right on the mark, so net-net pretty much the same quarter-over-quarter building and delivering on the fundamentals to mitigate continued headwinds.

Before we go to Q&A, let me echo John's comments that the entire team is focused on fully realizing the growth and earnings potential within the franchise that we have aggregated. Be assured, we will continue to be decisive and nimble in managing the business in these uncertain times.

With that, Nova, we can now begin the Q&A session.

Question-and-Answer Session

Operator

Thanks, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from (Inaudible). Your line is open. You can go ahead and ask the question.

Unidentified Analyst

Hey good morning, guys.

Greg Norwood

Good morning.

Unidentified Analyst

A couple of questions around the NIM guidance. You know, down 5 to 10 bps in the next quarter seems a little wide. I was just wondering, why so wide and expectations around the securities book size as well as yield compression going forward. And then on the commercial side of things, loan yields down 26 bps, you mentioned that is in line with your expectations. Do you expect that to continue going forward into 2013?

Greg Norwood

Yes. Let me see if I can kick off each one of those. If I missed one, let me know. For the guidance going forward, when we think about the range 5 to 10 basis points in predicting in this market I feel that's a good range to think about.

Also, if you think of that range relative to the guidance we gave last quarter that would mean for the back half of the year, we would be roughly in the 3.50 to 3.52 versus, I think, consensus last quarter was at a 3.54, so it feels pretty good about having our arms around the NIM number.

From a securities perspective, I would say for the fourth quarter that would remain relatively flat. I would echo John's comments that we are clearly moving in a direction of rotating the balance sheet. I mean, you shouldn't expect any kind of student body left or student body right, but no over the future we will rotate that down into the loan book versus the investment book.

From a securities perspective, I think the biggest number to think about is from a mortgage-backed, we see that re-pricing roughly 100 basis points lower than what's on the books. That reflects maybe a 15 to 20-basis point move relative to the post QE3. Again, those are market numbers that we see when we talk to other folks as well.

In the loan book the commercial move this quarter. I wouldn't expect the same type of move next quarter. I mean, certainly that is one of the big elements of a post QE3 perspective but I wouldn't expect to see the same drop in NIM on the commercial side.

Unidentified Analyst

Yes. Thank you. And then, John, just on the expense side of things. I appreciate your comments about the efficiency ratio. I mean, it does sound like you are not happy with the fixed handle on the efficiency ratio, but it does kind of sound like you are not really looking forward to doing anymore cost takeout or any sort of plan rather just work that down organically. Is that the right message?

John Koelmel

I'd directionally agree with the recap. On one hand, I am not looking to just let nature run its course here. Be assured, we're aggressively managing it. Trying to be clear that don't expect us to affect some scorched earth slash and burn policy. We feel comfortable with how we have built the business up.

Having said that different times, different circumstances, we are sharpening our pencil all the more in terms of how we running the business. But, clearly the M&A benefit that we are looking to ensure we deliver is on how we grow the business, take share of wallet, take share of markets, do that by leveraging the infrastructure and the platform we have in place rather than further impair that and compromise our ability to execute what was always and long been designed and intended which is to win in each of the markets in which we have expanded.

Greg Norwood

Maybe I can follow-up a little bit of some of the things we talked about in the earlier remarks. I mean, certainly I think from our perspective I would echo John's. Nothing about fix that excites us. I think if you look at how we have operated the company for the last five or six years, we know the territory of the mid-50s. We can run at that efficiency level and we will get back there over time, so it's not a promise to reach a territory we have never been in.

What I would also tell you is, when we look at the final HSBC and the types of people and where we need them to run going forward, as John alluded is, we took decisive actions and we will look at that from a reinvestment perspective, so the savings we have there in salaries, as we plan into the future, we will look at how to either deploy that in operating efficiency or effectiveness which will improve operating leverage.

So, what do I mean by that is, you know the savings there as I mentioned would be part of how we look at investing in treasury management services, how do we look at investing to enhance our digital and card. So, with us as we did last year in adjusting the branch complement in Eastern PA, we will continue to look at the operating model we have, how to make it the most efficient and effective and look at the investments we will make relative to that.

Unidentified Analyst

Okay. Thank you.

John Koelmel

Thank you.

Operator

Thank you. Our next question comes from Bob Ramsey. Sir, line is open. You can go ahead and ask question.

Bob Ramsey - FBR Capital Markets & Co

Good morning. I want to talk a little bit about fee income. I know you all sort of gave where you think the number comes out in total. But, as you think about the moving pieces, I know you mentioned the seasonality in the insurance line. Is the merchant and card fees line since I think that's newly broken out, how do we think about the seasonality there, and then how are you guys thinking about mortgage banking as well heading into the fourth quarter? What does the pipeline look like today versus a quarter ago, and is that income going to be flat, up, down? How are you thinking about it?

Greg Norwood

Sure, Bob. Insurance, as you know, is seasonally high third quarter. So, I would as I said, expect that to move down a little bit. The merchant and card I think the third quarter number is a good baseline. One of the factors is, we would expect that to continue to improve as we introduce more of the card capability that we garnered through HSBC into our existing customer base into the legacy First Niagara customers.

I think the key driver there is mortgage banking as you said and we believe the fourth quarter will be another strong quarter, and we will continue to add volume and capacity in the fourth quarter and first quarter, so, we see the fourth quarter being much the same around mortgage. The trade-off between volume and margin is one that we'll continue to manage.

And, another one I would tell you that, I think will continue to perform well is our capital markets derivative business. Again, the team there continues to operate very well, so I would expect that to be where it is at or maybe a little bit better. But, again, I think the fee story will continue to improve on a quarter-over-quarter basis.

John Koelmel

I can only underscore that we are very, very focused on outperforming, better performing in the fee arena, so whether the seasonality trends are relevant, that would be more true if we were fully penetrated. We're underpenetrated.

If the opportunities weren't already there for better execution with the book we have, the insurance agency, Kirk Jensen's settled into his role and clearly expect him and his team continue to grow that book of business as well, so you can run right down the line, Bob.

We are building, so don't over analyze the moment. Clearly, you continue to embed in your thought and thinking that this is about further penetration, better execution, better performance, not trying to predict off a static baseline.

Bob Ramsey - FBR Capital Markets & Co

That's helpful. I guess maybe two would be helpful. Given all that growth, the bottom line going to from $97 million to $92 million on an operating basis seems like more of a drop than just the insurance line would contribute, and so I was just kind of curious what else might be driving that directional move in the fourth quarter and where seasonality may or may not be a piece of that? Is there something other than the insurance line that's contributing to that drop or is that all really insurance?

Greg Norwood

Well, one, I wouldn't look at, when we say consistent with expectations, in isolation of the $92 million the Street had, I think you are focused on it, Bob, the right way. I would look at $92 million versus $97 million and make your judgments within that range.

Bob Ramsey - FBR Capital Markets & Co

Okay. Great. That's helpful. I appreciate it.

John Koelmel

We are not trying to imply too much of a level of precision in a consensus number, Bob.

Bob Ramsey - FBR Capital Markets & Co

Okay. Thank you.

Operator

Thank you. Our next question comes from Dave Rochester. Sir, line is open. You can open go ahead and ask the question.

Dave Rochester - Deutsche Bank Securities

Hey, good morning, guys. Since you've got a handle on what you are looking at for 4Q, I was just wondering if you could make a preliminary comment about or consensuses on trends for next year.

Greg Norwood

I think as most companies have said, it's pretty early to predict 2013. I mean, clearly, we are in planning and I would say we are continuously in planning. But, as we look forward to the end of this year and the election and the fiscal cliff, and frankly in my remarks, the reason I balanced that, is because I think the medium-term impact of QE3 really requires context of those, so we are not in a position to provide guidance any earlier than we normally would in the first quarter.

Dave Rochester - Deutsche Bank Securities

Okay. And, Greg, you had given the premium amortization for the quarter. I was just wondering what the total premium is on the books today?

Greg Norwood

I think it's roughly about $120 million, which is not a real change plus or minus from where it has been before. I will tell you, certainly, we are very cautious of putting a lot of MBS on the book, now its spreads and we are also making sure that we are putting those on at relatively low premiums relative to the marketplace.

Dave Rochester - Deutsche Bank Securities

Okay. In the NII, did you guys have another $3 million or so of accretion this quarter?

Greg Norwood

Well, let me answer very specifically. We had $3 million which has been consistent with what we had quarter-over-quarter, so it's not an increase.

Dave Rochester - Deutsche Bank Securities

Got you.

Greg Norwood

In fact, I want to make sure the transfer we made had no impact on the third quarter.

Dave Rochester - Deutsche Bank Securities

Right. Okay. Is that $3 million excluded from your margin guidance for 4Q?

Greg Norwood

No. And, again, I think to be clear that $3 million has been there from the first quarter, and actually going back to the fourth quarter of last year, so there is no real plus or minus to that. We always provide the guidance on an all-in basis.

Dave Rochester - Deutsche Bank Securities

Got you, and some securities grew $600 million or so this quarter. Can you talk about why it was up that as much as it was? I mean, was that just like a pre-buy to offset expected cash flow this quarter maybe just a little color there?

Greg Norwood

Well, one, I guess I would start with the macro level. As we look out into the future, we will rotate that balance sheet down. I wouldn't read too much into the $600 million. Clearly, it's an element of average in date buys, but I think realistically where we were in September and looked into the fourth quarter around purchases and tried to take advantage of market opportunities, so yes there probably was a little front end loading of the fourth quarter.

Dave Rochester - Deutsche Bank Securities

Okay. All right. Great. Thanks, guys.

Operator

Thank you. Our next question comes from Damon DelMonte. The line is open. You can go ahead and ask question now.

Damon DelMonte - Keefe, Bruyette & Woods

Hi, good morning, guys. How are you?

John Koelmel

Damon.

Damon DelMonte - Keefe, Bruyette & Woods

Great. I was just wondering if you guys could provide a little color around the loan growth you've been getting. The commercial loan growth has been very firm, and are you taking it from larger banks, from smaller banks, is it new demand from customers? Could you just give us a little color as to where you are seeing that growth?

Greg Norwood

Sure. From a macro level embedded in your questions, we don't see the pie getting bigger. I don't think anybody is suggesting that. And in our footprint, I would say, we don't see it getting bigger either.

I think one other thing that's really important to focus on in our story is our pie continually gets bigger, because we are introducing new products and services. We are introducing and delivering more in our newer geography, so whether it would be increasing share in Eastern PA and New England, and the growth opportunities there or whether it would be CRE's syndications, those types of things, we continue to add more oars in the water so to speak.

And, when you look at it too, another metric we look at and I think it kind of informs our confidence in growing is, when you look at our deposit market share and how we've looked at commercial penetration, our commercial penetration is less in each of our footprints than our deposit penetration, so that gives us the momentum and the perspective that we can continue to grow.

And, who are we taking it from? I guess the answer we continue to give is, it's from everybody. Whether it'd be Bank of America, Key, or those folks in the northern part of our footprint or Wells in the eastern part, and were the small banks, so I don't pick those names to say they are high or low on the list, but we compete up and down the spectrum, which I think is a real positive as a franchise.

The community bank, the relationship bank focus allows us to compete very well with the community bank structures and really do that in a relationship way they are used to, but in an enhanced product way that they are not, and when we reach up into the bigger credits and bigger banks, the things we've been adding; the derivatives, the syndications, allows us to do very well there and the talent is big bank talent that's driving that, so the spectrum is by design broad. So, does that give you the color?

Damon DelMonte - Keefe, Bruyette & Woods

It does. That's been helpful. Thank you. Could you also may be shed a little light on the size of credit you've been putting on? Do they run the spectrum as well or are you gravitating towards larger ones these days?

Greg Norwood

It runs the spectrum is the short answer. I think, if you look to our second quarter queue, we had about 10 loans over the $20 million range. That number is going to migrate up a little bit this quarter. But, again, one of the things we are very mindful of is, staying to what we think is an appropriate loan size and that is all relative to nature of the customer, the long-term value proposition and the short-term value proposition. So, not a big shift, Damon.

John Koelmel

We keep working on the same sweet spot we have been working for the last few years, Damon, so short version of the story. A terrific team, better equips, the market increasingly responds to the relationship-driven strategy and approach. We aren't stretching, we aren't doing anything different. We're just doing it that much better, make the decisions, and market and traction just continues to build.

Damon DelMonte - Keefe, Bruyette & Woods

Okay. Great. That's helpful. Thank you very much, guys.

John Koelmel

Thank you.

Operator

Thank you. And our next question comes from Erika Penala. Ma'am, your line is open. You can go ahead and ask the question now.

Erika Penala - BofA Merrill Lynch

Good morning.

John Koelmel

How are you?

Erika Penala - BofA Merrill Lynch

I am well. I apologize in advance. This is going to be a bit of a long question, but I just sort of wanted to understand how we could eventually get to 65% efficiency ratio to 55%, so if I sort of take your comments on the margins, and I appreciate Greg your comments that the commercial loan yield decline may not be as severe going forward. But, coming into next year with a 4.47 loan yield at 3.13 bond yield and an all-in funding cost of 43 basis points, and you mentioned that you are not necessarily, you don't need growth, right? Or you don't need outside growth, you are focused more on the efficiency of your balance sheet in terms of the margin.

And, additionally I appreciate the comments that you made on your fee income initiative, but if I put all that together, it seems like I can't get to 55% unless I assume that that $237 million expense run rate does go down, so I guess am I thinking about that the wrong way? Help me walk through from 65% to 55% in this rate environment?

John Koelmel

Let me give you a CEO response and you guys can pick it up maybe a little bit latter. We are not trying to guide you to 55% in '13 Erica. That was playing off of commentary we gave Barclays last month in terms of targets. Just like we are not trying to get to 95% loan-to-deposit in '13. These are just trying to reframe, reaffirm the targets, but we've continued to establish ourselves over the next two to three years, not over the next 12 months.

So, in terms of just the continued evolution whether it'd be loan-to-deposit ratio, whether it would be fee income targets, whether it would be efficiency ratio, just trying to increasingly provide the clarity of our focus and no implications that that's going to materialize or any of those metrics will materialize in the next 12 months.

Erika Penala - BofA Merrill Lynch

Okay.

Greg Norwood

Erica, I think the way you asked the question reasonably summarizes our operating approach as we move forward, and I would just agree with John's comments about how we've even talked about this in broader context in the Barclays presentation.

Erika Penala - BofA Merrill Lynch

Well, I appreciate that the 55% is long to medium-term goal. I guess I'm wondering, can you get there without rising shortly?

Greg Norwood

I'm sorry without what?

John Koelmel

We're running the business on the premise that rates aren't going to be helpful to any of us for the foreseeable future, so we don't have a better crystal ball than anybody else. We're assuming anything more than what the Fed is telling all of us, and we have got to be prepared to write this, so for us at some point personally the world will get better. But, we're focused on running the business with the environment that we have.

Erika Penala - BofA Merrill Lynch

Okay. And, Greg, I just asked a question if the 55% was achievable without rising rates. Just one last nitpicky question. The $10 million that you transferred from the non-accretable difference to accretable yield. Could you give us a sense of what the life of that pool was just so we could [feed] it into your margins.

Greg Norwood

Three years.

Erika Penala - BofA Merrill Lynch

Okay. Thanks, so much.

Greg Norwood

Yup.

John Koelmel

Thank you.

Operator

Thank you. Our next question comes from Tom Alonso. Sir, your line is open. You can go ahead and ask the question now.

Tom Alonso - Macquarie Research Equities

Thanks. Good morning, guys. Just a couple of quick, but I just want to make sure I heard things correctly. On the securities side of things, should we expect flat balances on a go forward basis or should they start to tick down. And then as they move into loans, and maybe the overall size of the earnings asset pool is flat, I just want to make sure I'm thinking about that the right way?

Greg Norwood

Generally, Tom, you are. I mean, again, I want to be clear that it's not a student body left or right. And, as we plan, we'll be very deliberate on how we bring that down but it is clearly an objective to bring that down and look at continuing to drive higher and higher returns.

Tom Alonso - Macquarie Research Equities

Okay. Great. And, then on the auto loans, the big jump this quarter and then the sort of the move down in yields, what's kind of the term on those? I mean are those short? Are they three years, are they five years? Sort of, what are you guys putting on the balance sheet?

Greg Norwood

Let me start at the top, I guess. From the beginning of this year, we talked about roughly $550 million to $600 million growth, and we did that in context of the fact that we are hiring a very experienced team both, in the front and the back of the house.

The other thing I would tell you is the production in the third quarter and second quarter were both roughly about the same yield, so our rates are not coming down. And, frankly, the FICO scores are exactly the same both, second to third quarter, so the portfolio from a credit perspective continues to be better than we thought, and I think also from a perspective the duration, think of it as a pretty standard book 2, 2.5 years. Again, we like that asset. It's one that we will use to rotate the balance sheet and we'll always compare the rate rocks on those assets and the rate environment relative to other loan growth opportunities.

Tom Alonso - Macquarie Research Equities

Okay. So then if I am hearing you correctly then that's going to build out probably through the fourth quarter, and then as you go forward, you are going to look at whether you build that as a function of where you get the best returns?

Greg Norwood

Yes. We will continue to grow, but you're exactly right. And, again as I said, the balance sheet composition for '13 and beyond will be one that reduced the securities increases the loans. I think also when you look at the auto, if you look at the rate tables, the second quarter number because it was a significant growth is a higher yield, but if you look at just coupons, they are both roughly 3.5%.

Tom Alonso - Macquarie Research Equities

Okay. Great. And then just, I guess, one number that you mentioned I think $2.5 million of higher comp expense this quarter or sort of incentive comp I guess related to stronger production. Was that from mortgage banking, or insurance, or sort of where was that?

Greg Norwood

You've got mortgage, insurance, wealth, retail, so again when you look at the very positive volumes, that does have a commission related variable expense component.

Tom Alonso - Macquarie Research Equities

Okay. Sorry. Go ahead.

Greg Norwood

No. That was it.

Tom Alonso - Macquarie Research Equities

Okay. Actually that was it for me as well. Thanks, guys.

Greg Norwood

Thanks, Tom.

Operator

Thank you. Our next question comes from Joe Fenech. Sir, your line is open and you can go and ask question now.

Joe Fenech - Sandler O'Neill & Partners L.P.

Good morning. Most of my questions were already answered. But on the expense side, guys, I know you said there aren't any major new initiatives planned but are there any sort of lingering synergies on the expense side that you are anticipating from HSBC that we are not yet seeing in the numbers?

Greg Norwood

Yes, Joe. So, go back to John's comment about in our perspective, when we closed the HSBC and looked at it from a very inside perspective, we did reduce the overall complement of FTEs. We think we need to run the business we have today, so we took those actions in the first part of October. And, so when we look out to 2013, that salary and benefits, say, to your point we will reinvest in things like treasury management services, digital and other fee initiatives.

John Koelmel

In terms of incremental synergies, Joe, at this point it's more about leveraging the benefit of the larger platform, more robust suite of products and the services, so we are not sitting on any efficiency or expense actions at this point.

Joe Fenech - Sandler O'Neill & Partners L.P.

Okay. And then I know you don't want to provide specific guidance for next year. I understand that. But, with respect to NIM, if we don't see any change in the rate environment over the course of the next year, what's sort of your general though on whether or not the redeployment or shift from investments securities in the loans or over times that shift in the mix of earnings assets, if you will, can that offset just sort of the natural headwinds against the margin in this type of rate environment if we stay right where we are?

Greg Norwood

Well, when I think about it, Joe, you're right. I mean, moving into loans not only for the yield but for the fee, will create a better contribution and security. So, clearly, that is part of the return focus. And, the ability to forecast that right now, I'll go back to what I said is we are just like others, not going to give guidance on that until we get into the fourth quarter results in the January call.

John Koelmel

Well, I can only reinforce what you are both focused on. We're managing total revenue, we're not managing margin, per se. As Greg said multiple times, we've got incremental levers to pull given the current balance sheet position as to how we remix the business, can do with that with better return opportunities, the growth trends in terms of the volume benefits, we feel very good about what we can make happen in '13 in spite of the adverse realities.

Joe Fenech - Sandler O'Neill & Partners L.P.

Got it. Thanks, guys.

John Koelmel

Yes. Thank you.

Operator

Thank you. Our next question comes from Matt Kelley. Sir, your line is open. You can go ahead and ask question now.

Matt Kelley - Sterne, Agee & Leach

Yes, guy. Just curious has the OCC guidance on customers who are going through bankruptcy and how you carry the home equity loans impacted your numbers or will they going forward?

Greg Norwood

Sure, Matt. A couple things. I would look at it from a P&L perspective. It does not have a meaningful impact on us. The main reason there is, one, we have very few bankruptcies overall, so we are talking handful of loans, and the other side of it.

John Koelmel

Literally.

Greg Norwood

Yes. Literally, its 20 loans, 30 loans something like that. The other side of that is, the whole issue there is a requirement to use the collateral value for your FAS "114". And, in our marketplace, as you know, [HPI] is flat or up. Though our collateral values for a bankrupt person in the bank is much higher than what I would say if you're looking at a portfolio in the [Sandy States]. So, when you think about it, it's way less than $1 million. We're actually looking at continue to refine that, but I don't see that changing a lot.

Matt Kelley - Sterne, Agee & Leach

Okay. Got you. And then can you just help us understand, how much of the commercial loan growth both CRE and C&Is is going to purchase syndicated type of credits and then what your thinking is on that going forward and how big those portfolios are today?

Greg Norwood

I would let Ron follow-up with you on the details of that, but the purchase syndicated book is not that significant a contributor in a quarter-over-quarter growth. As I mentioned, we did lead some deals this quarter, but we can give you some granularity around that book.

Matt Kelley - Sterne, Agee & Leach

Okay, and last question, the New England market improved in terms of commercial loan growth. Where were you seeing that C&I? Did you add people there? How did you kind of drive that?

Greg Norwood

Well, I appreciate the lead in on the people, because one of the things that we have talked about for some time now is turning the New England from more of the thrift to bank that they were trying to do before we acquired them. And, David Ring is running that geography for us right now and the people are in place, they are high caliber commercial bankers and we do expect to see that loan growth continue.

John Koelmel

The traction is finally kicking in and we are pleased with that, looking forward to even more in '13 and beyond.

Matt Kelley - Sterne, Agee & Leach

Okay. All right. Thank you.

John Koelmel

Thanks, Matt.

Operator

Thank you. Our next question comes from David Darst. Sir, your line is open. You can go ahead and ask the question now.

David Darst - Guggenheim Securities LLC

Good morning.

John Koelmel

Morning, David.

David Darst - Guggenheim Securities LLC

On the credit card platform. Is the product primarily in the acquired footprint today and what's the strategy to roll it out into your three states?

Greg Norwood

Yes. Great question. Our portfolio is largely the HSBC portfolio. And prior to that, I would say we had a pretty vanilla card offering, and now I think we have and we'll continue to build a really robust, so you are right relative to rolling that product capability out into the other part of the geography. We see that happening now and we can see that being a much bigger component in 2013.

I guess I would also add on the card piece. I think it's also important to say what we brought over from HSBC was the legacy Marine Midland, the legacy branch originated card. We all know branch cards perform 30% to 50% better. We saw that through the downturn, so from a growth perspective, we see a really strong ability to manage credit costs on the card and see a of penetration to get that into our customers' hands and then as we talk about in volumes to have those customers act more like bank customers in utilization and penetration.

David Darst - Guggenheim Securities LLC

So are you rolling out enhanced reward products in addition to what HSBC had?

Greg Norwood

We have product and I don't want to get into the type of rollouts and when, but we are continuing to rollout improvements in the products offering, and I will tell you another thing that we are looking at and we will do is to build out our own internal call and contact center, so that it will be 100% process. From a First Niagara perspective, we see that's a very important part of the branch relationship model, so those are the things you can expect over the next couple of quarters.

John Koelmel

With no implication we are doing anything more than what HSBC was doing.

David Darst - Guggenheim Securities LLC

Okay. How about in the commercial, or expanding your commercial businesses into the acquired branches, where would you say you are in that rollout?

Greg Norwood

From an HSBC perspective, we've done and we are pleasantly pleased with where we are on the loan origination components in the New York State market. We see continuing capabilities there. You probably noticed that we have pulled a tri-state region to focus on that part of our footprint and to make it an even higher and clear focus. It's obviously something we have been looking at, but it's those types of things that we think will allow us to continue to leverage the more density we have in the marketplace from an HSBC perspective.

David Darst - Guggenheim Securities LLC

Okay. Great. Thank you.

John Koelmel

Thanks, David.

Operator

Thank you. (Operator Instructions). John Pancari. Sir, your line is open. You can go ahead and ask the question now.

John Pancari - Evercore Partners

Good morning.

John Koelmel

Hi, John.

John Pancari - Evercore Partners

On the securities you put on this quarter against just back-to-back, so if I understand it correctly and your rationale for adding in this quarter is that you expect that you could have deposits come in next quarter that could allow the borrowings to taper off that you funded it with. Is that how you are viewing as the modest pre-buy here or I'm just trying to get more color on your decision add?

Greg Norwood

Yes. Not linking it to the funding buy per say, but when we are looking forward from an August-September perspective and the rate environments, we looked at taking free cash flow from a third and fourth quarter perspective and said okay how do we think about investing that realizing that we thought spreads would tighten, so it really is to keep the average balance about the same, but we looked at pre-buying what we would normally buy in the fourth quarter. Not in total, but in some part to capture what we thought was yield that exists in the third quarter that won't exist in the fourth quarter.

John Pancari - Evercore Partners

Okay. So, therefore you don't expect that you are going to I guess continue this in the fourth quarter, any type of leveraging of the balance sheet further out?

John Koelmel

No. Just the opposite.

John Pancari - Evercore Partners

Okay. All right, and then on the indirect auto book, you gave us some color on there. If I understand it correctly, you're not seeing rates on your new originations drop below that 350 or are you seeing that, because we are certainly hearing that comparative pressures are mounting in the segment that you are banking.

Greg Norwood

We are not seeing it.

John Pancari - Evercore Partners

Okay. All right.

Greg Norwood

I think part of it is, one, when you look at in the marketplace there's a lot of different variables and the type of products, but we have 60% of it used perspective which will help you rate the FICO bands we are in frankly as they dropped another 10 basis points. I think we have a better rate rock without any real difference in risk.

And, I think it's important to know of the 600 to 800 dealers, these are dealers that our teams have relationships with, so we feel like it's more of a lift out business than a building business and that allows us to be real smart about the types of credits we want to put on the books.

John Pancari - Evercore Partners

Okay. All right. And then lastly John, any comment on your M&A moratorium?

John Koelmel

As I said I'm fully focused on running the business right along with everyone else.

John Pancari - Evercore Partners

All right. Great. Thanks.

John Koelmel

Thank you.

Operator

Thank you. (Operator Instructions).

John Koelmel

Sounds like we wrapped up, Nova.

Operator

Yes, Sir. Sir, at this time there are no further questions and I would like to hand the call back to you for any closing remarks.

John Koelmel

I appreciate your facilitation Nova. And as always, very much value everyone's attendance and engagement this morning. Enjoy the rest of earnings season. Happy Halloween and holiday season all and we look forward to talking to you latter part of January. Thanks so much.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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