Jan 22, 2009
Executives
Henry L. Meyer - Chief Executive Officer Jeffrey B.
Weeden - Chief Financial Officer Beth E. Mooney - Vice Chairman and Head of Key Community Banking Joseph M.
Vayda - Treasurer Peter Hancock - Vice Chairman National Banking Charles S. Hyle - Chief Risk Officer
Analysts
Analyst for Matthew O'Connor - UBS Brian Foran - Goldman Sachs Justin Maller - Lord Abbott. Nancy Bush - NAB Research Gerard Cassidy - RBC Capital Markets Michael Mayo - Deutsche Bank
Operator
Welcome to KeyCorp's fourth quarter 2008 earnings results conference call. (Operator Instructions) At this time I would like to turn the call over to the Chairman and Chief Executive Officer, Mr.
Henry Meyer.
Henry L. Meyer
Good morning and welcome to KeyCorp's fourth quarter 2008 earnings conference call. Joining me for today's presentation is our CFO, Jeffrey Weeden.
Also with us to participate in the Q&A portion of our call are Beth Mooney, Vice Chair of our Community Bank; our Chief Risk Officer, Chuck Hyle; and our Treasurer, Joe Vayda. I am also pleased to have Peter Hancock with us this morning.
Peter joined us in December as Vice Chair of National Banking and brings with him an extensive background in the financial services industry, spanning nearly 30 years. He was held positions in business management, capital markets, finance, and risk management, bringing a unique and important dimension to Key’s senior management team.
If I could turn your attention to Slide 2, which is forward-looking disclosure statement, it covers our presentation materials and comments as well as the question and answer segment of our call today. Now if you would turn to Slide 3, today we announced a net loss of $1.13 per share for the fourth quarter.
The loss was primarily attributable to a non-cash accounting charge for goodwill impairment and continued building of the loan loss reserve. Our core results continue to benefit from solid performance from our community bank and decisions made to exit higher-risk or low-return, non-relationship businesses such as subprime lending and the actions taken to reduce our homebuilder exposure.
Our results for the quarter and the year also reflect the decisive actions taken to fortify our balance sheet and position the company for this extremely challenging operating environment. These actions included participating in the U.S.
Treasury’s Capital Purchase Program which bolstered our capital by $2.5 billion. For all of 2008 Key raised capital of $4.2 billion.
At year end our tier-1 ratio was a strong 10.81% and our total capital ratio reached 14.67%. We also continued to strengthen our funding and liquidity position by issuing $1.5 billion of new term debt under the FDIC’s Temporary Liquidity Program.
The added capital and strong liquidity position allow Key to take advantage of new lending opportunities and support our existing relationships. As highlighted in our earnings release, in the fourth quarter we entered into more than 22,000 new extensions of credit with clients, representing approximately $5.7 billion in new or renewed loans.
As I mentioned, we also continued to build our loan loss reserve given the current economic environment and uncertain outlook. In the fourth quarter our loan loss provision was $594.0 million, which exceeded our net charge-offs by $252.0 million.
At year end our loan loss reserve stood at $1.8 billion and represented 2.36% of period-end loans and 147% of non-performing loans. During the fourth quarter Key reached an agreement with the IRS on all material aspects about global tax settlement on leasing transactions.
As you will recall, Key took a $1.0 billion after-tax charge in the second quarter as a result of an adverse court ruling that impacted the accounting for certain lease financing transactions. During the fourth quarter Key and the IRS agreed on the terms for settlement on the disputed tax positions, which resulted in the reversal of $120.0 million of these charges.
The positive benefit of the settlement was partially offset by the accrual of $68.0 million of additional taxes for GAAP purposes for the wind down of our Canadian leasing operation. Over the past several years we have also continued to focus on the strategic allocation of our capital.
We have made substantial investments in our people, technology, and branch infrastructure, including our branch modernization program where we have completed 100 branches to date. We have also made progress in reshaping our business mix by exiting low-return and indirect portfolios and reallocating capital to our relationship businesses.
Jeff will provide an update on our exit portfolio in his remarks. Key has clearly benefitted from past decisions to exit subprime mortgage, credit card, brokered home equity, consumer auto, and the McDonald brokerage business.
We are also exiting direct and indirect retail and floor-plan lending for marine and recreational vehicle products and limiting new student loans to those backed by government guarantee. Now I will turn the call over to Jeff Weeden for a review of our financial results.
Jeffrey B. Weeden
Slide 4 provides an overview of the company’s fourth quarter results. As Henry mentioned, we incurred a net loss of $1.13 per common share for the fourth quarter.
While there are a number of items that impacted the quarter, the most significant items are noted on this slide and the respective EPS impact. We have included a more extensive of items impacting our quarterly results on page 2 of today’s earnings release.
Of particular note was the $465.0 million, or $0.85 per share, non-cash charge we took for goodwill impairment in our national banking operation. This charge had no impact on any of tangible or regulatory capital ratios.
And as Henry mentioned, we continue to build our reserve for loan losses and recognized a credit for reaching a settlement with the IRS in the quarter with respect to the disputed leveraged lease arrangements. Also during the fourth quarter we changed our plans for permanently reinvesting the proceeds of our Canadian leasing operations in Canada.
As a result, we recognized under GAAP additional taxes on the accumulated earnings of this operation. Turning to Slide 5, the company’s net interest margin contracted in the fourth quarter to an adjusted 2.84% from 3.13% in the third quarter.
This was greater than the contraction we were anticipating due to the asset-sensitive position the company was in and the significant cut by the Fed in interest rates experienced in the fourth quarter. As a result, we experienced asset repricing at a much faster pace than the ability to reprice deposits and other funding.
In addition, we were maintaining much higher levels of excess funds during the fourth quarter to meet potential liquidity needs of our clients. We estimate having a larger balance sheet, as well as maintaining 30 to 90 day term funding, during the fourth quarter versus overnight funding, weighed on the margin approximately 12 basis points to 14 basis points.
We also experienced a shift in our deposits to higher costing certificates of deposit from money market and NOW accounts. This further contributed to our asset sensitivity and along with the lagging down of rates paid on money market and NOW accounts due to the competitive market environment, further contributed to the margin pressure by another 8 basis points to 10 basis points.
And finally, the reduced value of free funds and elevated levels of NPAs and NCOs also pressured the net interest margin. Turning to Slide 6, the loan categories on this slide have been adjusted for the exit portfolios identified earlier in 2008.
For example, the marine and RV floor plan loans on this slide have been removed from the commercial, financial, and agricultural loans, CF&A totals, for all periods and are reflected in the exit portfolio details. Average total loans were up approximately $700.0 million from the third quarter.
During the fourth quarter the company experienced a $1.3 billion increase in average balances of CF&A loans. This was primarily the result of client draws on commitments late in the third quarter.
As the fourth quarter unfolded, we experienced many of these client draws paying down as liquidity conditions improved somewhat in the commercial paper markets. In addition, our ability to make new commercial loans in the markets we serve aided our commercial loan growth for the fourth quarter.
The increase in average balances of CF&A loans was partially offset by decreases in leasing and the exit portfolios. Turning to Slide 7, average deposits increased $1.5 billion, or 2.4%, unannualized from the third quarter.
Average deposits are up $4.9 billion, or 8.4%, from the same period one year ago. Included in this year’s balances are approximately $1.8 billion of balances associated with the Union State acquisition completed on January 1, 2008.
The company experienced good growth in our community banking markets for deposits. As part of this growth, we continue to see a shift in customer preferences, away from NOW and money market accounts and towards term CDs with individuals locking in higher rates for CDs as overall market rates continue to decline.
As we saw in our net interest margin, there was a cost associated with these shifting balances. We believe that longer term the growth in customer deposits will serve the company well by providing stable funding and ultimately a better overall cost of funds.
Slide 8 shows a number of asset quality measures and the trends we have experienced over the past five quarters. Net charge-offs in the fourth quarter were 1.77%, which is up from 1.43% we experienced in the third quarter.
This increase was incurred in our CF&A portfolio as well as across many of our consumer portfolios. We also experienced an increase in non-performing loans and non-performing assets in the current quarter.
Non-performing assets were up $225.0 million and represented 1.91% of total loans, other real estate owned, and other non-performing assets as of December 31, 2008. Our reserve balances stood at $1.8 billion and represented 2.36% of total loans and 147% of non-performing loans at December 31, 2008.
In the past year we have increased our reserve for loan losses by approximately $600.0 million. On Slide 9 we provide a breakdown of our credit statistics by portfolio for the fourth quarter.
During the fourth quarter we experienced an increase in net charge-offs from the third quarter in our CF&A portfolio of $57.0 million to $119.0 million, or 1.71% annualized of average balances. $29.0 million of this increase was tied to dealer floor plan lending in both recreational lending and auto floor plan.
The balance of the increase came from two credits in the institutional bank, one related to a media company and the other to a technology-related credit. Non-performing loans also increased $106.0 million in the CF&A category, with the majority of this increase tied to dealer floor plan lending and a significant portion of this in the exit recreational lending portfolio, which experienced an increase of $61.0 million in NPLs in the fourth quarter.
We expect the recreational lending portfolio to remain under stress as the economy continues to struggle. We will review the commercial real estate portfolio in more detail in a minute, however, we experienced a slight decrease in net charge-offs and continued to see an increase in non-performing loans during the fourth quarter from this portfolio.
The residential mortgage and home equity books also experienced an increase in net charge-offs in the fourth quarter as we saw an increase in bankruptcy-related charge-offs and a continuation of the declining real estate prices. Overall, we expect these portfolios to remain under pressure as unemployment continues to rise and the declining real estate markets persist.
However, we do expect to continue to see our community-bank based home equity loans outperform peer statics for overall credit quality. We have included a slide in the appendix of today’s materials, which provides additional statistics on our home equity loans.
With respect to the marine lending portfolio, which is in a run-off mode, we saw an increase in charge-offs and repossessions as we continued to see recovery rates fall to approximately 50% for the fourth quarter, down from 55% in the third quarter and approximately 60% for the fourth quarter of 2007. Slide 10 provides an updated view of our commercial real estate portfolio at December 31, 2008, by property type, by geographic location.
This portfolio of $18.5 billion of loans represented 24.2% of Key’s total loans outstanding and 46.1% of non-performing loans at December 31, 2008, and accounted for 26.9% of total net charge-offs for the fourth quarter. As was mentioned on the previous slide, this portfolio experienced a decrease in net charge-offs for the fourth quarter and the primary area of increase in non-performing loans in this portfolio was away from the residential property segment.
We expect the commercial real estate portfolio to remain under pressure in 2009 with the residential real estate segment continuing to be worked down and we experienced deterioration in other segments, such as the retail property group, which went from no non-performing credits at September 30, 2008, to $58.0 million in non-performing credits at December 31, 2008. Slide 11 shows the detailed breakdown of the residential properties portfolio.
This portfolio declined approximately $200.0 million from September 30, 2008, and $1.352 billion from December 31, 2007. Our exposures in Florida and California at December 31, 2008, stood at $615.0 million and represented 28.6% of our total residential properties CRE exposure, down from $1.449 billion, or 41.3%, of our total residential properties CRE exposure at December 31, 2007.
Slide 12 is an overview of our exit portfolios at December 31, 2008. These portfolios, which totaled $9.5 billion at December 31, 2008, represented 12.3% of total loans and loans held for sale and accounted for 40.6% of fourth quarter net charge-offs and 32.9% of total non-performing assets.
We expect to continue to experience elevated and a disproportionate level of net charge-offs from these portfolios in 2009. In addition, our expectations for paydowns on the portfolios has been extended as the economy continues to struggle, leaving fewer options for potential refinancing of these credits.
And finally, turning to our capital ratios on Slide 13, we remain well capitalized by any regulatory measure and our tangible equity to tangible asset ratio is a strong 8.92%. Excluding the TARP capital from this ratio, our tangible capital ratio is 6.58% and our tangible common equity to tangible asset ratio was 5.95% at December 31, 2008.
As I discussed when we were reviewing the net interest margin, we were maintaining excess liquidity during the fourth quarter to meet potential client needs. At December 31, 2008, we were carrying approximately $4.5 billion in excess funds sold position.
Adjusting for this excess Fed Funds sold position, our tangible common equity ratio would have increased to approximately 6.22%. That concludes our remarks and now I will turn the call over to the Q&A segment of our call.
Operator
(Operator Instructions) Your first question comes from Analyst for Matthew O'Connor – UBS.
Analyst for Matthew O'Connor - UBS
You’re sitting with more capital than most but haven’t done a deal yet. Two other Ohio banks reported results today and are sitting in a weaker capital position.
Do you have any appetite to consolidate within Ohio and can you do it without the help of the government?
Henry L. Meyer
You know we have always been looking for opportunities and as I have described on almost every quarterly call, our priority is to do them in market. While there are some higher-growth markets that Key participates in, we are not against trying to grow share in any of our markets, and that would include Ohio.
This is a very difficult environment to do a deal. We have seen a couple of the deals that have been done have had assistance or have needed additional capital.
So I would tell you that we are in a very strong position, but it isn’t burning a hole in our pocket and under the current valuations on balance sheets, I’m not sure and I haven’t studied it enough to really know all of the alternatives, but I’m not sure we wouldn’t need to raise even more capital. We’ve got capital to do smaller deals.
We are looking to participate in FDIC takeovers where our strong position would allow us in-market to be the winner on some of those bids. But as far as your specific question, in Ohio I don’t think we are going to see many big deals done that aren’t pushed by the regulatory agencies for some time.
At least until we see capital markets alternatives and activity pick up.
Operator
Your next question comes from Brian Foran - Goldman Sachs.
Brian Foran - Goldman Sachs
Liquidity, I think people are a lot more comfortable with 6%+ TC as opposed to being down in the 5%s. Are there other things you can do to raise TC as we look out into next year, assuming internal capital generation from earnings is going to be kind of minimal?
Jeffrey B. Weeden
We didn’t hear the first part of your question there but I know you were talking about capital and the need for 6%. I think if you look at the additional liquidity that we were carrying at the end of the year, on an adjusted basis, on a TCE basis, we were above the 6%, or in the 6.22% range.
I think the other thing that you have to factor in is that we have mandatory convertible preferred that is also out there, in the area of about $658.0 million balance at the end of the year, so that would add, based on approximately $100.0 billion of assets, about 65 basis points more to the capital ratios. So we think our capital ratios are actually in a very good shape.
And we are going to continue to operate going forward here in a very prudent manner, focusing on credit quality and our portfolios and the overall liquidity of the public company, which is in excellent shape at this time.
Henry L. Meyer
I would just add to that, that Jeff reviewed the exit portfolios, which total over $9.0 billion. While there are not a lot of homes, and therefore that portfolio is not going to come down quickly, as that portfolio reduces it improves our capital number.
So I think given that we raised common equity in 2008, that we have added to our tangible through the TARP funds, that we really stand in pretty good shape and we are not looking at needing to raise additional capital, even in our more stressed scenarios for 2009 and 2010.
Brian Foran - Goldman Sachs
The unfunded commitments, you mentioned some of the draw activity, Citigroup got some attention because in their $300.0 billion $50.0 billion of that was unfunded commitments in the government backstops. Have you seen any evidence that unfunded commitments being drawn today are adversely selecting and higher delinquency rates, higher default rates?
Just any evidence we should think about, loss content coming out of unfunded commitments.
Charles S. Hyle
I think the short answer is no. A lot of the draws that we saw through our unfunded commitments in the fourth quarter were major companies that really didn’t have as much access to the commercial paper markets.
And those drawings, while they were material during the quarter, have pretty much dissipated. So we really haven’t seen much in the way of adverse selection on the unfunded side.
Brian Foran - Goldman Sachs
What kind of severities should we think about on floor plan loans? I’m assuming historically it has been pretty minimal but it would be going higher right now.
Charles S. Hyle
I think historically the loss rates were sort of like 7 basis points or something like that, so they have been quite minimal. And clearly they are going up, and they have gone up.
Part of the issue is the out-of-trust situation and having good audit controls is really the most important aspect of this business. We have done a number of stress analyses on this.
I don’t see the loss content, at least in our portfolio, going up dramatically but clearly it is going to be at somewhat elevated levels over the next number of quarters. But again, the critical feature here is good audit controls and if you let that get out of control then the loss content numbers can go up.
Brian Foran - Goldman Sachs
You mentioned 6.22% excluding the excess liquidity and I realize you don’t need to carry as much as you did, or at least it doesn’t seem like you need to, but should we assume that you carry some going forward and then kind of haircut it and put it somewhere in between?
Jeffrey B. Weeden
In these uncertain times we are going to continue to have a little bit more in the form of excess liquidity than we would have had, say going back to 2007 and prior. Certainly I think 2008 and going through that particular type of an environment, it is just normal for us and natural for us to think about carrying more liquidity than what we have in the past.
At the end of the year we just happened to have extra around because we didn’t know what client needs might come about.
Operator
Your next question comes from Justin Maller - Lord Abbott.
Justin Maller - Lord Abbott.
Just on that score, to try to nail you down a little bit, is $4.5 billion really $2.5 billion kind of, in this environment? I think we’re just trying to get a sense, you’re trying to give us kind of a pro forma TCE and just trying to get a sense as we go into the first quarter and second quarter and so on, how much should that drift up, kind of all things equal.
As you bring some of the liquidity down.
Jeffrey B. Weeden
I think in terms of the $4.5 billion of excess liquidity, I would think in terms of we will probably end up operating anywhere from $1.0 billion to $2.0 billion, so if you used $1.5 billion kind of as an excess type of a position, so from that regard, about $3.0 billion down from where we were.
Justin Maller - Lord Abbott.
And then also on the draws from your customers, kind of ballpark number, and that has started to come down, because that obviously would also be accretive to TCE, right?
Jeffrey B. Weeden
Correct. But by the end of the year most of those draws had come down.
So they were drawn in the third quarter, they continued to go up in the first part of the fourth quarter, and then we saw them basically pay down in the latter part of the fourth quarter.
Justin Maller - Lord Abbott.
You talked about a certain percentage of NPAs and charge-offs and so on related to the floor plan. Could you just review that, in the context of what you were just saying about the losses have tended to be pretty minimal and the key is the audit capabilities.
I’m sure you are just trying to make sure whether it’s cars or boats or whatever that you have the inventory kind of controlled, but if you could describe that and what is there for lead into, obviously in the short term there is going to be some pressure as you need to move out of some of that stuff, but I would think by-and-large most of that should be money good, should it not?
Charles S. Hyle
Absolutely. And it is the critical feature of this business and our charge-off numbers, as Jeff outlined in the call, have gone up, split pretty evenly between recreational, boat, marine, RV, and auto, but your point is absolutely correct.
That if you have good audit and you have the vehicles and you have good procedures, the loss content should be relatively minimal, but it is very clear that this is an industry that is going through a lot of stress right at the moment so the losses will be higher than they have been historically. But we don’t expect it to be a major loss content.
Justin Maller - Lord Abbott.
What is the total portfolio? How does it break down into auto dealers versus marine and RV?
The reason I’m asking is I would think the auto side of it should be more liquid and easier to dispose of versus it might be a little bit tougher in the other two. Is that fair?
Charles S. Hyle
Yes, I think that’s fair. Auto is about $2.6 billion.
Henry L. Meyer
We actually have a slide on the exit portfolio. I believe it’s about $950.0 million, $945.0 million, at the end of the year, so it’s identified on the exit portfolio, on the marine side of the equation.
Charles S. Hyle
It’s a smaller business and that’s actually beginning to liquidate a bit.
Operator
Your next question comes from Nancy Bush - NAB Research.
Nancy Bush - NAB Research
I heard you say that the margin decline was due to your degree of asset sensitivity in the fourth quarter. Could you say again what you said guidance going into 2009?
Jeffrey B. Weeden
We did not provide specific guidance for going into 2009. I think a lot of the pressure we did experience in the fourth quarter, on a forward basis, there may be some additional pressure.
It’s such a challenging time right now to provide a high degree of certainty around a number of these measures, but I would expect that the margin would begin to stabilize at this particular point.
Joseph M. Vayda
I would just add that, as we discussed earlier, we clearly put a premium on having strong liquidity at the end of the year and during the fourth quarter and we knew in making that decision it would detract somewhat from our tangible equity ratio but it also detracts from the net interest margin. And that’s where the asset-sensitive position comes from as well.
When you are borrowing money for 30 to 90 days and investing in shorter term to create that excess liquidity, there is an increase in our cost of funds, that flows through a reduction in the margin. And as you know, there are many other moving parts to the margin as well.
And there are clearly pressures in a low-rate environment, coming from the inability to lower deposit rates to the same degree that we’ve seen a decline in the Fed Funds target. Recognize that most of our loan book, about 65%, is floating rate in nature and responds pretty quickly to declining rates as the prime comes down and LIBOR declines as well, but that’s not necessarily the case, again, to the same degree, in the rates that we pay on our deposit book.
Nancy Bush - NAB Research
You brought up the issue of deposits pricing, has there been any alleviation of the deposit pricing pressures in the Midwest? Has the demise of Nat City helped at all up to this point?
Beth E. Mooney
We continue to see our most competitive and aggressive rates continuing to be paid in our Midwestern and Great Lakes markets and since the end of the year we have seen some lessening of the overall rate environment that through the fourth quarter had money market offerings in the top of the market, in the 3% to 4%, range dropping into the high 2%s. But we still see Great Lakes competition as our most competitive deposit market.
But it has eased a little since the first of the year.
Nancy Bush - NAB Research
Could you also address branch openings, plans for this year? Has there been any change in the plans for branch renovations, branch openings, as a result of the pretty extreme credit situation?
Beth E. Mooney
Yes, as you know, a key part of our strategy is the density of our distribution and continuing to invest in what we call strategic growth markets, primarily in our western Rocky Mountains and western Pacific Northwest. We do still have plans to consider de novo expansion into select markets and a more scaled back modernization program, but we continue to feel strategically that those are important parts of the community bank strategy, part of our competitiveness in the market, and we feel like we will continue to make those align to the times, but continue to make those investments.
Operator
Your next question comes from Gerard Cassidy – RBC Capital Markets.
Gerard Cassidy – RBC Capital Markets
Could you give us your views on the legislation that is winding through Congress with the cram-downs through the Chapter 13 bankruptcy filings? What is KeyCorp’s position on that?
Henry L. Meyer
We support where the financial services industry has come out on this and specifically the Round Table, which is that’s just bad policy and is going to affect how we make loans as an industry, going forward. Its actual affect, as I think you know, on KeyCorp, is minimal because we’re just not much of a first mortgage lender.
We do some CRA first mortgages and we do some private banking, but we got out of the first mortgage business quite a while ago because we just get our depositors to commit to long-term rates so we had an imbalance there. So it isn’t going to be a big issue for us as a bank.
I think it’s a bigger issue for the industry and we think it’s bad policy to let bankruptcy judges decide how to change contracts.
Gerard Cassidy – RBC Capital Markets
In terms of the credit deterioration that you have experienced, has there been any shifting in terms of you’re seeing more delinquencies in other parts of your franchise versus what you saw 6 or 12 months ago? Southern California residential construction of course, was a problem that you discovered 12 months ago.
Are you seeing other parts of the country now becoming a hot spot for future credit deterioration?
Charles S. Hyle
I would say on the residential side it has clearly spread to a broader geography. Again, it is more southern but it is hard to generalize too much.
I mean, there is weakness is residential markets pretty much across the board to one degree or another. Clearly we have seen delinquency in our floor plan business.
We have seen some migration in broader consumer and commercial portfolios, very much driven, I believe, by the economy and the really rather dramatic shift the economy took in the fourth quarter. But in terms of our portfolio, our delinquency numbers, while they have moved some, they haven’t moved dramatically.
But we have certainly seen some migration. So I think that is the way I would summarize for your question.
Gerard Cassidy – RBC Capital Markets
Are you more concerned that as the general recession takes hold and goes deeper, say over the next 6 to 9 months, that parts of the franchise that were not over-exposed to the housing bubble bursting may be more vulnerable to credit deterioration because now we are in a good old-fashioned down leg of the credit cycle?
Charles S. Hyle
Clearly it’s something we look at a lot and every bank portfolio is correlated to the general economy to a greater or lesser extent. But we have spent a lot of time over the last three years, particularly in our middle market and business banking books, to find ways to take real cyclicality out of those businesses.
Focused on automotive industry, building material type companies, to try to anticipate that sort of down turn. I think we have done a relatively good job of that.
But having said that, this is a real tough economy and there is a lot of uncertainty out there as to how deep and how wide the recession is going to be. But we are certainly very focused on that.
Gerard Cassidy – RBC Capital Markets
You have been good at attacking the residential construction problems and trying to exit out of that area. One area of the portfolio I noticed this quarter had a little bit of a non-performing asset pickup was the unoccupied commercial real estate retail portion of the portfolio.
Can you give us some color in that area since there have been so many retailers that have filed bankruptcy recently and more apparently are expected. Is that particular portfolio of more concern than maybe 3 or 6 months ago?
Charles S. Hyle
It’s clearly of more concern than it was 6 months ago. I think we disclosed at the end of the third quarter we had an exceptionally clean portfolio in retail.
Virtually no NPLs or delinquencies. And we do have an increase of about $58.0 million in the NPL category in the fourth quarter.
That is isolated to two or three instances which I would characterize as not material problems, in the sense that I think they’re not no-hopers, but clearly there has been some degradation there. In terms of our exposure to retail, and this is a book that we have underwritten quite carefully and have a great diversity in our retail client base.
I think we only have about three or four retailers that make up more than 1% or 2% of the revenue stream associated with this book. So it is very well diversified and those top three or four are all sort of single-A-type national credits.
But clearly we are watching the retail space very carefully and any of the troubled retailer names, I would put it well below 1% of the rental property flows in that portfolio. But clearly it’s an area that we are watching very carefully.
Operator
Your next question comes from Michael Mayo – Deutsche Bank.
Michael Mayo – Deutsche Bank
Can you elaborate a little more on the deposit shift? I guess it’s like $3.0 billion away from the lower cost NOW, money market accounts.
That $3.0 billion into higher-priced CDs. I guess you were paying 1% before and now you are paying 4% on these CDs so that certainly can hurt the margin.
Can you talk about that shift a little bit more and the trade-off in going toward the higher priced CDs versus other government-insured debt funding programs.
Beth E. Mooney
We did see a distinct preference shift in the fourth quarter into certificates of deposits as Fed rates declined when the spread between what is available in the money market and what was available competitively in the markets for term CDs widened, we saw a significant shifting as consumers and other holders of liquid fund, as well as a flight to quality under FDIC insurance limits that were increased in the fourth quarter, we saw a migration. There was some shifting, also, as a result of diversification of funds in certain account holders, particularly in our wealth group, migrating deposits around to be in compliance with FDIC insurance limits.
So we did see some decline in the wealth sector. But the largest proportion of the shift really was flight to higher rate certificate of deposits.
Michael Mayo – Deutsche Bank
And the relative trade-off between pursuing more CD growth versus some of the newer government-insured debt programs.
Joseph M. Vayda
First of all, picking up on Beth’s comment, of course when you shift from our money market accounts to CDs it’s at a higher rate to the customer, and the pressures on the rates, due to competitors, particularly in the Midwest, is also true in the CD market. We do need to compete there and we do look to protect our deposit base, but again it has a cost to it.
And, frankly, picking up on my comment earlier related to asset sensitivity, when you are booking fixed rate CDs, primarily in the one to two year time frame, that’s a contributor to becoming more asset sensitive as well, relative to the money that previously had been in money market accounts. As far as the government programs, as you are probably aware, we have participated and issued under the FDIC’s Temporary Liquidity Guarantee Program, and we have issued $1.5 billion to date.
That was all in the fourth quarter.
Michael Mayo – Deutsche Bank
And what is the rate on that $1.5 billion?
Joseph M. Vayda
We have done some on a floating rate basis and some fixed. When you add in the government guarantee, the all-in cost to us tends to be around LIBOR plus 180 basis points or so.
Historically that is expensive so it increases our costs but relative to other market alternatives it is less expensive.
Michael Mayo – Deutsche Bank
So CDs are still better than the LIBOR plus?
Joseph M. Vayda
Today is fairly close to each other.
Michael Mayo – Deutsche Bank
At some point might you reduce the push on the CDs and issue more government-insured debt?
Jeffrey B. Weeden
We have capacity for $2.0 billion under the current approved levels for the government-insured debt. We have issued $1.5 billion.
So I think we still look at what’s the overall diversification of the funding, as well as the client relationships that we are trying to maintain and improve upon here. So there are trade-offs and we recognize what some of those trade-offs are, but they also will come up for repricing here, each and every month obviously.
And not all the pricing was offered in the one-year or two-year time period. We offered five-month CDs that we put people into at the end of the year, as well as eleven-month and eight-month and we will have repricing opportunities with those coming up, too.
Michael Mayo – Deutsche Bank
A little bit more on the C&I charge-offs, going from 94 basis points to 172 basis points and I guess auto floor plans. But can you elaborate more because that is a pretty big jump in a category that previously had been better.
Jeffrey B. Weeden
In the comments I talked about there were two areas, one happened to be the auto floor plan, which contributed about $29.0 million in charge-offs in the fourth quarter. And the other happened to be in the institutional area where there were two credits, one was in the media area, the other was a technology-related credits.
And those two credits accounted for $37.0 million of the charge-offs. So if you take the $37.0 million and the $29.0 million, that accounts for the increase in charge-offs.
We are going to continue to have charge-offs associated with business banking and other C&I-related credits. I think we saw a decrease within the community bank on what we call commercial middle market.
Those charge-offs, we had two specific charge-offs in the third quarter and then we dropped back down in that particular book of business. So the incidents are fairly clear, I think, to identify, in the fourth quarter, and as Chuck and I both talked about, we expect that we will have charge-offs in the dealer floor plan area as we continue to work some of those books down.
Michael Mayo – Deutsche Bank
So C&I losses maybe go down next quarter?
Jeffrey B. Weeden
I don’t think we’re in a position to make any types of comments with respect to charge-offs. We’re not providing forward-looking information.
I think it’s a very difficult environment in the economy. You can always have a credit or two that come up, just like we did in the fourth quarter, that can make that rate fluctuate.
Operator
Your next question is a follow-up from Justin Maller - Lord Abbott.
Justin Maller - Lord Abbott
First on Gerard’s question about the commercial real estate, obviously that is a source of consternation for many people with you, but as a percent of your assets or loans, it seems to be kind of in line with peers, although you are much more tilted toward the non-owner occupied because of the originate and sell model. But what percentage of those loans today, of the $13.0 billion call it, are fully funded and not taking draws and therefore would potentially be artificially low from and NPA and/or charge perspective, if that makes sense?
I’m just trying to understand how many of those have already graduated to fully funding and therefore paying status and we can therefore watch what the NPA trends and charge trends are going forward.
Jeffrey B. Weeden
Of the total non-owner occupied the remaining unfunded portion is about $3.2 billion. So that is the remaining unfunded portion of the non-owner occupied.
Charles S. Hyle
And we brought that number down. I would guess, off the top of my head, it’s down to almost a $1.0 billion over the last quarter or so.
So we have certainly been bringing that number down every way we can.
Justin Maller - Lord Abbott
Even within the $13.0 billion, a certain percentage of those would still be projects that would be drawing down on the $3.2 billion, would it not?
Charles S. Hyle
That is correct.
Jeffrey B. Weeden
Unfunded commitments in the last year have gone from $5.5 billion to $3.2 billion so while projects have continued to become completed and typically you would see, if the secondary markets were operating more efficiently or operating almost at all, you would see more of those credits leave the balance sheet. So you are correct in your assumption that as these have become fully funded there aren’t as many alternatives.
But there are still alternatives out there for whole loan sales. The CMBS market obviously has pretty much shut down but whole loan sales are still taking place.
Justin Maller - Lord Abbott
But you are 100% comfortable that the underwriting that you put against that portfolio was anything you would have put in the portfolio, therefore to the extent you can’t move it through CMBS or otherwise, you would hope that the migration of those credits should be no different than what you would be owning.
Charles S. Hyle
That’s correct. We put a lot of time and effort into having robust underwriting standards and we are pretty comfortable with holding onto those assets, assuming performance.
Justin Maller - Lord Abbott
On the funding, did you participate at all in the TAF auctions? Because I know that some of the banks that did were able to reduce meaningfully borrowing and stuff, HLB and otherwise, and take advantage of 30 basis points to 50 basis points kind of total costs, funding opportunities.
And I know you mentioned the debt, you took advantage of the government-backed debt, but just wondering on the wholesale side if that made sense?
Jeffrey B. Weeden
Yes, you are correct, that’s exactly what we did. In fact, our home loan advances right now are zero and we have participated under the TAF program.
Justin Maller - Lord Abbott
So looking forward on them, how should we think about it, as CDs start to mature and roll back down and hopefully we are done with the rate cuts, would you hope that it kind of bottoms here or is there still potentially some more pressure as we move in the first quarter?
Jeffrey B. Weeden
As I answered the question earlier, we believe most of the pressure is out of the margin at this particular point in time but we are not providing forward-looking guidance on the margin. But we do believe most of the pressure is out of it at this point.
We saw a tremendous amount of pressure obviously in the fourth quarter.
Operator
There are no further questions in the queue.
Henry L. Meyer
Again we thank all of you for taking time from your busy schedules to participate in our call today. If you have any follow-up questions on the items we discussed this morning, please call Vern Patterson, our head of Investor Relations, at 216-689-0520.
Operator
This concludes today’s conference call.