Huntington Bancshares Incorporated (HBAN) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Martina, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Huntington National Bank Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Todd Beekman, Director of Investor Relations. You may begin your conference.

Thank you, Martina, and welcome. A copy of the slides that we will be reviewing can be found on our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about an hour after the close of the call. Slides 2 and 3 note several aspects of the basis of today's presentation. I encourage you to read these, but let me point out one key disclosure. This presentation will reference non-GAAP financial measures. In that regard, I will direct you to the comparable GAAP financials and the reconciliation to the comparable GAAP financial measures within the presentation, the additional earnings-related material we released this morning and related 8-K filed today, all of which can be found on our website. Turning to Slide 4. Today's discussion, including the Q&A period, may contain forward-looking statements. Such statements are based on information and assumption available at this time and are subject to change, risk and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and the material we filed with the SEC, including our most recent 10-K, 10-Q and 8-K filings. Now turning to Slide 5 in our presentation. Participating today is Steve Steinour, Chairman, President and CEO; Don Kimble, our CFO; and Dan Neumeyer, our Chief Credit Officer. Let's get started and turning to Slide 6. Don?

Thank you, Todd, and welcome, everyone. We'll begin with a review of our third quarter performance highlights. Dan will provide an update on credit, Steve will then provide you with an update on our strategy and then close with a discussion of our expectations. Turning to Slide 7. We reported net income of $167.8 million or $0.19 per share, up from $0.17 per share last quarter and $0.16 in the year-ago quarter. Total revenues increased $8.1 million or an annualized 5% from the second quarter. Most of the improvement came from our noninterest income. Noninterest income increased $7.2 million, with a $6.3 million improvement in mortgage banking revenues driving most of this change. Our net interest income increased $0.8 million, reflecting a 4 basis point decrease in the margin and a $0.3 billion increase in earning assets. Total loans declined by $1 billion reflecting the impact of transferring $1.3 billion of auto loans to held for sale at the end of the second quarter. Average total core deposits were up 9% annualized from the second quarter led by strong growth in commercial deposits. Noninterest expense increased $14 million. The current quarter reflected a $4.7 million increase in personnel costs, almost entirely related to higher health care costs, a $4.4 million increase in the cost of extinguishment of debt related to loss on our trust redemption this quarter and a gain last quarter. And the quarter also included $4.5 million of cost related to our capital plan and stress test model development during the current quarter. The quarter also included one significant item, which was a $19.5 million state deferred tax valuation allowance benefit. Turning to Slide 8. Steve will provide additional detail later in the call, but you can see that our OCR methodology is continuing to drive success throughout the company. Turning to credit quality, net charge-offs increased $20.9 million this quarter. Of this quarter's net charge-offs, $33 million or 3 -- 33 basis points were related to regulatory guidance requiring consumer loans discharged under Chapter 7 bankruptcy to be charged down to collateral value. Over 90% continue to make payments as scheduled. Despite an additional $63 million of nonaccrual loans related to Chapter 7 bankruptcy, nonaccrual loans were down $29.1 million or 6%. Our allowance for credit losses as a percentage of nonaccrual loans decreased 3 percentage points to 189%. With regard to capital, our tangible common equity ratio rose 33 basis points to 8.74%. The Tier 1 common also increased, up 20 basis points from last quarter. Our Tier 1 and our total risk-based capital ratios declined by 5 basis points and 6 basis points, respectively, reflecting the impact of our trust preferred redemption. Turning to Slide 9 and other highlights for the quarter. We were recognized by MONEY Magazine this year as one of the best banks in America. This is the second year in a row that we've received recognition from this magazine. Another periodical, Bank Director Magazine, ranked Huntington as the second best bank in the country. Our capital management actions continued in the current quarter with an additional 3.7 million shares purchased and the previously announced redemptions of our trust-preferred securities. Our wealth area launched 2 new ETFs, and we entered into 2 new sponsorships in the state of Michigan. Slide 10 provides a summary of our quarterly earnings trends. Many of the performance metrics will be discussed later in the presentation. So turning to Slide 11. We show a summary income statement for the quarter and also on a year-to-date basis. We adjust the revenue and expenses for items like the gain on the Fidelity acquisition and the first quarter's addition to litigation reserve. We also show the impact of adjusting for our tax benefit, recognized this quarter. While we did not have positive operating leverage in the third quarter, we continue to see modest positive operating leverage on a year-to-date basis. This performance was despite the negative quarterly impact of approximately $17 million related to the Durbin Amendment effective in the fourth quarter of last year. We continue to expect positive operating leverage for the full year. Slide 12 provides trends in the net interest income and margin. The right-hand side of the slide provides a 4 basis point -- it displays a 4 basis point decrease to our net interest margin to 3.38%, which reflected 6 basis points of reduction related to the impact of the extended low-rate environment on asset, yields and mix, a 4 basis point decline from the balance sheet management changes. And these were offset by 6 basis points of increase from the reduction in deposit rates and improvement in deposit mix. Turning to Slide 13. On the right side, you can see that we've shown continued improvement in our deposit mix over the last 5 quarters, as noninterest-bearing DDA balances increased to 27% from 21% of total average deposits. The improved deposit mix reflects the success of Fair Play banking on growing consumer DDAs, as well as our treasury management and OCR focus on growing commercial demand deposits. This improving mix has contributed to the 29 basis point decline in our average rate paid on total deposits over the last 5 quarters. On the left-hand side of the slide, you can see that the maturity schedule of our CD portfolio and another wave of higher-cost CDs are expected to mature in the middle of 2013. Slide 14 provides a summary income statement and some color on items impacted linked quarter performance. Items of note included $6.3 million of improvement in mortgage banking revenues. This improvement reflected the higher secondary marketing gains, as origination volumes remained fairly stable at about $1.2 billion for the quarter. This quarter also included $4 million of security gains as we repositioned our portfolio by increasing our Held-to-Maturity securities portfolio by $0.9 billion to $1.6 billion. Noninterest expenses increased by $14 million this quarter, reflecting $4.5 million of regulatory costs related to this year's capital plan. We would expect these costs to continue at this level for the next quarter but do not -- not to continue into 2013. Our personnel costs were up $4.7 million for this quarter, primarily related to health care costs up 37% from last quarter. This increase reflects both the impact of a few large claims, along with seasonal trends. As we've announced earlier in the quarter, we continue to redeem our higher cost trust-preferred securities. We have $300 million of trust-preferred securities remaining, with an average rate of LIBOR plus 102 basis points. Slide 15 reflects the trends in capital. Intangible common equity ratio increased to 8.74%, up from 8.41% at the end of the prior quarter. The Tier 1 common risk-based capital ratio increased to 10.28% from 10.08% at the end of the prior quarter. These ratios reflect the impact of repurchasing 3.7 million common shares for approximately $25 million. The Tier 1 and total risk-based capital ratios declined by 5 and 6 basis points, respectively, reflecting the impact of $114 million of trust-preferred securities redemption. Slide 16 provides an update on the performance of our in-store strategy. We currently have 83 stores open under the Giant Eagle and Meijer partnership. We'll open another 44 stores by the end of 2013. We have stated our expectation for a 2-year breakeven for these stores. During the fourth quarter, we'll have 4 in-store branches that have been opened for this 2-year time period, 3 of which are already at breakeven or better. The impact of this strategy has reduced our pretax, pre-provision earnings by approximately $20 million in 2012. This proactive pretax pre-provision earnings is expected to continue into 2013, as the estimated $25 million increase to total expenses should be offset over the course of the year by the revenue generated from maturing branches. The total in-store strategy is expected to be breakeven in 2014. We continue to be pleased with the performance of this initiative and the value of the partnerships and the financial results, especially when considering the negative impact of this low-rate environment. Now let me turn the presentation over to Dan.

Thanks, Don. Slide 17 provides an overview of our credit quality trends. The third quarter charge-off ratio reflects an increase to 105 basis points, up from 82 basis points 1 quarter earlier. However, the ratio was impacted by $33 million, or 33 basis points, by the regulatory guidance related to Chapter 7 bankruptcy, consumer loans. Looking through this impact, both the commercial and consumer portfolios experienced improvement. Loans past due, greater than 90 days and still accruing, were relatively stable in the quarter and very well-controlled. You may recall that the second quarter uptick in past dues were caused by the acquired Fidelity portfolio. Fidelity loans include accruing, purchased impaired loans which were recorded at fair value upon acquisition and will remain in accruing status. The NPA ratio showed modest improvement in the quarter despite the addition of $63 million of new non-accruals due to the related impact of the previously referenced Chapter 7 loans. The criticized asset ratio also showed improvement, falling from 6.01% to 5.45%. The allowance for loan and leased loss and the allowance for credit loss to loans ratios fell in the quarter to 1.96% and 2.09%, respectively, reflecting continued asset quality improvement. The ALLL and ACL coverage ratios both fell modestly, although they remain healthy and appropriate given the generally improving loan portfolio, including lower nonperforming loans. Slide 18 shows the trends in our nonperforming assets. The chart on the left demonstrates a modest but sustained reduction in our nonperforming assets. The improvement in the quarter is impacted by the addition of the $63 million referenced earlier. Similarly, the chart on the right shows the NPA inflows, which also includes the additional $63 million. That $63 million accounts for 16 basis points of the 53 basis points of inflows. Slide 19 provides a reconciliation of our nonperforming asset flows. NPAs fell by 3% in the quarter, compared to 1% reduction in the prior quarter. As already mentioned, inflows increased in the third quarter due to the Chapter 7-related loans. Payments and return to accruing status were both up in the quarter and contributed to the quarter-over-quarter reduction. Turning to Slide 20. We provide a similar flow analysis of commercial criticized loans. This quarter saw a sizable reduction in criticized inflows as the previous quarter included $213 million of inflows related to the folding in of the Fidelity portfolio. Upgrades of previously criticized loans, along with increased paydowns, resulted in an 11% decrease in criticized commercial loans for the quarter, the largest reduction experienced in the last year. Moving to Slide 21. Commercial loan delinquencies remain elevated in both the 30- and 90-day categories, or over what we had shown from the second quarter of '11 through the first quarter of '12. This increase is due to the addition of the Fidelity portfolio. All of the 90-day delinquencies are related to the Fidelity purchased impaired loans, which were recorded at fair value upon acquisition and remain in accruing status. However, delinquencies remain very well-controlled. Slide 22 outlines consumer loan delinquencies, which are in line with expectations and reveal a generally improving trend. In aggregate, 30-day consumer delinquencies showed modest improvement quarter-over-quarter as depicted in the chart on the left. Both residential and auto loans showed improvement quarter-over-quarter, while home equity delinquencies were up slightly. 90-day delinquencies continued their overall decline, with auto flat quarter-to-quarter, residential down, and home equity up 3 basis points. Reviewing Slide 23. The loan-loss provision of $37 million was relatively flat from the prior quarter and was less than charge-offs by $68 million. The ratio of ACL to NALs continued the modest decline, from 192% to 189%. The ACL to loans was lower at 2.09%, compared with 2.28% last quarter. Most of the major credit metrics continued to show a continued improvement and therefore, we believe these coverage levels remain adequate and appropriate. In summary, we remain pleased with the quarter's results and expect continued positive movement in the coming quarters despite ongoing economic concerns. And now, I'll turn it back to Steve.

Thank you, Dan. Turning to Slide 24. As mentioned in Don's opening comments, our Fair Play banking philosophy, coupled with our optimal customer relationship or OCR process, continues to drive significant new customer acquisitions and increasing share of wallet. This slide recaps the continued strong upward trend in consumer checking account households. In the third quarter, consumer checking account households grew at an annualized rate of 12.7% to 1,204,000. We've grown households at a 12% rate over the last year, and since we've launched our new consumer strategy in the middle of 2010, we've added over 240,000 households. 4+ products and services penetration is relatively similar to last quarter at 75.9%, an increase over 3% since this time last year. The pause in the 4+ growth looks to be related to the timing of ACH payments that look to have cleared in early October versus month-end September for approximately 6% of the households. For the third quarter, related revenue was $246 million, down $4 million from the second quarter of 2012. However, it was $6 million lower than a year ago. As you may recall, the fourth quarter negative impact of Durban was $17 million, so when you compare just our consumer household revenue year-over-year, we've already made up over 65% of the mandated reduction in debit card interchange fees. Slides 31 and 32 in the appendix provide additional details regarding consumer quarterly OCR trends. Turning to Slide 25. Commercial relationship growth remained strong, but as we commented in the release, customer sentiment changed late in the quarter and this directly impacted growth. Commercial relationships in the third quarter grew at an annualized rate of 7.9% and were up nearly 10% from a year ago. While there was a slowdown in new relationship acquisition, we continue to increase cross-sell. At the end of the third quarter, 33.5% of our commercial relationships utilized 4 or more products or services, this was nearly 1% higher than last quarter and over a 4% increase from a year ago. Related commercial revenue, just like LIBOR and capital markets activities, continued to be volatile, decreasing $13 million, and it is a similar level from the third quarter of 2011. Slides 33 and 34 in the appendix provide additional details. Turning to Slide 26. Our strategy of investing in the business to grow the customer base, coupled with our OCR sales process to drive additional cross-sell and improve customer retention, is positively impacting the company's financial performance. The local Midwest economy plays an important role on our customer needs for additional financial services. Consumer sentiment has changed little and the pipeline of new commercial customers remains robust, but there has been a clear hesitation with commercial customers given the uncertainties surrounding the election and fiscal cliff. Nevertheless, we continue to benefit from the strength in the Midwest and our ability -- and the ability of our strategy will continue to drive growth and improve profitability. With regard to net interest income, we anticipate it will be relatively stable, modest total loan growth. Excluding any future impacts of additional auto securitizations, it is expected to continue, as is growth in low-cost deposits. So the benefit from this growth is expected be offset by net interest margin pressure. C&I loans are expected to show a steady growth reflecting the benefits of our strategic initiatives to expand our business in commercial and the expertise in the related verticals. Commercial Real Estate loans are expected to modestly decline from current levels. Residential mortgages and home equity loan growth is expected to be relatively flat. We continue to expect to see strong automobile loan origination, so on balance sheet, growth will be muted due to expectations of completing occasional securitizations. Growth in no- and low-cost deposits remains our focus. Growth in overall total deposits, however, is expected to be slightly less than growth in total loans. Noninterest income is expected to be relatively stable from this quarter's level, when you exclude any auto securitizations and security gains and net impact from the MSR. We expect our growth in new relationships and increased cross-sell success to be offset by a slowdown in mortgage banking activity. For 2012, we continue to anticipate positive operating leverage and modest improvement in our expense efficiency ratio. This will likely reflect more the benefit of revenue growth as expenses could increase slightly. While we continue our focus on improving expense efficiency throughout the company, we anticipate additional regulatory costs and expenses associated with strategic actions. On the credit front, we can expect to see continued improvement from current levels. There could be some quarterly volatility given the uncertain and uneven nature of the economic recovery. The level of provision expense, as mentioned earlier, is at the low end of our long-term expectations. We will remain disciplined in our growth and pricing of loans and deposits, and there's still some leverage there. We continue to believe 2012 will be another year of marked progress in positioning Huntington for measured growth and improvement in sustainable long-term profitability. Thanks for your interest in Huntington.

Operator, we'll now take questions. [Operator Instructions]

[Operator Instructions] And your first question comes from the line of Erika Penala from Bank of America.

My question is just sort of clarity on some of the expectations that you laid out for us, which we appreciate. As the top line is expected to be relatively stable and you're expecting some expense growth, some modest expense growth, what is going to fuel EPS growth for 2013? Should we count on the provision staying at the low end of the range? Or am I thinking of it too simplistically?

Yes. Erika, this is Don, and I don't know that we provided explicit guidance yet for '13, but we're very focused on improving the operating earnings of the company that in the near term, we will have some challenges because of the impact of some of our initiatives, namely the in-store branches, and so the addition of $25 million of expenses there we believe will be offset by other expense initiatives to help minimize that. We don't expect to have a significant positive operating leverage, but we are very focused on trying to drive that. As far as the credit outlook, we expect to continue to see improvement in the overall credit metrics and the provision will reflect the immediate reserves and the establishment of the provision for that.

And my follow-up question is for Steve. Steve, I think you have a very clear message to the investor community that you're looking to invest in this franchise over the long term. I'm curious as to -- if the operating environment lengthens some of your -- some of -- how long it takes, for example, to break even with some of your initiatives, how quickly will you look for expense rationalization elsewhere? For example, if the in-store branch network, not because of your efforts, but let's say because of the operating environment, takes longer than you think to break even, how quickly can you pull expense levers elsewhere?

Well, we're continuing to work expenses throughout the company and we will do so next year, and so we're offsetting some of the investments with reductions in a variety of other areas and that will continue. We're going to be paced about further expansions at this point, and I think we've got enough momentum and opportunities to absorb what we've already committed and still drive the company in the fashion we want to, Erika.

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

My question's on capital deployment. If I remember right, you had about $180 million that you could have bought back through first quarter of 2013, but it looks like buybacks slowed a lot this quarter. I was wondering if you can just provide a little more detail on kind of what your buyback strategy is and should we expect an acceleration in buybacks over the next couple of quarters just to get you up to the CCAR level? Or is there something else that we should be considering?

Ken, this is Don. And as far as the capital deployment, you're right that our approval for our capital plan included the ability to buy back over $180 million worth of common stock, that our strategy, as far as executing against that, has really had a couple of components, one is more of a recurring-based approach and another is to be more price-sensitive. And so this past quarter, we didn't see the same number of opportunities that we would have had in the second quarter to execute against that more price-sensitive type of strategy and we'll continue to reassess that as we work through the year.

Does your commentary on slowing loan growth play a part into just the lack of other options you have for that capital? I mean, with all things equal, with the same price, would you buy more stock because of the lack of loan growth opportunities?

Well, we do see loan growth slowing some, but it might just change the mix of business a little bit. I don't know that, that would have a direct impact on our share buyback approach or timing.

Your next question comes from the line of Bob Ramsey from FBR. Bob Ramsey - FBR Capital Markets & Co., Research Division: Along those same lines, if the market doesn't give you more attractive opportunities for buybacks and as you have highlighted, you do have a good deal of excess capital. How do you think about deploying that to the dividend and dividend increases potentially?

As far as dividend increases that -- we really are constrained based on the capital plan that we submitted last year, then we'll be reassessing that for the current plan that we'll be submitting in January to see if there's other opportunities in connection with return of capital. But now, we don't have any flexibility through the first quarter of next year as far as assessing that. Bob Ramsey - FBR Capital Markets & Co., Research Division: Well, as you, I guess, think about the plan for next year, I mean, do you have a payout ratio in mind that you guys would ideally like to work towards? Or how do you think about what the right level of dividend could be?

We're still working through that strategy now. We have a lot of thoughts and opinions on that and we'll be working that into our recommended plan and reviewing that with the regulators. So I wouldn't want to comment or provide any expectation at this point in time as far as any changes.

Your next question comes from the line of Scott Siefers from Sandler O'Neill. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: I guess on the theme of overall growth and then kind of tying it back into some of these capital deployment questions. If the loan growth environment is kind of getting a little tougher, does this change at all the way you would think about potentially doing M&A? I mean, Steve, you've been, I think, pretty clear about what kinds of banks you'd like to buy, but if the longer-term growth profile is maybe slowing a little bit, does that have any ramification on the way you think about looking externally for growth?

No, the answer to your question, definitely. We're -- we've established some criteria. We're going to be disciplined about the use of capital. If we find the right situation, we have the capacity to do things and -- but as you've seen throughout the year, we're going to retain the discipline. Despite -- the loan growth is only part of the story, Scott. We're getting extraordinarily strong, deposit household, consumer deposit household growth. And while the attractiveness of DDA in this interest rate environment is muted, it is contributing to our ability to actually manage a NIM expansion year-over-year in a meaningful way. So we like what's going on with our acquisition on the deposit side, and our cross-sell to those households, and we'll be working that very, very diligently, and then acquisition has the potential to create a bit of a distraction. So to that, like the fundamentals of the business in a number of respects, but we clearly will need to be driving at even a higher level, going forward, given this new interest rate environment. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: Okay, I appreciate that. And then I guess, Don, kind of a follow-on on the idea of growth and specifically with regards to the auto portfolio. I guess I've looked at the securitizations that you've been doing the last couple of years, as in part, just a way to help cap auto's contribution to the overall loan portfolio. But by the same token, it has generated some fee income. Have you guys given any thought, given that originations are still pretty strong, to maybe making those securitizations a little more frequent or regular, such that it could become a more consistent fee contributor?

Scott, as far as that question, we understand the value of having more frequent securitizations. The challenge we have is that there are costs associated with each transaction and we want to make sure that we're economic and efficient as far as execution on those. And so we do believe that we'll probably continue at, say, 2 a year, and the size of those securitizations might be changed slightly. We announced earlier this month that we closed a transaction of $1 billion, which was down from the previous securitization transaction, and also reflects the impact of the partial loan sale we had during the third quarter. So I think you might see a little bit more flexibility as far as the size of future transactions as opposed to the frequency.

Your next question comes from the line of Craig Siegenthaler from Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: So just isolating the C&I loan growth rate, and you're kind of more conservative comments today on the forward trend, I'm wondering, what was the impact from floor plan seasonality and any other items that may have been unusual or any other loan segments that might have been negatively seasonal in the third quarter? Was there anything else?

There really wasn't much else as far as seasonality and floor plan loans generally were fairly stable. So we didn't see much increase. What we really did see though was, in the month of September, commercial loan balances were fairly stable and we would tend to see a little bit of a step-up at the end of each quarter. And so that's why we showed a little bit slower growth in general than what we had in previous quarters.

Craig, the pipeline going into the third quarter was strong and currently is strong. What we saw, more deferred decision-making throughout the quarter, and that may be the environment until we get beyond this fiscal cliff uncertainty, which is why we're trying to just adjust expectation. I don't think the fundamentals have changed and our activities haven't changed. So I think we're in a moment of pause, but we're trying to be conservative and/or realistic depending on what happens with the upcoming election and the cliff. Craig Siegenthaler - Crédit Suisse AG, Research Division: And Steve, if you look at last quarter's, fourth quarter growth rate in C&I, it was very strong for almost every bank out there, very strong. A lot of that did then go away in January, but with that seasonal trend in the past, I guess your guess is the negative decision-making related to the fiscal cliff and election will more than offset that, sort of keeping C&I loan growth well below where it's even been in the nonseasonal quarters.

We do have that outlook. Obviously, there's a lot at play over the next 4 months here. And the fundamentals, however, remain encouraging, but a lot of our business, and it may be unique to us, compared to some of the other banks you're looking at, is with privately-held businesses. And put yourself in their shoes, you've got tremendous levels of uncertainty and I think that's causing a pullback, a deferral.

Your next question comes from the line of Ken Usdin from Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Don, I was wondering if you can just give us a little bit more color on the earning asset yield side. Number one, understanding the volume comments that you guys have all made, can you just talk us through what you're seeing in terms of the incremental pricing on the loan side? And then secondly, it does look like you're allowing some of the securities portfolio to run down a little bit. Can you talk about cash flows and your kind of from and to rates as far as how you're thinking about the tough rate environment with regards to securities and reinvestments?

Sure. As far as the loan yields, the C&I loan yields for the current quarter, really remained in line with what we've seen in previous quarters, that there is tough competition out there, but I think we've been doing a good job of remaining fairly disciplined as far as that price, that the yields will change over time as it reflects the improving underlying credit quality of the originations compared to the existing portfolio. Commercial Real Estate really did not have a lot of originations in the current quarter, and so I wouldn't want to comment on any changes there as far as pricing because there really wasn't sufficient volume to make that differentiation. On the Indirect Auto side, we continue to target our 2% type of credit-adjusted spread. We're maintaining that. We did see volumes come down just ever so slightly from second quarter to third quarter and that probably reflected a little bit more aggressive pricing from some of the competitors, but we want to make sure that we maintain that discipline there and you may see ongoing changes as far as volumes, based on that. And then on the consumer portfolios, we did see some price increases that we initiated on some of the consumer loan portfolios in anticipation of the new capital standards. And so we started to price some of those portfolios a little bit higher to reflect that. On the securities portfolio, in aggregate, if you add both the Held-to-Maturity and available for sale, the balance really stayed relatively stable from quarter-to-quarter. The challenge we're seeing now, though, that you probably heard from others, is with the effect of QE3, the primary asset class we put in that investment portfolios, are agency CMOs, and so that yield has come down. And so what we're seeing for the reinvestment of cash flows that are sourced from that, which tend to run about $140 million a month, are probably about 30 basis points lower today than where they were last quarter, and so we're seeing yields there in the $150 million to $170 million range as far as new purchases. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay, got it. And then my second question, I just want to ask you about mortgage banking because I know in kind your outlook, you're talking about it being a little bit lower, but you seem to have really still strong strength this quarter and that was even with the -- an MSR-net write-down. So I wanted to just ask you about your pipeline for mortgage banking, how you feel about the kind of production fees, and then if you could also just make a comment on what, if anything, you're changing with related to MSR hedging, and how that flows through the income statement?

Great. As far as the mortgage volume, we would agree that we think the fourth quarter is still going to be strong as far as origination volume for us in mortgage lending, that application flows are still very strong for us. So our outlook comment is more referencing over the longer-term horizon that we do think that will come down from the current levels. We expect to continue to see strong spreads from those secondary marketing gains on sale of those loans as well. As far as the MSR assets, we really have 2 components of our MSR, and the hedging strategy is different for each. For our fair value portion of our hedge, which is -- now represents about 1/3 of the total MSR asset, we try to hedge that so we can protect volatility against the overall impact from changes in interest rates. For the low-comp portion of the portfolio, we don't do a 100% hedge and what we do there is try to evaluate what the impact is to the total mortgage banking income line item as opposed to just the MSR asset. And so we're looking at that as far as the rate impact on current origination volumes and pricing to see if that's an organic hedge against a portion of it, so you might see continued volatility in that plus or minus $4 million range on a quarter-to-quarter basis based on that overall position. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay, great. And then Don, just the last thing. As we hear the outlook, it seems like some of the outlook is very consistent with near term and then some of the outlook is more about the longer term, right? And I guess maybe can you just spend a second and kind of just discern the 2?

Yes, we tend not to give a specific guidance on the next quarter, but I would say the majority of the observations or expectations are for the medium-term horizon, the next couple -- the 3 quarters or so. And so our guidance on loan growth, on margin, on fee income, tend to be more of that over the medium term as opposed to the immediate quarter.

[Operator Instructions] Your next question comes from the line of Stephen Scinicariello from UBS.

Just with regard to the expenses, we know that the in-store strategy poses a bit of a headwind over the medium term here. But just curious if you could talk about some of the potential sources of operating leverage that you see both over the medium term and longer term as well.

As far as additional efficiencies, we continue to look at a number of areas, including both frontline and back-office type efficiencies. And so we put in a number of changes that will help drive better efficiency in some of our branches and how we are providing service and how we process transactions from that perspective. We've done a number of things on the back-office side to consolidate and streamline and provide more efficiencies throughout the servicing side of it. This last year, we've really adopted more of a continuous improvement type of value throughout the entire company, and encouraging our colleagues to identify other opportunities for us to provide more efficient and effective service to both our internal customers, as well as our external customers. And so each one of those, while they may not be large initiatives and you probably won't see an announcement of a significant adjustment of staffing levels or one-time charges, but we do believe that each of them will be incremental and additive to help result in additional efficiencies that can help fund some of the investments we're making in in-store and other initiatives.

Great, that's very helpful. And then just the last question I had for you was, just as you look at that Michigan marketplace, some of the competitive dynamics may be in the process of changing, given the acquisition in that marketplace, just kind of wondering if you're seeing that as a potential opportunity or as a possible threat?

Well, Michigan has been a terrific market for us to operate in and we've been in it for decades now. We have significantly expanded the team in -- the teams, I should say, in Michigan. The Meijer announcement earlier this year reflects confidence, based on performance over the last few years, of our ability to grow in Michigan. And we certainly expect to continue to grow. Our deposit share went up a notch this year, I think, 8 to 7, and so we're going to continue to invest in Michigan and expect it to grow, and I haven't given thought to competitive dynamic change. There's a -- we like where we're positioned. We believe we can compete, win and grow, and we expect to continue to do that.

Your next question comes from the line of Joshua Sherwin from [indiscernible].

This is Josh, actually from Jack Micenko's team. Just a quick question on the deposit composition. I saw that your MMDAs ticked up significantly in the quarter. Is there anything in particular driving that?

We did see some increases there, especially on the commercial side, that as part of our treasury management services, for our commercial customers, we've been able to identify some customers that we've been able to attract their money market deposits. We've also had some concerted efforts as far as retention on the consumer side related to the money market balances as well, and that provided a change in the trend compared to previous quarters.

There are no further questions. Ladies and gentlemen, thank you for your participation today. This concludes today's conference call. You may now disconnect.