Huntington Bancshares Inc (HBAN) 2012 Q3 法說會逐字稿

Good morning ladies and gentlemen.

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

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

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

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

(Operator Instructions).

I would now like to turn the call over to 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, risks and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties, please refer to this slide and the material we file 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, 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 non-interest income.

Non-interest 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.

Non-interest expense increased $14 million.

The current quarter reflected a $4.7 million increase in personnel costs almost entirely related to higher healthcare costs.

A $4.4 million increase in the cost of extinguishment of debt related to the loss on our trust redemption this quarter and a gain last quarter.

And the quarter also included $4.5 million of costs 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 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 loss 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 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 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 two new ETFs and we entered into two 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.

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 -- 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 our 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 improvements 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 five quarters as non-interest-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 five quarters.

On the left-hand side of the slide, you can see the maturity schedule of our CD portfolio and then 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 that 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 remain 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.

Non-interest 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 not to continue into 2013.

Our personnel costs were up $4.7 million for this quarter, primarily related to healthcare 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.

The tangible 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 reflected 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 our $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 Mark Meyer partnerships.

We'll open another 44 stores by the end of 2013.

We have stated our expectation for a two-year breakeven for these stores.

During the fourth quarter, we'll have four in-store branches that have been open for this two-year time period, three of which are already at breakeven or better.

The impact of this strategy has reduced our pretax preprovision earnings by approximately $20 million in 2012.

This drag to pretax preprovision earnings is expected to continue into 2013 as the estimated $25 million increase of 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, 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 one 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 nonaccruals 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 lease 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 was 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 returns 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 pay-downs, 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 a 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 continue 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.

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 million.

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 or 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 looked 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 Durbin 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 of the appendix provides additional details regarding consumer quarterly OCR trends.

Turning to Slide 25, commercial relationship growth remains strong, but as we commented in the release, customer settlement 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 four or more products or services.

This is nearly 1% higher the last quarter and over a 4% increase from a year ago.

Related commercial revenue, just like LIBOR and capital markets activities continue to be volatile decreasing $13 million and 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 in 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 uncertainty surrounding the election and fiscal cliff.

Nevertheless, we continue to benefit from the stress in the Midwest and our -- 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, is expected to continue, as is growth in low-cost deposits.

So, the benefit from this growth is expected to be offset by net interest margin pressure.

C&I loans are expected to show 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, though 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.

Non-interest 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 efficiencies throughout the Company, we anticipate additional regulatory costs and expenses associated with strategic actions.

With credits up, we can expect to see continued improvement from current levels, and 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 is 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.

We will now take questions.

We ask as a courtesy to your peers, each person ask only one question and one related follow-up.

(Operator Instructions).

(Operator Instructions).

Erika Penala, Bank of America.

Good morning.

My question is just sort of clarity on some of the expectations that you laid out for us, which we appreciate.

If 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?

This is Don.

I don't know that we've 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.

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 reflects 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 are 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 breakeven, how quickly can you pull expense levers elsewhere?

We are continuing to work expenses throughout the Company, and we will do so next year.

And so we are offsetting some of the investments with reductions in a variety of other areas, and that will continue.

We are 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.

Thank you for taking my questions.

Ken Zerbe, Morgan Stanley.

Good morning guys.

My question is on capital deployment.

If I remember right, you had about $180 million that you could've bought back through first quarter of '13, but it looks like buybacks slowed a lot this quarter.

I was wondering if you can provide a little more detail on what your buybacks strategy is, and should we expect an acceleration in buybacks over the next couple quarters just to get you up to the C-card level, or is there something else we should be considering?

This is Don.

As far as the capital deployment, you are 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 going to be more price sensitive.

And so this past quarter, we didn't see the same number of opportunities that we would've had in the second quarter to execute against that more price sensitive type of strategy and we will continue to reassess that as we work through the year.

Does your commentary on slowing loan growth play a part in just the lack of other options you have for that capital?

With all things equal, with the same price, would you buy more stock because of the lack of loan growth opportunities?

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.

Okay, thank you.

Bob Ramsey, FBR.

Good morning guys.

Along the same lines, if the market doesn't give you more attractive opportunities for buybacks and, as you have highlighted, you 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, we really are constrained based on the capital plan that we submitted last year that we will be reassessing that for the current plan that will be submitting in the end of 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.

And as you I guess think about the plan for next year, 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 are 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.

I wouldn't want to comment or provide any expectations at this point in time as far as any changes.

Okay, thank you.

Scott Siefers, Sandler O'Neill.

Good morning guys.

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?

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, does that have any ramification on the way you think about looking externally for growth?

No is the answer to your question definitely.

We've established some criteria.

We're going to be disciplined about 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.

We are getting extraordinarily strong deposit households, 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 an 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.

Okay, I appreciate that.

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 as the 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?

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 we are economic and efficient as far as execution on those.

And so we do believe that we will probably continue at, say, two 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.

Okay.

That's good color.

Thank you very much.

Craig Siegenthaler, Credit Suisse.

Thanks guys.

Good morning.

So, just isolating the C&I loan growth rate and your kind of more conservative comments today on the forward trend, I'm wondering what was the impact from floorplan seasonality and any other items that may have been unusual, or any other loan segments that might've been negatively seasonal in the third quarter?

Was there anything else?

There really wasn't much else as far as seasonality and floorplan 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.

The pipeline going into the third quarter was strong and currently is strong, but 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 are trying to just adjust expectations.

I don't think the fundamentals have changed, and our activities haven't changed.

So, I think we are in a moment of pause, but we are trying to be conservative and/or realistic depending on what happens with the upcoming election and the cliff.

Steve, if you look 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 you're 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 four 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 pull-back, a deferral.

Got it.

Thanks for taking my questions.

Ken Usdin, Jefferies.

Thank you.

Good morning.

Don, I was wondering if you can 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 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 re-investments?

Sure.

As far as the loan yields, C&I loan yields for the current quarter really remained in line with what we'd seen in previous quarters.

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.

The yield 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.

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 are maintaining that.

We did see volumes come down just ever so slightly from the second quarter to the third quarter and that probably reflected a little bit more aggressive pricing from some of the competitors, but we want to make sure we maintain that discipline there.

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.

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 are seeing, now, though, that you've probably heard from others is, with the effective QE3, the primary asset class we put in that investment portfolio is our agency CMOs, and so that yield has come down.

And so what we are 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 are seeing yields there in the 150 to 170 range as far as new purchases.

Okay.

Got it.

And then my second question, I just want to ask you about Mortgage Banking because I know, in kind of 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 an MSR net write-down.

So I want to ask you about your pipeline for Mortgage Banking, how you feel about the kind of production fees.

And then if you could also make a comment on what, if anything, you're changing with related MSR hedging and how that flows through the income statement.

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 and 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 asset, we really have two 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 a third of the total MSR asset, we try to hedge that so we can protect volatility against overall impact from changes in interest rates.

For the low comp portion of the portfolio, we don't do 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 are 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.

Great.

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 could you spend a second and kind of just discern the two?

We tend not to give 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, three 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.

That's helpful.

Thanks a lot, Don.

(Operator Instructions).

Stephen Scinicariello, UBS.

Good morning everyone.

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 I'm 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 front-line and back-office type efficiencies.

And so we've put in a number of changes that will help drive better efficiency in some of our branches in 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 efficiency 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.

So each one of those, while they may not be large initiatives and you probably won't see an announcement of a significant adjustment to staffing levels or one-time charges, 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 are making in in-store and other initiatives.

Great, no, that's very hopeful.

Then 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 are seeing that as a potential opportunity or as a possible threat.

Michigan has been a terrific market for us to operate in, and we have been in it for decades now.

We have significantly expanded the team -- the teams, I should say, and Michigan.

The Meyer 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. So we are going to continue to invest in Michigan and expect it to grow and haven't given thought to competitive dynamic change.

There's -- we like where we are positioned.

We believe we can compete, win and grow.

And we expect to continue to do that.

Great, thanks so much guys.

Joshua Sherwin, SIG (inaudible).

This is Josh actually from Jack Micenko's team.

Just a quick question on the deposit composition.

I saw that your MMDA has ticked up significantly in the quarters.

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's provided a change in the trend compared to previous quarters.

Great, thanks.

There are no further questions.

Ladies and gentlemen, thank you for your participation today.

This concludes today's conference call.

You may now disconnect.