ASB
#Sure <UNK>, this is <UNK> <UNK>.
Despite the fact that we have moved through and seen a number of charge-offs in the portfolio, we are still seeing a number of customers under stress and going into bankruptcy.
So that in itself has not abated.
So some of these customers moving into the bankruptcy role, although we still feel we are well secured we nevertheless do move those into nonaccrual.
This is still <UNK>.
The two loans where we've taken most significant charges had unique characteristics.
I don't want to get too technical, but there was a heavy reliance on non operated working interest collateral.
In both of those cases we had relatively weak operators that went bankrupt.
Both of those loans and the collateral backing them went through a liquidation process at very low prices.
That generated a lot of losses.
Needless to say, we've gone through the rest of the book.
We don't have loans that have those exact same characteristics, nor of course are we making loans like that anymore.
They are going to need it.
Lambeau isn't too far away.
Sure.
The pipeline for our commercial real estate has been quite robust for literally years.
If you look at our year-to-date production, it's pretty well-balanced across our various offices around the Midwest, so our Illinois teams have generated probably about 45% of the loan production followed by Minnesota and Wisconsin.
And then high single digits from Ohio, Missouri, Texas et cetera.
Actually multi-family has not dominated our new production this year.
It is the second category, retail has actually led.
But we have had good balance from retail, multi-family, industrial office, et cetera.
So it's been well-balanced.
As a number of banks are starting to bump up or get concerned about the OCC guidance on real estate concentrations, competition is starting to lessen a little bit.
Pricing continues to firm.
These structures are pretty attractive, we happen to have plenty of room as we sit here today to take advantage of those dynamics.
No.
We had good growth in the first half of the year and from what I can tell from reading industry information and seeing what some other banks are reporting, a number of banks are reporting slower general commercial loan activity in the third quarter.
I don't know exactly what to attribute that to, but there is nothing that we know of that is a big concern.
Yes we did see ---+ following Brexit, or right at the end of June we started to see an increase in the prepayments going through July, stepping up dramatically in August and further into September, and obviously that trend ---+ we know it because we already see the prepayment factors for what we're going to get hit with in October ---+ will continue to be an increasing prepayment.
That combined with the fact that yields were lower during the quarter contributed to our lower net interest margin for the quarter.
And what we have been buying, as you are well aware, have been the Ginnie Mae plain vanilla and [BF] securities and the yields on that, despite the fact that they are a zero risk weight and have all the right dynamics, have also been attractive to others.
So actually yields have not only fallen because the market felt soft, but because the entire market seems to be buying that product, and so we have seen the attractiveness of that investment portfolio option fall precipitously over the course of the quarter.
While that remains sort of our strategy that we had in place, we are sitting here frankly looking forward and saying: does that still makes sense as a platform.
And we are reevaluating alternatives.
I don't think that means we're going to do any of the stuff that we haven't done per se, in this investment portfolio, but it means we are thinking the allocation of the investment portfolio going forward.
Look, we've got an ongoing process where you're riding the markets as they go.
Obviously if rates backed up again, or as a result of the Fed hike in December they started to pick up again, we probably would jump in with both feet.
But as we sit here today, it's tough at these yields to put into portfolio stuff that we know is going to be both diluted to the margin and diluted for ability to earn ---+ have positive earnings over time.
No.
They weren't all in risk and compliance by any means.
I think we just call those out as maybe ---+ I'm guessing maybe there was a dozen of them or something.
There were other people picked up here and there.
We did not add 60 people in risk and compliance.
We have plenty.
As we sit here today, it is the same grind that we've been on.
So we have been slowly increasing revenues, and we been keeping expenses flat.
And so we are slowly grinding the efficiency ratio to a better number.
I like the 63% this quarter too, but don't fall in love with it.
Yes.
There's a couple of drivers of that.
There's the syndication business, which in our case is largely commercial real estate driven.
And we have built a very good commercial real estate business, and we are very active underwriters and then sellers of commercial real estate loans.
So that pipeline continues to look good.
The other piece is the [derivatives] business.
That is more dependent upon what our customers' rate outlook is and how much they want to lock in their interest rate exposures.
So that one is a little harder to predict.
And <UNK>, just for clarity it was $3 million quarter over quarter from the second quarter, $5 million year over year ---+ $4.8 million year over year.
Sure the answer is yes, they were all residential, and essentially it's two factors, I think that's still thought through the portfolio mix is generally where we want it to be, it hasn't changed much.
Had we not sold we would've change the mix a little bit.
Also we looked at Brexit, we were cognizant and expected prepayments to be a factor moving forward.
And we looked at our overall portfolio, and as you are aware most of our portfolio is in ARM products, principally the 5/1 ARM.
Sort of looked at that mix and thought: how much fixed rate exposure do we want potentially in an environment where prepayments might accelerate.
And we decided to take some chips off the table.
Correct.
There is a very small amount that usually might be there at quarter end.
By and large the trades get done within the quarter, and they are closed out at quarter end on the commercial side.
That pipeline essentially is all residential.
I'm sorry <UNK> I just don't have that in front of me.
It would be a few loans, I'm guessing maybe $50 million.
Those are probably approximately right.
Cost of funding looks pretty stable.
Yield on loans was stable.
Probably stable-ish, maybe a little downward pressure.
Probably securities.
Obviously we're in competition for loans.
But securities were the key drivers of margin compression and again I think as was asked earlier, if we continued our current investment strategy there would be more downward pressure because rates are absolutely lower and prepayments are accelerated.
I think as <UNK> intimated we are taking a hard look at that right now.
This is probably a decent assumption.
I would like to believe that we learned some things from what we did last year.
So the outcome might slightly be more positive.
That really had no impact at all in the fourth quarter, and the carry-over into the first quarter, we saw some lift on the gross yield and margin but we also do a lot of renewals in our book in the first quarter.
And it appears that essentially the competitive dynamic traded away some of the lift we saw with new lower rates on the renewals.
And what we ended up with was compression from the cost of funds.
I will tell you that I think that our cost of funds position as we finish the year here is looking relatively strong, and I think we have learned something about managing that a little better.
But that will remain to be seen in the first quarter and how the renewal effects weigh against any yield uptick in the 1-Month LIBOR.
At this point in time, don't expect it to have any impact for Q4.
Might be a modest positive going into Q1.
Thanks.
So, just in closing our loan deposits, fee and expense trends were all steady to positive for the quarter and our credit metrics outside of energy remain very strong.
We look forward to talking with you again next quarter, and if you have any questions in the meantime, give us a call.
Thanks again for your trust in Associated.
