CBU
#Yes, <UNK>, so if it's down 11 basis points I would assign 7 basis points of that to the pre-investment decision and I would use 4 as the core reduction.
Without getting too mathematical, too, <UNK>, which is always my risk, the quarter has an additional day.
And so that actually moves the number versus the second quarter or the first quarter.
But I think a 7/4 split I'd be comfortable with.
<UNK>, in terms of that, again, that $71 million of exposure, of which only $35 million is actually outstanding, a lot of this is operating lines for the contractor side of the business.
But that is the loan asset that is criticized today within the pool.
And I think our expectations will be completely based upon production expectations relative to the drillers.
We like the portfolio that we have relative to other sources of cash.
We like where we are from a collateral position with this portfolio.
So we think we have, quote, the right set of partners.
We'll acknowledge it's difficult for somebody to very quickly react their business to a 40%, or 50%, or 60% drop in utilization, field equipment or transportation equipment, which is the answer of what we've got with this one asset.
Because if you look, <UNK>, at that list of customers, several of the largest, I think including ---+ I mean, two of the top three largest of those customers are pipeline and related infrastructure credits.
Those companies are still doing somewhat better because the pipeline activity continues.
It's really more of the drilling-related activity that's deteriorated.
So just a little more color, the larger credits that we have are in the pipeline-related space.
But I think it's clear there are many fewer drilling rigs in at least the market we're in down there in the Marcellus Shale right now than there was six months ago.
And I think if that continues and oil prices continue to be low and drilling continues to be slow, I would expect that there may be other credits in that portfolio that could deteriorate from where they're at right now.
I think, on the other hand, if oil prices move back up and that's additive for natural gas as well, I think drilling will resume.
And that would be helpful.
So I think some of it is just a function of the direction the market moves in and the duration of the downturn in drilling activity, which is impossible to predict.
Yes.
I think there's 14 relationships that have total exposure of more than $1 million.
And a couple of those, the largest are, as I said, pipeline contractors that have about $23 million of the total related exposure.
But I believe the outstandings of those are ---+ they may even be zero.
I'm not sure about that.
They're low, very low.
But the outstandings are actually low although the total potential exposure is high.
So, as I said, the bigger credits are the pipeline contractors.
We have some construction, stone, quarry related credits that is another $16 million in total potential exposure.
Again, the actual outstandings are about half what the exposure is.
And the rest of it is smaller things that are, again, water haulers, fuel companies.
And there's a couple that are ---+ I think two credits that are hospitality related.
They're hotels.
So that's kind of a brief summary of the majority of the portfolio.
The only thing that I would throw in that category, <UNK>, would be the two hospitality credits that we have.
The total exposure is about $7 million.
Those were built in anticipation of the drilling activities.
The credits have extremely high alternative sources of repayment for us in terms of guarantees and the liquidity-slash-network capacity of the guarantors.
So it would be just those two and we're unconcerned at this point and I would expect we'll remain unconcerned about those two credits.
Yes.
We expect that the approval of the closing will happen in reasonably sufficient order here.
And we're, as I said, very well prepared operationally to execute.
There's been very good integration and teamwork with our folks and their team as well.
So we are fully positioned to execute on the transaction at this point which, again, we expect will happen in reasonably short order.
However, with that said, we also thought it would happen in July.
But, we also understand in the environment we're in, a protested transaction goes through a separate level of review in DC by our principal prudential regulator.
And they have a process they go through and they're conducting that process and we are cooperating fully and, again, expect approval before the end of the year.
So, we're fully prepared to execute on Oneida.
At this juncture it would not forestall us from considering any other high value opportunity.
Sure.
What needs to happen is we need to finalize regulatory approval, which we expect, as I said, will happen before the end of the year.
And then we close on the transaction.
So what pushed it back was during the public comment period, which is part of the regulatory approval process, there was a protest filed relative to, I guess you'd call it, fair-lending-related issues.
Because the transaction was protested, it puts it into a different level of review, which needs now to go to the Washington office of the OCC for review.
And they have a process that they go through, a program, to review any transaction that's been protested.
So, we initially thought we would close the transaction in July, which was a historically reasonable timeframe for us based on the February announcement.
And subsequent to the protest it went to the review process, which is a more elongated process in Washington.
And so that's what necessitated the delay in the closing.
Well, the protestor's comments were public and our response is public.
The basis of his claims were fair-lending related and they were entirely inaccurate.
But, needless to say, that is ---+ [it got] consequential to the process, which is if you have a protested transaction, it goes to Washington for this programmatic review.
And so we're in the midst of that programmatic review currently.
Alex, I would go with this, just to say that we're at a 3.65% level with essentially the leverage of the transaction already being in our P&L and in our margin results.
So if you think about what we're going to inherit from Oneida, it's a little over $500 million of lending assets at yields a little bit above 4%.
We will replace the funding that we've got on an overnight basis with core deposit funding that's actually lower than the borrowed funds that we're using today for not only for the strategy, but to fund the rest of the core balance sheet.
So I think the number doesn't move a whole lot, just based on that.
Now, that being said, Oneida operates in the same markets that we operate in, so the modest headwinds associated with asset repricing will continue to exist for them and their balance sheet, much like they exist for ours.
<UNK>'s got that in front of him but, Alex, I'm going to tell you that I think the blended rates are about 3.75 and they are a little bit lower than the third quarter of last year, but actually pretty consistent with the first two quarters of this year.
Yes.
The most recent third-quarter 3.81; the quarter before was 3.67; quarter before that was 3.68; quarter before that was 3.70; and then the third quarter of 2014 was 3.61.
So, they've actually been over the last four or five quarters in the 3.60 to 3.70 range, but it moved up to 3.81 for this quarter.
And just another data point on the margin, something that we like to look at is, by portfolio, what is the yield of the originations in that quarter relative to the yield of the overall portfolio.
And so if you look at all of our portfolios right now ---+ I won't go through all the details.
But, in summary, the consumer portfolios we have, so consumer mortgages, home equity, auto lending, direct branch lending, all the consumer channels, the third-quarter yields of the originated credits were about equal, give or take a few basis points, to the overall portfolio yield.
Where we're still experiencing a meaningful differential between originated yields and portfolio yields is on the business lending side.
So, for the third quarter, our originated yields were about 50 basis points below the blended yield for the portfolio for the quarter.
So we've kind of stabilized on the consumer lending side, on the commercial lending side.
Still, I think as everyone knows, highly competitive in terms of rate environment right now.
And so we would expect there would continue to be a differential between the portfolio yields and the originated yields on the commercial portfolio.
We'll probably continue to see some decline in the yield on the commercial portfolio into 2016.
Worth adding to that, though, is the fact that there's certainly a much larger proportion of commercial relationships that are originated at variable rates or index-based outcomes, as opposed to the lion's share of our consumer portfolio that gets originated at a fixed rate.
The effect is about net neutral, Wally, under the premise of at a 25-basis-point hike with a pause we will have certain instruments that are index based so, again, assuming the underlying indexes, whether it's LIBOR or prime, actually move with the change.
So we would actually have more assets that would reprice in that first 25.
And without giving away a secret, we wouldn't expect to raise deposit rates much in the first 25.
So I think we've actually said in the 25 with a pause we'd actually get a modest benefit.
It probably would not move the needle relative to EPS generation, but it would probably be a net positive.
Yes.
I would go with that, Wally.
That's been history and that's probably what we're using for one- to five-quarter-type projections for us right now ---+ understanding that as we just went through the detail on the lending side, that we have a larger than average invested portfolio.
And if we're going to fully redeploy our cash flows off that, there's still a challenge out there to put the same type of quality assets on the books at existing yields.
Boy, Matt, in front of me I do not have the combined quarterly number for that.
But let me start with this, that from a practical standpoint the third quarter for us, at a $56 million run rate, as I said before, is a pretty reasonable place to start with in terms of our longer-term expectations.
Now, as you know, we are the slave of seasonal outcomes in our footprint, which means that we get a little bit more expensive when we turn the heat on and we get a little bit more expensive when we plow the snow.
Which means our utility and maintenance costs kind of ride up $0.005 per share into the fourth quarter, go another $0.015 in the first quarter and then start to taper back off for the second quarter.
So as it relates to our general operating environment, we are the cheapest based in the third quarter of every year.
Now, blending in the Oneida outcome, what we've said is that working off Oneida's base today we expected about an $8 million cost save off their run rate.
And, again, in front of me I don't have what that is.
We're still pretty comfortable with being able to deliver that kind of synergy-related or redundancy-related expense save as we move into the transaction, despite the delay.
And actually we've probably honed our estimates a little bit better as to where those are.
So, no difference from that.
But the comment I made earlier relative to since we pre-invested the $300 million, their portfolio, what has to happen after the transaction closes is now you have the rest of the revenue generation activities of their enterprise, both banking and nonbanking, and you have the expense structure associated with both banking and nonbanking, and remind everybody we have to issue the shares.
So we will have ---+ our expectation is 2.4 million shares to be issued.
So, certainly we are still thinking that we will have accretion above just the, quote, redeployment of the securities.
But it's probably not likely to be material for the first couple of quarters after we close.
I think that's a fair question, Matt.
At this juncture, we don't expect a material acceleration of operating expenses related to our work towards the $10 billion level.
We've already begun the resource investment and the investment in DFAST.
We've already begun our investment in the systems and processes around improving BSA, AML and compliance.
So I don't ---+ I think it will be marginal.
The incremental cost will be at the margins.
I don't think it's going to be millions of dollars of additional expenses that are going to jump out.
I think it will be marginal and it will be incremental and it will accumulate over the course of the next probably couple of years as we trend further towards the $10 billion mark.
But I don't think ---+ you're not going to see anything that's going to jump out that's going to be a surprise.
The significant matter, in my mind, either beyond addressing DFAST and what we think are increased expectations around compliance ---+ BSA, AML, and those kind of things ---+ is really the impact of Durbin.
And so that's kind of the greater strategic challenge for us, which we have spent a fair bit of time at the board level and the senior management level addressing what those specific challenges are and what the alternatives and pathways are for us to hurdle that issue without impairing value to our shareholders.
So I think we're in pretty good shape.
But, to circle back to your question, we do not expect any ---+ the current significant expenses that are going to jump out at you, they will be marginal and incremental.
I think if you called it ---+ if you took a run rate now and you said, okay, we're going be bigger so we're going to get a pickup as we get to be more than $10 billion and then you took the haircut off that, I think if you used $8 million you'd be in the neighborhood, give or take.
We do have an authorization outstanding which we've had as a matter of just good discipline over the course of a number of years.
I think we have not used it since the first quarter, I believe.
Right, <UNK>.
That's right.
When we bought back I think it was a couple hundred thousand shares.
At this point we don't have any specific plans to use it or not use it.
As you observed, we have very strong capital levels.
In fact we have what we consider to be excess capital levels, if you look at our balance sheet and what we think an appropriate, prudent level of capital should be against our balance sheet.
At 10%-plus Tier 1 leverage, we have more than we need.
And so the question of how much more ---+ we're going to be deploying some of that with the Oneida transaction, which is a 60/40 cash/stock mix.
So we will be deploying some of that capital as part of the cash component of the Oneida transaction.
And we'll look for other opportunities to deploy that capital as well.
We have a history of increasing our dividend, which we certainly expect will continue, or least hope to continue.
Expect is the right word.
So, I'd prefer not to buy back the stock.
I would prefer to use it for construction reasons that can help create sustainable and growing earnings capacity for shareholders.
I think our shareholders expect us to use that capital to create a growing return capacity, whereas a stock buyback, the capital's gone and you're not going to get any growth out of that.
It's a one-time benefit to shareholders, for sure, but that benefit never improves.
Where if you deploy the capital in an M&A fashion, organic growth, any kind of growth fashion, maybe our nonbanking businesses which we've invested in and have grown nicely, you have the capacity to grow that benefit.
So I think our preference would not be to do a stock buyback.
I always kind of like doing small buybacks like we did the first quarter just to clean up over time some of the dilution from equity programs and equity incentive programs and the like.
But at this juncture I think our shareholders would prefer we invest in the business and provide an opportunity for us to grow that capital benefit as opposed to take a one-time benefit for shareholders, which doesn't have the capacity to grow over time.
So, I don't know if that was the answer to your question you're looking for, but ---+
Wonderful.
Thank you, Shannon.
Thanks, everyone, for participating today.
We look forward to speaking again in January.
Thank you.
