Community Financial System Inc (CBU) 2002 Q1 法說會逐字稿

Welcome to the Community Bank Teleconference Call. At the request of Community Bank, this call is being recorded for replay purposes. Should you have any objections, you may disconnect at this time. And now, I would like to introduce today's call leaders, Mr. Sanford A. Belden, President and Chief Executive Officer of Community Bank System, and Mr. David G. Wallace, Executive Vice President and Chief Financial Officer of Community Bank System. Gentlemen, you may begin.

Thank you very much

, and welcome to our quarterly investor's call. We're delighted to have so many people joining us today. And I'll ask David at the outset to read the forward-looking statement, please.

This investor call contains forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. The following factors among others, could cause the actual results of CBU's operations to differ materially from our expectation. And these are the successful integration of operations of the recently acquired FleetBoston branches, competition, changes in economic conditions, interest rates in financial markets, and changes in legislation and regulatory requirements. We do not assume any duty to update forward-looking statements.

belden. Thank you, Dave. We are very pleased with our substantial progress and solid results both on cash and gap basis for the first quarter. The affective integration of 2001's acquisitions especially the FleetBoston branches has been our primary and intense focus during the first quarter, and it's very gratifying to see so much hard work by all our operations and branch people pay off so handsomely.

In particular, the increase in IPC deposits in the Fleet branches of over five percent since the acquisition in mid November reflects the growth potential for our style of banking in the acquired markets and the capability and experience of the staff we acquired. We have been busily training and retraining that staff with respect to our loan products and they are now poised to create the loan growth production we envisioned from the acquired markets. And experienced commercial lender has been added in suburban Buffalo to capitalize on small business lending opportunities there.

As noted in the release, we are in the midst of an aggressive direct mail marketing campaign and an installment loan promotion to stimulate loan growth and help drive earnings for the balance of the year. Both the gross commissions and net contributions from our broker dealer business has improved markedly over last year. We have continued to add selected brokers in key markets including the new Fleet markets and to upgrade the skill level of our existing cadre of brokers.

Improved performance and the continued success of our business model at benefit plans administrative services also supported the growing contribution from our financial service businesses to revenue growth and bottom line profitability.

We continue to be confident about our asset quality profile and credit administration processes. The entirety of the increase in non-performing volumes is attributable to a single loan which has an adequate specific allocation in the allowance for loan and lease losses and is being actively managed in our workout group.

Finally, we are working hard and we believe quite successfully to increase our visibility with investors. We will hold our annual meeting this year in Scranton Wilkesboro to reach out to investors there and are delighted to be on a Northeast Regional Community Bank conference in Boston in early June.

Our trading volume has picked up nicely since our November equity offering. In fact, we traded 40,000 shares today and the 25 percent increase in our stock price since the first of the year, has pushed our market capitalization nicely above 400 million. David.

I'll talk briefly about margins and overheads and earnings guidance. First of all, as you saw from the release, the net interest margin, we used the word nicely, well, I have it here too. Net interest margin was up nicely to the third straight quarter to a little over 4.5 percent which is almost pretty close to the point above the low from the second quarter of last year.

Again, as we talked before, it reflects the cost of funds coming down at a faster rate than earning asset yield and that is giving large part to reprising CDs coming in at about 200 basis points during the first quarter below -- the new CDs were coming in about 200 basis points below the reprising, the maturing CDs. And that favorable replacement of CDs is coming today's deal curve is projected to drop to about a 125 basis points by mid year and then to the neutral by about the end of the third quarter.

So it's projected in earlier calls, it has been coming down, but it certainly has been a handsome impact on our margin here to forth. But from this point forward, the combined impact of continued modest reduction in long yields as we have talked in the release the temporarily higher mix of investments is likely to offset most of the benefit of lower cost of funds.

So, we expect the margin to stabilize to the rest of the year at about today's level. Briefly, on non-interest incomes, Sandy has already talked to you about quantitatively at least was a goodly 28 percent increase in C income compared to the first quarter of last year.

Unfortunately, the rise in non-interest and net interest income was an even stronger percentage, kind of a mixed blessing so the non-interest income ratio that we've steadily been building up for the last few years was down slightly to 18.3 percent. Still a good number. But once our cross selling of financial services, has time to mature in the new FleetBoston branches as well as in Pennsylvania, that ratio should resume it's steady climb towards our long term 40 percent goal over the next three to five years.

Overhead, excluding one-time items, was, as you saw, containing a certain amount of noise in it. First of all, on the one-time item, they are considerably down as you would expect and the good news is that we don't anticipate any more of them. At least to speak as these calls. There was some noise in the overhead data, even after taking out the one-time items, but we're comfortable that the fourth quarter level shouldn't be more than one percent higher than it is now, by the fourth quarter.

Normally, expenses are down in that quarter, but there are still some selected extra staff the branches that we'd like to consummate in order to improve customer service. Nonetheless, we do see the efficiency ratio coming down from the present 56.3 cent and ending the year about two to three percentage points below where it is now. You'll also recall that we recognized a $5 million minimum pension liability at year end with a charge to capital. We since contributed five million in cash to the plant, restoring capital to it's original level.

Plant assets are now about a million and a half above the accumulated benefit obligation that's just kind of detailed, but results though are more important to projections resulting into an expected annual expense of about a million dollars in that low million dollar range.

That will mean there'll be about a 20 percent increase in pension expense over 2001 level, even after the full year's impact of all of 2001's acquisitions and that projection is included in our overall overhead estimates that we talked about.

Regarding intangible amortization, as you saw from the release, we're not benefiting about a penny and a half per quarter from not having to amortize goodwill in our citizens and the last asset management acquisition. And I'm sure you're familiar with the news that we may be deciding to suspend amortization on goodwill derived from branch transactions. That should save us nearly 5 cents a quarter. So the combined benefit of FASBE's actions should be about 25 cents more earnings per share this year over last year.

Even if FASBE follows-through with their publicized intentions though cash earnings will still add another 37 cents per year over and above that. Though 57 cents or so is the difference between cash and the current level of earnings that we're talking about.

As noted in the release, assuming today the

conference, again we're very comfortable in that our 2002 earnings will be the upper end of the range currently estimated by analysts of $2.50 cents. Again, that's without the benefit on additional 19 cents per share from FASBE deliberations assuming this announcement will be retroactive which the current thinking says it will be.

Our goal, of course, is to do better than these estimates as we did in the first quarter. Asset liability management issues always have an important bearing on our results, whether actual or projected. So, we're going to have

, our Investment Officer discuss a few items in that area with you, before we open up the call for questions.

Thank you, David and good afternoon everyone. As part of the earnings guidance Dave spoke about, the calculation for our projection of net interest margin was based on a treasury yield curve that remained unchanged for a period of 12 months. In addition, though, to this unchanged

environment, we did test two other interest rate scenarios which we hope will provide you with some additional guidance.

Given the recent improvement seen within the economy over the last several months, we believe the probability of a rate increase by the

over the next 12 months remains high. As such, we tested the impact to our margins by raising short term interest rates 200 basis points over a 12 month period, while at the same time holding long term rates at current levels.

Under this simulation test, our projected net interest margin remains virtually unchanged from the guidance discussed. The second test we performed was to hold short term rates constant for the next 12 months, but reduce long term rates to their more normalized and lower level. Under this simulation test, our projected net interest margin does show some modest compression. However, in both scenarios tested, the bank was able to meet the range of earnings discussed in this release.

Thank you, Joe. And now

, we're open for questions.

Thank you. If you wish to ask a question, please press star one. You may need to lift your handset prior to pressing star one. To cancel your question or comments, simply press star two. Once again, that's star one to ask a question, and star two to cancel. Our first question comes from

of Cohen Brothers.

Hi Wilson.

Hi, you had excellent quarter, gentlemen.

Thank you.

Everything was very clear, I thought in your -- in your release this time. I thought it was very well done. But could you give some little more flavor on that one loan that went into non-performing, and could you also tell us a little bit about, you know, the increase in the 90 day category, as to whether or not you're seeing, you know, more coming into that category going forward here, whether we really can't turn the corner.

I'll take the first part of that and then David will take the second part of it. The loan in question, when we put it in non accrual had a balance of about 3.3 million. It's now paid down by about a 140,000 or so. They're in the business of providing tree clearing and tree trimming services as well as repairing and updating tree trimming equipment.

You get into a problem with over-expansion and they've now scaled back, they've brought in a new management. We haven't, you know, out work out group, we have an effective working relationship with the principals and as I mentioned, we think that our specific allegation is adequate for what potential exposure we might have. But it was -- we don't have any concentration in that industry and this was truly a one-off situation.

As far as the trend in 90 days ago, just looking at the last three months, there is some ups and some downs. There are some loans that leave that category and others that entered, some movement in non accruing, we did have some loans move out of non-accruing. So, there isn't any, kind of, straight line trend that would be a concern of ours right now.

As Sandy said, we keep up to date with specific allocations that are necessary, whether it's a 90 days delinquent or not. So, as far as the adequacy of the reserve goes, we're very comfortable with we've provided for what is -- as we're instructed by the accounts to say, the probable level of loss is in the loan portfolio.

And we remain quite confident, and in fact pleased with the credit administration in Pennsylvania. We are under examination by the OCC at the moment. They've finished in Pennsylvania and their work would, in essence confirm our judgment about the credit administration down there. So, that's a -- that's a positive sign.

And we have in the last year designated a very experienced person who came to us from one of the larger banks to focus on our various problem loans, so to speak, and we've added someone to work with him too. So we've taken a real aggressive stature in specializing and making sure that we're monitoring those situations more carefully than ever.

Good. Are you seeing any trends in the hospitality area because as I recall you had some minor concentration in ...

We're not seeing any negative trends. Our hospitality business is essentially concentrated in hotels and motels that cater to traveling business people and people commuting along Interstate 86 and they'd be

and of that elk. So, we don't have any high-end hotel business in our port folio. We don't have any convention business in our port folio. These are pretty

and functional accommodations that we're financing.

Good. Thank you.

Thank you.

Our next question comes from Jared Shaw of KBW.

Hi Jared

.

Good afternoon.. Great quarter.

Thank you.

I was wondering if you could give me a little breakdown on the auto portfolio if you're seeing an uptick in

there charge-off delinquencies, things of that nature or if it's going along pretty steadily.

David is looking at his stay here as I answer the first part of that. The increase in the business has really come primarily out of the Pennsylvania franchise where we've added dealers. We're doing that business through our

and buying center. So, we're using exactly the same underwriting criteria, the same decisioning criteria that we have been using in New York State.

There's no discernible change in the mix of the business. It's still largely used car paper about 75 to 76 percent used car paper. So, I'd say that there is no -- there's no significant change in the delinquency rate. We watched that carefully and we also do a vintage analysis. We'll be doing a vintage analysis every quarter on the installment loans and tracking their performance on an aging basis. So, we've got pretty good diagnostics for evaluating the performance of that port folio. David, anything you want to add?

No, as far as the -- well, yes. There's nothing of -- nothing of negative consequence. As far as the net charge-off to the average, in this case, indirect loans outstanding, it's been right around one percent very steadily over the last 12 to 15 months. In fact, in March, it was 82 basis points.

So, there's nothing that would suggest that there is any concern there, and in terms of the dollars of charge-off on the indirect side, that's been very steady to down as well. So, it's continuing to be well managed in our collectors are as vigilant and it's timely as ever to make their calls as soon as one day has missed.

Have you have the cost of disposing of the repossessed cars going up to I guess, to the flooding of used cars on the market with the zero percent financing rates? Is that some of the ...

Yeah, we have seen a little of that. Nothing, again, that's been problematic. We have a -- we have a well established set of outlets for repossessed automobiles and -- so, that's been reliable and stable.

And if you look at our -- at our, what we call our profit and loss accounts right then, there's been no particular change in that. So, it hasn't been a concern.

OK, great. Thank you.

Thanks, Jared.

Our next question comes from Claire Percarpio of Janney Montgomery Scott.

Hi, Claire.

Hi, what a great quarter. I'm -- you'll be glad to know that I've, you know, told the sales force earlier I was listing my earnings estimates. So, I'm in a 240 range and I just wanted to be clear, Dave, your guidance was that you expect to come in the upper end of the consensus and the consensus is 242. So, is that what you're ...

No, upper end of the range.

Of the range, which goes to 245 or -- it goes to 250.

Right. One of your

produced the 250.

Right. OK.

it's ...

Clearly well trained.

Superbly well trained.

OK. So, let me ask a few questions. The -- first of all the -- have you heard anything current about the timing for a FASBE ruling on the goodwill?

Well, the -- what's most important is when PriceWaterhouseCoopers was here today and yesterday for the director's

committee meeting, they were, they were very confident that when it is accepted, that it would be retroactive. Now, we haven't seen the draft, although I -- but they would tell us. The thing is the draft came out for comment. That was supposed to have come out, well, it is early May, and that was what we were expecting. So, there isn't -- hasn't been anything that has changed and the opinion of the accountants that this won't happen now. But, we'd like to see the first stage of something written for comments.

So, we might -- if it comes out for comment in May, we might see what a 60 days later or it's 90 days later depending on how many comments they get -- a decision ?

Well, it's -- all I can say is that they told us that they thought there would be an accelerated or if that is a compressed comment period compared to the north, but, you know, we'll have to see, I think that so much enthusiasm and rightly so from at least the banking industry that, I guess, is more affected by FAS 72 and others, that I think that there would be an overwhelming, a positive comment or response to this and it's certainly, in terms of the STC trying to make clarity of earnings important, certainly would eliminate some of this disparity now between those of us who have taken one route to expand through branches and other who have had hold that acquisitions where economically we're the same, but from the accounting standpoint that we look different.

Right. OK. And can you comment on your thoughts on loan growth going forward. I see you've got a program in place for loan growth. I want you to talk a little bit about the economy and specifically where you really -- what types of loans your program is focusing on?

The good news is -- and 17 days does not make a trend, but for the first 17 days of April, we're actually up and more than we were down for the entirety of the first quarter. So, there is some seasonality in our business certainly, on the

side. Consumer indirect loans have been, have been pretty steadily growing, although modest, on a regular basis, especially in Pennsylvania, but indirect loans because of the seasonality in particular. When you have nice days, a pair of people get out in a car and try to find a better one, not necessarily a brand new one.

So, consumer loans are up for the first half a month. Mortgages continue to grow, but the commercial side now -- it was down 6 million for the first quarter and it's almost half way back up there. So, if you recall, two years ago, when we're actually at this point, loan demand was way off and everyone was revising our estimates down and we were not so sure ourselves.

Well, maybe the same thing might happen. But I think a couple of elements are important and that is while acquisitions do result in one time expenses, they also result in people including lending officers being distracted from calling efforts and they're also in our organization responsible for various branch activities and customer issues and that is behind us.

So they are now calling and they're happy to start calling. So that's a positive -- we have some of our larger customers who are now starting to feel the benefit of some additional inquiries regarding purchase of capital equipment that may start to come through.

And as Sandy has mentioned, we've added some additional lenders and in the branches -- in the Fleet branches in particular, some of the, call it branch people, have been refocused into doing more calling in our -- in our new market. So, there is -- there is a lot of momentum now in getting out more people, people who are anxious when we announced that we're going into those Fleet markets and there's nothing to say that their enthusiasm hasn't been diminished. The economy should begin to help us and we are out there reminding people that we are ready to help.

You know, we do have a specific loan promotion for consumer, direct installment loans. We have a rate of 6.75 and based on my visits to a number of branches over the last 10 days the response has been very positive and we haven't seen it's coming up in the pipeline yet, but lot of interest and a lot activity. So I think what we laid out in the release is the basis for our guidance and the basis for our expectation, but we are we are optimistic that now that we've got things moving that the momentum will go.

We've just put some finer point on those 120,000 mailers that we sent out to over 31 to the new Fleet market and over nearly 30 went to the -- to the

Liberty Market where there has never been promotion before and the people now having been on board for nine months and training being in place and the good level of enthusiasm that should have an impact too. So we are on -- we are active in getting out into the market place.

And we have hired, in the case of Pennsylvania, a couple of people from P&C who were in that market and we're very optimistic that they are going to be successful in bringing business in.

Sounds great. I thought that was a very complete answer, that's terrific, it's very helpful. Also, your tax rate is a little higher than I thought it might be this quarter, might it come down in following quarter?

Well, our blended tax rate did come down from 29 percent in the fourth quarter to 27 percent this quarter and that's where we expect it to stay. And I know that when we all go through our modeling, we like to do things in a full tax equivalent basis on FDE and then back it up in the tax line.

Right.

But in the end if you don't come out to just comparing the taxes to the pre-tax normal line, if you don't come out close to 27 percent, it's probably a little high. There is a lot of complexity in our tax situation now between our 9A subsidiary and our

and the sector we're in Pennsylvania now and a certain amount of New York State taxes are avoided.

There is a thing called an allocation and I kind of gave up a little while ago and said 27 percent that's the number, the marginal rate is actually about 39 and a quarter, but it's better to try to stick to 27 percent. So we're really active in managing that tax line. Compared to the first quarter of last year, it's about the same, but that was more functional as the way we've combined our books with first Liberty. If you look at third, well, second, third and fourth quarter of last year, it should be at 29 percent level. So, there should be a benefit to the earnings compared to last year on the tax money going forward in the second, third and fourth quarter.

OK. Good. And any additional flavor on the local economy?

Not a lot of change, Claire. As David suggests, there is a bit of renewed interest on the part of some of our customers in making capital equipment purchases. As we discussed before, we think we're not unduly exposed to the issues that continue to challenge

Inc. and the influence that

Inc. has in the greater quantity market. We're certainly cognizant to that and it's not encouraging news, but does not appear to have a lot of direct implications for us. Beyond that, it's, I'd say pretty stable.

OK. And talking with one of the lenders, he observed despite what's happening with

Inc., we've seen more prospects in that

and eastern half of the southern tier markets and we've seen it for a long time. Having said that, the rate competition is pretty active, but that portion of our market is showing more interest than it has for a long time.

Thanks. Well, terrific. That's all I had. Great quarter.

Thank you, Claire.

Our next question comes from

of

.

Hi,

.

Hi, how are you doing?

Great. How are you?

Good. I just have a simple question, I think. For matters of comparison, has the current goodwill accounting rules been in effect for the first quarter of 2000? What would the net income have been then?

First quarter of 2000 or 2001?

2001. Excuse me.

Yes.

OK. We have -- we gained -- we gained this quarter a penny and a half for what was in effect of the -- of the new accounting rule. If the -- if the balance of what

is talking about now were in effect, that would add another 5 cents. So, this quarter as opposed to being 60 cents on operating basis might have been 65 cents or you could add a nickel to -- or you could add -- actually, you could add 6.5 cents to last year as a way to compare it as well.

6.5 cents to last year?

Right.

For the current -- the current accounting, that's not the way they are going ...

Well, actually probably for the current accounting of penny-and-a half.

Penny and a half.

Right, for the current accounting, right.

Thank you very much.

OK.

That was a very good question indeed.

Once again, that's star one to ask a question. At this time I show no further questions.

Thank you all very much and we'll talk to you in July, and look forward to it. Thanks.

This concludes today's conference call. Have a good day.