Community Financial System Inc (CBU) 2003 Q3 法說會逐字稿

Good morning. Before we begin today's call, I'd like to remind you that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the Company operates. Such statements involve risk and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the Company's annual report and form 10-K filed with the Securities and Exchange Commission.

And now, I would like to introduce today's call leaders, Mr. Sanford A. Belden, President and Chief Executive Officer; and Mr. Mark E. Tryniski, Executive Vice President and Chief Financial Officer of Community Bank System. Gentlemen, you may begin.

Thank you, Randy, and welcome to all of you to our third-quarter call featuring the first full quarter with Mark Tryniski as Chief Financial Officer. We're delighted with our all-time record earnings performance this quarter, and especially with the solid basis on which those earnings occurred. While Mark will say more about our strong performance with respect to both net interest income and non-interest income, I want to complement Mark and our entire CBSI team on exceptional management of the net interest margin. I would also like to remind all of us how our diversified and complimentary financial services businesses stabilize and grow our earnings across varying economic environment as evidenced by our results this quarter.

It is satisfying to report that asset quality continues to be productively managed and that our asset quality metrics are solid and consistent. That said, we remain diligent and highly attentive to asset quality and credit administration. As noted in the release, both third quarter acquisitions were successfully and seamlessly consummated, and the immediate and positive impact of both, especially Harbridge, is evident in this quarter's results. We are pleased with the positive response of the Grange shareholders to the acquisition and continue to be impressed with the commitment and capability of Tom McCullough (ph) and our new associates at Grange as we move towards another productive and conversion and assimilation in late November. Mark?

Thank you, Sandy. We're very pleased to have delivered record earnings this quarter with year-to-date earnings up by 9 percent, particularly in light of the challenging interest rate environment. Operating performance has been driven by the continued strength of our net interest margins, as well as significant increases in non-interest income. I will comment first on the net interest margin, which remained very strong at 4.63 percent, up 2 basis points from the comparative 2002 quarter and down 12 basis points from the second quarter of 2003.

There are two reasons our margins are holding up so well, as I discussed last quarter. First, we have been aggressive in managing down our cost of funds, particularly with respect to maturing time deposits. Second, the yield on our investment portfolio has held up very nicely due to a substantial level of longer-term call protected securities we added to the portfolio in 2001 and 2002 to protect us from falling rates. With that said, we do expect the margin to continue to fall through the fourth quarter as deposit repricing opportunities diminish and loan and investment yields decline.

Reductions in nonperforming loans and charge-offs that were previously provided for were behind the decline of loan loss provision this quarter, which was down from the same 2002 quarter and the first two quarters of 2003. Nonperforming loans have declined in each of the past two quarters with delinquencies trending downward for the past three consecutive quarters.

Non-interest income, excluding security gains, is up 27 percent from last year’s quarter and 22 percent year-to-date, principally on the strength of the overdraft product introduced in the fourth quarter of 2002 and the revenues associated with our July 31st acquisition of Harbridge Consulting Group. We're very pleased with the performance this quarter of our financial services businesses, which delivered their best results since the third quarter of 2002 on the strength of improved investment markets.

Excluding acquisition costs, operating expenses were up 10 percent for the quarter. Two percent of that increase relates to Harbridge expenses, primarily salaries and benefits, with another 2 percent resulting from increased pension costs. The remainder of the increase of approximately 6 percent relates to increased salaries, occupancy costs and technology investments. Year-to-date, recurring operating expenses are up 5.6 percent.

Now I will comment on guidance. Based on year-to-date operating performance and analysis regarding fourth quarter results, we expect full year 2003 to diluted earnings-per-share, excluding the effects of acquisition expenses and any balance sheet restructuring, to be 320 to 325 per share. We are presently evaluating certain collective actions to enhance our interest rate sensitivity profile and optimize future earnings performance. These actions may include the sale of securities and the repayment or refinancing of outstanding borrowings, which if affected (ph), may serve to increase or decrease earnings that would have been otherwise reported for 2003. That concludes our prepared comments, and now we would ask Randy to open the lines for any questions.

(Operator Instructions). Bill McCrystal, McConnell Budd.

Very impressive numbers. No particular order, but the tax rate obviously down, you mentioned, due to a higher level of tax-exempts. But looking at the average balance sheet, it doesn't look like that number has changed all that significantly. Maybe you could give me a little more help in that matter?

Well, the average tax-exempts that we projected for the full fiscal year we estimate are going to come in higher than what we've projected year-to-date, though. So our tax provision we record based on our projection of the expected effective tax rate for the year, which we think is going to decline based on that volume of tax-exempt securities. So we lowered the effective rate again, because we believe that is where we're going to end up full year.

And then just for modeling, what kind of rate would you -- what should we be looking for for 2004?

Well, as I stated in the release, we're going to provide guidance for 2004 in January of 2004. We expect full-year this year to be approximately 24 percent.

Okay.

Full year effective tax rate.

You have said in the past on numerous occasions, talking about the economy, and I don't think this surprised anybody that the New York State economy particularly is still a little bit sluggish. With the announcement earlier about Carrier (ph) and all of the other issues, what are your thoughts overall about the conditions in your market?

Well, we're not directly influenced by Carrier, because we don't really have any banking business in metropolitan Syracuse, so that does not directly affect us. I think that our perspective, Bill, is that economic conditions continue to be pretty stable. We are seeing a little more optimism on the southern tier, I think attributable to the renewed optimism at Corning, Inc. (ph), for example. And there has been some improvement in milk prices of late, so the dairy situation appears to be a bit brighter than it was, let's say four or five months ago. And I think the general mood is that the economy has more positive aspects in upstate New York than it has negative aspects, notwithstanding the continuing erosion of old line manufacturing jobs.

Even with the loss in manufacturing jobs, the unemployment rate in central New York is still below 6 percent. And actually, there has been net job creation in the metropolitan Syracuse market. So I think what we are seeing in the Carrier case is the continued transformation of the nature of the economy in upstate New York away from traditional manufacturing with more of an orientation towards service businesses and higher technology oriented manufacturing processes. And there are a number of instances in central New York of small technology-oriented production businesses that are growing and doing very well. Census (ph) (indiscernible), for example, would be a couple names that might be familiar to you.

As a follow-on to that, the most recent census data that we looked at for all of the counties where we do business suggests that the demographics are up marginally in our markets. Principally population and average household income is up in the markets that we do business in. These are marginal increases; they're low, single-digit increases, but nevertheless, they are not downward numbers, which we have seen at previous points in the past, and frankly other of the more metropolitan markets are experiencing. So we are encouraged at least by the most recent census data in the counties where we do business.

I think the manifestation alone of that is at least reasonably evident in the improved asset quality metrics for us, particularly the delinquency rate now being now down for three consecutive quarters.

Okay. Just going to the margin for a second, you in the last call had indicated 5-10 basis points in the quarter and just slightly less than that. Could you give us some -- and I know you've said the margin will continue to fall somewhere the fourth quarter. Just give a sense of how you are set for rates. You put on some additional borrowings in the quarter, and maybe just comment a little on that.

We think, as I stated, that there will be continued pressure on margins because of our inability to reprice deposits down further, principally the timed deposits, as well as I think what we believe will be further declines in loan investment yields. But right now, our fourth quarter margin, we are looking at probably another 5-10 basis point decline, 453 to 458, somewhere in that range of the fourth quarter, with full year-to-date margins we think coming in somewhere in the mid-460s.

Okay. And can you give some idea of what -- in terms of borrowings, what you have been putting on term and so forth?

Yes. They had been principally short term borrowings, Bill. Federal home loan bank short term borrowings.

Okay, thank you very much.

Jared Shaw.

Good quarter, gentlemen. Most of my questions were asked and answered, but in terms of the margin decline this quarter from second to third quarter, how much of that was attributable to the integration of acquisitions, and how much of that was the pure -- the core CBU Bank? Do you have that broken out?

No, I would say that it was not very significant, though. The acquisitions that we did in the quarter, the People's Bank Corp. acquisition was a $29 or $30 million asset transaction, so that did not have a significant impact at all on margins for the quarter.

Okay and I guess, did you implement FAS-150 this quarter, or have you always accounted for your trust-preferred interests in interest expense?

Yes. We have always had it classified as a borrowing, and we have classified the interest as interest expense, and not as other expense. So there was no change for us for the implementation of 150.

Great, thank you.

(Operator Instructions). Claire Percarpio.

Good morning. I guess I had the instructions backwards and I was -- anyway, a couple of questions for you, and forgive me if any of this got covered. I guess I was not expecting the amount of loan loss reserve decline. And certainly, you still beat my expectations on the earnings. But just a little bit more on the philosophy of your -- what kind of loan loss reserve you're targeting going forward. And then second, and second, how much -- can you give us what flavor on that fourth quarter possible repositioning that you're thinking about, and what that means for the margin next year, and whether it's more likely to be gains or losses in the quarter?

Short. As it relates to the loan loss reserve, we have an established quantitative methodology that essentially calculates with some level of judgment for certain qualitative factors what our loan loss reserve should be. It is unusual, I guess I would say, to report a provision which is less than your charge-offs for the quarter. One of the reasons for that, the principal reason is that our nonperforming loans were down and the charge-offs that we did take in the quarter were charge-offs which were previously provided for in prior quarters. So that explains, Claire, I guess what you would perceive as a reduction in the provision, but it was really generated off the improvement in the asset quality of the decline in nonperforming loans.

We have provided year-to-date about a million more than we did through the first three quarters of last year also. So year-to-date, we are well ahead, in terms of provision expense, vis-a-vis 2002.

I guess I ought to be focusing more on the reserve to loan ratio from a year ago, which you are up from that level, even though you're down from recent (ph) quarters?

Correct. And we're back to 200 percent coverage on the nonperforming assets, which we had dropped below with the well-documented actions taken in the first quarter particularly. So we're back above 200 percent coverage on NPAs -- I'm sorry -- NPLs, which we think is a good target for us to always keep in mind. But Mark, the second part of Claire's question --

The second part of your question related to the balance sheet restructuring, I guess is the way I referred to it. Some of the things that we're considering to better position ourselves going into 2004 with respect to our interest rate sensitivity profile and in efforts to optimize future earnings performance, we are looking at certain restructurings, including the sale of securities, the paydown of existing borrowings or the refinancing of those borrowings. What we're looking at is really the long-term borrowings and not the shorter-term borrowings as much. But that could come into the equation, depending on where the analysis ends up. So those are the things that we are looking at, and we will comment further on what we believe the impact on 2004 of those actions would be if we decide to take those actions in the January 2004 guidance.

Okay. But I guess -- it sounded like you want to be more asset-sensitive at this point too. Is that right? What is your asset, or liability sensitivity at this point?

We're already slightly asset sensitive. We would not be looking to position ourselves to be more asset sensitive at this point.

So then perhaps it's more driven by what you want to do on the borrowing side?

The borrowings -- and again, we're looking at securities too as well, but you're right. Principally on the borrowing side.

All right, thanks.

There are no further questions in queue at this time.

Thank you very much, and we will talk to you in January.