Community Financial System Inc (CBU) 2003 Q4 法說會逐字稿

Good afternoon everyone, thank you for holding. And welcome to the Community Bank System call. Today's call will begin with a presentation followed by question-and-answer session, and instructions on that feature will be explained later in the program.

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 Security Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets, and economical environment in which the company operates. Such statements involve risks 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 your presentation.

Thank you very much, Linda and welcome to our call to discuss results for the fourth quarter of 2003. And our performance for the entire year.

Fourth quarter results reflected a solid improvement on a core basis, vis-a-vis the fourth quarter of 2002, and added a fitting cap stone to what has been an excellent year for CBU. Record earnings were posted for the year, and nicely ahead of initial expectations going into 2003. Our team has done an exceptional job in managing the net interest margin and I expect it is rather unusual for banks to the produce improved net interest margins in 2003 compared to 2002.

I'm also very pleased with our persistent progress on the asset quality front. Nonperforming loans to total loans ratio improved each quarter throughout 2003, from a high of 87 basis points at the end of March to a low of 62 basis points at the end of December. As noted in the release, charge offs are on a favorable trend against total loans, and our team has produced persistent improvement in delinquencies. Coverage of the allowance for loan and lease losses against nonperforming loans improved to 2.2 times versus 1.99 times at September 30, 2003. We continue to effectively execute our strategy in the fourth quarter, with the successful conversion and assimilation of Grange National Banc. Don McCall is firmly in place as President of Pennsylvania Banking and we eagerly await our second quarter 2004 acquisition of First Heritage Bank in rounding out or senior management team in Pennsylvania with Bob Matley from First Heritage, who will become Executive Vice President and Senior Lending Officer for Pennsylvania.

We're off to a good start in 2004, and we're delighted by the positive response to our recently announced stock split. Mark?

Good afternoon. As Sandy said, we're very pleased with our earnings results with operating EPS for the full year in fourth quarter periods up by 9%, 4% respectively. The strength of our earnings has been driven by high net interest margins, significant increases in non interest income, lower loan loss provisioning, and a lower effective tax rate with these benefits partially offset by higher operating expenses. I'll first address the net interest margin, which held up remarkably well all the way through 2003.

The margin was up 7 basis points for full-year 2003, from 462 to 469. There are two reasons you are margins held up so well. First, we were relatively aggressive in managing down our cost of funds particularly with respect to maturing time deposits. Second, the yield on our investment portfolio held up very nicely due to substantial level of longer term call protected securities we added too the portfolio in '01 and early '02 to protect us from falling rates.

To provide some trend perspective, the fourth quarter margin was 459, down from 463 in the third quarter, and 474 in the second quarter. We do expect the present interest rate environment to continue to exert downward pressure on margins, and estimate the full-year '04 margin at approximately 460.

Improved asset quality metrics led to a slightly lower loan loss provision in '03 with the provision to average loans ratio declining from 69 basis points to 59 basis points. We achieved year-over-year reductions in the charge off ratio, nonperforming loan ratio and delinquency ratio, with total nonperforming loan balances declining in each of the last three-quarters.

Non interest income was up 25% in 2003, principally on the strength of the new overdraft product introduced in the fourth quarter of 2002. Overall, revenue from our financial services business increased 9%, if I might borrow from Charles Dickens, that increase was very much "A Tale of Two Cities".

Benefit plan administrative revenues were up 21%, and that is excluding the Harbridge Acquisition, while the asset-based businesses were down 17% as a result of the comparative strength of these businesses in the first two quarters of '02. We are optimistic and encouraged by the second half performance of the asset based financial services businesses, which were up 8% over the first half of '03 on improved market confidence.

Excluding acquisition costs, operating expenses were up 8% for the full year and 15% for the quarter. Recurring operating expenses from the three acquisitions closed in '03 accounted for approximately $2.3 million of additional full-year expenses, and $1.7 million of additional fourth quarter expenses. In addition, increases in certain benefit costs, principally pension and medical benefits, increased by approximately $2.5 million, or 50% for the full year, and $1.4 million just in the fourth quarter. This fourth quarter impact included approximately $800,000 or 4 cents per share of nonrecurring adjustments that were not contemplated in our third quarter earnings guidance. Overall, the acquisitions and benefit costs just discussed accounted for approximately 5% of the full-year increase in operating expenses of 8%, and 13% of the fourth quarter increase of 15%.

With respect to our expectations for 2004, we believe that net interest margins will continue to trend downward, and that we will be well-challenged in meeting our loan generation objectives. We will continue to be vigilant in managing asset quality, and are hopeful that the third and fourth quarter improvements in our financial services businesses will continue into 2004. Additionally, the three acquisitions we closed in 2003 are all expected to provide incremental earnings opportunities in 2004. Subject to the effects of actual events and circumstances our present estimate of diluted earning per share for 2004 is between $3.20 and $3.30 per share. That concludes our prepared remarks, and we would now ask Linda to open the line for questions.

Thank you, Mr. Belden. If anyone has a question or comment just press one on your touch-tone phone.

Thank you, our first question comes from Wilson Smith. Mr. Smith, your line's open.

Good afternoon, gentlemen.

Good afternoon, Wilson. How are you?

Well, you must be -- you obviously feeling quite good about the quarter and the prospects for '04, it's nice to see you looking so ebullient.

Well, it's only in part an attempt to address the extraordinarily cold weather we're having. So we feel warm on the inside, how's that?

Well, how much snow do you have on the ground?

Oh, we've had 110 inches and counting, way too much.

All right. In the fourth quarter, it seems as though your tax rate ticked up a little bit there. Mark, was that the case and is that going to be kind of the run rate we should expect, the tax rate we should expect in '04?

It clicked up just a little bit as you probably recalculated, Wilson, but our budgeted effective tax rate in 2004 is about 25%.

Okay. Goof.

And on the loan provision, it ticked up there in the fourth quarter in terms of dollars, not, you know, as much in terms of ratio, but I'm assuming that that was really due to the Grange Acquisition. Is that correct?

No, not really. I think that we did book a few hundred thousand higher than what our run rate has been, and part of that was due to our desire to strengthen coverage of non-performers. Despite the fact that non-performers were down, we wanted to strengthen our coverage percentage of those non-performers. So that increase in the provision in the fourth quarter over what our first three quarter run rate was, accounted for about 2 cents, Wilson.

Okay. Now, then from that discussion, there, should we infer that you are happy with maintaining your loan loss reserve ratio at, you know, around 1.37 or so? Or are you going to be looking at that matching charge offs more or less in '04?

Well, we right now budgeted in '04 a provision that equates to approximately a 50 basis point charge off the loan ratio. So that will -- that would equate to, I guess, a run rate in '04 of a little under $3 million a quarter.

Okay.

And that 50 basis points is conservatively better than what we did in 2003.

Yeah, it looks as though in '03 you ran about 55 basis points in terms of that charge off. So, from that can we infer that you're expecting a somewhat better year in terms of net charge offs in '04 than '03?

Yes. Of course, subject to actual events and circumstances.

Absolutely. Absolutely. So without being too specific here, but I will, if we're -- if you're looking at budgeting like 50 basis points a quarter or $3 million, should we be looking at, like, 45 basis points average charge offs for the year?

Well, we've budgeted 50.

Okay. Good. Now, in the fourth quarter, it looked as though loan growth without including Grange was around 2%. Is that correct?

In the fourth quarter?

Yeah. I think Grange had about $163 million?

Yes, that's about right. A little -- excluding Grange, about 1.7%.

Okay. And now, when we look forward, how does the pipeline look, and would that -- would the growth rate in the fourth quarter, would that carry over, do you think, into '04?

Well, like most things, our mortgage pipeline is down a fair bit, all the demand that was created in the third quarter, a lot of that closed in the fourth quarter, excluding Grange, our consumer mortgage portfolio was up about 7% in the fourth quarter alone. So we certainly expect the run rate as it relates to consumer mortgage generation, to be less than 7% a quarter.

Yes. Okay. Terrific. I'll let some other people get in here and I'll hop back into the queue if I think of something else.

Thanks, Wilson.

Thank you.

Thank you. Your next question comes from Jared Shaw. Mr. Shaw, your line's open.

Hi, Jared.

Good afternoon.

How are you?

Good, thanks, how about yourselves?

Good, go Patriots, right?

Absolutely. We're going to get a foot of snow though tonight

Sorry about that, I guess better you than us.

This I guess to follow up on some of the questions, in terms of the NPAs, can you gave breakdown of where you're seeing -- in terms of where the buckets of the NPA's are?

By geography, they're still concentrated in northern New York, and that remains the area where we have had the most challenge. In terms of the portfolio, they're still disproportionately, as you'd expect, concentrated in the commercial portfolio, but there's no particular pattern by SIC code, or NAICS code now, but they are more concentrated in our northern region than in either our Finger Lakes business or in Pennsylvania.

Not a lot of agricultural loans in there?

No.

Okay. Good.

No.

And then in terms of loan growth, I guess looking into '04 and to the extent you can '05, are you expecting to see Pennsylvania be a stronger market than your New York market or is it pretty evenly split?

No, we are expecting greater growth out of Pennsylvania. As you know, we've had some runoff in Pennsylvania, and we think with the new leadership in place down there as well as the markets that we have added with the Grange Acquisition and will be adding with the First Heritage Acquisition, that our prospects and potentials are very good in Pennsylvania. And we think disproportionately so against our New York opportunities.

Okay. And then finally, I think Wilson asked but I didn't hear, for tax rate this quarter, you know, the tax rate I guess has just generally been fairly good. Is this still a good tax rate you use, based more on the 24% range, Mark?

We're budgeting a higher, obviously higher taxable income next year so the proportion of the benefit that relates to text exempt income is going to go down a little bit which we are forecasting drive up our effective income tax rate to around 25% next year.

Great, thank you very much.

And Jared, just to further elaboration on your earlier questions about the -- or question about the farm loans, we have two farm loans in the non-performing loan list, and together they aggregate well, well under a $1 million.

Great, thank you very much.

Okay, thank you.

Thank you, sir. Your next question comes from Bill McCrystal. Mr. McCrystal your line's open.

Good afternoon Mark, Sandy.

Hi, Bill.

Hello, Bill.

You mentioned I was trying to write down and I can't multitask too well but you talked about $800,000 of expenses that were not anticipated, I wonder if you could give a little -- I'm just basically trying to get between the guidance last time and where you wound up here trying to get the biggest components of that.

Sure. Well, I mentioned the three components that really make up the majority of that difference. As I said, about 4 cents related to some -- a number of nonrecurring actuarial-related adjustments to benefit obligations that we didn't anticipate when we were putting together our forecast. That's about, again, $800,000 or four cents. Our provision was a little bit higher. It was a couple cents higher than what our run rate has been. Again, because we wanted to strengthen coverage of our non-performers. And then we were a little, I guess, overly hopeful with respect to the recovery of some of our asset based financial services businesses. You can see that they recovered nicely in the third and fourth quarter, but I think we expected even more trajectory in the fourth quarter than we got. So that was about a penny or so. So those three things really are the biggest components of I guess I would call the differential between the consensus and our results for the fourth quarter.

Which would be right around 7 cents.

Right.

That's what the differential would be. So...

Okay. That helped. And I don't want to risk being redundant, but I'll once again ask about some of the economically -- obviously the Kodak announcement recently, granted you probably don't have direct exposure, but I'm wondering what the collateral damage from the Kodaks, from the Carrier, from Oneida, what are your thoughts regarding the continued sort of negative news that are coming out of the upstate New York market?

Well, certainly that's why in good measure we look for greater growth opportunities in Pennsylvania. It's certainly is not good news for the upstate economy in terms of direct impact on us from any of those three, Bill. We have no exposure in and around Oneida. So we are, I'd say, completely insulated from that event. We have very little exposure, as you know, in metropolitan Syracuse. So almost no direct exposure to the Carrier reduction in force.

In the case of Kodak in Rochester, we have, of course, nothing in the metropolitan area itself. We do have some branches to the east and the west and the South, so I'd say we're anticipating some limited derivative effects there, probably on the consumer business, not really on the commercial business as far as we can anticipate at this point.

I think, Bill, also if you look at our franchise, we do business now in over 20 counties. So the ability of any particular adverse economic event to impact us in any substantive way is really reduced by that geographic diversification.

That's fair enough. Thanks very much.

Okay, thank you, Bill.

Thank you, sir. At this time, there are no more questions in queue at this time.

We thank you all very much, and we will speak with you after the end of the first quarter, when now doubt it will be warmer. Thank you all very much. Bye-bye.