Community Financial System Inc (CBU) 2005 Q4 法說會逐字稿

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  • Operator

  • Good morning everyone and thank you for holding.

  • 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 different 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 & Exchange Commission.

  • And now I'd like to introduce today's call leaders.

  • Mr. Sanford A. Belden, President and Chief Executive Officer.

  • Mr. Mark Tryniski, Executive Vice President and Chief Operating Officer.

  • Mr. Scott Kingsley, Execute Vice President and Chief Financial Officer and Mr. Joseph J. Lemcheck, Senior Vice President and Chief Investment Officer of Community Bank System.

  • Gentlemen, you may begin.

  • - President and CEO

  • Good morning everyone and welcome to our first investor call in 2006.

  • We are pleased to have been able to reward our shareholders in 2005 with record earnings and another dividend increase in August in the face of what was a challenging year for the banking industry with respect to interest rates.

  • We enter 2006 in a very strong position to continue building organic growth in loans and deposits, to capitalize on the substantial momentum in noninterest income created in 2005, to benefit from our consistent track record in managing asset quality, to flatten our operating expense profile and to deploy our strong capital position as opportunities present themselves.

  • Most importantly, we are already successfully into the transition to a new executive leadership at Community Bank in the person of Mark Tryniski and I am very pleased about our selection of Mark, his progress and the bright prospects for the future of this company under his leadership.

  • Scott will now provide a deeper look at the fourth quarter and all of 2005 to be followed by Mark.

  • Scott?

  • - CFO

  • Thank you, Sandy, and good morning.

  • Our fourth quarter earnings of $0.27 per share were $0.13 cents or 34% below the fourth quarter of 2004 and included a one time $2.9 million or $0.07 cents per share charge related to certain early retirement actions.

  • Full year 2005 earnings of $50.8 million or $1.65 per share were $0.01 per share above 2004's results and represented a new high for the company.

  • Cash earnings per share which excludes the after-tax effect of the amortization of tangible assets were $1.82 for both 2005 and 2004.

  • For the year, higher noninterest income including securities gains improved asset quality in organic loan and deposit growth offset higher operating expenses, including special charges and increased cost of funds, lower investment income and a higher effective tax rate.

  • I'll first discuss the balance sheet.

  • Average earning assets were down 5.0% from the fourth quarter of 2004 and declined $59.9 million or 1.6% from the end of this year's third quarter.

  • Average loans were up $8.7 million from September 30th while investment securities decreased $68.6 million.

  • Total investment securities were down $281 million from December 2004.

  • Although our decision in 2005 to not reinvest securities cash flows in the current yield environment had a negative impact on current and future quarterly earnings, it improved our overall interest rate sensitivity profile.

  • As we communicated in previous quarters, we took advantage of market conditions in 2005 and sold $245 million of securities in order to shorten the average life of the portfolio and maximize their total return attributes which add $0.29 per share after taxes to our full year results.

  • The investment portfolio still contained net unrealized gains of $13.7 million as of December 31st.

  • On a year over year basis, loans grew $53.3 million or 2.3%.

  • The company added $50.6 million of consumer installment loans in 2005 including significant growth in our indirect auto-lending operation.

  • Although we did sell some new mortgage originations into the secondary market in the fourth quarter, residential mortgages increased $14.4 million for the year.

  • Business lending was down $11.6 million for the year and included a significant decline in automotive dealer floor plans, the result of robust manufacture incentive programs in effect during the year, uncertainties associated with upcoming vehicle redesigns and generally lower sales expectation for early 2006.

  • Borrowings were down $53.5 million from the end of the third quarter and have been reduced $267.4 million or 29% from the end of 2004.

  • These reductions in principally short-term variable rate advances contributed greatly to the Company's ability to improve its overall interest rate sensitivity profile in the current rate environment.

  • Deposits remain consistent from the end of the third quarter and increased $55.8 million or 1.9% year over year.

  • Our capital levels remain strong with our tier one leverage ratio improving to 7.57%, our tangible equity ratio stood at 5.9% at December 31st.

  • Also the Company acquired an additional 72,000 of its own shares during the quarter at a cost of $1.7 million under the 1.5 million share repurchase program authorized by the board of directors in April.

  • For the year, a total of 1.1 million shares were repurchased at a cost of $25.9 million.

  • At December 31st, there were 900,000 shares available for repurchase under the previously mentioned authorization.

  • Shifting to the income statement, the net interest margin for the fourth quarter actually improved to 4.12% from 4.06% in the third quarter.

  • The earning asset yield increased 21 basis points and included the receipt of an FRB dividend forecasted for the first quarter of 2006.

  • Loan yields improved 25 basis points from the third quarter reflective of a more favorable mix.

  • The cost of funds rose 15 basis points to 2.20% which was slightly below our most recent projections.

  • The full year net interest margin of 4.17% was 28 basis points below 2004.

  • The price of a 6 basis point increase in earnings asset yields offset by a 35 basis point increase in the cost of funds.

  • Our loan loss provision for the quarter was $2.3 million compared to $2.1 million in the fourth quarter of 2004 and consistent with $2.3 million recorded in this year's third quarter.

  • The full year provision of $8.5 million was 2.5% below the $8.8 million recorded in 2004 and $0.8 million above the full year net charge-offs of $7.7 million.

  • Our loan loss allowance to total loans outstanding stood at 1.35% at year end consistent with our levels at the end of both the third quarter and December 2004.

  • Nonperforming loans to total loans outstanding are at 0.55% compared to 0.56% at the end of the third quarter and 0.55% a year ago.

  • The delinquency ratio was 1.46% of total loans at December 31st '05, in line with the 1.45% at the end of 2004.

  • This favorable and stable asset quality profile is primarily the result of our enhanced credit risk management programs and our continued emphasis on and adherence to disciplined underwriting standards.

  • Noninterest income excluding securities gains was up 16.8% over the fourth quarter of 2004.

  • Deposit service fees increased 13.1% over the prior year's fourth quarter, driven by several revenue enhancement initiatives put into place this year and were up 8.6% on a year over year basis.

  • Our employee benefits administration and consulting business posted a 30% jump in revenues over last year's fourth quarter thanks to new products to both new and existing clients, resulting in a full year revenue improvement of $2 million or 22%.

  • Operating expenses excluding special charges and acquisition expenses increased 4.5% over the year ago quarter from $30.2 million to $31.5 million.

  • This was due to increases in salaries and benefits costs, utility costs, business development expenses and certain writedowns of facilities, partially offset by lower intangible amortization.

  • Excluding special charges, fourth quarter operating expenses were $0.8 million above the third quarter also due to the above-mentioned factors as well as higher OREO related costs.

  • Our effective tax rate for the quarter was 24.2% compared to 27.4% for the third quarter and 24.9% in the fourth quarter of last year.

  • The proportion of tax exempt income to total income continues to be the most significant determinant in our effective rate.

  • Lastly, we expect a flat yield curve to continue into 2006 compressing our net interest margin to near 4.0% compared to 4.1% for full year 2005.

  • We expect to continue to pay down borrowings with excess cash flows including those from our securities portfolio in this current interest rate environment.

  • We will also begin recognizing compensation expense for stock options in 2006 with an estimated $0.04 to $0.05 per share impact.

  • I'll now turn over to Mark for some comments on 2006.

  • - COO

  • Thank you, Scott.

  • And thank you, Sandy, as well for your earlier words of confidence in me and in the future of Community Bank System.

  • Your shoes are indeed large ones to fill.

  • But I have great confidence in our management team to continue the tradition of growth and success established under your leadership over the past 14 years.

  • The fourth quarter brought continued rate environment challenges, however, our margin did hold up better than we expected.

  • As Scott commented on despite our general satisfaction with overall operating results, the 20 basis point reduction in margins in the fourth quarter of 2004 to this most recent quarter adversely impacted earnings by approximately $0.05 per share.

  • Also, as it relates to full year 2005, the 28 basis point reduction in margin impacted earnings by approximately $0.25 per share.

  • As I commented on in detail last quarter, 2005 was productive in a number of ways that we expect will benefit our performance and earnings capabilities as we begin 2006.

  • We finalized integration efforts in Pennsylvania.

  • Results in 2005, however, did not meet our heightened expectations, and one of our most important objectives for 2006 is to more effectively generate revenues and reduce operating costs in our Pennsylvania markets.

  • We've intensified our commercial business development efforts across the company.

  • In fact, our southern New York region achieved 13% commercial loan growth for 2005, so in as much as upstate New York as a whole is not a high growth market there are regions of opportunity where superior results can be achieved through superior execution.

  • I would add that the executives responsible for building our commercial lending team in the southern region now function as Chief Banking Officer and Chief Credit Officer for the entire Company.

  • We strengthened and restructured our sales and marketing function.

  • As a result we now have the capabilities to undertake in 2006 a significant company-wide retail deposit generation initiative.

  • This effort will focus on core checking customers with the objective of achieving a double digit increase in this all important customer base in 2006.

  • The incremental marketing and business development costs associated with the startup of this effort will approximate $2 million, which we expect will be offset by similar levels of revenues in 2006.

  • We expect to generate increases of nearly $2 million in 2006 due to several banking fee initiatives implemented in the first half of 2005 as well as the checking account initiative I just commented on.

  • In addition, our benefits administration and consulting and our wealth management businesses are expected to deliver revenue increases of $3 million or 16% in 2006.

  • Combined, we're expecting increases in total noninterest income of 10% in 2006.

  • As I discussed in detail on the third quarter call, we repositioned our balance sheet in 2005 to better favor a rising rate environment which we accomplished as Scott said by selling securities and repaying and restructuring our borrowings.

  • We do expect to experience a bit more compression in 2006 with full year margins declining by 15 to 20 basis points.

  • The resulting impact on 2006 operating results is estimated to be $0.14 per share.

  • I also commented during the third quarter call on expense reduction opportunities across the Company.

  • We've undertaken a number of initiatives to reduce operating costs, including FTE reductions, branch consolidations, and vendor management efforts.

  • We expect these reductions in the aggregate to approximate $3.5 million.

  • Total operating expenses for 2006, excluding stock option expense, are expected to be on par with 2005 with the aforementioned cost reductions offset by annual salary adjustments, benefit cost increases and $2 million of increased marketing and business development costs.

  • As a penultimate point, we expect 2006 earnings per share excluding the $0.04 effective options expense to approximate results for 2005 as adjusted for foregone incoming gains associated with the 2005 security sales of $0.38 per share and excluding the fourth quarter early retirement charge of $0.07 per share.

  • This expectation presumes a continued flat yield curve and reductions in the securities portfolio from contractual cash flows.

  • Any improvements in the interest rate or capital market environment in 2006 could present opportunities for securities or other actions that would benefit operating results.

  • Lastly, I would like to comment on growth strategies.

  • Because of the more modest growth markets we operate in, it will continue to be important to our overall growth strategy to be a disciplined acquirer over time of small to mid-sized community style banks that meet our qualitative and quantitative standards.

  • In support of this objective, our board recently appointed Sandy as chairman of a newly created acquisition and integration committee and I look forward to working closely with him in this new role as we continue to utilize our strong capital position to grow the company and provide exceptional returns to shareholders.

  • That concludes our prepared comments and I would ask Linda to open up the line for questions.

  • Operator

  • Thank you, gentlemen. [OPERATOR INSTRUCTIONS] Our first question comes from Jared Shaw from KBW.

  • Mr. Shaw, your line's open.

  • - Analyst

  • Mark, can you hear me?

  • - COO

  • Yeah, hi.

  • Good morning, Jared.

  • - Analyst

  • Good morning.

  • Sorry, I had the wrong button pushed there.

  • Could you just go through quickly again the different line item guidances at the beginning?

  • I missed it.

  • It sounds like you're saying the 164 that was the 2005 top line number, subtract out the $0.29 of securities gains, add back in the $0.07 of severance cost and then add in the $0.04 to $0.05 cent option costs.

  • Is that roughly correct?

  • - CFO

  • Jared, I think you also have to reduce from that the additional $0.09 of investment income that will be foregone as a result of having a lower investment securities, in other words, we had investment securities on some of those transactions we sold in '05, earlier in '05.

  • - COO

  • Yeah, the gains are $0.29.

  • The income is about $0.09, which is the $0.38 that I referred to as an adjustment associated with the impact of the 2005 securities sales.

  • - Analyst

  • Okay.

  • And then in the margin this quarter, was the dividend -- the Federal Reserve dividend in there and how much did that impact the margin?

  • - CFO

  • It impacted the margin by about 4 basis points so without it would have been closer to 408 as opposed to 412.

  • - Analyst

  • Okay.

  • Great, thank you.

  • - CFO

  • You're welcome.

  • Operator

  • Thank you.

  • Our next question comes from Kevin Timmons from CL King.

  • Mr. Timmons, your line's open.

  • - Analyst

  • Thank you.

  • Hey, guys.

  • - COO

  • Hello Kevin.

  • - Analyst

  • My question, tax rate for next year, any significant change for where we are this year as far as you can see?

  • - CFO

  • No, Kevin, very close to this year.

  • I think it's fair to be within a percent either way of this year's final number.

  • - Analyst

  • Okay.

  • The other expense line has fluctuated a little bit in '05.

  • Is the Q4 number a reasonable run rate to start with or should we adjust that?

  • - CFO

  • Kevin, I would argue that the Q4 number is high by about $350,000 for facility writedowns.

  • We took about a $350,000 pre-tax charge to write down some of our branches that we'd either closed or consolidated and then we currently have for sale.

  • I would not put those into your model on a recurring basis, but as you know, that what tends to be the lumpy part of that line tends to be OREO related costs that typically run across there based on the workout of those types of assets.

  • - Analyst

  • Great, okay.

  • And any other one-time items?

  • - CFO

  • No, I think other than mentioning that the Federal Reserve Bank dividend did show up, a couple days earlier than we anticipated and therefore that's in the fourth quarter as opposed to the first quarter of next year.

  • Other than that, with the exception of course of the special charge we took in the quarter.

  • - Analyst

  • What was the dollar amount of the Federal Reserve Bank dividend?

  • - CFO

  • It was the Federal Reserve Bank dividend and it was almost $300,000.

  • - Analyst

  • $300,000, okay.

  • The Federal Reserve dividend?

  • - CFO

  • Correct, Federal Reserve dividend, which is twice a year.

  • - Analyst

  • Okay.

  • And if I can just step through again to make sure I'm making the correct adjustments.

  • We're starting at the 165.

  • - CFO

  • Right.

  • - Analyst

  • Minus 29 plus 7 minus 4 minus 9.

  • - CFO

  • Exactly.

  • - Analyst

  • For 129, the GAAP number is a comparable number?

  • - COO

  • That's about it, yes.

  • - Analyst

  • So that's a GAAP basis.

  • That's the number we should be thinking about for '06 again on a GAAP basis?

  • - COO

  • Well, I think what we said is we expect that number to be approximately where we expect for 2006, so I think the notion of approximate is up to all of you to judge.

  • I think one of the things that has impacted our -- I guess desire to give more detailed guidance is just the impact that the yield curve can have in either direction on reported results.

  • For example, in -- just in the fourth quarter alone in 2005 was about $0.05 a share compared to the fourth quarter of 2004, so I think in giving any kind of more definitive range of guidance, we felt that, based on our expectations and forecasts, Kevin, that we felt the guidance we gave is approximate to what our expectations are for 2006.

  • - Analyst

  • Okay.

  • And the difference between the cents per share impact of noncash items, is that still going to run about $0.04 a quarter in '06?

  • - CFO

  • Pretty close to that, Kevin.

  • The amortization is actually coming down a little bit and you saw that first quarter, that really showed up was the third quarter of this year.

  • I think if you use the fourth quarter amortization number for all of next year, that's pretty safe.

  • - Analyst

  • Okay.

  • And then more generally, can you just kind of give us a sense for what you're seeing as far as loan demand?

  • I know this isn't the best time of the year in some of your markets to talk about that, but what do you see out there?

  • - COO

  • Sure.

  • I think if we look at 2005 broadly, the demand, broadly speaking was more on the consumer side than the commercial side.

  • We had strong growth in all of our consumer lines in terms of commercial, as I said, we had pockets of real -- what I would say are great strength and I commented on the southern region of New York which is kind of the finger lakes and west, where we had 13% commercial growth.

  • There are also -- there's a lot going on in terms of activity in Jefferson county in northern New York, which is the home of Fort Drum.

  • In fact, based on some of the most recent information demographically I've looked at, Jefferson county is the seventh fastest growing county in New York state so I think we have opportunities in that market.

  • I think we didn't get the results in the north that we did in the south, nor in Pennsylvania and as I said I think that's an area of focus for us in 2006 is the commercial lending in Pennsylvania, but with that said, our pipelines are pretty strong.

  • We expect strength again in the southern region for 2006 so we think that the opportunities for us are going to transition from '05 to '06 from consumer line opportunities to commercial opportunities

  • - Analyst

  • Okay.

  • I guess I have one other thing.

  • In your release, you don't break down deposits by type.

  • And I'm just wondering what kind of shift you might have seen this quarter.

  • - COO

  • I would say that broadly speaking overall, over the course of the year, all our deposit lines were up except for savings.

  • Savings was down and time deposits were up, so what we saw shift over the course of the year, Kevin, was a shift from savings deposits into money market and time deposits, so it's those depositors reacting to higher yielding opportunities in other product lines and that's the shift that we saw over the course of the year.

  • - Analyst

  • Okay, thank you.

  • - COO

  • Just looking at just -- you asked -- I know your question was really the fourth quarter change, and just kind of looking at it quick, I would say that we experienced the same -- the exact same dynamic in the fourth quarter as we did for the year.

  • - Analyst

  • Okay, thanks a lot.

  • - CFO

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from Rick Weiss from Janney.

  • Mr. Weiss, your line's open.

  • - CFO

  • Hi, Rick.

  • - Analyst

  • Hi, guys.

  • - COO

  • Good morning, Rick.

  • - Analyst

  • Just -- Kevin got most of my questions.

  • Just if you could, no doubt it's a tough environment out there.

  • How do you think that's going to affect M&A?

  • Are some of the smaller banks going to have even more head winds in your opinion?

  • - CFO

  • I'm sorry, you were cutting in and out there for a second, Rick.

  • Could you repeat the question?

  • - Analyst

  • Sure.

  • I'm just saying as a result of the challenging rate environments a lot of people are experiencing head winds.

  • How do you think that's going to affect the M&A market in your area?

  • - President and CEO

  • I think it will be generally beneficial, Rick, in terms of an opportunity to look at more situations.

  • I think you've put your finger on it.

  • The environment remains challenging not only from a net interest margin perspective, but also in terms of the regulatory burden that falls disproportionately on smaller institutions.

  • So I think that we're optimistic that we will have a look at as many and hopefully more opportunities in '06 than we looked at in '05.

  • As you know, we didn't consummate anything in '05.

  • But we certainly had some good looks.

  • So I think in general, it should be beneficial for the M&A environment.

  • It's always a matter of, as you know, of sellers' expectations conforming to buyers' expectations and finding a point where both parties can constructively agree.

  • - CFO

  • I think, also, our view would be that some of those head winds that you talked about in the comment Sandy made would temper some of the seller expectations which in many cases we've viewed in discussions as unrealistically high, so that's our hope and expectations and, you know, frankly the formal and informal ongoing discussions that we have with others throughout the industry would be supportive of that prognostication.

  • - Analyst

  • In terms of your criteria with regards to earnings per share dilution, are you looking for immediate increasion or are you willing to wait a year or do you have guidelines on that?

  • - President and CEO

  • We basically have said for some time that we would expect any deal to be accretive to earnings within 12 months, within a year of consummation of the transaction and that, I think, remains our expectation and our discipline, Rick.

  • - Analyst

  • Okay.

  • Thank you very much.

  • - President and CEO

  • Thank you.

  • - CFO

  • Thanks, Rick.

  • Operator

  • Thank you.

  • We have another question from Kevin Timmons from CL King.

  • Mr. Timmons, your line's open.

  • - Analyst

  • Hi, guys, sorry to come back on this.

  • - CFO

  • That's okay.

  • - Analyst

  • The dollar 64 minus 29 and so forth, the minus 29 is the full year -- sorry.

  • The $0.09 was the net interest income lost basically from the sale of securities?

  • - CFO

  • Exactly.

  • - Analyst

  • Okay.

  • Now that's a full year number but in fact most of the restruction occurred before Q4, right?

  • - CFO

  • That's correct.

  • We had no securities transactions in the fourth quarter, Kevin.

  • - Analyst

  • So if I'm looking at Q4 as my baseline, making -- how big of an adjustment do I really have to make versus my Q4 number because I guess I come out -- if I just run my model 4 making some adjustments that I know I do have to make, I would come out a little bit higher than that, say a $1.30 sort of number that the annual adjustments would apply unless you'd rather talk offline on that.

  • - CFO

  • Well, I'd be happy to talk offline about that, but just taking a shot at that, in the release, if you trended from that fourth quarter investment income of 16.3 knowing that maybe there was $300,000 of noise in there, but our current expectations for '06 also suggest there's probably a $100,000,000.00 of natural investment cash flows down.

  • So in other words we expect to continue to use the cash flows off the securities portfolio upon maturities and calls to continue to pay down on the debt side.

  • Right now our current projections don't suggest we will be reinvesting that.

  • - Analyst

  • And what kind of spread are you currently getting on the investment security portfolio relative to what you'd pay down?

  • - CFO

  • It would be approximately 125 right now, 125 basis points.

  • - Analyst

  • Okay, so that's about $600,000 of lost revenue.

  • Okay.

  • I can talk more to you offline.

  • - CFO

  • Thanks, Kevin.

  • - President and CEO

  • Thanks, Kevin.

  • Operator

  • Thank you.

  • We have no other questions in queue at this time.

  • - President and CEO

  • Thank you all very much.

  • Thanks, Linda.

  • Operator

  • That concludes today's conference.

  • Thank you for your participation.

  • You may now disconnect.