Community Financial System Inc (CBU) 2008 Q1 法說會逐字稿

Good day, everyone. Thank you for holding. Welcome to the conference. Please note 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, market, and economic 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. Mark Tryniski, President and Chief Executive Officer, and Mr. Scott Kingsley, Executive Vice President and Chief Financial Officer of Community Bank Systems. Gentlemen, you may now begin.

Thank you, Elaine. Good morning, everyone. Thank you all for joining our 2008 Q1 conference call. The first quarter was a strong one for us with EPS growing 13% over last year. The net interest margin improved for the second quarter in a row as a result of reduced deposit and borrowing costs in spite of the impact of contracting loan yields associated with a significant fed funds rate reduction over the past four months. Our deposit mix continued to improve with time deposits declining $13 million and core deposits increasing $28 million. The significant focus we placed on lower cost deposits has increased NAD timed deposits from 55% of total deposit funding to 57% over the past four quarters. Core deposits will continue to be an important element of our strategic and operational objectives. The second consecutive quarter, organic loan growth was strong. The first quarter is historically our most difficult in terms of asset generation but this quarter saw $25 million of loan growth in business banking and consumer mortgage line with a slight seasonal decline in the consumer installment portfolio. I am particularly pleased with the performance of business banking where we have made and continue to make increased investments in people, products, and technology. Asset quality metrics continue to be strong and steady across all portfolios, including chargeoffs, nonperformers and delinquencies.

At the risk of being repetitive over the past several quarters, but necessary in the present environment we have no exposure to sub prime or other higher risk mortgage instruments either in our loan portfolio or our investment book. Net interest income was up over 30% for the quarter with double digit growth across all lines, including banking fees, wealth management revenues and administration and consulting revenues. In summary the first quarter was a good one for us, it met our expectations. We think we are off to a strong start for the year and we are looking forward to the remainder of the year. With that, I will ask Scott to give us a more detailed financial report.

Thank you Mark, Good morning, everyone. Our first quarter earnings of $10.9 million or $0.36 per share were $0.04 above the $0.32 per share reported in the first quarter of 2007, or a 13% improvement. As Mark mentioned, solid loan growth, continued expansion of non-interest income sources and improved net interest margins and stable asset quality resulted in the improved quarterly operating results. Cash earnings per share, which excludes the after-tax effects of the amortization of intangible assets and acquisition-related adjustments were $0.41 per share in the first quarter, a full $0.05 a share above GAAP reported earnings.

I will first discuss the balance sheet. Our average earning assets of $4.17 billion were up $143 million from the first quarter of 2007 but were down slightly from the fourth quarter as we chose not to fully reinvest investment cash flows in the quarter. We grew average loans by $138 million from last year including $31 million in business lending, $69 million in consumer mortgages, and $37 million in consumer installment products. Average investment securities including cash equivalents were only $5 million above the prior year, but do reflect the higher proportion of cash flows being reinvested in tax-exempt securities. We increased average deposits to $3.22 billion for the first quarter 2008, up 1.3% or $41 million above the prior year, consistent with our focus on expanding core account relationships and reducing higher cost time deposit levels, balances in core product relationships grew $67 million or nearly 4% since last year's first quarter, while timed deposits were down $26 million.

First quarter average borrowings of $883 million decreased $36 million from the fourth quarter, including the redemption of $25 million of trust preferred securities in January, as planned. Average loans grew $20 million in the first quarter, or 3% annualized, consistent with Mark's comments in what has been the most difficult of the quarter of the year to generate meaningful operating and organic growth. Business lending growth was 1.4% from the end of the fourth quarter or 5.6% annualized. Our capital levels in the first quarter remain strong. The tier one leverage ratios stood at 7.55% at quarter end, and our tangible equity ratio grew at 5.30%. Our first quarter dividend pay out ratio was 58% of GAAP earnings and just 51% of our cash earnings, allowing for meaningful capital build.

Shifting out of the income statement, our reported net interest margin for the first quarter was 3.81%, up 18 basis points from the fourth quarter, our second consecutive link quarter improvement and driven by a decline in funding costs of 24 basis points, while asset yields declined six basis points. Proactive management of deposit funding costs and a debt restructuring completed late last year resulted in the first quarter improvements. The loan loss provision for the quarter was $0.8 million compared to $0.9 million in the fourth quarter of 2007, and $0.2 million in last year's first quarter. Net charge offs for the quarter were also $0.8 million, down slightly from the $0.9 million reported in the fourth quarter, and up $117,000 from a very favorable first quarter of last year. Our loan off loans to total loans outstanding stood at 1.28% at quarter end versus 1.29% at December 31, and 1.34% a year ago. This small decline in coverage ratio is due to the improved underlying credit profile of our portfolios and also includes the lower coverage ratios on acquired portfolios. In addition, our coverage ratio of nonperforming loans stood at 398% at quarter end, compared to 285% at the end of last year's first quarter, due to meaningful reductions in nonperforming assets.

Quarter end nonperforming loans to total loans outstanding were 0.32%, an improvement from the 0.47% level reported at the end of last year's first quarter. This favorable and stable asset quality profile is primarily the result of our credit asset risk management programs and continued emphasis on and adherence to disciplined underwriting standards. First quarter non-interest income, excluding securities gains and losses and debt refunding charges was up 29% over the prior year. Our employee benefits administration and consulting business increased revenues by 59% over last year's first quarter, including acquired and organic growth. Deposit service fees and other banking revenues increased 16% over last year, driven by additional account relationships and growing debit card related revenues. Our wealth management businesses posted a 16% year over year growth, Overcoming less than favorable first quarter market conditions with acquired and organic growth in property and casualty insurance revenues.

Operating expenses of $38.4 million in the first quarter increased $4.5 million or 13% over the first quarter in 2007, primarily a result of the two acquisitions completed in 2007. In addition, the company had higher business development and volume based processing cost, increased facility based utilities and maintenance costs and higher personnel expenses during the quarter. Operating expenses were up 3% for the fourth quarter, reflective of personnel-related merit increases and seasonally higher occupancy costs. Our effective tax rate in the first quarter was 22.5%, down from 24.1% reported in the first quarter of 2007, reflecting a higher level of income from tax-exempt sources. With that, I will turn it back to Elaine to open the line for questions.

(OPERATOR INSTRUCTIONS). Our first guest today is David Darst. David, your line is open.

Thank you, good morning.

Good morning.

The securities transaction, in the press release you indicated you sold about $130 million of taxable and repurchased $52 of non-taxable?

Actually David, that was a process that we started last year in the fourth quarter, so by the time you get to the end of the first quarter, that's pretty close to the net result, yes.

That was over two quarters you did that?

Absolutely.

Any further repositioning you want to do or opportunities to leverage a little bit with municipal bonds?

There is still opportunities in terms of leverage. I think we constructively review those opportunities versus alternative uses of capital opportunities on an ongoing basis. I will say this, David. We are not far away from alternative minimum tax levels, so the continued usability and functionality of more tax-exempt securities does actually run into a wall not too far away from where we are.

What would be an outlook for the securities portfolio from where it is at quarter end?

I think we are certainly planning on flat line for now. We don't have a significant amount of investment cash flow coming in the second quarter. We have a larger expectation of cash flows coming back in the third quarter. Certainly for modeling purposes, baseline flat to up a little is reasonable.

Okay. And what would be a good tax rate to use for the second quarter?

I think, David, I would stay in the 22.5 to 23.5% range. I think we are capable of maintaining that. Assuming again that the proportion of non-taxable securities stays similar to what it is today.

Could you comment on consumer demand? Is that seasonal, or are you doing anything on the indirect side to let that run off?

I would maybe answer the question by separating consumer into the newer component parts. The consumer mortgage demand has been very strong in the first quarter. We actually had consumer mortgage growth in two of our three markets in the first quarter, which was a good result. The indirect installment portfolio however was down, I think about $8 million or so in the first quarter, which is not unusual for the first quarter for us in that portfolio. I think we experienced the same thing if I am not mistaken last year in the first quarter. So I think the consumer element component of -- or the mortgage component of consumer demand has been strong, the installment component of consumer demand has been seasonally down, but what we expect in that portfolio typically comes back with very strong growth in the second quarter. And some growth in the third quarter as well. And then, tapers off a bit. But the consumer mortgage and home equity growth continues to be robust and actually above average for us historically s in the first quarter.

Okay. Scott, could you comment on the expense run rate?

I think it is fair, David, if you looked at the first quarter of 2008 in terms of things that might make that a little higher than some of our future quarter expectations, we clearly had some very high utility and maintenance costs in the first quarter, coming out -- if we didn't need a reminder, we got a reminder that it's more expensive to heat and plow than it is to mow and air condition in our markets, that was probably the one item that sticks out for us that those costs were unusually high for the first quarter . I think in terms of utilization on a run rate basis we are pretty happy with where we are. We think our expectations, the salaries and the core processing site costs are probably in line with what we expect going forward, in other words, our first quarter is probably a reasonable run rate for some of those types of things. Again, the only other thing we are likely to have that is likely to be outside of some of these seasonal things would be in situations where we have got, we are working through other real estate owned properties and we have potential for some cost fluctuation in some other categories . Otherwise, I think absent the seasonal maintenance and utilities of the first quarter were a decent barometer for that.

Just a broad based comment for that, David, I think if you look at our balance sheet for some of the acquisitions that we've done to grow our financial services business, the reasonable question might be why aren't you getting better operating leverage on that growth, which is a good question. Some of the answer to that is that we made over the past couple years sizable investments in our foundation, if I can call it that. People investments. Product development investments. Investments in organic business development capabilities. Sales and marketing and technology capabilities across the company in different ways. We have made a lot of investments in our foundation and you can see that in the higher expense run rate in several lines. We think we have gotten paid for it because the earnings are growing. Organic growth is better than it has been in a long time. I think we do need to be mindful of getting better operating leverage going forward on some of those investments we have made in our foundation, and we expect to focus on that and achieve that over the course of the next couple years or so.

Okay, thanks. Looks good.

Thank you, David.

The next guest today are Steve Moss at Janney Montgomery. Your line is open.

Good morning.

Good morning. Just a little more color on the business lending activity this quarter. Was commercial loan growth also driven in part by less competition or just new hires?

That is a good question. It has not been really new hires. We do have a couple of more lenders, I guess in this quarter than we would have in the 2007 quarter. So, some of this, it may be chalked up to the fact that we have more boots on the ground. I think the real reason frankly is a renewed focus on business development efforts in our business banking line. We're implementing some technology, we've implemented some -- across the company, sales and business development processes that we had not previously had in place. So I think a lot of this is just making a better effort, frankly at doing more and better business in our markets.

Okay.

If I could chime in, too. I don't think we've actually seen a significant participant in our marketplace sort of advocate or pull away from opportunities, but the one good thing that the first quarter brought up is we actually saw business lending growth in all four regions. I think for us that is a very good outcome.

I think we had business lending growth in the fourth quarter, which again is usually not our toughest quarter, but probably our second toughest quarter. So I think the current trajectory of our business banking line is solid.

Thank you. And on the M&A front, what are your thoughts, and are you seeing more opportunities?

Well as you know, our strategic objective is to continue to grow our institution organically and through high value partnerships with other community oriented institutions as well as non-backed financial services opportunities that meet our criteria. We are continually on the alert for those opportunities, both those that we are proactive in pursuing, and those which, I guess in a sense come our way. I have not seen a real change in the flow of opportunity and potential opportunity. I think as a general observation, I would say folks don't sell when prices are low, they sell when prices are high. We continue to have opportunities and pursue opportunities and continue to expect that we will continue to be able to grow successfully with high value acquisitions that are accretive and that are consistent with our quantitative and qualitative objectives.

Thanks very much.

The next guest today is Damon DelMonte. Your line is open.

Good morning. Nice quarter. Could you provide color with regard to your margin? Obviously, you know what the factors were that were driving the increase this quarter. How sustainable do you think the 380 level is?

That is a great question, Damon. I think if we were coming off that 363 coming out of the fourth quarter and I think we guided people this way in January. We knew we were going get about 9 or 10 basis points coming out of the debt restructuring that we completed in the fourth quarter, so I think we were starting off with an expectation that was in that low to mid 370s range. We were happy that we were capable of moving down deposit funding costs in the quarter that at least or obviously, based on the outcome, more than kept up the repricing of the variable rate lending instruments. So I think we were pretty happy with that outcome. And I think we were being progressive enough, Damon, to be able to sustain that absent some giant shock to the rate system in terms of, I am not sure that 200 more is possible. But the expectation that 25 to 50 more, we can see some continuing erosion on the margin on some of those variable or those adjustable credits. But at the same point in time, we have been very proactive on the deposit side. And also, quite frankly, have the ability right now based on our balance sheet to not have to participate if high funding needs from some of our competition comes back into the market. We are actually not seeing that in our market. We are seeing responsible deposit pricing from everyone. We are not seeing a couple of outliers or anybody not consistently moving down with the trend.

I think even some of the larger banks that have already effected recapitalization, and fund capital raisings and the like, there is less pressure from some of the bigger institutions that really scrambled in the last quarter of 2007 to preserve capital and preserve liquidity, so we are seeing a little less pressure on rates as well.

Great. Thank you very much. With regard to the consumer installment portfolio, what is the break out between home equity and direct auto?

It is roughly $275 million of home equity, and $450 million of indirect auto. And the rest is in sort of smaller, one off direct based, or branch based instruments. And in that 275, of home equity, about $100 million of that is adjustable.

Okay. Are you seeing any stress in your indirect auto portfolio at all?

Not really. The charge off rate and the delinquency is pretty consistent actually for a number of quarters.

You know, David, I think that is another area and I think we have now said this a couple quarters before this. We would be shocked if our quality numbers actually got better. That being said, we are not seeing very steep erosion or something to that effect going on in any of the portfolios, including indirect auto. In other words, in our marketplaces in fairness, the consumer seems to have survived the winter quite well.

With net charge offs of about 11 basis points this quarter, do you think that's -- that's still a very low rate. Do you see that kind of creeping up a little bit?

We would think so. We would certainly think so over time as the year goes along. But again, during 2008, we would overtly disappointed if we went back to some of those historical numbers that we saw, say in the 2003 and 2005 cycles.

Just with respect to like seasonal factors in your fee lines of business, does the benefit plan section, does that have any benefit in the first quarter that might kind of go away in the second quarter?

It does. The actuarial side of our benefits administration and consulting practice does have a heavier workload in the first quarter based on year end valuations and financial reporting guidelines. This number might be $250,000 s more robust than we are capable of sustaining. You can see from the banking on interest income side, historically the first quarter is a very low point in terms of services utilization, and product utilization whether card-related -- or just straight accountant relationship. We would expect those to kick back up to more historical-based run rates for the second, third, and fourth quarter.

Okay. Great. That is all that I got. Thank you very much. Nice quarter.

Thank you very much.

Currently there are no more questions in queue. (OPERATOR INSTRUCTIONS). Gentlemen, I have no further questions.

Great. Thank you. Thanks everyone. We will see you next quarter.

Thank you. This concludes today's conference. You may now disconnect.