使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, everyone. 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, markets 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 this statement. 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 System. Gentlemen, you may now begin.
Mark Tryniski - President & CEO
Thank you, Elaine. Good morning, everyone and thank you all for joining our third-quarter conference call. I understand that Bernanke and Paulson had an 11.30 public meeting, so we will try to be brief here.
Our third-quarter operating and financial performance met our objectives with EPS up 7% over 2007 and year-to-date earnings likewise up by 11% over 2007. We continued to execute against our objective of achieving structural improvements to our balance sheet. Those being, on the asset side, reducing securities and drawing loans and on the liability side, reducing timed deposits and growing core deposits.
Over the trailing 12 months, we have grown loans over $200 million while reducing securities by $125 million. Over that same period, we have reduced timed deposits by $170 million and grown core deposits nearly $100 million.
Asset quality continues to be strong, although net charge-offs were up a bit as a result of a sole commercial lending relationship that Scott may comment on further. Our nonperforming and delinquency metrics are solid and we see no indications of imminent stress in any of our portfolios.
Our markets remain stable, including the real estate market, but we need to be vigilant. The credit crisis has clearly begun to spread more broadly to the consumer and expectations of a recessionary economic environment are looming. Although our markets have held up better than most across the country, we are not immune to a broad-based recession and will continue to be vigilant and disciplined in our credit administration and operating decisions.
With respect to the Citizens branch acquisition we announced in the second quarter, we are making good progress on the conversion and integration of these 18 branches in northern New York and remain on target to close in early November.
Also, as previously announced, we completed a secondary offering earlier this month, raising nearly $50 million of common equity to provide capital support for the Citizens branch acquisition. The offering was significantly oversubscribed, allowing us to increase the capital raise from 2 million shares to approximately 2.5 million shares. We were very pleased with the outcome of the offering, particularly given these very difficult and challenging times for the capital markets.
Earlier in the quarter, we announced an increase in our quarterly dividend from $0.21 per share to $0.22, which is our 14th dividend increase in the past 15 years. As I said in the press release, underscores our commitment to continuing to provide steady, growing, long-term returns to our shareholders.
Overall, the third quarter and all of 2008 to date has met or exceeded our operating objectives. We improved our balance sheet, have continued capital strength, very solid asset quality and strong earnings performance. The fourth quarter will be a busy one for us with the Citizens closing, but we think we are well-positioned to finish the year strong. With that, I would ask Scott to give us more commentary on our financial report.
Scott Kingsley - EVP & CFO
Thank you, Mark and good morning, everyone. Our third-quarter earnings of $11.8 million or $0.39 per share were $0.8 million above the $11.0 million reported in the third quarter of 2007 or a 7% improvement. As Mark mentioned, solid loan and core deposit 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 effect of the amortization of intangible assets and acquisition-related adjustments, were $0.44 per share in the third quarter, a full $0.05 per share above GAAP-reported results. Year-to-date earnings of $34.0 million, or $1.13 per share, were 11% above the $1.02 per share reported in the first nine months of 2007.
I will first discuss the balance sheet. Our average earning assets of $4.25 billion were up just $21 million from the third quarter of 2007. Although we produced very solid organic loan growth, we have chosen not to fully reinvest investment cash flows over the last 12 months. We grew average loans by $188 million from last year, including $46 million in business lending, $68 million from consumer mortgages and $74 million in consumer installment products.
Average investment securities, including cash equivalents, were down $167 million from the third quarter of last year, but do reflect a higher proportion of cash flows being reinvested in tax-exempt securities. Average deposits were $3.25 million for the third quarter of 2008, down 2% or $70 million from last year's third quarter. However, consistent with our focus on expanding core account relationships and reducing higher cost timed deposit levels, balances in core product relationships grew $99 million, or 5.4%, since last year's third quarter while timed deposits were allowed to decline $169 million.
Third-quarter average borrowings of $926 million increased $57 million from the second quarter this year in anticipation of the significant additional liquidity we will be receiving from the Citizens branch acquisition. Loans grew organically $82 million in the third quarter and are up 6.5% or $183 million for the year. Business lending growth was 4.4% from the end of 2007, or 5.9% annualized. Year-to-date, consumer mortgages have grown 6.3% and consumer installment products are up 9.0%.
Our capital outlook in the third quarter remained strong. The tier one leverage ratio stood at 7.73% at quarter-end and our tangible equity ratio was 5.01%. Our third-quarter dividend payout ratio was 56% of GAAP earnings and just 50% of cash earnings, allowing for continued meaningful capital building.
The carrying value of our level three investment assets, which is almost entirely comprised of pooled trust preferred securities, declined $11.6 million from the end of the second quarter. The valuation changes reflect market and interest-rate volatility, as well as the assets of an active market for these types of securities. Our holdings, which are super senior and AAA-rated, continued to fully perform.
Shifting now to the income statement, our reported net interest margin for the third quarter was 3.82%, up 26 basis points from the third quarter of 2007 and up four basis points from the second quarter. Proactive management of funding costs resulted in the year-over-year improvement as total funding costs declined 63 basis points from last year's third quarter and were partially offset by a 37 basis point decline in earning asset yields.
The loan loss provision for the quarter was $2.0 million compared to $1.6 million in the second quarter of 2008 and $0.5 million in last year's third quarter. Net charge-offs for the third quarter were $1.7 million, up from the $0.9 million reported in the second quarter and up $0.9 million from a very favorable third quarter of last year and did include one $500,000 charge on a single commercial relationship, which was specifically reserved for in the previous quarter. Our loan loss allowance to total loans outstanding stood at 1.25% at quarter-end versus 1.27% at June 30 and 1.31% a year ago. This small decline in coverage ratio is due to the $82 million of loan growth experienced in the third quarter, combined with the stable underwriting credit profile of our balanced portfolios.
In addition, our coverage ratio of nonperforming loans stood at 325% at quarter-end compared to 388% at the end of last year's third quarter. Quarter-end nonperforming assets to total assets outstanding were at 0.26%, consistent with the level reported at the end of the second quarter. This favorable and stable asset quality profile is primarily the result of our credit risk management programs and continued emphasis on and adherence to disciplined underwriting standards.
Third-quarter non-interest income, excluding securities gains and losses and debt refunding charges, was up 10% over the prior year. Our employee benefits administration and consulting business increased revenues by 26% over last year's third quarter, principally on the strength of acquired growth from the Alliance Benefit Group MidAtlantic transaction completed in early July.
Deposit service fees increased 8% over last year, driven by additional account relationships and growing card-related revenues. Other banking services revenues, which included nearly $650,000 of annual dividends from the creditor life and disability programs in which we participate were down $338,000 from last year's third quarter.
Our wealth management business has posted a 2% year-over-year growth, overcoming less than favorable third-quarter and full-year market conditions with growth in insurance agency revenues and certain other products. Operating expenses of $39.3 million increased $2.5 million or 7% over the third quarter of 2007, nearly half of which related to the AVG acquisition completed in July.
In addition, the Company recorded higher FDIC insurance premiums, incurred higher volume-based processing costs and increased facility-based utilities and maintenance costs over last year. Year-to-date, operating expenses were up 9.3% from 2007 and include the three acquisitions completed since May of last year. Our effective tax rate in the third quarter was 22.5%, consistent with the first half of 2008 and down from 24.3% reported in the third quarter of 2007, reflecting a higher level of income from tax exempt sources. I will now turn it back over to Elaine to open the line for questions.
Operator
(Operator Instructions). Damon Delmonte, KBW.
Damon Delmonte - Analyst
Hi, good morning, guys. How are you? Scott, I was wondering if you could quantify for us, from a modeling perspective, what we should look for intangible amortization with the branch acquisition closing this quarter?
Scott Kingsley - EVP & CFO
Yes, Damon, we are not quite there yet in terms of the evaluation of that. It certainly depends on the characteristics of what we actually inherit, but I think what we have looked at -- may have talked about this before -- is we are range modeling that 15% to 20% of the entire intangible or 15% to 20% of the $75 million anticipated intangible would be something we would be amortizing. And we will be determining that from a useful life standpoint certainly over the course of the next 45 days or so. My anticipation would be the useful life of that would probably be 8 to 10 years and we would be using an accelerated model for that.
Damon Delmonte - Analyst
Okay. And any guidance on how the acquisition will impact the margin?
Scott Kingsley - EVP & CFO
Probably not at this point, Damon. And the reason I say that is that we -- consistent with what we said before, we do expect to inherit about $400 million of net liquidity. And so I think the margin determination will be fully dependent on how fast we are successful at deploying that net $400 million into multiple classes of assets. Because, as you know, we certainly won't be deploying them into loans or our expectation would be that we would deploy them into loans over the next one year and I think, given some of the market volatility, we certainly don't want to rush into investment decisions. So I think we will be pretty disciplined in how we redeploy that.
Damon Delmonte - Analyst
Sure. Makes sense. And then lastly, on the branch acquisition, any estimated fee income from these deposits? Do you have a perspective on what they were generating under Citizens?
Scott Kingsley - EVP & CFO
I think, Damon, actually it'd be very consistent on sort of a ratio basis to what you see to our existing portfolio.
Damon Delmonte - Analyst
Okay, great. And then just a couple of other quick things. Any comment on the TARP plan?
Mark Tryniski - President & CEO
Well, let's hope it works.
Damon Delmonte - Analyst
How about specific to you guys?
Mark Tryniski - President & CEO
We are looking at it. Certainly the 5% tier one capital is advantageous. It is something that we are looking at, the opportunity to participate and whether there are opportunities that would be accretive to shareholder value over the next three to five years if we did participate. But I do have some concerns about the qualitative implications of smaller banks like us participating in a program that is deemed to be a bailout or corporate welfare or whatever word you want to use to describe it. So I do have some qualitative concerns with it. But if it is something that we can make use of productively to create shareholder value over the next three to five years, as I said, that is something we're looking at right now in terms of what those options are.
Damon Delmonte - Analyst
Okay, great. And then just lastly, Scott, if I heard you correctly, you said the decline in the trust preferreds was about $11.6 million of fair value this quarter?
Scott Kingsley - EVP & CFO
It was, Damon. You heard that exactly right.
Damon Delmonte - Analyst
Okay. And so if I run the numbers through your amortized costs of $73 million, so now they are being held at about $50 million, so roughly $0.69 on the dollar?
Scott Kingsley - EVP & CFO
Very close, Damon. Right. Correct. 69% of par is about 67% of amortized cost for us.
Damon Delmonte - Analyst
Okay, great. Thank you very much.
Operator
Amanda Larsen, Raymond James.
Amanda Larsen - Analyst
Thank you. How are you, guys?
Mark Tryniski - President & CEO
Good morning, Amanda.
Amanda Larsen - Analyst
Good, thanks. My question was actually mostly asked by Damon already, but it is about the NIM. I also wanted to know -- throw in -- I wanted to know about the NIM with the branch purchase, but also throw in there the recent Fed action.
Scott Kingsley - EVP & CFO
Yes, certainly, Amanda, let me handle it two ways. Certainly our net interest margin we expected to decline in the fourth quarter because we don't think we will deploy that net $400 million at earning asset yields that are consistent with our $4.25 billion today, but we would certainly think the net interest margin itself will contract. We expect it to produce more net interest income, but we expect the net interest margin itself to contract some.
Relative to your second question, and this is probably consistent with what we said in the first quarter of this year, that the recent Fed actions and the existence probably of one more coming at month-end will actually impact near-term results negatively. In other words, we have more assets that will reprice themselves in the short term, so we would expect to have a negative result of that. Not significant, but at the same point in time something we think we would recover from over time.
But again, as the rates continue to come down towards these historic lows, in that 1% range for the Fed funds rate, how far one can actually go on the deposits side -- at some point in time, there is a floor out there. Certainly if that is zero, but with that being said, our ability to recover that on the deposits side might be a little bit more elongated as the rate structure gets lower.
Amanda Larsen - Analyst
Thank you.
Operator
David Darst, FTN Midwest.
David Darst - Analyst
Good morning. Did you give us the revenue that you received from ABG during the period?
Scott Kingsley - EVP & CFO
Sure, David. In the third quarter, revenues from ABG were approximately $1.3 million and expenses were approximately $1.2 million.
David Darst - Analyst
Okay. And then could you give us an idea of what the annual expense base would be for the 18 branches and the number of FTEs?
Scott Kingsley - EVP & CFO
David, I don't have an annual expense number to give you at this point in time. I think we are inheriting about 100 FTEs, but I think we do know that relative to -- since we are putting on a growth of 15% to our balance sheet, that there is going to need to be some infrastructure investment relative to oversight. Again, we certainly like our structure as it exists in northern New York today, but we have already made a couple of internal investments in people and moved some people around to accommodate some leadership in anticipation of these 18 branches.
David Darst - Analyst
Okay. And how about giving us the changing mix of the balance sheet with liquidity? Will there be any changes to your tax rate next year?
Scott Kingsley - EVP & CFO
Actually, David, I think the anticipation should be that our tax rate in 2009 would be a little bit higher. A couple of reasons. We expect to be generating net interest -- or we expect to be generating taxable income from lending and depository activities that will be probably fully taxable and we expect it to be all in the State of New York and we would expect our New York State rate to move up a little bit also.
David Darst - Analyst
Okay. And then could you comment on your loan pipeline and the ability to continue to grow through the winter, which might be countercyclical?
Mark Tryniski - President & CEO
Well, it has been, David, as you know, typically. I think clearly the first quarter of 2008 we performed quite well, surprisingly well and the second and third quarters have both been extraordinarily strong. I think about $80 million of growth this quarter I think is close to that. The second quarter -- the first quarter was strong. I would tell you that our current growth rate, I would not expect that necessarily to continue. I think we have got done a good job improving our organic business development capabilities and execution skills.
We hit the markets more aggressively and we have made -- Scott mentioned that business -- as we talked about in 2007, as far back as 2007 to improve those business development capabilities. They are starting to yield very positive results for sure, but I think that given the markets that we are in, the nature of those markets, we expect them to hopefully continue to be stable and I don't think we are going to get above-average growth rates.
I would use in terms of modeling less loan growth than what we have delivered the last three or four quarters. I think we have always said, over the winter months, if we can grow just a bit in the fourth quarter, breakeven in the first quarter, we typically really get it done in the second and third quarters and I would probably use that for modeling going forward.
David Darst - Analyst
Okay. And then will there be any negative impact from LIBOR spiking through the quarter-end?
Mark Tryniski - President & CEO
We do not have a lot in terms of LIBOR-based lending assets if that is where the question was going on the loan side. We do have about $400 million in variable, mainly prime-based, some of those are LIBOR-based, but the majority of them are prime-based commercial lending relationships. So 400 out of - well, that includes commercial and noncommercial as well and home equities. So in total, out of the portfolio, about $400 million effective immediately repriceable assets. But not much on the LIBOR side. I don't know what the number is, the dollarized number, by my guess is it would be under $50 million, maybe under $25 million.
David Darst - Analyst
Okay. And that is -- how about on the liability side with your trust preferred?
Scott Kingsley - EVP & CFO
Actually, David, we are into a fixed swap on the trust preferreds, so it is 643 for the indefinite future.
David Darst - Analyst
Okay. Thank you.
Operator
Rick Weiss, Janney.
Rick Weiss - Analyst
Good morning. Hey, I was wondering with respect to the investment securities or in cash you are picking up for the branches, what are your plans with those, would they be running down I suppose or continue -- where do you see -- how's that going to go?
Mark Tryniski - President & CEO
Well, I think as Scott commented, given the market environment, we are going to need to be a bit disciplined in how we deploy that liquidity, which is going to be significant. As much as we've tried hard over the past, trailing four quarters and longer to reduce that securities portfolio, I think it blipped up a little bit this quarter in anticipation of the need to deploy that liquidity. So I think the objective of reducing the securities as a percentage of our overall earning assets is going to be -- we are going to have a hill to climb here with the transaction, on the Citizens transaction.
But I think longer term, that is still an objective. We want to have a higher, slightly higher loan to deposit ratio and reduce that -- increase the level of loans and core banking relationships and reduce the securities levels. It is just given the near-term impact of the Citizens acquisition, that is probably going to move in a different direction for a period of time until we can continue to grow that loan portfolio.
Scott Kingsley - EVP & CFO
And Rick, we don't think, in terms of that ultimate redeployment into the investment portfolio, our expectations today are to look for bullet agency securities, other municipal securities, stuff that we are good at and understand already. We are not anticipating introducing another asset class to the mix in the investment securities side.
Rick Weiss - Analyst
Thanks. Does it make sense to pay down any borrowings?
Scott Kingsley - EVP & CFO
We continue to monitor that, Rick. In the current environment, it does not look like that currently in terms of the impact of taking a capital charge to exit some of our term borrowings early, but we will continue to monitor that and certainly this level of liquidity will allow us to be monitoring that on a concurrent basis.
Mark Tryniski - President & CEO
A debt refinancing is also one of the options we are looking at with respect to the TARP.
Rick Weiss - Analyst
Okay. And then I guess I was wondering with the planned benefits and consulting expense, it seems like those numbers jump around a bit. What would be a good run rate to use?
Scott Kingsley - EVP & CFO
In terms of the -- on the expense side, Rick or --?
Rick Weiss - Analyst
Actually on both I guess.
Scott Kingsley - EVP & CFO
Well, I think if you looked at the third-quarter benefits administration revenue side, I think we made the comment that most of our improvement has been related to the ABG acquisition we completed in July. And one of the reasons is there is some proportion of our revenues in that line of business that is attached to market valuation or account balances [for] the plans for the administrator for and those were clearly down all of this year, but have been down substantially in the third quarter.
On the expense side, and I think David had asked this a couple of different times, I think the third-quarter expense side is fairly representative of what we would expect on a going-forward basis in terms of our expense load because we basically did have that ABG acquisition for the entire quarter. I will say this, we certainly know that from a utilities and a maintenance standpoint, we are more expensive in the winter than we are in the summer, so there is a little bit of seasonality that bumps around there. And again, the only thing for modeling purposes to remind people from a seasonality standpoint is that the first quarter of every year, we tend to be down relative to deposit and service fees. And I think that is just utilization of product space. Other than that, there is really not a whole lot of other things that are "seasonal".
Rick Weiss - Analyst
Okay. And I guess my final question is back to asset quality and is there anything that is going on from a quantitative or qualitative point of view that would suggest raising loan loss reserves at this time?
Scott Kingsley - EVP & CFO
Right now, Rick, there is not. Again, we've continued to have -- if you look at rolling 36-month charge-offs in our portfolio, the numbers are still actually down. So in other words, the third quarter of 2005 as an example had a higher charge-off level than the third quarter of 2008. Again, I think that is a very important window for us to look at in terms of recent results is this rolling 36. We certainly look out further than that and try to assess how close are we to some of the dynamics that we may have seen in the 2001/2002 timeframe in terms of general economic conditions.
But right now, there is really nothing that is out there giving (inaudible) that supports raising the number. And in fairness, if you were to pull out that specifically reserved loan that we charged off in the third quarter from the reserves at the end of the second quarter, because it was specifically reserved for, you'll find the coverage ratio is 125 in the second quarter also.
Rick Weiss - Analyst
I know. It definitely looks good now. I was just wondering what you're seeing on Watchlist or what loan officers are telling you about your customers, if you're seeing any kind of -- more signs of stress?
Scott Kingsley - EVP & CFO
I think there is no, as I may have suggested in my comments, there is no imminent signs of stress. I think the concern on the part of our folks on the ground is this notion that the consumer is pulling back, that businesses are pulling back, that there is fear of a recession, it is looming, it is going to be broad-based and could actually impact our market. But I would say that is where the -- if there is any sense of concern, that is the genesis of it, on the ground in our markets.
Rick Weiss - Analyst
Okay. Thank you very much.
Operator
John Stewart, Sandler O'Neill.
John Stewart - Analyst
Good morning, guys. Most all my questions have been answered, but I do want to piggyback Rick's question, if there is not enough evidence out there to suggest that the reserve will be lifted, is there enough to suggest that it will stop going lower? The reserve has trended from the mid 130s as a percentage of loans down to the mid 120s. Has that -- is there enough to suggest that you'll stop kind of lowering that number from here?
Scott Kingsley - EVP & CFO
I will take that, John. I think what we are looking at right now would suggest, as you can see, that we are providing more than -- we have been providing more than charge-offs for the last four quarters in terms of that. So despite actually having improved underlying qualitative statistics, we are providing more than charge-offs to the portfolio and again, I think that we would actually expect to actually see lower loan growth volumes in the fourth quarter and in the first quarter of 2009, which also might suggest that some of that quote stress on pushing the coverage ratio down wouldn't be quite as profound.
But again, I think in terms of the mechanics of how that works, until the qualitative attributes actually suggest that you should lean a different direction, I think we could see that move in that range that is in the 120s or if certain conditions change, it could move back up from 125 to maybe sort of 130. I think that is a fair range.
John Stewart - Analyst
Okay. Great. That was my only question. Thank you.
Operator
(Operator Instructions). Gentlemen, currently, I have no questions in queue.
Mark Tryniski - President & CEO
Very good. Thank you, Elaine. We are just in time for Ben and Hank here and I thank you all for joining us. We will talk at the end of the year. Thank you.
Operator
That concludes today's conference. Thank you for your participation. You may now disconnect.