Community Financial System Inc (CBU) 2009 Q3 法說會逐字稿

The following presentation contains forward looking statements, within the provisions of the Private Security Litigation Act of 1995.

They 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 these statements.

These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission.

Today's presenters are Mark Tryniski, President and Chief Executive Officer, and Scott Kingsley, Executive Vice President and Chief Financial Officer of Community Bank System.

Gentlemen, you may begin.

Thank you, Tony.

Good morning, everyone, and thank you all for joining for our third quarter conference call.

The third quarter was a relatively solid and uneventful one for us.

Earnings for the quarter at $0.38 were a penny less than 2008, but excluding the increased FDIC assessment of $0.02, we're $0.01above.

Revenues were up on both the net interest and non-interest income line, but so were expenses, mostly the result of the branch acquisition closed in last years fourth quarter.

Third quarter expenses excluding the FDIC special assessment last quarter were reduced over those of the first two quarters of the year.

As I had discussed on last quarter's call, we are undertaking an expense reduction initiative, which is identified $5 million to $6 million of cost reductions, an effort that is now under way in which we expect will result in a lower cost structure in 2010, the net of 2009.

Our wealth management investments administration businesses were down over the 2008 quarter as a result of market conditions and despite increases in the number of account relationships, but were up over the previous quarter and we expect will show continued improvement into the end of this year and into 2010.

Asset quality continues to be strong and stable, although we did experience an increase in nonperforming assets related almost entirely to a single commercial credit that is presently in the process of improvement.

Scott will comment on that a bit further.

We continue to have high levels of liquidity despite deploying over $200 million in the Capital Markets over the third quarter.

Our surplus cash liquidity has declined by over $100 million.

That will add modestly to ongoing earnings, but an important and challenging objective continues to be productive deployment of that excess liquidity.

The 18 branches acquired from citizens financial group in the fourth quarter of last year continued to perform exceptionally well, with both loans and core deposits up from the date of acquisition.

We have gotten less earnings lift from this transaction than we expected, due to the under-deployed liquidity I just discussed.

But the operating traction we've achieved in growing the relationships and gaining share in those markets continues to exceed our expectations.

We announced the fourth quarter cash dividend of $0.22 per share, consistent with the past several quarters.

I will repeat what I said last quarter, that with respect to the dividend, we expect to continue to pay at the current level or higher and that we believe a strong dividend is a very important component to providing favorable total returns to shareholders over time.

We remain very well capitalized, with all of our capital ratios reflecting continued growth in the third quarter.

The business environment remains challenging, particularly with respect to productive asset generation.

Total interest earning assets are up about 4% this year.

We've had different results in our different geographies and product lines and are working hard every day to identify pockets of high value opportunities.

Our commercial lending pipeline is up heading into the fourth quarter, which is good news, and atypical for our more seasonable market.

Another bright spot continues to be deposit funding.

Over the past four quarters, we have grown core deposits organically by over $300 million or 16% and reduced our higher cost CD book by $200 million.

We believe that it positions our balance sheet and earnings capacity quite well for the future.

Overall, we are satisfied with out financial and operating results for the quarter and for the year-to-date.

Our earnings and asset quality remain strong, we have considerable surplus liquidity, our balance sheet is well positioned, our capital levels are strong and growing, and we like our expected performance trajectory heading into the future.

And with that, I will turn it over to Scott Kingsley for further commentary.

Thank you, Mark, and good morning, everyone.

I would like to make a few remarks on the third quarter as a follow-up to the items Mark just covered.

First, third quarter cash earnings per share, which excludes the after-tax effect of the amortization of intangible assets and acquisition-related adjustments were $0.43, a full $0.05 per share, or 13% above GAAP reported earnings of $0.38 per share.

This $0.20 per share differential on an annualized basis continues to be a meaningful value driver for our company, especially at a time when valuations seem to be so focused around tangible common equity ratios.

I'll now discuss some balance sheet items.

Our consumer mortgage portfolio was up just $2.5 million from June, reflective of our continuing decisions not to portfolio lower rate longer-term assets and instead, sell most of our originations to Fannie Mae.

Asset quality results continue to be very favorable in this portfolio, with total net charge-offs for the first third quarters of 2009 of $350,000, or under 5 basis points of loss per quarter.

Our home equity portfolio over approximately $321 million also declined slightly in the quarter and was also likely influenced by low long-term mortgage rates.

In addition, we did experience lower line utilization again in the third quarter, indicative of our customers' desire to continue to delever, despite the low rate environment.

Asset quality results continued to be very favorable in this portfolio, with very low loss rates, consistent with our consumer mortgage portfolio.

Our consumer indirect portfolio of nearly $536 million was up $3.8 million from June and reflected another difficult quarter for most participants in the automotive industry, despite the incremental volume generated by the Cash for Clunkers program.

A by-product of very low new vehicle sales has been an improvement in used car valuations where the largest majority of our lending is concentrated.

Net charge-offs for the last four quarters have been around 60 basis points, which is higher than we experienced for the six quarters ended June 30, 2008, but still reasonable and manageable levels.

With our bias towards A and B paper grades, yields have remained very consistent.

Although we experienced a reduction in our business lending portfolio in the third quarter, we have generated a respectable $20.3 million of growth in 2009, excluding the impact of certain planned reductions in our automotive dealer floor plan business.

Charge-offs in our business lending portfolio in 2009 are at 27 basis points, which is up from 2007 and 2008, but still favorable to long-term trends.

As Mark mentioned, we did experience a $4 million increase in nonperforming loans in the third quarter, the large majority of which related to one relationship that was in the 90-plus days past due status at quarter end.

The credit is currently in the process of collection and we expect it to return to a more current status prior to month end.

Quarter end deposits were up $24 million from June, comprised of $108 million increase in core accounts and an $84 million reduction in time deposits.

Core deposits now represent nearly 68% of total deposits at September 30, '09, the continuation of a very favorable funding mix change we've worked diligently at.

Quarter end investment assets increased $162 million from the end of the second quarter and principally agency and agency-backed securities.

Invested cash equivalents were down $113 million from June 30.

As Mark said, our capital levels in the third quarter remain strong.

The tier one leverage ratios (inaudible) 7.27% at quarter end and tangible equity to net tangible assets was 5.15% at quarter end, a 31-basis points improvement from the end of the second quarter.

Net unrealized gains in our investment portfolio at quarter end were $30 million, despite the carrying value of our level 3 investment assets, which is almost entirely comprised of pooled trust preferred securities being nearly $26 million below book value.

The valuation of these assets continued to reflect market and interest rate volatility, as well as the absence of an active market for these types of securities.

Our holdings, which are super-senior, continue to fully perform.

Shifting now to the income statement, our reported net interest margins for the third quarter was 3.78%, up 5 basis points from the second quarter of 2009, and 4 basis points lower than the third quarter of 2008.

Proactive management of funding costs continue to have a positive effect on results, but as has been previously mentioned, quarterly earning asset yields were again significantly impacted by our high level of net liquidity.

Third quarter non-interest income excluding securities gains and losses was up 7.3% over the prior year.

Deposit service fees increased 22% over last year, derived from the branch acquisition completed last November and our organic core deposit growth over the last several quarters.

Mortgage banking revenues were consistent with the third quarter of 2008, but were significantly lower than those generated from the robust secondary market activities experienced in the first two quarters of 2009.

Our employee benefits administration consulting business posted a modest increase in revenue over the third quarter of 2008, with new client gains tempered by unfavorable year-over-year comparisons from asset-based sources.

Our wealth management businesses experienced a 13% year-over-year decline in revenues, the result of continued unfavorable comparisons in market conditions, the low interest rate environment, and generally weak demand.

Third quarter other banking services included $0.3 million of annual revenues from pooled credit life and disability programs in which we participate, which were $0.4 million below the same period last year.

Operating expenses excluding acquisition expenses of $44.1 million increased $4.9 million over the third quarter of 2008 and reflected the branch transaction completed last November.

In addition, the company recorded an additional $1.0 million, or over $0.02 per share of FDIC assessments compared to the third quarter of last year.

Salaries and benefits costs increased $2.1 million, or 9.7% over the third quarter of last year and included nearly $750,000 of additional pension costs related to the unfavorable investment performance of the planned underlying assets in 2008.

The branch acquisition had an approximately 100 additional FTEs to our company in the fourth quarter of last year, accounting for most of the remaining increase.

Occupancy and equipment expense increased $229,000, or 4.3% year-over-year and reflects the additional 18 branches acquired in November, which upped our branch facilities count by almost 11%.

Amortization of intangibles, both core deposit and customer list related, increased $299,000 over the third quarter of 2008, again, reflective of last year's branch transaction.

Other operating expenses, principally customer processing and communications, marketing and development and postage costs were up 11% over last year, reflective of our larger base of customers and accounts.

Our effective tax rate in the third quarter was 23.0%, reflective of our current mix of non-taxable and fully taxable securities compared to a rate of 22.5% in the third quarter of 2008.

With that, I'll now turn it back over to Tony to open the line for questions.

(Operator Instructions) Our first question is from Mr.

David Darst.

Your line is open.

Good morning.

Good morning, David.

Hello, David.

Mark, could you maybe touch on the funding mix?

And not related to the rates, but maybe as it pertains to clients and what you're seeing.

I mean do you have a similar amount of non-interest bearing, or low cost deposit growth as runoff and CDs, is that kind of the same customer pool changing accounts, or are you actually seeing a lot of new account growth?

Well, I think we're seeing a little bit of, a little bit of both, David.

I think some of it's organic growth.

It's new customer generation.

We've been pretty active for the past three years, focused on core deposit generation, and I think we've, you know, we've grown that funding base quicker than our -- than our market has grown.

So, I think it's a combination of both, but if you look at the, clearly the funding mix is improved.

As you suggested and I imagine relative to significant increase in core funding and a significant decline in time deposits, which is all part of our strategic funding objectives as it has been for the past several years.

And if you look at the different account components of those core accounts, the demand deposits are up both interest bearing and non-interest bearing, the savings accounts are up.

I mean for years we experienced this general flow of declines in savings accounts, as I think -- did many others, but even the savings, the savings category is up, as is the money market.

So all -- all of those account types that consist of our core funding are all up pretty strongly again.

I think a combination of organic growth in terms of new customers, as well as the fact that the savings rates increased across the industry and I think we're the beneficiary of that as well.

I don't think that -- I mean a lot of this I think is a function of the efforts we've had in place to grow core deposit funding over the last several years.

So, that was kind of in place before what transpired with the economy and the spike in the savings rate.

But we've also been the beneficiary of the increase in the savings rate and the deleveraging of consumer and businesses.

Okay.

Do you have any statistics maybe pertaining to the Northcountry and Plattsburgh, as new account growth year-over-year maybe compared to what you have seen earlier in the year that shows us that that's actually what you're picking up up there?

I do not have that in front of me.

I would have to dig that out, David, which I can do.

I will tell you the core deposit growth, we've achieved in all of our markets.

We're up significantly on organic basis in the Northcountry, which is up even much more than that because of the acquisition last year.

But the organic core deposit growth in the north, in fact, I do have some of those statistics.

Let me kind of dig them out while I'm talking here.

But our -- all three of our regions, the north is up in core deposit growth.

The kind of finger lakes of the western region of our franchise is also up in core deposits, as is our Pennsylvania franchise.

So, the core deposit growth has been pretty strong in -- I think double-digit in all three of those markets.

Now, our experience on the lending side is a fair bit different.

But on the, on the funding side, all three of those markets are up pretty good.

Okay.

And then, Scott, could you give us an outlook on your expense base and run rate and how much expense growth we might expect to see?

In terms of, in terms of fourth quarter, David?

Yes.

I would suspect that the third quarter is a pretty good proxy for the fourth quarter.

All that being said, very granularly, there's a couple more payroll days in the fourth quarter than there are in the third quarter because of the calendar, and, you know, as we've said a couple times before, as it gets a little bit colder outside, it gets a little more expensive for us in some of our locations.

Really more of a first quarter phenomena, but I would expect us to be modestly up relative to that.

I think to follow that up, David, you know, Mark made the comment that we think we've identified $5 million to $6 million of cost reduction initiatives that we are busy implementing as we speak.

We might get a little bit of help from some of those in the fourth quarter, but again, to Mark's point, I think we feel pretty comfortable that if and when those are identified, that we could actually deliver a 2010 expense base that's lower than '09.

Okay.

And David, pulling out -- or answering the question you asked specifically, pulling this data out quick, our core deposit growth trailing four quarters in the north is 19.9% in the south region or the kind of finger lakes and west region there, 16.7%.

And in Pennsylvania, I guess I did mischaracterize.

I thought it was double-digit in all regions.

9.6%.

Okay, thank you.

And then, Scott, you typically have an insurance payment that comes in in the third quarter, is that correct?

David, I tried to put that in in a thousand words or less in the release.

We participate in a (inaudible) administered pool for credit life and credit disability programs, which were a very large participant and originator for.

Typically in our third quarter, we end up with almost $0.02 a share of additional income from that annualized dividend due to both some underwriting results, as well as some investment results of the pooled trust.

Our receipt was down about $400,000 from last year.

So, that is the item I'm trying to describe there in other banking.

Okay.

So.

the payment was about $250,000?

Yes, or $300,000 David, around.

Okay, thank you.

Thank you.

Thank you.

Our next question is from Whitney Young.

Your line is open.

Hello.

Good morning, Whitney.

Good morning.

I was wondering if you could -- I think in the past you provided some commentary on how the different regions are doing in terms of credit quality, and I was looking for an update if central Pennsylvania is still where you see the most problems.

And then I have another question, which is if you see any more acquisition opportunities, if you're thinking about raising capital to go on the offensive.

And if any of your thoughts there have changed.

Thanks very much.

Thanks, Whitney.

I think as it relates to asset quality, interestingly enough, there's been some consistency between what we've seen as demand, credit demand in the different regions and asset quality in the Northern region, the demand has been much stronger.

We've had very good results this year in the Northern region, and the asset quality has actually improved a bit.

In the southern region, we're still up in terms of commercial credit.

We're still up for the year in terms of, you know, loan growth modestly.

And asset quality is hanging in there pretty good.

In Pennsylvania, demand is softer in Pennsylvania than it is elsewhere, and that's where we're seeing a softening of some of the asset quality metrics as well.

In fact, the one credit that Scott and I both mentioned that tipped into the NPAs this year, or the past-dues, it's over 90 still accruing, is a Pennsylvania credit.

I think the second question was just in terms of M&A and issuing large amounts of capital to pursue strategic opportunities.

I think we are of a mind at this point that we're unlikely to do that.

We're certainly not going to be raising capital just for offensive purposes.

I think if we had an opportunity that we thought was significant and high value and worth pursuing, I think we believe we can raise the capital at that time based on that transaction to --, to support the acquisition.

So, I don't think we're going to be pre-emptively or offensively raising capital to do that.

We may be filing a shelf registration.

Just for purposes of capital flexibility and in the event that we do have that kind of opportunity, maybe an FDIC transaction or other that would cycle up more quickly, which they seem to do these days, we'll be in a better position to issue that capital, but we have no plans on offensively pulling down capital to pursue acquisition.

And, sorry, just another follow-up.

So, do you see more opportunity than you have in the past, or has that outlook changed from the second quarter at all?

Well, I think in our markets, and even generally somewhat beyond our markets for the most part, there hasn't been a lot of failures.

The markets -- our markets remain economically reasonably stable.

The -- the focus of the FDIC is just the transaction seems to move around from geography to geography and state to state.

I think we would be interested in looking at those such opportunities that maybe expand the franchise a bit in different places.

You know, clearly south of route 80 in Pennsylvania is showing an awful lot of weakness.

There are places in New Jersey that are showing lots of weakness.

So, I think, you know, we understand where those soft spots are and where there may be future opportunities.

I don't know that that's going to, you know, that the whole M&A market is going to unthaw rapidly.

Valuations seem to be low.

There's still some concern about future earnings.

I think a lot of banks have needed to issue additional capital for purposes of refilling their credit losses, which have diluted out shareholders and maybe disinclined to sell rapidly or quickly when the cycle turns.

But I don't expect we're going to see a rapid return to a highly active M&A environment in our markets or even expanding upon our markets, at least in the near term here.

Thanks.

That's very helpful.

Thanks, Whitney.

Thank you.

Our next question is from Mr.

Jason O'Donnell.

Your line is open.

Good morning.

Congratulations on a good quarter.

Thanks, Jason.

Thanks, Jason.

Just -- can you give us an update on the securities portfolio and if there's any impairment risk issues that we should be aware of in the near term?

My recollection is that you have some higher quality corporate debt and some -- smaller pool trust positions.

We do Jason, and I'd be happy to give you that update.

The portfolio ended the quarter at just a bit over $1.4 billion.

Most of that in available for sale.

It continues to look like it's looked for a number of years, Jason, but, you know, most of the securities are in municipal obligations, or agency obligations, mortgage-backed agency obligations.

Our purchases in the quarter, you know, Jenny May securities, short-term in nature, most of them in terms of expected duration.

To your point, you know, the one set of -- one class of securities we get to keep talking about, is we do have, from a carrying value standpoint, about $45 million of trust preferred securities.

They have a book value closer to $70 million.

That's certainly the class of assets that, you know, takes us 4.5 pages in the 10-Q to disclose the fair market value calculations on.

We're in a supersenior tranche in the three pools that we're holding assets in.

They continue to perform fully.

There has been a higher level of deferrals and defaults in each of the pools that we're in.

That's not unexpected.

But there's still a very substantive subordination from our position as a supersenior holder.

So, we certainly don't see a near-term impairment issue.

You know, I know there's a temporary impairment issue, but that being said, there's not a whole lot of market activity that's pushing the valuation of those securities any higher than where we're carrying them today either.

But other than that, the portfolio is performing very well in this market condition.

Okay, great.

Thanks for the update.

In terms of the -- on the mortgage banking side, just switching gears a little bit, the revenues came down pretty sharply in the third quarter.

I'm just wondering what you're looking for in that business in terms of going into the fourth quarter based on where rates are?

Well, I mean as you know, the first half of the year, really the first two -- first two quarters, we were very active in terms of trying to price aggressively, particularly the 30-year product, and sell it into the secondary market because the -- it didn't fit our ALCO modeling very well in terms of 30-year, 4% assets.

We just -- those were not attractive to hold, despite the liquidity.

So, we continue to sell those.

We -- actually our origination activity is up by I think 0.3 or so year-to-date over last year.

So, the origination activity is up, even though the outstandings are down because we -- we just didn't want to hold these long-term low rate assets on the books.

So, I think the, you know, the activity has come down a bit since the first half of the year, and I think we're continuing to portfolio the 15-year and under kind of origination and continuing to sell the 30-year and up origination.

I expect that's going to continue to be where we're going to be at, absent a significant change in the interest rate environment into the fourth quarter.

And Jason, two attributes of that mortgage banking revenue for the first half of the year, the real gains that you experience relative to the rate differential between what you can originate them at and what you can tell them at and then the creation of the mortgage servicing rates because we do retain servicing so we can retain the customer relationship.

We are huge fans of the gain on the sale of assets when the rate differential allows you to do that.

We will admit freely mortgage servicing assets are not our favorite asset class either.

That being said its a productive business for us, we have the capacity to do more and I suspect that we will be sort of slaves of the rates on that as we go forward.

Okay, perfect.

Thank you very much.

Thanks.

Thank you.

Thank you.

Our next question is from Tim [Braziler], your line is open.

Hello, good morning, guys.

Good morning, (inaudible)Tim.

First question is what was the quarterly swing in AOCI?

Tim, I'm not sure we understood the essence.

Give me that one more time.

What what was the quarterly swing in AOCI?

Ask me something else while I look.

Sure.

The next question pertains to that commercial credit, which were 90-plus days this quarter.

Can you kind of give us a little more information on that?

What's the collateral behind it?

And then what's the total exposure you guys have within Pennsylvania?

Well, the total exposure on that credit's a bit over $3 million.

It's actually a multi-- it consists of a number of different credit relationships.

Some of it is financing, a business that is really, you know, financing receivables and inventory and the like.

Some of it is related to the financing of mobile home park.

There's another real estate component to it.

There's a couple of personal components to it.

So, there's a number of different credits that are in different kind of stages of collateral and cash flow and in different stages of collection.

Much of it is backed by real estate.

As I said, we are in the process of doing some things to shore up that credit regarding additional collateral and asset sales and the like.

But Tim, to come back to your first question, the change in AOCI from June 30 to September 30, was $9 million positive.

So, a $9 million swing positive.

Thank you.

And just to clarify, that loan is still accruing interest, correct?

It is.

It is.

Because it's in the process of collection.

It -- and when whether thats status by the end of the year, I think that will depend on a lot of things in the next 60 days relative to improvement mechanisms for the credit.

Okay, and do you happen to have the total loans you guys have within Pennsylvania?

Yes, in front of -- in front of us, probably not.

Yes, I -- actually I think I've got it here, Scott.

End of the third quarter, Pennsylvania total loans were about $780 million.

About $356 million was business.

$185 million indirect installments.

$178 million consumer mortgage.

And the rest was home equity.

Perfect.

That's very helpful.

On the $5 million to $6 million of cost reductions, should we expect to see all that come in in the next year?

And can you give us some of the initiatives that you guys are undertaking?

Sure.

To answer the first question, as much as we've identified $5 million to $6 millions of cost reductions and expect to get that, there are going to be some offsets to that for 2010 in terms of the expense base, which is why I said I believe that we will have a lower total cost base, probably absent some costs to put in our new IT system, which is going to be an effort throughout 2010.

But I expect that our overall recurring cost base in 2010 to be less than 2009.

But there will be some offsets to that.

We expect healthcare costs to go up.

We expect costs associated with the, the technology services and costs associated with the growth in core deposits, I think this -- year-to-date we've put 25 or so thousand new checking accounts on the books.

Our debit card penetration has grown dramatically.

All of those things actually have a fairly high level of back room costs, third party back room costs associated with them.

So, there's going to be some offsets for a handful of different reasons like that.

So, I'm not trying to suggest in any way that we're going to get $5 million to $6 million lower cost reduction, cost debates next year, but there will be some offsets that we do expect to get the $5 million to $6 million driven out of our -- out of our cost base.

The initiatives are really fairly broad based.

We looked at almost the entirety -- we did look at the entirety of our cost structure.

We are going to be doing some benefit plan restructuring.

We've renegotiated a number of vendor contracts across the company.

Some are technology related.

Some are related to Courier services and other -- the provision of other services, branch maintenance.

We're reducing, or let's say we are reducing our marketing costs, but we're doing some things to be smarter about where we spend our marketing dollars.

There will be some FTE reductions, principally from ongoing attrition and retirements and so we really did look at virtually every category of cost and look to put together a, an action plan to reduce those costs where we could and we expect to put that into place here, hopefully the majority of it before the end of 2009 and the remainder in the first part of 2010.

Excellent.

Thank you.

That's very helpful.

Very nice quarter, guys.

Thanks very much.

Thank you.

Thank you.

(Operator Instructions) And our next question is from Rick Weiss.

Your line is open.

Good morning, actually most of my questions were answered.

But just one, if you guys could talk a little bit about the loan competition as well as loan pricing today.

Fair question Rick, I think the -- for us it really -- it does matter what region we're talking about.

I think consist with my previous answers to those inquiries, we're seeing a lot of strength in the Northcountry and a fair bit of opportunity.

I think some of that is the fact that the economy in many of those markets is actually doing quite well and that's certainly not across the board in the Northcountry, but it's doing reasonably well, holding its own.

And we're finding opportunities.

I think we're being more aggressive up there and so I think that market -- we're having -- and there's less competition there.

So, I mean historically, our margins have always been higher in the Northern region than anywhere else in the company.

In the southern region, kind of the finger lakes and western part of our franchise, we're seeing moderate levels of competition still.

I don't think a lot has changed.

There hasn't been the same level of dislocation in our markets that there has elsewhere in terms of the competitors because we haven't had the same level of losses in crisis and real estate devaluation that other markets have had.

So, the competitive environment has been accordingly less affected than other markets across the country.

So, the competition still remains pretty high there.

I think for a period of time we were seeing better ability to, you know, get floors in and do some other things for a period of time.

I think that's starting to drift away a bit.

It's getting to be a little bit more difficult in terms of the competitive environment.

You can still get floors in, but they are lower.

So, ti's those kinds of things.

And then in the Pennsylvania region, I think just demand is a little bit softer there and competition still remains pretty robust, although, you know, we very much like that market.

There's some things going on there that we think are going to be very productive in the Northern part of our Pennsylvania franchise, the Marcellus shale activity, the gas activity is creating a fair bit of economic vitality in those markets where we have 10 or 12 branches.

So, I think we're going to see a great deal of opportunity in that particular market, but overall, I would say to date, demand in Pennsylvania is probably a little bit softer than it is in our New York markets and the competition is a little bit more.

They are slightly larger markets than our New York markets.

So, the competition is a little bit greater.

There's been less dislocation there, although we are seeing some of that credit quality -- issues are -- seem to be creeping northward in Pennsylvania.

I think everyone understands that south of route 80, the banks are having a very difficult time in terms of credit quality, and, you know, you're starting to see some of the institutions in northeast Pennsylvania reporting softer credit quality numbers.

But the, the big banks there, the bigger banks than us continue to be aggressive and successful and active in the marketplace.

So, we haven't really, you know, seen much in terms of an improvement in the competitive environment there at all, Rick.

So, it's really different by market and it tends to change with the, you know, with the cycle as well and as much as I know it looks like we're just all in kind of northeast, the northeast part of the world, our Northern market is different from our southern New York market, which is different than our Pennsylvania market.

Would you say that the Northern market is doing well?

Are Canadians coming down into those areas to spend their money, helping to support that local economy?

Well, they have been on and off.

I mean it depends on the strength of the Canadian dollar versus the US dollar, which I mean everybody understands the US dollar has not been performing well recently, so there has been more cross-border activity.

We've got a lot of branches on the border and so we're seeing the benefit of some that activity in those markets that are just across the border from Canada.

I think some of it as well, Rick, it's just the kind of inherent stability in low growth kind of nature of those markets historically.

I mean there's been really a very, very modest decline in real estate valuations in Northern New York.

Some markets are a little bit different than others, but overall, there's been very, very modest decline in real estate valuation.

So, I think that's helped -- you know, I don't know that I can say the Northcountry is growing like crazy.

I don't think that's the case.

Right.

I think the unemployment rates are still relatively high.

There's not tons of new businesses moving in, but there are businesses actually being created in the Northcountry, in different markets.

The watertown market is pretty active still because of what's going on with (inaudible) there.

But I think it's just the fact that there -- its the stability of those markets through the course of this cycle, which has really created the strength in that market right now and what I characterize as the demand relative to the, you know, the other markets we're in.

Okay, and a final one would be, when you said that the larger banks are more aggressive now, is that in terms of price, or in terms of -- or looser underwriting standards?

You know, it depends on really the specific transaction and the specific location of the institution.

I mean some are more aggressive than, you know, than others.

I think, you know, we've had the smallest decline in loan yields this quarter than we've had for a long time.

So, hopefully we're seeing kind of a floor in the, in the, in the loan yields, but it's still pretty -- pretty competitive including on pricing for high quality credits.

Okay, great.

Thank you very much, and real nice quarter, guys.

Thank you, Rick.

Thank you.

At this time, gentlemen, we have no questions in queue.

Very good, Tony.

Thank you.

Thanks, everyone, for joining in.

We will talk next quarter.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.