Community Financial System Inc (CBU) 2010 Q3 法說會逐字稿

Welcome to the Community Bank third quarter 2010 earnings conference call. 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 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 call 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, Betty. Good morning, and thank you, all, for joining our third quarter conference call. I would particularly like to welcome the Wilber National Bank shareholders, who are participating with us here this morning. Scott and I will discuss operating results first and then provide an overview of our recently announced merger agreement with Wilber National Bank.

The third quarter was a very busy and productive one for us. This was our second consecutive quarter of record earnings per share results, which we are very satisfied with. And thinking about our current earnings performance, they're very much the result of efforts undertaken over the past two years to improve overall earnings performance. That comment on this call over the past couple of years, we've worked very hard in growing core deposits, which has resulted in higher margins with stronger fee income.

We've worked very hard in growing the non-interest revenue streams of our Wealth Management and Benefits Administration businesses. We've worked hard on maintaining a strong credit discipline and favorable credit costs. We've worked hard to reduce and control operating expenses, and we've worked very hard to successfully integrate the Citizens branch acquisition closed at the end of 2008. All of these efforts have really come together to contribute to the improved earnings strength of the Company.

Summary. As I said last quarter, when revenues are up and expenses are down, that will always be a good outcome for our shareholders.

I'm also pleased to report that we successfully completed our core processing and information systems conversion over the first weekend of September. It was not without its difficulties as expected of a project of this scope and scale. We did have some minor backroom and customer-facing issues, most of which have been overcome with some remaining to be solved. This new system will give us improved functionality and sub-customer service capacity, improved operating efficiency, and over time, a much reduced cost structure.

With respect to our outlook for the future, I would say our prospects remain bright. Our earnings and asset quality are strong, and our capital continues to build. We have two new branches underway, one in Orchard Park, New York, a southern suburb of Buffalo and one in Montrose, Pennsylvania in the heart of the shale gas drilling. And we're certainly very encouraged about our partnership with Wilber National Bank and the opportunities that hold for our shareholders.

With all that said, we do face some headwinds. Loan demand remains soft, with the exception of residential mortgage lending and direct consumer lending. And we do expect the impact of regulation to have some potential to adversely impact our cost structure and revenue streams.

However, regardless of the operating environment, it's our duty and we remain highly focused on continuing to seek out those opportunities to grow sustainable earnings, to grow our dividend, and to continue to create exceptional returns for shareholders.

Scott.

Thank you, Mark. And good morning, everyone. First, as mentioned in our release, third quarter earnings of $0.51 per share were 34% better than the $0.38 reported in the third quarter of 2009. Cash earnings per share, which excludes the after-tax effect of the amortization of intangible assets and acquisition-related adjustments, were $0.54 per share for the quarter or 6% above GAAP reported results.

Our declared dividend of $0.24 per share represents 47% of quarterly GAAP earnings and just 44% of cash earnings. These favorable and improving operating results continue to contribute to meaningful capital growth.

I will first discuss some balance sheet items. Average earning assets of $4.87 million for the quarter were up very modestly from the second quarter and were 1.5% above the third quarter of 2009. Average loans were up $14.3 million from the second quarter, while investment securities including cash equivalents were $10.6 million lower. Our business lending portfolio of $1.04 billion at quarter end was down 1.7% on a linked-quarter basis, reflective of modest demand characteristics as well as generally lower levels of line utilization.

Asset quality results continue to be favorable in this portfolio with net charge-offs of 31 basis points over the last four quarters and 26 basis points over the previous 11. Our total consumer and real estate portfolios of $1.38 billion comprised of $1.07 billion of consumer mortgages and $311 million of home equity instruments that's basically unchanged from June 30, and reflected our continuing decision not to portfolio certain lower-rate, longer-term assets and best sell those originations to Fannie Mae.

Asset quality results continue to be very favorable in these portfolios, with total net charge-offs over the last 11 quarters of under $1.1 million or less than five basis points of loss. Our consumer indirect portfolio of nearly $511 million was also consistent with the end of June and reflected another challenging, yet modestly improving quarter for most participants in the automotive industry.

The byproduct of historically 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 11 quarters have averaged 44 basis points, which is higher than we experienced back in 2007, but still very reasonable and manageable levels. With our continued bias towards A and B paper grades, yields have trended down slightly since last year's third quarter.

Total deposits at quarter end were up $26 million from June, comprised of a $75 million increase in core accounts and a $49 million reduction in time deposits. Core deposits now represent over 75% of total deposits, the continuation of a very favorable funding mix change we work diligently at.

Quarterly average investment assets increased $308 million from the third quarter of 2009, while average overnight invested cash equivalents were down $242 million from the previous year's third quarter, reflective of our first quarter 2010 decision to deploy a portion of our excess liquidity in intermediate-term US Treasury securities. The weighted average life to maturity of our investment portfolio stood at 5.3 years at the end of September, a very comfortable level.

Net unrealized gains in our $1.1 billion available-for-sale portfolio at quarter-end were $42.4 million despite the carrying value of our Level 3 investment assets which is almost entirely comprised of pooled trust preferred securities being nearly $25 million below book value. The valuation of these assets continue to reflect market volatility and uncertainty, as well as the absence of an active market for these types of securities.

Despite continued increases in the interest deferral and default rates of collateral in our pools over the last several quarters, our holdings, which are super senior continue to fully perform. Also, although not reflected anywhere in our financial results, net unrealized gains in our $600 million held-to-maturity portfolio were an additional $48 million at September 30.

Our capital levels in the third quarter remained strong. The tier one leverage ratio stood at 7.99% at quarter end and tangible equity to net tangible assets was 6.21%, a 106 basis point improvement from last September. As I've mentioned before, consistent with regulatory instructions, our calculation of the Company's tangible equity ratio includes adding back to both the numerator and the denominator $19.9 million of deferred tax liabilities associated with tax deductible goodwill created from several of our asset acquisitions, primarily branch transactions. Exclusion of this differential would render our comparison to peers incomplete.

Shifting now to the income statement, our reported net interest margin for the third quarter was 4.08%, down 2 basis points from the second quarter of 2010, but 30 basis points better than last year's third quarter. Proactive management of deposit funding cost and a more productive deployment of net liquidity have continued to have a positive effect on margin results.

Second quarter non-interest income was up 10.1% over the prior year and included a $990,000 increase in mortgage banking related revenues, reflective of the robust secondary market activities experienced in the quarter. Deposit service fees increased 2% over last year, despite regulatory changes that have created downward pressure on certain product utilization.

Our employee benefits administration and consulting business posted a 4% increase in revenue over the third quarter of 2009, a combination of new client generation, expanded service offerings and increased asset-based fees.

Third quarter Wealth Management revenues increased 23% from a weak third quarter of 2009, reflective of favorable market valuation comparisons and generally improving conditions.

Total operating expenses of $44.4 million were $240,000 above third quarter of 2009 and reflected solid cost management across all areas of the Company. Implementation of several expense reduction programs allowed the Company to report full-year lower total operating expenses despite year-over-year increases in merit-based compensation as well as higher technology and volume-based processing costs.

Quarterly amortization of core deposit and other customer intangibles was $750,000 lower than last year's third quarter, related to the completion of amortization on one of our 2001 branch transactions. As Mark mentioned, the Company continued to have significant resources dedicated to the conversion of its core banking systems completed in the third quarter.

Our effective tax rate in the third quarter of 2010 was 26.5% compared to 23.0% in the third quarter of 2009, reflective of a higher level of income from fully taxable sources.

In summary, our high-quality 2010 earnings are the result of our continued focus on both the right and the left side of the balance sheet, as well as productive improvement from both the top and the bottom of our income statement. Our ability to reward shareholders with a 9% increase in their cash dividend this year stems directly from this commitment to a disciplined and balanced approach to our business regardless of market conditions.

With that, I'll now turn it back over to Mark for some additional comments.

Thank you, Scott. I'd just like to comment on the announcement, which I'm pleased to report on that on Monday, we announced that we have entered into a definitive merger agreement with Wilber Corporation, which is the parent holding company for Wilber National Bank. And the transaction was unanimously approved by both companies' Boards of Directors.

Wilber is a $930 million asset institution, 22 branches across seven counties, across the Leatherstocking, Capital District, and Catskills regions of Upstate New York. They are contiguous markets to us, but new markets. There is virtually no overlap whatsoever in our market footprint. So it's very attractive in terms of the geography. They also operate in markets very similar to where we operate; smaller cities, smaller towns and in villages where we've historically performed very well. We know how to do business successfully in there and really very identical markets to those. They have a very nice trust business and a mortgage origination business in addition to the commercial and retail banking business that they have.

Another attractive qualitative characteristic for us is their customer service philosophy, being in similar towns and markets where we are; they have a very similar customer service philosophy. And there's also, I would say, a similarity of values amongst the organizations in terms of character and integrity and the like, which we found very compelling in this transaction.

Wilber is a relatively healthy institution with what we think are very manageable credit quality metrics and is a very attractive core deposit base. Their branch network is also predominantly in the Marcellus Shale region of New York State, which we hope is positioned for significant economic and demographic growth and prosperity if and when the State of New York lifts their ban on natural gas drilling in New York.

In terms of the transaction itself, it's $101.8 million or $9.50 per share in stock and cash. We're going to offer an election to shareholders whereby they can make an 80:20 elections, an all-stock election or an all-cash election with a proration of those who elected all-stock and all-cash back to achieve the 80:20 ultimate mix. The price is fixed, but it is subject to a collar, which means that between -- if our stock price is between $19.71 and $25.35 per share, then the consideration to Wilber's shareholders is $9.50.

If our stock price fall below $19.71, then the exchange rate gets fixed and the price lows. So if our stock price goes below $19.71, there would be a total consideration of a bit less than $9.50. But conversely, if our stock price exceeds $25.35, again the transaction converts to a fixed exchange floating price structure, in which case the total consideration would exceed $9.50. But this line is to make that point on how the collar component works.

We'll be assuming two seats on our holding company and bank Board of Directors. There is a material adverse effect clause in the agreement with respect to delinquent loans and non-performing assets as defined in that if any month end prior to closing the non-performing assets and delinquencies exceed $32.16 million, then that would trigger the remedies relative to the material adverse affect clause, which speaks really to our ability to terminate the transaction.

Now, in terms of pricing and impact, the pricing is at about 132 and book 141 on tangible book. I think the attractive element of this merger from our perspective is that it's about 13.5 times the last 12 months EPS. So we think from an EPS standpoint, it's an attractive opportunity for us and I guess I would say that book value does not create earnings and does not pay dividends, but earnings does. So we think we've got a partner with a fair earnings stream and good earnings capacity and potential going forward as well. And that's 13.5 times without the cost savings.

The one-time costs are expected to be a little under $8 million. Estimated cost savings we've put it about 19%, which is a little over $5 million. We've estimated a loan mark of $21.5 million to $26.5 million and that's in addition to an existing loan loss reserve of about $10 million. The pro forma balance sheet, $6.4 billion in total assets, $3.7 billion in total loans, $4.7 billion in total deposits. We will have 170 branches, about 145 of those in New York State. The earnings accretion is expected to approximate 2% to 4% per share to -- excuse me, 2% to 4% on our EPS in 2011 and 2012 with an internal rate of return of about 12%.

Book value accretion is $0.64 a share on book; it's $0.16 dilutive to tangible book per share. If you look at our estimated pro forma capital ratios at closing, we're estimating north of 7.4% on our tier one leverage ratio. The risk based and total capital ratios are well over the standards necessary to be well capitalized and our pro forma tangible common equity to tangible assets ratio is 5.82%. We expect to close at the end of the first quarter of 2011 and I would just say that we believe this is very much a high-value, high-opportunity transaction for our shareholders.

And with all of that, Betty, we would throw the line open for questions.

Yes, sir. (Operator Instructions). Okay. Our first guest is Damon DelMonte. Damon, your line is open.

Hi. Good morning, guys. How are you?

Good morning.

Good morning, Damon.

Scott, could you talk a little bit about your outlook for the margin? I guess, just organic, I don't know, organic is not the right work, but I guess the legacy CBU balance sheet and then how it's going to be sort of impacted with Wilber?

Sure. We think it shows that, Damon, in terms of -- and we've probably come up consecutive quarters of what we call very good margin outcomes, 4.10% and 4.08%. I think we've said a couple of different times, Damon, we don't expect to continue to have the ability to lower our funding costs going out into 2011 and beyond, much below where they are today. That being said, we seemed to have done it every quarter. I would suggest you that at 75% core deposits that that trend is probably about finished.

In terms of the asset side of the balance sheet, as Mark pointed out, we had fairly modest demand on the lending side, which means our new originations are basically replacing the amortization of instruments. I don't have to tell you that the new instruments are probably priced a little bit lower than the expiring instruments in most cases and we do have about $250 million of expected investment securities cash flows in 2011. So I think that if we could remain in that 4% to 4.10% ratio, we would be very, very happy with that outcome.

When you add Wilber into the mix, they have a little bit lower marketing characteristics than we enjoy today, more in the 3.60% to 3.70% range. And I would suspect certainly early in the transaction, we have a difficult time improving that because I'm certainly will be -- will have characteristics of protecting market share for the first couple of quarters of the transaction. So understanding, Damon, there probably Wilber represents 15% to 16% of the balance sheet, I would think we would get some dilution in that net marketing result in '11.

Okay. That's helpful. Thank you. And then just kind of from a modeling perspective, what should we think about for intangible amortization?

I think you can probably use the third quarter number, it will be pretty close. Up until we complete the Wilber transaction and then we'll have to give you new numbers because we really haven't sized up the size of the core deposit intangible and that I'll come in.

Okay, great. And then, I'm sorry if you tell this -- I missed this, what's the total loan mark on the Wilber book?

We've put a range in Damon of $21 million to $26.5 million, which is in addition to the $10 million that they currently carry in their -- as a reserve today in their portfolio. Understanding that the accounting has changed since our last transaction, where what you're really trying to do in that asset mark is doing a life of loan concept for the credit mark associated with the portfolio as opposed to saying that's what more we need to go into a loan loss reserve. So for us, that's -- this transaction will be the first time we've accounted under those rules.

Okay. Great. Thank you very much, guys.

You're welcome.

Thanks, Damon.

Thank you. Our next guest is David Darst. David, your line is open.

Good morning.

Good morning, David.

Mark, did you discuss in your loan demand? It sounded like you are really speaking more to the indirect business. Are you seeing anything on the business lending side that you're optimistic on?

Yes. The things are a bit soft on the business lending side. I would say that the opportunities that we have in large measure continue to come from some of the larger banks. But overall, I would say demand is fairly soft and you can see by the numbers we had a bit of runoff in the business lending in the third quarter. And the mortgage business was about flat although the originations are very strong and the benefit to the P&L from those gains were very strong in the third quarter, but we're not keeping a lot of our 4% 30-year assets on the books right now.

Actually, direct consumer lending was pretty good. I mean, we had an up quarter in direct consumer lending. And the indirect was actually down a little bit quarter-over-quarter. So, it's kind of a mixed bag right now. Some of the consumer lines are pretty good. The business lending remains a little bit flat. We continue to work the markets very hard. And it does a nice job in getting some attractive relationships again from some of the bigger banks for different reasons. And I would say overall demand right now here is fairly soft and we aren't seeing a big pickup in the pipeline either at this point.

Okay. And do you have any borrowings that are maturing in the next couple of quarters before the acquisition closes?

We really don't, David. I think we -- as we methodically go through our opportunities on the debt side to see -- should there be something we stepped into from an early takeout standpoint. But from a scheduled maturity standpoint, we really don't have much in all of 2011. And that being said, the Wilber balance sheet only has about $60 million of term advances and quite frankly not very many of them are scheduled for disposition in 2011 either.

Okay. What was the mortgage production volume that you sold during the quarter?

A little over $25 million of sales, David, but I will say this, the pipeline of closings going into the fourth quarter is very robust. So I think that there is a meaningful chance that we continue to see a lot of closing activities here in the fourth quarter. But you understand the mortgage banking accounting and revenue rules here is you recognize some of that pipeline gains in the quarter that you take the transaction in-house as opposed to necessarily the closing.

Is there any chances that it is as large as it is today in the fourth quarter?

I think that I would be surprised to repeat the third quarter. I think it will be noticeably above the $250,000 a quarter that we generate in servicing revenues, but I would be shocked if we were capable of repeating that $1.2 million net number for fourth quarter.

Okay. Great. Thank you.

You're welcome.

Thanks, David.

Thank you. Our next guest is [Kevin Kampung]. Kevin, your line is open.

Hi, guys. How are you?

Hello, Kevin.

Just wondering if you can give me an idea, kind of a little bit more information on how the acquisition came about, whether you guys were out actively shopping or whether Wilber approached you or whether it was a little bit of both?

Well, I'm not going to comment on that at this point, Kevin, but there will be --

Okay.

There will be further details forthcoming on that as the registration document gets put together and filed.

Okay. And the only other question I had was, if you guys can give me an idea on what the impact on jobs is going to be, do you anticipate any layoffs as a result of this?

Well, we haven't concluded on that yet at this point, Kevin. We did -- as I said, we've projected about 19% cost saves or about $5 million. Certainly, some of that will come from certain redundancies and overlap in different functions. So we haven't landed on that yet. So we actually finalized the details of the integration plan, which we will be beginning to work on here very shortly, now that the agreement has been announced.

Okay. Thanks, guys.

Okay. Thanks, Kevin.

Thank you. (Operator Instructions) And our next guest is [Johnny Madrid]. Johnny, your line is open.

Hello, it appears that you guys are demonstrating some sustained growth in the benefit part of the administration, sir, could you elaborate on where this business could go for you in 2011-2012?

Sure, I'll take a shot at that, Johnny, a pretty good question. Our Benefits Administration business today is at a revenue run-rate in the $29 million to $30 million revenue level on a full-year basis. We have over the last several years enjoyed very good organic growth in that business and we think we've timed a couple of really productive acquisitions to add to that.

On a going-forward basis, that platform is certainly set up for us to have a continued organic growth. The products that we are offering, both from a defined contribution administration in actuarial [perspective] and a general [SIP] administration business, I think they're all positioned to be able to grow, they grow a little faster when asset-based fees are capable of moving up and above some average rate.

And what we did see in 2009, [and I think] that trend has started to come back the other way, is a reduction in people contributing to their defined contribution, usually their 401-k plans as well as certain employers bringing their 401-k plans to a [seat stead] and -- but I think we're set up from an organic growth standpoint to get back on an accelerated growth pattern in those businesses. Our platforms are capable of it. We've invested in the technology, the back-office support be able to handle that and again the business lines is very fragmented in terms of participation by other people.

Do you have any sense for what kind of growth you could see?

Pardon me.

Do have any sense for what kind of growth you could see in the upcoming year or two?

I think if you go back historically, we were actually achieving 8%, 9%, 10% growth organically in some years not that long ago. That being said, we're working up a bigger base today. So I think a projection forward in the 5% to 7% range is certainly not out of the -- out of our expectations.

I see. I see. Thank you. One last question.

Yes.

Have you guys made any estimates as to what could happen to your deposit service fee based on expected regulatory changes and the potential?

Well, we haven't done that yet. We really don't know where the regulations are headed, Johnny. I don't know that anybody does. I think we're going to just have to wait and see what evolves and then react to a fashion that's [in the interest] of our customers and our shareholders at that point. I think we're just -- we're in wait and see mode right now to see what the regulation is going to mean.

Based on just kind of the guidance, what you guys are seeing right now, do you guys have -- are you guys extremely uncomfortable with what could come or comfortable? Is there -- and kind of what you can give me a sense of that?

I mean we don't really have any way of knowing what that is. And I think certainly, we understand that there will be more of regulatory guidance coming down from a numerous different agencies as a result of the financial regulation bill, but we just don't know what that might be. There has been already some things done around interchange revenues and I think that will ultimately impact us as well. And there could be other areas of the business [being primarily, I guess] we get impacted adversely. So, [we just call it] write-downs. I said we will react when we understand what the regulations are in a fashion that's in the best interest of our customers and our shareholders.

Gotcha. Understood. Thank you, sir.

Thank you, John.

Thank you. Our next guest is [Brad Moore]. Brad, your line is open.

Yes. Good morning, gentlemen.

Good morning.

I was just curious if you had mentioned that you're adding two Board seats with this transaction with Wilber and could you -- do you know who those people will be added to your Board from Wilber Bank or Wilber Corporation, excuse me?

Well, that hasn't yet been disclosed, but will be forthcoming in the near term, I suspect.

Okay. Thank you. That's all I have.

Thank you.

Thank you. Our next guest is [Denise Rob Richardson]. Denise, you line is open.

Thank you. Good morning. What business do you expect from the natural gas drilling in Marcellus Shale and what impact will it have on Community Bank?

We've got some experience with that. We've got six or eight or ten branches in Northeast Pennsylvania where gas drilling is currently underway in a very meaningful way. And we've actually achieved significant deposit growth in those markets. I mean, it's in some cases a large double-digit number in terms of the deposit increase. So, there has been a lot of economic activity, don't have to do really a whole lot more than drive along that Route 6 Corridor in Northeast Pennsylvania to see that.

I expect that same kind of economic opportunity could come to New York as well if and when -- or when and if, I should say, New York lifted its ban on hydro fracing. So the opportunities are enormous. I mean there is 500 trillion cubic feet of gas in that Marcellus Shale formation. So there is a great deal of economic opportunity and as I said, the Wilber branch footprint is by and large in the midst of that Marcellus Shale opportunity and I think the fact that it's for the most part away from the larger cities within the Marcellus Shale reach, it also creates the potential for even more drilling activity and economic benefit to the area and ultimately to all of our shareholders, including the Wilber shareholders.

Thank you. Can you just remind me who is speaking?

It's Mark Tryniski.

Thank you very much.

Thank you, Denise.

Thank you. (Operator Instructions). And our next guest is John Stewart. John, Your line is open.

Hey, good morning, guys.

Yes, John.

Mark, I was just curious if you could talk about, recognizing that the Wilber deal doesn't close for another couple of quarters, kind of what you feel like your M&A appetite is at this point following that deal? Does this take you out of the market for a while, in other words?

Well, between now and in the first quarter of 2011, I would say, yes, it does. I mean we're going to have -- this is a fairly significant and certainly an important opportunity for us, and we're going to need to put our whole attention and focus and efforts into making sure we create value for our shareholders and for Wilber's shareholders. So we will be certainly less active and interested in any opportunities between now and that point, John.

And how about after that?

Well, we will continue to pursue our strategic objectives, which is to grow by a disciplined combination of organic growth and acquired growth. So that strategic focus will not change, and where that leads? I can't predict right now what that means for the future, but we try to be very disciplined as who we partner with. And we think Wilber is an exceptional opportunity for us and for our collective shareholders, and we look forward to getting right at the integration process and providing the returns to shareholders that we think this opportunity has the possibility of providing.

Okay. And Scott, if I could just ask a couple of questions on the bond portfolio, you mentioned the average life to maturity. Can you just -- can you give me the effective duration of your bond portfolio overall?

John, it's about 3.5.

Okay. And what is it in the tax exempt portion?

Give me two seconds. Now, in the municipal side, it's probably closer to 5.5 or 6.

Okay.

That being said, if you look at where current structures are, you would certainly build a model that would suggest there would be early refinancing of such tax-exempt issuances. And given the current marketplace, it's been questionable as to whether some of those have actually been replaced.

Understood. Okay. It looks like there -- I mean, there were some net buy in the bond portfolio this quarter versus -- on a spot basis versus last quarter. It looked like some of that was in the tax-exempt book, can you just kind of talk about kind of what it is you are buying and what types of bonds? What the duration is? What the yield is? Just give us a little color there.

Yes. From the third quarter standpoint, most of the corporate placement of cash flow did end up with the municipal portfolio. In terms of average duration, maybe a little bit longer than the both diluted average of the whole portfolio. So maybe in that six to seven-year range on a tax equivalent yield stuffed in the mid to high 5s, something we're very comfortable with a school district type lending instruments, where mostly in the states we're familiar with or in certainly excluding states we're not familiar with is, [frankly], a better way to say it. So nothing changed in terms of the qualitative mix, John, of substance.

Okay. And the cash flows you have the $250 million in '11, can you just tell us what the yield is currently on those assets?

John, actually, I repeat it, I don't have it in front of me. I can catch up with you later on that.

Okay. And then, just finally, the -- you guys disclosed you breakout the cash from the cash equivalent line and the average balance.

Yes.

Can you give me the cash equivalents line and the period end balance as well? And do you think that's something you guys can start to break out going forward, just because it's become a meaningful swing factor?

John, I'll have to get back to you on that. I did not bring all the -- I want to make sure that I've got that right for you in terms of the breakout at the end. I'm pretty comfortable with the averages that we disclosed, but in terms of end of period, as you know, end of period is about one day in time.

No, I understand, yes.

So I wouldn't put a lot of stock and a trend factor attached to that end of period, but I [cannot] be happy to catch up with you ahead after the call.

Okay. Thanks.

Thanks, John.

Thank you. (Operator Instructions) And our next guest is [John Moran]. John, your line is open.

Hey, guys. Thanks for taking the question. Just on the Wilber transaction that most of the deposit ratio there is a bit lower than where you guys are, could you comment on obviously loan demand is kind of soft right now, but longer-term opportunity is to kind of take some of those deposits and redeploy them more productively?

Well, that's certainly one of the opportunities I think that the partnership with us allows for a much greater lending capacity. Our legal lending limit is a fair bit higher than Wilber's. So I think we've got that opportunity there as well as the differential in product mix and all of those kinds of things. And I think we've got a history in these kinds of mergers with doing well and I would point to the Citizens transaction we did. The branch is up in the Plattsburgh region.

I mean, our -- we went into those markets in a pretty disciplined and aggressive fashion. And in terms of marketing, [not in] terms of credit risk certainly and we've actually [drawn] relationships and grown some of those large relationships and maybe customers that Wilber had a more difficult time serving because of lending limitations and the like. So we think there is a good opportunity here to extend our lending capacity, to extend our products and services into the Wilber marketplace.

Terrific. Thanks, that's helpful.

Thank you, John.

Thank you.

Thank you. Our next guest is [Michael Cook]. Michael, your line is open.

Hi, Mark, Scott.

Hi, Mike.

Hi, Mike.

I have three questions related to Wilber. It looks like an interesting transaction except for -- I'm trying to just stay on price, you've got a company that has asset quality deterioration and are now operating under an OCC agreement, can you speak to that? Secondly, can you go over the back one more time? And the third question is relative to pricing, you mentioned the deal is at 1.41 times tangible book value, is this before the $26 million mark and if so, whether the price to tangible book is corrected for the mark?

I think you had two questions in there, Michael, around pricing, I guess. I mean the first one really related more to the OCC agreement. We did an awful lot of due diligence and we brought in a third party to help us assist with some of the due diligence that's got a great deal of expertise in doing that kind of work across the country and we satisfied ourselves with respect to what the credit issues are at Wilber. So we think we have a pretty good understanding of that.

I think on the question of pricing, as I said, our view is that book value does not create earnings and book value does not pay dividends, earnings does. And so our principal focus with respect to pricing is really on the ability of the -- as I said, the partner to generate earnings that will help us in terms of growing sustainable earnings and presumably capital appreciation, as well as creating cash earnings and help us raise the dividend. So that was more of the -- a greater focus certainly for us than what the book value multiples are.

If you look at the transactions over the course of the past 12 months in the Northeast region, as defined by SNL, which is New York, Pennsylvania, Connecticut, Massachusetts, [about a bunch other bigs] in the Northeast region. We did pay a bit more in terms of book value, but in terms of earnings multiple, it's about half. So, I mean you have to understand the -- some of these institutions that you would classify or characterize this as a troubled institution have very, very weak earnings capacity. So we think on an earnings basis, this is an attractive opportunity.

I understand there are those, maybe yourself, who look more at book value, but our view is book value doesn't create earnings and it doesn't pay dividend. So it's not that we don't look at that in terms of what the negotiations are relative to the right price, but at the end of the day, we're a bit more focused on the earnings capacity and the dividend-generating capacity of the transaction.

Your comments relative to the pricing in the loan mark, I think, are right on given that's the way they all work. You can -- you understand also the pricing characteristics today are very different than they used to be because of partly the change in the accounting and now you have to use this life loan concept versus an incurred loss concept in the accounting so that it will clearly be -- the book values today are different than -- and much lower than what the book values were a number of years ago. So that's I guess a bit of our thinking on the background of it.

That's helpful. What about the MAC? Can you go over that one more time, the Material Access -- Adverse Change clause in the agreement?

Yes, that's just a clause that basically allows us to terminate the transaction.

I understand what it is, but what are the terms of it? What has to happen again for you to be able to walk?

Their delinquent loans and non-performing asset is defined in the agreement. If those, at any month-end prior to the closing date, exceeds $32 million, about $32.1 million, then that would trigger our right to terminate.

What is the number now?

I think it's about $24 million.

Thanks a lot.

Thanks, Michael.

Thank you. (Operator Instructions) And it appears we have no other questions.

Great. Thank you, Betty. Thank you, all, for joining our third quarter call. We look forward to catching up again at the end of the year. Thank you.

That concludes today's conference. Thank you for participating. You may now disconnect.