Community Financial System Inc (CBU) 2011 Q4 法說會逐字稿

Welcome to the Community Bank System's fourth quarter and year end 2011 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 presenters are Mark Tryniski, President and Chief Executive Officer, and Scott Kingsley, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.

Thank you. Good morning, everyone, and thank you all for joining our fourth-quarter conference call. You have probably noticed that we have been quite busy as of late.

On Friday we announced a branch acquisition which I will comment further on, and this morning commenced a $50 million common equity offering to capitalize the transaction. We have filed a prospectus and a free writing prospectus with the SEC providing detailed information regarding the offering, and we refer you to those documents which are available on the SEC's website and from RBC Capital Markets.

Since we are in the market on the offering, we will not be hosting a Q&A session at the end of our commentary. I would like to remind you again that statements made by Community Bank System are not historical facts, and there may be forward-looking statements. These statements are based on assumptions that may or may not prove to be accurate, and actual results could differ materially from those anticipated due to a variety of risks and uncertainties discussed in the Company's most recent filings with the Securities and Exchange Commission. Please consider such risks and uncertainties carefully in evaluating these forward-looking statements and the Company's prospects.

With all that said, we believe 2011 was a very good year for Community Bank System. We reported record earnings; we raised our dividend for the 19th consecutive year; we closed and successfully integrated the Wilber merger; and we closed on the acquisition of a strategically important non-banking business.

Earnings per share for 2011, excluding acquisition expenses, were up 9% over last year to a record $2.10. You may hear Scott repeat that, but that is okay.

Driving that outcome was a strong margin, continued low credit costs, revenue growth in both our Wealth Management and Benefits Administration businesses, a reduction in the efficiency ratio from 59.5% to 57.6%, and the accretive impact of the Wilber merger in April.

Scott will provide additional color on balances, but our consumer lending businesses were reasonably strong in 2011 with both the consumer mortgage and consumer installment portfolios performing very well. Business lending, which was soft in 2010, continued to remain so in 2011.

This was also an active year for us for acquired growth. We closed on the $870 million asset Wilber merger in the second quarter, adding 22 branch offices in contiguous markets. The integration and performance there has gone extremely well and we expect will continue to be very additive to our operating performance.

We also completed in November the acquisition of CAI Benefits, Inc., a provider of actuarial consulting and benefit administration services, with offices in Manhattan and in northern New Jersey. This transaction will add $4 million of revenue to our existing $32 million Benefits business; but more importantly, provides a platform for growth across the greater metropolitan New York marketplace.

Lastly, we announced this past Friday our agreement with First Niagara to acquire from them and from HSBC 19 branches located across our core Upstate New York markets. These branches constitute approximately $955 million of deposits, $218 million of loans, and certain wealth management relationships associated with the branches.

We will be paying a blended deposit premium of 3.22% and expect to close in the third quarter. We believe this is a very attractive transaction which will be additive to the existing strength of our core markets in Upstate New York and which will be additive to shareholder value through expected earnings accretion of 4% to 5% in 2013. Scott?

Thank you, Mark, and good morning, everyone. First, as mentioned in our release, fourth-quarter earnings of $0.51 per share were $0.04 or 8.5% higher than the fourth quarter of 2010, reflective of higher net interest income and non-interest income and a lower provision for loan losses, partially offset by additional operating expenses, a higher effective tax rate, and an 11% increase in diluted shares outstanding.

Reconciling the $0.51 per share earned in the fourth quarter with the $0.54 reported in the third quarter includes a $0.01 reduction in other banking fees, a result of the annual dividend from our participation in the New York Bankers Credit Life and Disability Programs received in the third quarter; a $0.005 per share reduction in mortgage banking revenues, a result of a $300,000 impairment recorded on mortgage servicing rights in the quarter; and a $0.015 increase in income taxes related to a higher effective tax rate in the quarter necessary to achieve the required full-year rate of 29.4%. The increase in the full-year tax rate from 26.7% to 29.4% reflects a higher level of income generated from fully taxable sources.

On a year-to-date basis, excluding $0.09 of acquisition expenses, operating earnings of $2.10 per share were 9.4% better than the $1.92 per share of operating earnings generated in 2010 and represent another record result for the Company.

Average earning assets of $5.77 billion were up $31 million from the third quarter, with all of that increase in investment securities. Ending loans were down $5.4 million from the end of the third quarter, comprised of $19.5 million of net organic loan growth offset by $24.9 million of contractual and other principal reductions in the acquired Wilber portfolio. Continued solid results in consumer mortgages were offset by continued soft demand and seasonal reductions in business lending.

Quarterly net charge-offs were $1.8 million or 0.21% of total loans. Full-year net charge-offs of $5.03 million represented 15 basis points of total loans, another very strong asset quality performance.

Total nonperforming loans did increase in the quarter by $10.5 million to $29.4 million or 0.85% of loans outstanding, from a very low base. The increase related to two commercial lending relationships, one of which was acquired in the Wilber transaction, which were both placed into non-accrual status in December. The inclusion of these two relationships as nonperforming also resulted in the total delinquency ratio moving up 30 basis points to 1.99% of total loans at year-end.

As of December 31, fair value based loan marks and reserves related to the $417 million of outstanding balances acquired in the Wilber transaction approximated $21 million or 5.1% of the total remaining acquired balances.

The composition of our $2.15 billion investment securities portfolio remained consistent with the last two quarters, as did its weighted average life to maturity. Net unrealized gains in our$1.5 billion available-for-sale portfolio were $86 million at year-end. In addition, there were approximately $63 million of unrealized gains in the $600 million held-to-maturity portfolio.

Average deposits in the fourth quarter of $4.81 billion were $14 million above the third quarter. Core deposits, or everything other than CDs for us, now represent 77% of total deposits, a very stable and favorable funding mix.

Our capital levels in the fourth quarter again improved and remain strong. The Tier 1 leverage ratio stood at 8.38% at year-end, and tangible equity to net tangible assets was 7.12%, a 98 basis point increase from December 2010.

Our reported net interest margin for the fourth quarter was 4.06%, down 1 basis point from the fourth quarter of 2010 and 2 basis points higher than the linked third quarter. Total non-interest income improved 2.8% from last year's fourth quarter, as solid gains in deposit service fees and other banking services, Benefits Administration and Consulting, and Wealth Management revenues more than offset a $1.4 million reduction in mortgage banking revenues reflective of the very robust secondary market demand in the second half of 2010, as well as a $0.3 million mortgage servicing rights impairment in this year's fourth quarter.

Fourth-quarter operating expenses of $47.8 million were $3.7 million or 8.4% above the fourth quarter of 2010, and reflected the additional operating costs associated with the Wilber acquisition, offset slightly by a decline in FDIC insurance costs.

Our effective tax rate in the fourth quarter of 2011 was 32.4%, bringing the full-year rate to 29.4%, reflective of a higher level of income from fully taxable sources. The higher fourth-quarter tax rate lowered earnings per share by $0.015 compared to the third quarter of 2011.

On a full-year basis our earnings were $2.10 per share excluding the $0.09 of acquisition expenses. Our reported return on equity was 10.4%, with the calculated return on tangible equity above 20%.

Our ability to generated incremental capital and reward shareholders with a meaningful and growing cash dividend annually stems directly from the commitment to a discipline and balanced approach to our business regardless of market conditions. Mark?

Thanks, Scott. In closing, I would just say that we are pleased with the record performance in 2011 and believe that we are well positioned to continue to create value for our shareholders into the future.

We have strong earnings and dividend capacity, plentiful existing and available capital, solid asset quality, strong and stable core funding, and talented and motivated employees. All of the necessary elements remain in place for continued success for Community Bank System and for our shareholders.

Thank you all again for participating. I apologize for no Q&A, and look forward to our first-quarter call in April. Thank you.

That concludes today's conference. Thank you all for your participation. You may now disconnect.