Community Financial System Inc (CBU) 2015 Q3 法說會逐字稿

Welcome to the Community Bank System third-quarter 2015 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 those 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'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, Shannon. Good morning, everyone, and thank you all for joining our Q3 call.

Third-quarter results were very positive, including a record level of earnings per share, continued loan and core deposit growth, expense control that was better than we expected, and positive growth in net interest income. Asset quality remains very good, with NPAs and provision up marginally relative to the past two quarters, which were historically exceptional.

With respect to the pending Oneida Financial acquisition, we are making progress with the regulatory review process and expect approval this quarter.

We are very well positioned for the remainder of this year and into 2016. Balance sheet growth, capital strength, earnings momentum, asset quality, cost control, and the Oneida transaction will serve us well. But we expect also to be challenged by a continuing contraction in margin and a higher expected tax rate next year.

We do, however, understand our job as always is to manage and grow the Organization in a disciplined fashion that creates sustainable improvement in earnings and dividend capacity for the benefit of our shareholders.

Scott?

Thank you, Mark, and good morning, everyone.

As Mark mentioned, the third quarter of 2015 was a very solid operating quarter for us.

I'll first cover some updated balance sheet items. Average earning assets of $7.12 billion for the third quarter were up 6.9% from the third quarter of 2014. Average loans grew $107 million year over year, or 2.6%. Ending loans were up $50 million from the end of the second quarter of this year, with productive growth in almost all of our portfolios.

Average investment securities were up 14% compared to the third quarter of 2014, principally a result of our decision to pre-invest the expected net liquidity of the pending Oneida financial transaction. Since early March we have purchased $400 million of Treasury securities with blended yields just below 2%, as a planned replacement for the $300 million of securities currently held in the Oneida portfolio, as well as the redeployment of our own expected investment cash flows for 2015.

Average deposits were up 2.5% from third quarter of last year, with all of the growth in core accounts, which resulted in another modest decline in overall deposit costs.

Quarter-end loans in our business lending portfolio of $1.29 billion as of September 30, were $37.6 million, or 3.0% above the end of the third quarter of last year. Asset quality results in this portfolio continue to be very favorable, with net charge-offs of under 11 basis points of average loans over the last nine quarters.

Our total consumer real estate portfolios of $1.97 billion, comprised of $1.62 billion of consumer mortgages and $345 million of home equity instruments, were also up on a linked-quarter basis, and were 1.5% higher than the end of the third quarter of last year, consistent with general market demand.

We continued to retain in portfolio most of our short- and mid-duration mortgage production, while selling secondary eligible 30-year instruments. Asset quality results continued to be very favorable in these portfolios, with total net charge-offs over the past nine quarters of just 8 basis points of average loans.

Our consumer indirect portfolio of $873 million was up $36 million, or 4.2%, from the end of the second quarter of 2015, which was historically consistent and in line with seasonal demand characteristics. Despite solid new car sales, used car valuations, where the largest majority of our lending is concentrated, continue to be stable. Net charge-offs in this portfolio over the past nine quarters were 30 basis points of average loans, a level we consider very productive.

We have continued to report very favorable overall net charge-off results, with the first nine months of 2015 at just 0.9% of total loans being a stellar performance.

Nonperforming loans, comprised of both legacy and acquired loans, ended the third quarter at $27.7 million, or 0.58% of total loans. Our reserves for loan losses represent 1.10% of our legacy loans and 1.06% of total outstandings. And, based on the trailing-four-quarters results, represent over eight years of annualized net charge-offs.

Nonperforming loans increased $2.2 million in the third quarter, entirely related to one oil-and-gas-related relationship in the Marcellus Shale region of Northeast Pennsylvania. We continue to closely monitor our $71 million of oil-and-gas-related credit exposure, with roughly $35 million of that amount outstanding as of September quarter end.

Our exposure is comprised of 24 specific relationships which include pipeline contractors, construction equipment and materials providers, stone and quarry enterprises, fuel and water transportation companies and hospitality-related properties. The weighted average risk rating in this small segment continues to be consistent with our overall commercial portfolio.

As of September 30, our investment portfolio stood at $2.92 billion and was comprised of $230 million of US-agency and agency-backed mortgage obligations, or 8% of the total; $684 million of municipal bonds, or 23%; and $1.93 billion of US treasury securities, or 66% of the total. The remaining 3% was in corporate debt securities.

The portfolio contains net unrealized gains of $101 million as of quarter end, a level consistent with the end of the first quarter of this year, but nearly $45 million higher than June 30.

Our capital levels in the third quarter of 2015 continued to be strong. The Tier 1 leverage ratio stood at 10.09% at quarter end, and tangible equity to net tangible assets ended June at 9.14%. Tangible book value per share was $17.05 per share at quarter end and includes $38.7 million of deferred tax liabilities generated from tax-deductible goodwill, or $0.94 per share.

Shifting to the income statement, our reported net interest margins for the third quarter were 3.65%, which was down 24 basis points from the third quarter of last year and 11 basis points lower than the second quarter of 2015.

The decision to pre-invest the expected liquidity from the Oneida transaction into Treasury securities contributed to the overall decline in net interest margin in both the second and the third quarter this year, but was also clearly additive to net interest income generation.

Also, consistent with historical results, the second and fourth quarters of each year include our semiannual dividends from the Federal Reserve Bank of approximately $0.5 million, which adds 3 basis points of net interest margin to second-quarter results compared to the linked first and third quarters.

Proactive and disciplined management of deposit funding costs continues to have a positive effect on margin results, but have generally not been able to fully offset declining asset yields.

Third-quarter noninterest income was up modestly from last year's third quarter and seasonally above the first two quarters of 2015, as expected.

The Company's employee benefits administration and consulting businesses posted a 5.3% increase in revenues from new customer additions and additional service offerings. Our wealth management group revenues were essentially even with the very strong third quarter of 2014.

Seasonally, our third-quarter revenues from deposit service fees were up from the levels reported in the first and the second quarters, but were actually down 2.7% from the third quarter of 2014, as higher card-related revenues did not completely offset lower utilization of account overdraft protection programs.

Mortgage banking and other banking services revenues were up $178,000 from the third quarter of last year and again included our annual dividend from certain pooled retail insurance programs, which amounts to just over $0.01 a share.

Quarterly operating expenses of $56.1 million decreased $2.7 million compared to the third quarter of 2014 and included $562,000 of acquisition expenses, while the third quarter of last year included $2.8 million of litigation settlement costs. Excluding those costs, core operating expenses were down $0.5 million from the third quarter of 2014, or 0.9%.

Our effective tax rate in the third quarter of 2015 was 30.0% versus 29.9% in last year's third quarter, a reflection of a modestly lower proportion of tax-exempt income to total income.

We continue to expect net interest margin challenges to persist for the balance of 2015 and into 2016. Although the majority of our new loan originations in our consumer lending portfolios are at yields consistent with those of the existing instruments, yields on new commercial originations remain below blended portfolio yields. Core net interest margins, excluding the impact of the previously mentioned pre-investment decisions, has declined 2 to 4 basis points per quarter this year.

Also, as a reminder, a meaningful portion of the $0.07 of expected GAAP earnings accretion from the pending Oneida transaction was realized in the second and third quarters from securities pre-investment.

Our funding mix and costs are at very favorable levels today, from which we do not expect significant improvement. Our growth in all sources of recurring noninterest revenues has been positive and we believe we are positioned to continue to expand in all areas.

While operating expenses will continue to be managed in a disciplined fashion, we do expect to continue to consistently invest in all of our businesses.

We continue to expect Federal Reserve Bank semiannual dividends in the second and fourth quarters each year.

Our year-to-date net charge-off results have been extremely positive and, although we do not see signs of asset quality headwinds on the horizon, it would be difficult to expect improvements to current asset quality results.

Tax rate management will continue to be subject to a successful reinvestment of our cash flows into high quality municipal securities, which has been a challenge at times during this period of sustained low rates. In addition, after the close of the pending Oneida transaction our expected consolidated asset size will eliminate certain state tax planning opportunities, resulting in an estimated 2 to 3 percentage points increase in our effective tax rate.

Despite some of these current challenges we believe we remain very well positioned from a capital and an operational perspective for the balance of 2015 and into 2016.

Now I'll turn it back over to Shannon to open the lines for questions.

Thank you. (Operator Instructions) Collyn Gilbert; KBW.

Scott, just first quickly on the NIM, you had indicated that the core NIM maybe will continue to be under pressure. What should we expect for future NIM pressure related to the pre-investing? Is that all done now and we've kind of seen the stabilization of that? Or will there be --

You have.

-- further compression -- okay. Okay.

So I would go back to it will just be the core compression now, which would be, to the extent that we continue to replace commercial assets at slightly lower yields than the blended portfolio rate, we probably still don't have enough funding power to be able to bring down funding costs to offset that going into 2016. We ended the third quarter with depository costs at 11 basis points. So probably not projecting they're going (technical difficulty).

Okay, that's helpful. And then just on the expense side, I think expenses came in lower this quarter. I think you were thinking -- you had indicated post second quarter that maybe it would be that $57 million run rate. Was there anything unusual that was happening? And I know you had indicated continuing to grow the business, but I don't know if we grow over this level or that $57 million level.

Well, it's a really good question. And it was literally across the board in terms of our attention to FTE management, our attention to occupancy-related costs associated with maintenance and service arrangements, our attention to controlling and not growing processing costs both on the core side in some of our technology initiatives. So, we didn't really hold anything up, Collyn, in the third quarter this year relative to our spending lines.

So I really think it's a pretty good core run rate at what you're looking at for the third quarter. We do have an expectation going into 2016 to have roughly a 3% merit type of an increase across the board for our folks. We will obviously continue to aggressively manage FTE levels to the extent that they're consistent with our service needs. So, we're pretty pleased with the outcome for the third quarter, but don't think there's anything unusual that, quote, wasn't in the number.

Okay, that's helpful. And then, can you just give a little bit more color on the oil and gas credit that came on this quarter, just what the size of it was and what the nature of the credit was?

Yes. It's an equipment and transportation, water-hauling enterprise. The size of the credit is a little over $2.5 million. And it's just really a reflection of who your partner is relative to into the drilling side. So, with the drilling levels being down substantially, this particular customer is in the middle of going through a much lower utilization of their deployed assets.

Were they on your watch list in prior quarters?

You know, Collyn, I think this particular asset no, was not. And as you know, the producers or the drillers had that opportunity to manage their production or their harvesting levels based on where the market price is for natural gas. But this was not on our watch list before. Essentially, though, the entirety of our $71 million credit exposure, which has $35 million outstanding at quarter end, has been on a list that we've been looking at consistently since the tail end of last year.

Okay. Just one final question on the oil and gas portfolio. So what type of reserve do you have set aside for those credits?

They're blended in, Collyn, given their risk ratings. I think we did have a small specific reserve attached to this one individual credit, but that being said, across the broader group we have not tried to allocate anything specific to that group. Just given the levels of reserve containment we have today, we think we're probably still in decent shape.

Okay, that's great. One final question -- can you give us an update on Oneida? And I know you said in the press release you expect regulatory closing in the fourth quarter, but just any kind of update that you can offer there. And that's it. Thanks, guys.

Sure. Thanks, Collyn. Well, we're prepared operationally and otherwise. So we are just -- we're anxiously awaiting the conclusion of the regulatory review process. I think we are making progress and we expect approval in the fourth quarter.

All right. Thank you.

Joe Fenech; Hovde Group.

First, Scott, on the impact to the margin this quarter, I know you've talked about it a couple times, but how much specifically was the pre-investing initiative in terms of the negative and how much was just margin bleed to the legacy business, if you had to ballpark it?

Yes, Joe, so if it's down 11 basis points I would assign 7 basis points of that to the pre-investment decision and I would use 4 as the core reduction.

Without getting too mathematical, too, Joe, which is always my risk, the quarter has an additional day. And so that actually moves the number versus the second quarter or the first quarter. But I think a 7/4 split I'd be comfortable with.

Okay. And thanks for the detail on the energy exposure. Just building on that last question, how much of the $71 million is criticized or classified at this point? And what's your expectation for how this portfolio performs if six months from now oil prices are flat with the current level?

Joe, in terms of that, again, that $71 million of exposure, of which only $35 million is actually outstanding, a lot of this is operating lines for the contractor side of the business. But that is the loan asset that is criticized today within the pool. And I think our expectations will be completely based upon production expectations relative to the drillers.

We like the portfolio that we have relative to other sources of cash. We like where we are from a collateral position with this portfolio. So we think we have, quote, the right set of partners. We'll acknowledge it's difficult for somebody to very quickly react their business to a 40%, or 50%, or 60% drop in utilization, field equipment or transportation equipment, which is the answer of what we've got with this one asset.

Because if you look, Joe, at that list of customers, several of the largest, I think including -- I mean, two of the top three largest of those customers are pipeline and related infrastructure credits. Those companies are still doing somewhat better because the pipeline activity continues. It's really more of the drilling-related activity that's deteriorated. So just a little more color, the larger credits that we have are in the pipeline-related space.

But I think it's clear there are many fewer drilling rigs in at least the market we're in down there in the Marcellus Shale right now than there was six months ago. And I think if that continues and oil prices continue to be low and drilling continues to be slow, I would expect that there may be other credits in that portfolio that could deteriorate from where they're at right now. I think, on the other hand, if oil prices move back up and that's additive for natural gas as well, I think drilling will resume. And that would be helpful. So I think some of it is just a function of the direction the market moves in and the duration of the downturn in drilling activity, which is impossible to predict.

And on that note, Mark, what are some of the larger, couple of larger relationships you have in terms of size? And are those ones that you feel among the most comfortable with of those 24 relationships? Or are those included in that group of ones you're [currently] watching?

Yes. I think there's 14 relationships that have total exposure of more than $1 million. And a couple of those, the largest are, as I said, pipeline contractors that have about $23 million of the total related exposure. But I believe the outstandings of those are -- they may even be zero. I'm not sure about that.

They're low, very low.

But the outstandings are actually low although the total potential exposure is high. So, as I said, the bigger credits are the pipeline contractors. We have some construction, stone, quarry related credits that is another $16 million in total potential exposure. Again, the actual outstandings are about half what the exposure is. And the rest of it is smaller things that are, again, water haulers, fuel companies. And there's a couple that are -- I think two credits that are hospitality related. They're hotels. So that's kind of a brief summary of the majority of the portfolio.

Okay. Do you have anything that you consider to be ancillary exposure to energy that you're also watching, like, any CRE, for instance, in and around the Marcellus that's kind of popped up in recent years to support the boom?

The only thing that I would throw in that category, Joe, would be the two hospitality credits that we have. The total exposure is about $7 million. Those were built in anticipation of the drilling activities. The credits have extremely high alternative sources of repayment for us in terms of guarantees and the liquidity-slash-network capacity of the guarantors. So it would be just those two and we're unconcerned at this point and I would expect we'll remain unconcerned about those two credits.

Okay. And last one for me, the Oneida deal is obviously delayed beyond what was initially planned, but does that potentially in your minds also push out the timing of the next potential deal? Or could we see you possibly follow up with another transaction quickly on the heels of this one? Or would that not be something you'd even consider doing, just given the closeness of when the Oneida deal were to close?

Yes. We expect that the approval of the closing will happen in reasonably sufficient order here. And we're, as I said, very well prepared operationally to execute. There's been very good integration and teamwork with our folks and their team as well. So we are fully positioned to execute on the transaction at this point which, again, we expect will happen in reasonably short order. However, with that said, we also thought it would happen in July.

But, we also understand in the environment we're in, a protested transaction goes through a separate level of review in DC by our principal prudential regulator. And they have a process they go through and they're conducting that process and we are cooperating fully and, again, expect approval before the end of the year.

So, we're fully prepared to execute on Oneida. At this juncture it would not forestall us from considering any other high value opportunity.

Okay, thank you.

Alex Twerdahl; Sandler O'Neill.

Could you just remind us what the timeline is for Oneida at this point and what events still have to happen before this thing can close? And then also remind us what it was that pushed it back several months?

Sure. What needs to happen is we need to finalize regulatory approval, which we expect, as I said, will happen before the end of the year. And then we close on the transaction.

So what pushed it back was during the public comment period, which is part of the regulatory approval process, there was a protest filed relative to, I guess you'd call it, fair-lending-related issues. Because the transaction was protested, it puts it into a different level of review, which needs now to go to the Washington office of the OCC for review. And they have a process that they go through, a program, to review any transaction that's been protested.

So, we initially thought we would close the transaction in July, which was a historically reasonable timeframe for us based on the February announcement. And subsequent to the protest it went to the review process, which is a more elongated process in Washington. And so that's what necessitated the delay in the closing.

Was it related to fair-lending practices at Community or at Oneida? And is there a lesson that can be learned here or is this just something that is to be expected in any deals these days if someone decides to file a letter.

Well, the protestor's comments were public and our response is public. The basis of his claims were fair-lending related and they were entirely inaccurate. But, needless to say, that is -- [it got] consequential to the process, which is if you have a protested transaction, it goes to Washington for this programmatic review. And so we're in the midst of that programmatic review currently.

Okay. And then, based on the pre-funding strategy that you've done here from Oneida, what should we expect the margin to do after the deal closes? Should we have a pretty core margin in the fourth quarter to be able to model into 2016? Or is there going to be some sort of a shift, obviously purchased accounting aside?

Alex, I would go with this, just to say that we're at a 3.65% level with essentially the leverage of the transaction already being in our P&L and in our margin results. So if you think about what we're going to inherit from Oneida, it's a little over $500 million of lending assets at yields a little bit above 4%. We will replace the funding that we've got on an overnight basis with core deposit funding that's actually lower than the borrowed funds that we're using today for not only for the strategy, but to fund the rest of the core balance sheet. So I think the number doesn't move a whole lot, just based on that.

Now, that being said, Oneida operates in the same markets that we operate in, so the modest headwinds associated with asset repricing will continue to exist for them and their balance sheet, much like they exist for ours.

Okay. And then just finally, on new indirect to auto production, can you just tell us where the rates are today relative to a year ago?

Mark's got that in front of him but, Alex, I'm going to tell you that I think the blended rates are about 3.75 and they are a little bit lower than the third quarter of last year, but actually pretty consistent with the first two quarters of this year.

Yes. The most recent third-quarter 3.81; the quarter before was 3.67; quarter before that was 3.68; quarter before that was 3.70; and then the third quarter of 2014 was 3.61. So, they've actually been over the last four or five quarters in the 3.60 to 3.70 range, but it moved up to 3.81 for this quarter.

And just another data point on the margin, something that we like to look at is, by portfolio, what is the yield of the originations in that quarter relative to the yield of the overall portfolio. And so if you look at all of our portfolios right now -- I won't go through all the details. But, in summary, the consumer portfolios we have, so consumer mortgages, home equity, auto lending, direct branch lending, all the consumer channels, the third-quarter yields of the originated credits were about equal, give or take a few basis points, to the overall portfolio yield.

Where we're still experiencing a meaningful differential between originated yields and portfolio yields is on the business lending side. So, for the third quarter, our originated yields were about 50 basis points below the blended yield for the portfolio for the quarter.

So we've kind of stabilized on the consumer lending side, on the commercial lending side. Still, I think as everyone knows, highly competitive in terms of rate environment right now. And so we would expect there would continue to be a differential between the portfolio yields and the originated yields on the commercial portfolio. We'll probably continue to see some decline in the yield on the commercial portfolio into 2016.

Worth adding to that, though, is the fact that there's certainly a much larger proportion of commercial relationships that are originated at variable rates or index-based outcomes, as opposed to the lion's share of our consumer portfolio that gets originated at a fixed rate.

That's extremely helpful. Thanks, guys, for taking my questions.

William Wallace; Raymond James.

I have just an additional question on margin, not to beat a dead horse. But if you look at the combined organization and you assume that we get a 25-point basis point hike from the Fed and then a pause, what do you anticipate would happen with your margin?

The effect is about net neutral, Wally, under the premise of at a 25-basis-point hike with a pause we will have certain instruments that are index based so, again, assuming the underlying indexes, whether it's LIBOR or prime, actually move with the change. So we would actually have more assets that would reprice in that first 25.

And without giving away a secret, we wouldn't expect to raise deposit rates much in the first 25. So I think we've actually said in the 25 with a pause we'd actually get a modest benefit. It probably would not move the needle relative to EPS generation, but it would probably be a net positive.

Okay. And just for clarification, I know you've given a lot of numbers and direction on margin, but I'm not sure I've heard a number of the actual pressure you expect. You had mentioned that you were expecting 2 to 4 a quarter on core. Is that what you expect moving forward, assuming a flat rate environment, 2 to 4?

Yes. I would go with that, Wally. That's been history and that's probably what we're using for one- to five-quarter-type projections for us right now -- understanding that as we just went through the detail on the lending side, that we have a larger than average invested portfolio. And if we're going to fully redeploy our cash flows off that, there's still a challenge out there to put the same type of quality assets on the books at existing yields.

Thanks, that's helpful. And all my other questions have been asked. So, thanks, guys.

Matthew Breese; Piper Jaffray.

Could we just touch on the expense base? With the combined institution with Oneida, could you remind us of the cost saves and give us an idea of where you expect the quarterly expense run rate to shake out?

Boy, Matt, in front of me I do not have the combined quarterly number for that. But let me start with this, that from a practical standpoint the third quarter for us, at a $56 million run rate, as I said before, is a pretty reasonable place to start with in terms of our longer-term expectations.

Now, as you know, we are the slave of seasonal outcomes in our footprint, which means that we get a little bit more expensive when we turn the heat on and we get a little bit more expensive when we plow the snow. Which means our utility and maintenance costs kind of ride up $0.005 per share into the fourth quarter, go another $0.015 in the first quarter and then start to taper back off for the second quarter. So as it relates to our general operating environment, we are the cheapest based in the third quarter of every year.

Now, blending in the Oneida outcome, what we've said is that working off Oneida's base today we expected about an $8 million cost save off their run rate. And, again, in front of me I don't have what that is. We're still pretty comfortable with being able to deliver that kind of synergy-related or redundancy-related expense save as we move into the transaction, despite the delay. And actually we've probably honed our estimates a little bit better as to where those are. So, no difference from that.

But the comment I made earlier relative to since we pre-invested the $300 million, their portfolio, what has to happen after the transaction closes is now you have the rest of the revenue generation activities of their enterprise, both banking and nonbanking, and you have the expense structure associated with both banking and nonbanking, and remind everybody we have to issue the shares. So we will have -- our expectation is 2.4 million shares to be issued.

So, certainly we are still thinking that we will have accretion above just the, quote, redeployment of the securities. But it's probably not likely to be material for the first couple of quarters after we close.

Right. Okay. And then, just thinking about your overall size combined, closer to $8.5 billion, closer to that $10 billion mark, do you expect there will be any sort of expense growth acceleration as we approach the $9 billion, or $9.5 billion mark and eventually being subject to the DFAST stress test and the CFPB and all that comes with that?

I think that's a fair question, Matt. At this juncture, we don't expect a material acceleration of operating expenses related to our work towards the $10 billion level. We've already begun the resource investment and the investment in DFAST. We've already begun our investment in the systems and processes around improving BSA, AML and compliance.

So I don't -- I think it will be marginal. The incremental cost will be at the margins. I don't think it's going to be millions of dollars of additional expenses that are going to jump out. I think it will be marginal and it will be incremental and it will accumulate over the course of the next probably couple of years as we trend further towards the $10 billion mark. But I don't think -- you're not going to see anything that's going to jump out that's going to be a surprise.

The significant matter, in my mind, either beyond addressing DFAST and what we think are increased expectations around compliance -- BSA, AML, and those kind of things -- is really the impact of Durbin. And so that's kind of the greater strategic challenge for us, which we have spent a fair bit of time at the board level and the senior management level addressing what those specific challenges are and what the alternatives and pathways are for us to hurdle that issue without impairing value to our shareholders.

So I think we're in pretty good shape. But, to circle back to your question, we do not expect any -- the current significant expenses that are going to jump out at you, they will be marginal and incremental.

Right. And then, just on the Durbin, do you have the combined revenue figure at risk with yourselves and Oneida?

I think if you called it -- if you took a run rate now and you said, okay, we're going be bigger so we're going to get a pickup as we get to be more than $10 billion and then you took the haircut off that, I think if you used $8 million you'd be in the neighborhood, give or take.

Great. That's all I had. Thank you very much.

Ryan Strain; Guggenheim Securities.

Quick question on the capital you have. Are you considering any buybacks after the completion of this Oneida deal?

We do have an authorization outstanding which we've had as a matter of just good discipline over the course of a number of years. I think we have not used it since the first quarter, I believe. Right, Scott?

That's right.

When we bought back I think it was a couple hundred thousand shares. At this point we don't have any specific plans to use it or not use it. As you observed, we have very strong capital levels. In fact we have what we consider to be excess capital levels, if you look at our balance sheet and what we think an appropriate, prudent level of capital should be against our balance sheet. At 10%-plus Tier 1 leverage, we have more than we need.

And so the question of how much more -- we're going to be deploying some of that with the Oneida transaction, which is a 60/40 cash/stock mix. So we will be deploying some of that capital as part of the cash component of the Oneida transaction. And we'll look for other opportunities to deploy that capital as well.

We have a history of increasing our dividend, which we certainly expect will continue, or least hope to continue. Expect is the right word.

So, I'd prefer not to buy back the stock. I would prefer to use it for construction reasons that can help create sustainable and growing earnings capacity for shareholders. I think our shareholders expect us to use that capital to create a growing return capacity, whereas a stock buyback, the capital's gone and you're not going to get any growth out of that. It's a one-time benefit to shareholders, for sure, but that benefit never improves. Where if you deploy the capital in an M&A fashion, organic growth, any kind of growth fashion, maybe our nonbanking businesses which we've invested in and have grown nicely, you have the capacity to grow that benefit.

So I think our preference would not be to do a stock buyback. I always kind of like doing small buybacks like we did the first quarter just to clean up over time some of the dilution from equity programs and equity incentive programs and the like. But at this juncture I think our shareholders would prefer we invest in the business and provide an opportunity for us to grow that capital benefit as opposed to take a one-time benefit for shareholders, which doesn't have the capacity to grow over time.

So, I don't know if that was the answer to your question you're looking for, but --

Okay. Yes, that's helpful. Thanks, guys.

And it does appear we have no further questions at this time. (Operator Instructions)

Wonderful. Thank you, Shannon. Thanks, everyone, for participating today. We look forward to speaking again in January.

Thank you.

And that does conclude today's teleconference. Thank you all for your participation.