Community Financial System Inc (CBU) 2015 Q4 法說會逐字稿

Welcome to the Community Bank System's fourth-quarter and year-end 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 the actual results to differ materially from the results discussed in these statements.

These risks are detailed in the Company's annual report in 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.

Gentlemen, you may begin.

Thank you, Jamie.

Good morning, everyone, and thank you all for joining our Q4 and full-year conference call.

The fourth quarter was a busy and productive one for us, with the December 4 closing of the Oneida Financial acquisition previously announced in Q1.

The integration went very well, adding 12 branches, $400 million of loans, $700 million of deposits, and a $20 million revenue insurance and benefits business.

This business, called OneGroup, is a significant strategic platform for growth, including revenue synergies with our existing benefits administration business.

Fourth-quarter results were a bit noisy with the acquisition and the tax rate adjustment, but very strong on an operating basis -- particularly the performance of our commercial banking business, which grew sequentially more than 4% over Q3.

Year-over-year, net operating earnings grew $0.04 to a record $2.30 a share, inclusive of a negative tax rate impact of $0.05 per share.

So we are very pleased with our full-year operating performance.

Organically, loans grew 4%, with business lending up 6%.

Core deposits grew 5%, and our benefits administration business had a record year, with 7% revenue growth and 8% earnings growth.

We also raised our dividend for the 23rd consecutive year.

Forbes recently ranked us as the eighth strongest large bank in the country, and the MSR Group ranked us as the most trusted bank in the Northeast and in the top four nationally.

So in all respects it was very productive year for Community Bank System and our shareholders.

With respect to the $10 billion threshold, we are making good progress as it relates to implementing DFAST systems and strengthening our risk management and compliance operations in order to be fully prepared to effectively hurdle this threshold at the appropriate time.

We will, however, remain focused on growing our earnings and dividends in a disciplined and sustainable fashion for the benefit of our shareholders and not growth for its own sake.

We remain committed, at the appropriate time, in the appropriate manner, to hurdle the $10 billion threshold in a fashion that optimizes the economic outcome for our shareholders.

We are very well positioned for 2016 and beyond.

Balance sheet growth, record capital levels, earnings momentum, asset quality, cost control, and the Oneida transaction will all serve us well.

But we also expect to be challenged by continuing contraction in margin, a higher expected tax rate, and costs associated with DFAST and other regulatory and compliance investment.

As always, the burden remains on us to execute in a focused and disciplined fashion to create growing and sustainable value for our shareholders.

Scott?

Thank you, Mark; and good morning, everyone.

As Mark mentioned, the fourth quarter of 2015 was a very solid operating quarter for us, but certainly included some atypical items for us, with the Oneida Financial acquisition clearly being the most significant.

Full-year operating EPS of $2.30 per share was a new all-time high for us and was $0.04 above 2014's operating EPS of $2.26 a share, despite absorbing a $0.05 per share year-over-year negative comparison from the full-year effective tax rate moving to 31.0% versus 2014's 29.6% rate.

I'll first cover some balance sheet items.

Average earning assets of $7.30 billion for the fourth quarter were 9.2% up from the fourth quarter of 2014 and 2.5% higher than the third quarter of 2015.

Average loans grew $236 million year-over-year or 5.6%.

Ending loans were up $488 million from the end of the third quarter of this year, with approximately $400 million of that related to the Oneida acquisition and the remainder from a very productive organic growth fourth quarter.

Organically, loans grew 2.1% on a linked-quarter basis, with positive growth in all portfolios.

Average investment securities were up 15.3% compared to the fourth quarter of 2014, principally a result of our decision to pre-invest the expected and now actual net liquidity provided by the Oneida Financial transaction.

Ending deposits were up $938 million or 15.8% from the end of 2014 and included approximately $700 million from the Oneida transaction and the remainder from solid core deposit growth in 2015.

Because of the timing of the Oneida closing, for modeling purposes it will be more productive to use our ending balance sheet as the starting point for averages going into 2016.

Year-end loans in our business funding portfolio of $1.50 billion were $235 million or 18.6% above the end of 2014, with approximately $150 million of that increase coming from the Oneida transaction.

Despite the one large charge-off previously mentioned, asset quality results in this portfolio continue to be very favorable, with net charge-offs of 11 basis points of average loans for 2015 and 13 basis points of loss over the last nine quarters.

Our total consumer real estate portfolios of $2.17 billion, comprised of $1.70 billion of consumer mortgages and $404 million of home equity instruments, were also up on a linked-quarter basis and included approximately $185 million of loans from Oneida.

We continue to retain a portfolio of most of our short and mid-duration mortgage production while selling secondary-eligible 30-year instruments.

Asset quality results continue to be very favorable in these portfolios, with total net charge-offs over the past nine quarters of just under 8 basis points of average loans.

Our consumer indirect portfolio of $936 million was up $63 million from the end of the third quarter of 2015 and included $45 million of outstandings from the Oneida transaction.

A solid fourth quarter resulted in full-year organic growth of 6.8%, which was an excellent finish to a year that started noticeably challenged in the first fiscal quarter.

Despite solid new car sales again in 2015, used car valuations, where the largest majority of our lending is concentrated, continue to be generally stable.

Net charge-offs in this portfolio were 33 basis points of average loans in 2015 and have been 35 basis points of loss over the past nine quarters -- a level we consider very productive.

Despite the larger-than-typical net charge-off level we reported in the fourth quarter -- which, again, included a $1.0 million partial net charge-off on a commercial relationship we had previously reserved for and discussed -- 2015 was a continuation of the favorable overall asset quality results that is part of our credit DNA.

Full-year net charge-offs of 15 basis points of average loans were consistent with the level reported in 2014.

Nonperforming loans, comprised of both legacy and acquired loans, ended the fourth quarter at $23.9 million or 0.50% of total loans.

Our reserves for loan losses represent 1.05% of our legacy loans and 0.95% of total outstandings after the Oneida acquisition, and based on the trailing four quarters' results, still represent over seven years of annualized net charge-offs.

We continue to closely monitor our oil- and gas-related credit exposure in the Marcellus Shale region of Northeast Pennsylvania, which totaled approximately $66 million at year-end, with roughly $46 million of that amount outstanding as of December 31.

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, which is less than 1% of our total outstandings, continue to be consistent with our overall commercial portfolio.

As of December 31, our investment portfolio stood at $2.85 billion and was comprised of $224 million of US agency and agency-backed mortgage obligations, or 8% of the total; $663 million of municipal bonds, or 23%; and $1.90 billion of US treasuries, or 67% of the total.

The remaining 2% was in corporate debt securities.

The portfolio contained net unrealized gains of $65 million as of year-end -- a level fairly consistent with the end of 2014 and certainly somewhat higher today.

Our capital levels in the fourth quarter of 2015 continued to be very strong.

The Tier 1 leverage ratio stood at 10.32% at year-end, and tangible equity to net tangible assets ended December at 8.59%.

Tangible book value per share was $15.90 per share at year-end and includes $39.7 million of deferred tax liabilities generated from tax-deductible goodwill, or $0.91 per share.

Shifting to the income statement, our reported net interest margin for the fourth quarter was 3.70%, which was down 19 basis points from the fourth quarter of last year and 5 basis points higher than the third quarter of 2015.

The decision to pre-invest the expected liquidity from the Oneida transaction to Treasury securities during the second and third quarters of 2015 contributed to the overall decline in net interest margin in the second through the fourth quarters of 2015 but was also clearly additive to net interest income generation.

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

We also recognized approximately $0.5 million of incremental loan interest income from certain unscheduled commercial payoffs in the fourth quarter compared to the linked third quarter, which also added roughly 3 basis points to net interest margin results.

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

The month of December's net interest margin was approximately 3.62%, excluding the Federal Reserve Bank dividend and the previously mentioned incremental commercial loan income, and included Oneida loans and deposits for 27 calendar days.

Fourth-quarter noninterest income was up 10.8% from last year's fourth quarter and was meaningfully impacted by the Oneida acquisition.

The Company's employee benefits administration and consulting businesses posted a 6.6% increase in revenues from new customer additions and additional service offerings -- a very solid finish to another record-year performance.

Our wealth management and insurance group revenues were 57.2% above the fourth quarter of 2014, with almost all of that improvement related to the Oneida acquisition.

Consistent with Oneida's historical results, the month of December was again seasonally strong in the acquired insurance services business.

Our fourth-quarter revenues from deposit service fees were up from the levels reported in the fourth quarter of 2014, but all of that increase came from the Oneida acquisition, as higher card-related revenues did not completely offset lower utilization of core account overdraft protection programs.

Mortgage banking and other banking services revenues were down $984,000 from the linked third quarter of this year, which again included our annual dividend from certain pooled retail insurance programs, which amounts to just over $0.01 per share.

Quarterly operating expenses of $65.0 million included $5.7 million of acquisition expenses as well as the operating activities of the Oneida acquisition for 27 calendar days, including 19 payroll days for the approximately 275 employees that were added.

Despite the delay in the closing of the Oneida transaction from our originally announced expectations, we believe we are already very close to achieving the forecasted cost synergies we expected at announcement.

The consolidation of certain smaller peripheral systems and other infrastructure efficiencies will spill into the first half of 2016 but are not expected to have a material impact on consolidated operating costs going forward.

Our effective tax rate in the fourth quarter of 2015 was 32.7% versus 28.8% in last year's fourth quarter, bringing the full-year rate to 31.0% versus last year's 29.6% full-year effective rate.

Certain legislative changes to state tax rates and structures over the past two years resulted in the majority of this resultant higher rate, including those related to our overall asset size.

We continue to expect net interest margin challenges to persist into 2016.

Although the majority of our new loan originations and 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 margin, excluding the impact of the previously mentioned investment decisions, declined 2 to 4 basis points per quarter in 2015.

Although we are not forecasting similar declines for all of 2016, we believe our core net interest margin for the month of December 2015 is a reasonable proxy for our 2016 expectations.

Also, as a reminder, a meaningful portion of the $0.07 of expected GAAP earnings accretion from the completed Oneida transaction was realized in the second through the fourth quarters of 2015 from securities pre-investment.

Our funding mix and costs remain 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's semiannual dividend in the second and the fourth quarters each year.

Our full-year 2015 net charge-off results were again favorable; 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 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, as we mentioned in our third-quarter call, our consolidated asset size will further eliminate certain state tax planning opportunities, resulting in an estimated 1.5 to 2 percentage points increase in our full-year effective tax rate in 2016.

Despite some of these apparent challenges, we believe we remain very well positioned from both a capital and an operational perspective going into 2016.

I'll now turn it back over to Jamie to open the line for questions.

(Operator Instructions) Alex Twerdahl, Sandler O'Neill.

Hey, good morning guys.

Good morning, Alex.

Good morning, Alex.

Congratulations.

Thank you.

A couple of questions here.

First off, the $1 million in net charge-offs that you took this quarter related to the commercial loan -- is that the same $2.5 million credit that was oil- and gas-related that migrated during the third quarter?

It is one in the same, Alex.

Okay.

And then can you just give us a little more color -- I think last quarter you said that your outstanding loans on oil- and gas-related was about $35 million, and then you said in your prepared comments that they went up to $46 million this quarter just in the outstandings.

Can you just maybe give an example of what one of those loans, and why it might have gone up in the fourth quarter, just so we can get a little more comfortable with those credits?

Sure, Alex, absolutely.

I think as we had said before, our total credit exposure of $66 million is a combination of working capital lines of credit, some equipment lines of credit, and then some fixed-term mortgages which principally are related to the hospitality-related credits.

But as an example, in the fourth quarter one of our very well-established, very profitable customers trued down their working capital line almost $10 million.

And it had the -- you know, consistently going along with pipeline expectations that are in the marketplace.

As much as the drilling and the new fracking has certainly backed up the cost of -- or the selling price of natural gas has gone down so much, the pipeline guys are still very busy along with certain of the other contractors in the infrastructure business.

So in fairness, really happy to get a drawdown of the line from this specific customer, but in that line.

So no other changes relative to the monitoring characteristics that we got with that portfolio.

Again, it's less than 1% of our total outstandings.

Weighted average risk ratings have not moved material during 2015 on any of those credits, with the exception of the one who turned over on us.

So other than that, Alex, I think we feel pretty good.

I think we think we are lending money to the right folks in that area -- you know, kind of like our base of customers on a holistic basis.

And we'll just continue to have very robust monitoring.

Okay, that's extremely helpful.

And then I'm sorry if I missed it earlier, where you were talking about the loan growth in the fourth quarter, and it was very strong: is that indicative of strong pipelines going into the first quarter?

Or was there a lot of stuff that maybe got -- that closed ahead of schedule and caused a little bit more in the fourth quarter, and that we should expect a little bit of a slowdown in organic loan growth in the first quarter on the commercial stuff, specifically?

Yes, Alex, I think as it relates to the commercial banking business, that was true in the fourth quarter.

Some of it was timing-related.

As you recall, we got off to a very difficult start to the year in 2015.

I think our overall loan book was down $70 million in the first quarter.

And a really, really nice recovery in all our portfolios to end up the year organically up about $165 million.

Half of that was in business lending.

A good part of that increase actually happened in the fourth quarter.

A lot of that was just timing on some larger credits that had been in the pipeline and closed in the fourth quarter.

But in terms of pipelines, the business lending pipeline is still very strong.

We think we're going to have a decent first quarter, certainly relative to last year's first quarter.

The mortgage pipeline, interestingly enough, is still also quite strong given the seasonality of that business, certainly relative to 2015.

So we're in pretty good shape heading into the first quarter.

I would tell you that the early results for the quarter relative to last year are very favorable, which is good.

So I think, to answer your question, a lot of the significant, I would call it, outperformance for us in the fourth quarter on the credit side was the timing of a lot of the larger business banking credits that closed in Q4.

Okay.

Thank you for all that color.

That's all my questions for right now.

Thanks.

Joe Fenech, Hovde Group.

Just building on one of those last questions, guys, on the $46 million outstanding, I understand the reasoning and what you said -- the $10 million coming from the one strong customer.

But just sort of a conceptual question for you: what sort of safeguards are in place just to make sure that borrowers that are in pain aren't just pulling down lines -- which, obviously, in this environment you could argue could come at a tough time?

In other words, I guess, do you have the ability to shut down a lot of these guys if you see things you don't like with respect to their specific financial situation or just the environment generally?

And what would be the trigger for that?

Yes, it's a really good question, Joe.

And I can give you an example of that.

When we reported last in the third quarter, we had said we had $71 million of credit exposure, and now were saying we have $66 million.

A $5 million portion of an operating line was actually terminated during the quarter.

Some of that was based on utilization of the customer.

So it's not -- we'd be less than transparent if we said we shut somebody's off.

But I think just the management, the relationship management of understanding where some of these people are from a cash flow standpoint in a more challenging operating environment than they've been used to in the last five years -- I think that's indicative of our style.

But that being said, we had -- in the asset that we ended up partially charging off, the financial results of the borrowers were great going into the quarter, where we made the loan or extended the credit.

So I think it's on-the-ground monitoring, Joe, more than anything else.

I wouldn't say there's anything in the system that automatically triggers that.

We are still, quote, the slaves of updated financial information; but when we do see something that suggests a cash flow weakness or a business operating weakness, certainly we react to it from a capacity standpoint.

But are you concerned at all that that is sort of, maybe, Scott, a little bit of a lagging indicator?

Like, I guess, you know, it's just -- a contract is a contract, right?

So you can't say, $28 oil, whatever the price of natural gas is today -- you can't say, we don't like that and then kind of -- you know, you have to kind of wait for a demonstrated issue, cash flow issue, from these borrowers to sort of take action?

Or are there other safeguards that maybe you can take to maybe get ahead of a potential issue?

Joe, so many of them are formula based on the working capital side that, you know, if revenues declined, and therefore you had a borrowing base that was receivable-based, you would get an automatic decline in the capacity that that borrower could go to.

The other thing is sort of separating this discussion for us between pipeline and infrastructure contractors and field management services enterprises.

The vast majority of what we're doing are infrastructure pipeline-related people that have been in that business for quite a while.

These are not people that found an opportunity when fracking started in Northeast Pennsylvania to sort of ground-up do a new business venture.

So I think a lot of them have other sources of cash flow that also support the overall credit relationship.

And again, as much as energy prices across the gamut are certainly unbelievably challenged right now, remember that the Marcellus Shale activity in Northeast Pennsylvania wasn't completely built out.

This isn't West Texas or the Dakotas, so you weren't running at 105% of capacity to shut it back to 30%.

This was still a building process.

One could argue you're only five to seven years into the exploration side of Marcellus.

So the available capacity was not at a very high level relative to field services folks and equipment providers in that market, anyways.

It was actually still growing.

And any kind of stress test assumptions you could give us, Scott, terms of -- like, you know, oil is at sub-$30 six months from now or a year from now?

Have you guys done any expectations of credit migration of that book under a certain set of assumptions as we kind of move through 2016?

I think that it would be difficult to stress.

If you look at the price of natural gas in Marcellus right now, I think it's like $1.00.

It's already close to zero.

I think what we do is we have a formalized structure for evaluating the financial performance of all of these credits on a quarterly basis with the credit administration team and the lending team, and we react to the outcome of that.

I think we're only talking about two dozen credits in total.

So it's not as -- I don't think it's as big of a challenge.

In terms of management administration, I mean, clearly there certainly could be other operators that we have relationship with in that area that could be challenged.

But we're doing everything and all that we can to monitor that on a continual basis, and we react very quickly.

Okay.

And then any sort of -- on the commercial real estate side that may touch the shale activity, I know you talked about the hospitality credits, but is any of the -- just anecdotally -- the vibrancy of these towns and cities have kind of had as a result of the shale boom, is that dissipating it all as of yet?

And if that does happen, where would you expect to see it?

And how do you think about quantifying what sort of the ancillary exposure could be?

That's a good question.

I mean, I would tell you anecdotally, and even from the perspective of on the ground in that region, there's a couple of things that have happened.

You know, the drilling is down.

The other thing that's down is some of the gas companies that own the mineral rights in that region are letting leases expire -- land leases expire.

So generally, there is less activity on the ground in that region because of the collapse in the price of gas, and particularly the collapse of the price in the Marcellus Shale region relative to gas more broadly.

So there has been a deterioration of activity, no question.

And we'll see what the future brings.

As Scott mentioned, part of the problem in the Marcellus area is there isn't enough infrastructure yet in terms of pipeline, which is -- I think over half of our outstanding exposure is to the pipeline companies, most of which have extremely strong balance sheets and financial capacity.

So we're happy about that.

So the pipeline side continues and, we expect, will continue into the future.

I mean, there's more gap than there is infrastructure right now.

And that needs to get built out.

That will happen; over the next couple of years there will be a lot more pipeline capacity.

So I think we're reasonably well positioned.

As I said, we monitor it very closely.

We did have one tip over.

It's not impossible that there's others into the future.

But we, as I said, keep very tight -- we a very tight controls over the monitoring of that exposure.

And we don't expect that at this juncture there will be any material impacts because of our exposure in that industry.

Okay, I appreciate it.

Thanks for the color, guys.

Collyn Gilbert, KBW.

Scott, just of the net interest income that you guys posted this quarter -- how much of that was from accretable yield tied to Oneida?

And then maybe what your outlook is for that going forward?

Actually, Collyn, very little of that was from accretable yield from Oneida.

One, it was only a month worth of activities; and two, interesting outcome with the Oneida purchase accounting -- the interest rate mark was actually larger than the credit mark.

So that will not be something that moves the needle for us going forward.

When I mentioned incremental loan income in the fourth quarter, it actually related to some payoffs of loans that were part of the Wilber transaction.

So a little bit of accretable yield there.

And then, really, the collection of loan fees for early terminations of obligations -- so somebody who refinanced somewhere outside of our Bank and was willing to pay a prepayment penalty.

Okay, okay.

That's helpful.

And then I know you'd touched on this -- just on the mortgage banking line, what was the amount of dollars that were tied to the insurance pool this quarter?

On that line for this quarter, it's a very miniscule amount, Collyn.

What happens is typically the pools of the dividend once a year to its participants based on production level of activities, and so we picked up about $750,000 in the third quarter.

There is an ongoing revenue stream attached to that, but it's probably under $100,000 a quarter outside of the third quarter.

Okay.

And just a general outlook for -- I know you had indicated that the mortgage pipeline was strong, but just maybe a general outlook, having Oneida come over, on where you think that business line can go?

Just the core -- talking about the core mortgage banking.

Well, we think -- oh, the mortgage banking.

Yes.

We've always had a very strong mortgage banking business.

We think that will continue to grow.

We bring over a number of talented and qualified originators with the Oneida transaction, and they've already hit the ground running.

We fully implemented all of the TRID regulations on time, including some of the systems adjustments that I know a lot of banks have had trouble with because the systems providers weren't able to revise the systems on time.

So we are in pretty good -- we're in really good shape in terms of TRID in the regulations.

You know, the unfortunate impact has been to extend the commitment timeline to closing for the mortgage business.

And I think that's an industrywide challenge right now.

It takes longer to close a mortgage.

So the pipeline grows, and it creates difficulty, and frustration, and all those kinds of things.

I mean, I would just say more broadly: we'll continue to see growth in our mortgage business.

I think that's certainly true.

The originating yields right now in the mortgage business are about -- almost exactly what the all-in portfolio yield is.

So I don't think we're going to see -- absent, you know, material changes in the rate environment, we're not going to see further compression in the -- we don't expect to see further compression in yields.

But the costs of that business are higher in terms of regulation, in terms of training, the complexity of the products, the compliance needs, certification, registration of your mortgage originators.

So it's gotten to be a more difficult business to make money in terms of its returns.

But in our markets, that's a core product in our markets.

Mortgage and home equity loans -- we'll continue to pursue that business.

I think that business will continue to grow for us.

And we're going to have to work to optimize the returns of that business, given the new operating environment.

Okay, that's great color.

Thank you for that.

And then just to go back to the oil and gas.

And I apologize; I feel like you guys are -- we're beating a dead horse on it, but I think you're a good resource for all of us that are not operating in the Texas market.

So just to understand a little bit better, the $10 million drawdown that you saw in the quarter from one of your borrowers -- what was the intended use for those dollars?

I'm just curious.

Essentially, Collyn, it's again just to support the existing balance sheet from a working capital standpoint.

And I will say this, and I don't know this specifically to the dollar the extent of this one.

But what you'll find a lot of times is that generally contractors at the end of the year will try to improve the balance sheet that they are presenting to bonding companies for the next year.

So a drawdown of a working capital line creates some working capital for them from a balance sheet perspective, and that's always deemed to be a net positive relative to most of the bonding services.

I won't say that was all of the drawdown here, but it seemed relatively consistent with activity we have had from that borrower in other fiscal year-ends.

And in some years we hold onto that level of line utilization into midyear of the following year; in other years, not so much.

But we didn't see anything inconsistent with the behavioral patterns of anybody's working capital or equipment lines in the Marcellus Shale or on the Southern Tier border of New York State this quarter and versus what we got in previous quarter-ends.

And that particular customer is one of if not the strongest of the two dozen I mentioned in terms of their financial capacity, and their equity, and the collateral strength of the credit.

So we are -- we're not concerned whatsoever about that particular customer.

Got it.

Okay, that's really helpful.

And then just one final thing on this, and then we are almost done.

So the $1 million charge-off you took this quarter -- you had -- was it -- the full outstanding was what again?

And kind of walk through the process in the third quarter.

I think you'd said $2.5 million you'd put aside?

Or just -- if you could, just run through those numbers, just to understand (multiple speakers)

I'll take a shot at real granularity on this one.

The total of the credit was just over $2.5 million.

We had a reserve of roughly $600,000 or $700,000 at the end of the third quarter.

When it was very early in the stages of where this was going from a remediation standpoint with this particular customer, we got a little better at understanding where we were from a collateral position and what the suggested operating outcome of this operator is going to be over the next 6 to 12 months in a reorganization plan.

And so decided -- which is again very consistent with our decisions -- you know, we call a spade a spade.

And we said we think that there's reason to believe that we should actually process a charge-off as opposed to leave a larger reserve on the books for the end of the fourth quarter.

So hopefully that helps a little.

Yes, that's great.

Okay, that's all I had.

Thanks, gentlemen.

Matthew Breese, Piper Jaffray.

Just thinking about credit quality and some of the detail in the Marcellus, how should we be thinking about the provision and your expectations for the provision in 2016?

And is the last two quarters indicative of what we might see as a run rate?

Let's see.

A lot of moving pieces on that one, Matt.

Do we have an expectation that we had the need for a provision for something that's north of $1 million?

Definitely not in our forecasting on a single-credit basis.

What I would look at from us, Matt, as a proxy would be -- we start with a process that says: if all their asset quality metrics are remaining consistent, we think about providing a provision for net charge-offs and incremental loan growth.

So that's kind of been our constant in behind it.

And then obviously we will qualitatively adjust some of those things based on what we're seeing in terms of credit trends.

Understanding that we've been a fairly consistent conservative provider of allowance over time, none of that has really changed.

I look at this, Matt, more than anything to say: we acknowledge our first- and second-quarter net charge-offs, and therefore the resulting provisions in 2015, were exceptionally low.

Would have loved to have said we could continue that into infinity, but that was highly unlikely.

We kind of blend this across the four-quarter basis and say 15 basis points of net charge-offs; the balance sheet grew, to Mark's point, 4% organically.

Is our provision in line with those types of dynamics?

So that's what you should expect from us on a going-forward basis.

Yes, if you look at the last two quarters, the average charge-offs have been about, what, 25 basis points?

Yes.

Between last two quarters, to your question.

And to Scott's point, I think we would expect something less than that.

2015 is kind of historical if you look at the last couple of years.

And we don't necessarily see any changes to asset quality trends beyond that.

So I would say that the third and fourth quarters were somewhat atypical and, we certainly hope, not a reflection of our run rate out into the future.

But we'd expect 15 basis points to -- I mean, that's what we task ourself on is 15.

No, that's good color; I appreciate that.

And then touching on expenses, first, what are the remaining one-time merger-related costs tied to the Oneida transaction?

And then, given Oneida was only integrated for part of the quarter, what would you expect for overall expenses per quarter headed into 2016?

That was a fair question.

We think we got almost everything on the one-timers.

Do we think there's still maybe a handful of costs associated with conversion of peripheral systems that wouldn't represent a capital expenditure upon that conversion?

There might be some small ones.

But what -- we think we picked up all of the conversion-related technical costs.

We think we picked up all of the contract termination costs.

We think we picked up all of the things associated with severance of people.

So we think we're pretty all-encompassing on that.

Would not expect a lot more there.

Your color relative to the fourth-quarter expense run rate and trying to put some parameters around that: essentially, we have a month's worth of activity in Oneida, both on the revenue and the expense side.

That change in operating expenses, if you just looked at our third quarter versus the fourth quarter, you get roughly a $3.7 million increase.

Now, some of that was going to be related to the core growth of our own businesses, but the lion's share of that of that should be associated with the acquisition on a run rate basis.

So if you sort of put a quarterly result behind $3.7 million of monthly expenses, you land with something between $11 million and $11.5 million of quarterly expectations of expense growth.

Matt, I expect that we are going to do roughly a 3% across-the-board merit increase.

So the salaries and wages line of our P&L probably should have trends-based outcomes of 3% attached to it.

Historically, we've done a little better than that on the all other lines.

We have [not] trended at 3%.

We have probably trended at half of that.

So I think from a modeling standpoint, those would kind of be the parameters I would use and essentially are the parameters we are using to monitor our success out of the gate.

I would just throw a little bit of caution out there to those who love to model.

We're a little more of an expensive date in the first quarter.

And, yes, winter did show up; I know there's a lot of people on this call expecting 2 feet of snow somewhere in the country this week.

We already got it this week.

But from a practical standpoint, remember that we've got a couple cents of share of seasonality attached to our operating expense run rate.

So I won't be surprised if our first quarter looks a little bit higher than what I just described.

Got it, okay.

And then on the margin, hoping for something stable at 3.62% for the whole year.

Now, does that include the FRB dividends, or is that exclusive of that?

It would not have that.

So I think if you kind of put that back in, it's pretty fair to put another $1 million worth of FRB dividends back into that composite outcome.

That would be a fair assessment, Matt.

You get that in the second and the fourth quarter.

And again, I think for us that we ended the year with roughly $300 million of short-term credit instruments, essentially overnight borrowings at the Home Loan Bank.

If we are a little bit more successful than maybe our track record run rate had been, we could actually generate enough deposit funding to limit the risk of the upside against those variable-rate instruments and find ourselves with an opportunity to actually not have some projected increase in funding costs, just because we have in instrument out there that's floating.

I think we said before -- whether the Fed is going to move up rates 25 basis points a quarter, or whether it's just -- you know, the market, I think, seems to be expecting maybe 2 to 3 instead of 4. With that, I think we've said at 25 basis points, the one that's already happened, we didn't touch deposit rates.

The next 25, not expecting to touch deposit rates.

The third 25 we hold open to have to review and see where we are.

We enjoy, you know, a 70% loan-to-deposit ratio right now.

So you wouldn't think we'd have to sprint to the front of that line.

There's some other geographies not that far from us where people have 105% or 110% loan-to-deposit ratio.

I think they're probably going to have to react a little quicker than we will.

So kind of bring those types of concepts together, Matt, I think we think that where we are today is tough to improve on.

But at the same point in time, we think we probably will hold our own to it.

Got it.

Okay.

And then my last one: with Oneida closed, can you give us an updated sense for your appetite on future M&A, and how you're thinking about approaching and crossing the $10 billion threshold with M&A in mind?

Sure.

I think, as you know our history, we operate in slow- or lower-growth markets.

And to create the kind of double-digit returns that we have over the last 10 or 15, maybe even 20 years, we need to augment our limited organic growth with high-value acquisition opportunities.

So we'll continue to focus on that strategy.

I don't think anything has changed there.

I think Oneida was a really good example of a high-value in-market acquisition strategy that had a really strong platform for future growth above and beyond the market rates of growth in our banking business.

So we'll continue to look for those high-value opportunities.

They need to make sense for our shareholders.

As I said, we're not going to grow just for the sake of getting bigger.

If it makes sense for our shareholders, and it can create growing and sustainable earnings and dividend capacity, then we are interested.

As it relates to the $10 billion threshold, you know, I think as many have observed, just stepping over it will be painful for our shareholders.

And so we don't plan to just step over it.

We are going to need to do something in terms of -- an optimal outcome for our shareholders would be a, let's call it, $2 billion- to $3 billion-sized acquisition that has the capacity to offset the costs and revenue impacts of exceeding the $10 billion threshold.

So we -- that's where we expect to go.

And in our markets and in contiguous markets, there's only so many of those opportunities.

We know exactly what they are, and where they are, and who they are.

And we'll continue to work towards that eventual outcome.

As I've said previously, we're not in a hurry.

We don't need to run past $10 billion.

It needs to happen in its own time, again, in a way that's really about shareholder value.

So if it happens tomorrow, that would be great.

If it happens in two years, that would be great.

In the meantime, as I said, we are making really good progress on DFAST.

We're making good progress on enhancing and strengthening some of our risk management and compliance related systems, so that we are fully in a position at that juncture to become a bank that has over $10 billion in assets in terms of what the regulatory expectations are -- but, just as importantly, our shareholder expectations.

So that's, I guess, a broad outline of our thinking at this juncture.

Very helpful.

I appreciate the color.

Thank you, guys.

(Operator Instructions) And at this time there are no further questions over the phone.

Excellent.

Well, thank you all.

Appreciate your participation and look forward to the first-quarter call.

Thank you.

Thank you for your participation.

This does conclude today's call.