CBU
#Thank you, Nicole.
Good morning, everyone, and thank you for joining in on our first-quarter conference call.
We started out 2015 on a productive note.
Operating earnings were very good at $0.55 per share, which is $0.01 better than 2014 and also on historical high water mark for the first quarter.
The margin contracted as expected, which <UNK> will discuss further.
Earnings were supported by continued growth in noninterest revenues, very strong credit quality, and effective expense management.
The one area of underperformance was for the quarter was in credit generation.
Total loans were down 1.7%, which is a much greater seasonal decline than we typically experience in the first quarter.
On a more positive note, the second quarter has started out very strong, and we have already grown back a third of that decline over the first three weeks of this quarter.
Also, our commercial pipeline is 20% higher than the same time last year.
The mortgage price line is up, and we are entering the seasonally strong months of the auto lending business, but we think we are in very good shape heading into our peak Q2 and Q3 lending quarters.
In addition, deposit balances grew sequentially by over $190 million or 3%, which will provide low-cost funding support for expected loan growth.
For the past several quarters, we have commented on capital levels and are focused on productively deploying access capital.
In that regard, in February, we announced the acquisition of Oneida Financial Corp, an $800 million asset institution with 12 branches across Madison and Oneida counties.
The 60% stack and 40% cash mix of consideration will effectively deploy approximately $55 million of that surplus capital.
This transaction is attractive in many respects, including Oneida's geography, which will give us the number four deposit market share in the Syracuse MSA; its business model, which is very community focused; and its culture, which aligns extremely well with ours.
Oneida also has significant nonbanking businesses that drive more than 60% of its total revenue, including insurance, benefits administration, and wealth management ---+ all businesses that will integrate well with our existing and highly profitable businesses.
As disclosed, we expect the transaction to be approximately $0.07 per share accretive to 2016 GAAP earnings and $0.11 per share accretive to 2016 cash earnings.
We are very pleased that Oneida's chairman and CEO, Mike Kallet, and its President, Rick Stickels, will be joining our Board of Directors.
The merger integration is proceeding well, and we expect to close in early July.
With respect to the remainder of the year, we do expect modest core margin contraction, but improvements in asset generation, in banking and nonbanking revenues.
Asset quality is very strong right now, and our focus on expense efficiency will continue.
We will remain in a surplus capital position, even after the United transaction, and will continue our focus on opportunities to deploy that capital in a manner that is productive to our shareholders.
<UNK>.
Thank you, <UNK>, and good morning, everyone.
As <UNK> mentioned, the first quarter of 2015 was a very solid operating quarter for us with seasonally modest, yet still productive year-over-year operating improvement trends.
I will first discuss some balance sheet items.
Average earning assets of $6.67 billion for the first quarter were up 1.3% from the first quarter of 2014, with all the growth in earning assets being in loans, a positive relative to mix, meaning that the average loans grew organically $91 million or 2.2%.
Average deposits were up 1.5% from the first quarter of last year, and the multiyear trend away from time deposits and into core checking, savings, and money market accounts continued in early 2015, resulting in a further decline in overall funding costs.
Average outstanding loans in our business lending portfolio in the first quarter were within 0.2% of the fourth quarter, a seasonally expected outcome.
Asset quality results in this portfolio continue to be very favorable with net charge-offs of under 6 basis points of average loans over the last 15 months.
Our total consumer real estate portfolios of $1.94 billion comprised of $1.61 million of consumer mortgages and $339 million of home equity instruments were also down model modestly on a linked quarter basis.
We continue to retain in portfolio 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 five quarters of just under 8 basis points of average loans.
Our consumer indirect portfolio of $804 million was down $30 million from the end of the fourth quarter of 2014, in line with seasonal demand characteristics and reflective of the significant quarterly contractual cash flows off this portfolio.
Despite solid new car sales, used car valuations were the largest majority of our lending in concentrated continue to be stable.
Net charge-offs in this portfolio over the past 15 months were 33 basis points of average loans, a level we consider very productive.
With our continued bias towards A and B paper grades and the very competitive market conditions in this asset class, yields have continued to trend lower over the last several quarters.
We have continued to report very favorable overall net charge-offs results with the first quarter of 2015 results at just .
09% of total loans being a stellar performance.
Nonperforming loans comprised of both legacy and acquired loans ended the first quarter at $22.7 million or 0.54% of total loans.
Our reserves for total loan losses represent 1.14% of our legacy loans and 1.08% of total outstandings and based on the trailing four quarters' results represent over seven years of annualized net charge-offs.
As of March 31, our investment portfolio stood at $2.66 billion and was comprised of $247 million of US agency and agency-backed mortgage obligations or 9% of the total, $670 million of municipal bonds or 25%, and $1.68 billion of U.S. Treasury securities or 63% of the total.
The remaining 3% was in corporate debt securities.
The portfolio contained net unrealized gains of $106 million as of quarter end.
Our capital levels in the first quarter of 2015 continue to grow.
The Tier 1 leverage ratio rose to 10.15% at quarter end, and tangible equity to net tangible assets ended March at 9.19%.
As mentioned previously, these higher capital levels and our strong operating income generation allowed us to again raise our quarterly dividend to shareholders in 2014 to $0.30 per quarter or a 7.1% increase.
Tangible book value per share increased to $16.31 per share at quarter end and includes $36.7 million of deferred tax liabilities generated from tax deductible goodwill or $0.90 per share.
Shifting now to the income statement, our reported net interest margin for the first quarter was 3.83%, which was down 11 basis points from the first quarter of last year and 6 basis points lower than the first quarter of 2014.
Consistent with historical results, the second and the fourth quarters each year include our semiannual dividend from the Federal Reserve Bank of approximately $500,000, which added 3 basis points of net interest margin to the fourth-quarter results compared to the linked first quarter.
Proactive and disciplined management of deposit funding costs continue to have positive effect at margin results, but have generally not been able to fully offset declining asset yields.
First-quarter noninterest income was up 2.4% from last year's first quarter and seasonally below the fourth quarter of 2014 as expected.
The Company's employee benefits, administration and consulting businesses posted a 6% increase in revenues from new customer additions, favorable equity market conditions, and additional service offerings.
Our wealth management group revenues were essentially even with a very strong first quarter of 2014.
Seasonally, our first-quarter revenues from banking noninterest income sources were down 7.6% from the levels reported in the fourth quarter, but were up modestly from the first quarter of 2014.
Quarterly operating expenses of $55.6 million, excluding acquisition expenses, decreased $245,000 or 0.4% from the first quarter of 2014.
Merit-based personnel cost increases in 2015 were partially offset by slightly lower headcount levels, as well as lower net benefit costs.
Seasonally, as expected, our facilities-related costs in the first quarter were higher than the linked fourth quarter, but were still almost $300,000 lower than the first quarter of 2014.
Our effective tax rate in the first quarter of 2015 was 31.0% versus 29.7% in last year's first quarter, a reflection of a lower proportion of tax-exempt income to total income, as well as certain statutory changes driving up our effective state tax rates.
We continue to expect net interest margin challenges for the balance of 2015 as most of our existing assets are still being replaced by new assets with modestly lower yields.
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 noninterest revenues has been very 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.
As we frame our expectations for the second quarter of the balance of 2015, we remind ourselves that the second quarter contains one more calendar day and one more payroll day than the first quarter and the third and the fourth quarters, two more.
We continue to expect Federal Reserve Bank's semiannual dividends in the second and fourth quarters.
While we expect a seasonal decline in certain of our utility and maintenance costs in the second quarter, we historically spend a bit more in marketing and business development in the last three quarters of the year.
Our first quarter net charge-off results were extremely positive and, although we do not see signs of asset quality headwinds on the horizon, we would expect higher levels of provisioning for the remainder of the year.
Tax rate management will continue to be subject to successful reinvestment of our investment cash flows into high-quality municipal securities, which has been a challenge at times during this period of sustained low rates.
However, we believe we remain very well positioned from both a capital and an operational perspective for the expected Oneida financial integration in the third quarter of this year.
I will now turn it back over to Nicole to open the line for any questions.
Sure.
Origination volume was lower, and pay down volume was higher.
That, I guess, was experienced across all of the portfolios.
It was more acute in the auto lending portfolio, which has cash run off of about $30 million a month.
So because of the short duration in that portfolio and the growth last year in the second and third quarters, in particular, in that portfolio, we experienced higher level of cash flows in the quarter.
So a large part of the fourth-quarter or first-quarter performance was just seasonal expected cash flows out of the indirect portfolio.
The commercial portfolio was down a bit also ---+ a bit more than we had historically experienced.
I think, frankly, it was just ---+ it was seasonally related, just the more acute in terms of the first quarter and just general economic activity in the first quarter more broadly, and that played out in commercial as well.
Mortgage lending, the application volume in the first quarter of this year was actually higher than the application volume in the first quarter of last year.
So I think we are in pretty good shape, particularly heading into the more seasonally active homebuying season here in our market.
So I hope that gives you the color you were looking for, Alex.
I would say both of those things are probably true.
I think it was a more seasonally difficult quarter than it has been in the past.
But, again, if we look at our pipeline, right now, at the end of the first quarter, if you look at the commercial pipeline at the end of the first quarter, compared to the commercial pipeline at the end of the prior year's quarter, it is actually 20% higher.
So I think we think that we are in very good shape.
In fact, as I said in my prepared commentary, we have already earned back in the first three weeks of the second quarter a third of the loan decline we experienced in the first quarter, and leading the charge there has been commercial.
So I think we are starting to fund that higher pipeline, and I believe you're going to see that play itself out similarly over the second and third quarters.
Sure, Alex.
What I am probably focused on there is the ---+ what we end up with other for us, essentially, are things that are not occupancy related.
So they tend to be things like business development-related outcomes, technology-related expenses.
And what we have found is that activity levels on the revenue production side of our income statements go down, so goes down some of our operating expenses.
So we have got some linear outcomes, things like IT processing, transactional processing, and a handful of our IT environments that actually move down or move in sync with the revenue generation.
We always tend to be a little bit more modest relative to our business developments and marketing spend in the first quarter than we are for the balance of the year, and I think that is really just ---+ we know from an access standpoint of our customer base across our geography, some of our great marketing initiatives just don't take hold with people when their activity levels are so modest in that first quarter.
Nothing else beyond that, Alex, really stands out and really steps up, but it is ---+ and, I think, in <UNK>'s comments, similar to this.
The activity levels that you saw from a standpoint are very modest revenue increases.
You also had some activity levels in our own utilization of people and technology that were lower in the first quarter.
Sure.
I think, as you know, we've got the business we have been in for a long time.
It has got a number of components to it.
The run rate on that business right now is probably $45 million to $50 million.
The margins are also very productive at over 25%.
So it is a very attractive business for us.
We have continued to invest in that business in a lot of different ways over a number of years.
Some of it has been organic investment in technology because there is a significant element to that business that is technology oriented.
It is people in terms of resources, it has been new business ---+ investment in new business lines, new revenue lines, some of which have grown really nicely and blossomed into their own business units and some of which have not.
So some of it has been almost like venture capital support, if you will, for those businesses, and some of it has been acquisition over the years.
Acquiring resources.
A lot of times it is expertise.
It gets acquired, and occasionally it is just purely revenue.
So strategically, those businesses continue to be very important for us.
They have grown I would say in a relatively linear fashion over time in terms of just consistent and continual growth.
Some periods are greater than others in terms of the revenue growth.
The business continues to grow.
So at the current run rate, grown that business, let's say, 5% to 10% a year, is somewhere ---+ is $3 million to $5 million increase in revenue.
So it does get a little harder over time, just by virtue of the numbers to grow at what we saw.
There were years where that business grew organically double-digits, and that would be very difficult now, I think, to do given the scale and breadth of the business, which is okay.
Because we have got a better model and better fixed costs in that business that allow us to create more net margin with incremental increases in revenue.
So I think we really like the business model right now.
We like the mix of businesses.
We like the growth characteristics and opportunities in all the businesses underlying the benefits administration, more broadly, which does consist of a number of different business lines.
So we will continue to invest in that business.
I expect that it will continue to grow.
I think we really like to get to the second part of your question, <UNK>, what Oneida brings to that set of businesses.
It is one of the more attractive elements of the Oneida transaction.
They have got a nonbanking ---+ set of nonbanking businesses including insurance, benefits administration and wealth management.
It is about 60%-plus of its revenue mix.
So very different for a bank that size.
They have been very successful in growing their nonbanking revenue lines.
We think that they are going to integrate really well with ours because there is a lot of similarities, and there is also a lot of complementary kind of revenue streams where they are doing something that we don't really do that is complementary to something else we do and vice versa.
So there is a lot of opportunity in those businesses to integrate with what we have already got right now.
Our margins in those businesses are higher, which they should be because we have larger businesses with the exception of insurance, <UNK>, a significant insurance business relative to ours.
So we think we are going to be able to combine all those businesses in a way that is going to be very efficient from an operating perspective, as well as the ability to cross-pollinate our skill sets in a way where we will be able to sell through to a greater degree across our collective client bases.
As I said, there is things that they do well that we don't, and things that we do well that they don't do.
So I think the ability to kind of get in front of the client with a more full suite of capabilities, really across the benefits in wealth management and insurance lines, is going to be very productive for everyone.
So we will continue invest in that business.
We're going to continue to have opportunities.
I think we are going to continue to see it grow.
I expect the margins will continue to be very strong, and I expect that the Oneida transaction will be highly complementary in many ways and give us the opportunity to further grow that business just by virtue of greater scale and some of the cross pollination of revenue lines.
<UNK>, it is a combination.
It is not a one office setting in terms of the nonbanking businesses that Oneida has.
They have some concentration in Oneida, Madison and (inaudible) County, so central New York.
Where, as <UNK> pointed out, they are probably deeper relative to the lines of service they are providing at their existing customer base than maybe certain of the activities that we actually do today.
In terms of building that out, I think, to <UNK>'s point, the complementary services to existing clients, is being wider and deeper for new customers, and it is being able to say, I have got a full-service solution and being able to say that across employee benefits administration, insurance characteristics, as well as wealth management.
So I think knowing that some of the demographic areas that we are in, deeper and more astute consultative advice, sells in our marketplace, and we think we will be able to exploit that.
I also think in terms of the buildouts of that customer base, it is not all residing in central New York.
Oneida has a downstate presence relative to insurance outcomes that is very productive and, again, that is more of a producer-based activity.
We would love to think that we could grow that organically over time by adding production resources, and we will continue to look for that.
And, not unexpectedly, after we announced the Oneida transaction, my phone is ringing relative to other insurance enterprises.
So if that is productive on a longer-term basis, we will continue to look at that.
The entire portfolio has effective duration of just about five years.
The treasury portion of that is a little bit over six years.
The unrealized gain across the whole portfolio is about $106 million at the end of the quarter, which is probably, again, close to where it is today.
The treasury portion of that is about $69 million.
<UNK>, I think, if opportunities present themselves to shorten the duration a little bit, that is what certainly we would look at.
In the first quarter, we added $150 million of treasuries at about the seven-year point, which arguably didn't shorten the duration, but we like the mix characteristics.
I think we were a buyer at about a [205] rate where, if you asked that same question today, I think you get a number about [50] below that.
The other thing we didn't get to think about is that Oneida brings about $300 million of investment securities, principally mortgage-backed securities and municipals, and so we will be doing some repositioning of some of that portfolio.
One could argue that that $150 million in the first quarter was partially an early repositioning of some of the stuff they hold, as well as some of our own existing cash flows.
If the market presents that same opportunity in the second quarter, you may see us do it again.
Just because, again, from a positioning standpoint, we get to look at a little bit larger portfolio now and say, what do we want the characteristics of that to look like, both from a duration and a quality perspective.
So there could be some moving parts on that until the closing.
Well, I think, first and foremost for us, <UNK>, it is the continuing challenge of putting investments ---+ putting loans on the books instead of investment securities.
Again, a long-term challenge for us, just given some of the demographics that we are in and because historically we have been deposit buyers more often than not from a branch perspective.
So that is first and foremost.
I think other than that, <UNK>, we have had a long-term approach that does not take credit risk in our investment portfolio, and I don't see that changing in a big way, certainly over the course of the next year.
To your point, because I think we disclosed some of these things, we expect that there will be rate changes ---+ rate increases on the short end of the curve later this year and then in some kind of methodical way up as you go into 2016.
We do think the yield curve gets back to historical levels of shape.
It is still a little bit higher than its historical levels today.
So we are cognizant of that.
And what we are also cognizant of is we enjoyed this funding profile that we think is better than most.
So we can have a little bit more duration on the asset side and feel ---+ still feel very comfortable with our balancing.
That is unlikely to change in the next year.
And so we certainly are not seeing signs that long-term rates look like they are headed for steepening over the course of the next year.
So that is kind of the basis we are operating under.
<UNK>, I would say, we are trying not to lengthen it, but I would also say that the prognostication of where that goes in terms of what we have seen for long-term rates over the last five versus the next five is we don't try to bet in either direction.
We try to balance within a certain level of interest rate sensitivity, and that is the regulatory obligation that we have to do.
And, again, I think over the last four or five years, we have proven that we are pretty adept at that.
Gee, <UNK>, I think we ---+
I think we modeled $12 million.
Yes.
We did.
I think we modeled $12 million in total.
Yes.
And I don't think we think that that is going to be radically off, <UNK>, but we will have that more centered over the course of the next four weeks than we had over the last four weeks.
But I have $12 million in my model as well.
Actually, that is a good point.
We certainly are a net gatherer of deposits on the municipal front in the first quarter of the year and then a little bit again in the third quarter of the year.
<UNK>, that was a little bit stronger than historical on the municipal side, but there is some movement underway that would suggest some of the bigger banks are moving from that municipal line of business.
But, that being said, we usually actually in the first quarter have a decline in sort of core non-municipal balances, and we actually did experience that in the first quarter.
So I think it was good across the board from a depository funding standpoint.
And, in fairness, lots of these municipal relationships that we have either broadened or deepened actually feel like they will be sticky for quite a period of time.
You might see a little bit of that, but, remember, with us, <UNK>, the deposits ---+ the municipal funding for us is 10% or 11% or 12% of the total mix, not 25% or 30%.
So a little less data, maybe, than some of our peers or some of our smaller peers that are in market.
The other thing I would also say is that we can say this on a personal level, but we are firm believers in that some of that core accounts went from my checking account to the government's checking account in the first quarter and don't expect that it is quite as profound in the second and third.
Thanks for that.
They were not.
So they were across the quarter.
There were a handful at the tail end of January and into early February and then again more like the middle of March to the end of March, so to your point.
But, at the end of the day, we acquired enough shares to essentially stay even from a total outstanding share standpoint from where we were at the end of the year, which would suggest that we did some housekeeping relative to covering equity plan issuances, stock option exercises, and restricted stock vesting.
That was the objective, and we thought we would sort of telegraph that, and we are happy to have completed that in the first quarter because we really hadn't been doing that over the last couple of years.
It is almost entirely fixed.
(multiple speakers).
The ARM activity would be immaterial.
I don't know that it was bigger than other quarters, was it.
I think it was about consistent, I thought.
I would think that, given the seasonality of where we are headed and the fact the application volume has been up, without looking at the numbers in detail, there is some likelihood that the number could get bigger into the next two quarters than it was in the first quarter.
For us, that line where mortgage banking is buried so we had like $1.1 million in quarterly revenue, which has been pretty consistent in that whole line.
But just the mortgage banking side of that is only about half of that number.
Then, the all other everything is the other half.
Yes.
I think that is about where we are thinking.
I think the first-quarter decline was bigger than we expected, and the pipelines are also bigger than we expected.
So hopefully, the two of them will wash each other out, and we will get back to where we hope and expect to be, which is 3% all-in.
Agreed.
I think one of the things you get from the fourth quarter to the first quarter ---+ and this is pretty granular ---+ is that some of the effective tax rate changes that we went through, especially with New York State, deep into this earnings release, there is a line for fully tax equivalent yield adjustments, and that is down quite a bit from the fourth quarter.
And so, really, the end of the year was sort of a bright line for that.
So certain of the activities that we were doing relative to tax planning sort of came through a natural life end at the end of December.
So you will see a much lower number there, which pulls through on the NIM side.
One could argue, you don't necessarily pay for it in net interest income, but you pay for it on the tax line.
But, to get back to your question, I would say to 2 to 3 to 4 basis points a quarter is well within our expectations in terms of straight core margin decline, and some of that gets offset in the quarters where we pick up the Federal Reserve Bank dividend.
So sort of balancing that back to a 2 or 3 type expectation, probably safe to model that way.
If you look at the portfolio yield, specifically, I mean, what seems to be the trend, the commercial yield on the commercial TRE continues to decline.
A lot of that competitively oriented ---+ market oriented.
On the consumer side ---+ and I would put in consumer, mortgage, home equity, indirect lending, and direct lending through the branch ---+ it feels like it is pretty much bottomed out or very close to it.
So I think we are going to see continued downward pressure on commercial and CRE and pretty much stable to maybe very slightly declining yields on the consumer side ---+ the other lines.
As it relates to the deposit funding costs, as you can see, they have pretty much gotten as low as they are going to be.
I think they were 17 basis points last quarter.
That funding cost isn't going to go much lower than that.
So that is kind of the underlying dynamics as it relates to the margin.
Sure.
It is almost exactly $70 million.
The majority of that is pipeline related.
To a much lesser degree, it is drilling related, which is mostly stone and gravel and water.
We also have a couple of hotels ---+ lodging that we have kind of put underneath the gas portfolio just because of where it is at in the revenue support for that, which is principally gas related.
So that is kind of the mix of the $70 million.
The weighted average risk rating of that portfolio is almost exactly what the risk rating is for the entire commercial portfolio as a whole.
So that is good.
We continue to monitor all the credits in that portfolio as a group that meets quarterly to review the performance of that portfolio and the underlying financial metrics.
In terms of broader based activity in the gas markets, there has been a slowdown in drilling activity, but no slowdown whatsoever in the pipeline part of the business, which is one of the issues, which is, there is a tremendous amount of supply, but there is an insufficient infrastructure around transmission, which is needed to free up the supply.
So given the majority of our $70 million portfolio is related to pipeline, that continues to proceed and, in fact, grow in some cases in terms of the activity.
So we monitor that portfolio regularly, and it is continuing to perform sufficiently well for us at this point, consistent with the rest of the commercial portfolio as a whole.
Very good.
Thank you, Nicole.
Thanks to everyone for joining us here today, and we will talk again next quarter.
Thank you.
