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Edited Transcript of CBU earnings conference call or presentation 21-Oct-19 3:00pm GMT

Q3 2019 Community Bank System Inc Earnings Call

DE WITT Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Community Bank System Inc earnings conference call or presentation Monday, October 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph E. Sutaris

Community Bank System, Inc. - Executive VP, CFO & Treasurer

* Mark E. Tryniski

Community Bank System, Inc. - President, CEO & Director

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Conference Call Participants

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* Alexander Roberts Huxley Twerdahl

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Erik Edward Zwick

Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the Community Bank System Third Quarter 2019 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates.

Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual reports and Form 10-K filed with the Securities and Exchange Commission. Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer.

Gentlemen, you may begin. Thank you.

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [2]

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Thank you, Angel. Good morning, everyone, and thank you all for joining our third quarter call this morning. We had a busy and very productive quarter, with strong earnings, solid organic growth, the closing of the Kinderhook transaction in July and the announcement this morning of our acquisition of Steuben Trust Corporation.

Operating earnings were up 4% over last year's quarter and 5% over the second quarter. Organic loan growth was strong for both the commercial and mortgage businesses, and organic deposit growth and nonpublic funds was also very good. We closed the Kinderhook transaction in July, as I commented on last quarter's call, and that integration and subsequent operational performance could not be going better. We have a strong leadership team there on both the commercial and retail side and like the opportunities we see in the Albany market going forward.

As we announced this morning, we're thrilled to be partnering with Steuben Trust Corporation, a $570 million asset bank in Western New York. This is a high-value, lower-risk transaction of a solid-performing in-market institution. We have considerable close proximity branch overlap, and so also have consolidation opportunities that we have not incorporated into our model. We expect to close in the second quarter of 2020, and expect full year accretion, excluding cost saves, to approximate $0.08 to $0.09 per share.

Overall, it was a solid quarter, and we're having a strong year, particularly in light of the fact that the full year 2019 Durbin hit was a $7 million headwind compared to 2018. Our performance momentum is very good heading into Q4. And looking forward, both the Kinderhook and Steuben transactions should be nicely additive to 2020.

Joe?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [3]

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Thank you, Mark, and good morning, everyone. As Mark noted, the third quarter was a very active and productive quarter for the company. We closed on the Kinderhook transaction early in the quarter, increased our dividend $0.03 per share, redeemed $22.7 million of trust preferred securities, navigated 2 interest rate cuts by the Fed, entered into a definitive agreement to acquire Steuben Trust Corporation, and produced a year-over-year improvement in quarterly operating earnings of $0.03 per share.

Before I review the third quarter earnings results in more detail, I'd like to touch on the other activities. On July 12th, we closed on the -- our acquisition of the Kinderhook Bank Corp. As a reminder, we acquired Kinderhook in an all-cash transaction for $93.4 million. In connection with the transaction, we acquired 47 -- excuse me -- $479.9 million in loans and $568.1 million in total deposits. These amounts were in line with our expectations when we announced the transaction in the first quarter.

We are confident that we will meet or modestly exceed our 30% cost savings targets, and expect the Kinderhook transaction will reduce GAAP earnings per share of $0.08 on a full year basis. We remain excited about our opportunities in the Kinderhook markets and the capital region generally.

During the third quarter, the company raised its quarterly dividend from $0.38 per share to $0.41 per share. The $0.03 increase represents approximately 8% increase in the quarterly dividend rate and increased the company's streak of raising its dividend to 27 consecutive years. We are proud of this achievement, and believe the company's business model, earnings results and strong capital resources not only support this increase, but also allow us to maintain significant flexibility for future growth opportunities.

During the third quarter, we redeemed $22.7 million of trust preferred securities with a weighted average rate of 4.43%. $20.6 million of these trusts were acquired in connection with the company's 2017 acquisition of Merchants Bancshares, Inc., and $2.1 million were acquired at the Kinderhook transaction.

Now I'd like to briefly account on the operating and deal metrics regarding Steuben. As noted in this morning's press release, Steuben Trust is a 15-branch franchise operating in a 6-county region in Western New York. Community Bank currently serves 4 of these counties within Steuben's current footprint, and the other 2 are contiguous to our markets. The demographics are consistent with much of our current New York State footprint, but also increases our presence in the greater Buffalo and Rochester, New York markets.

At the end of the second quarter, Steuben had total assets of $577 million, including total loans of $347 million and $484 million in total deposits. Steuben's loan portfolio is largely a commercial book with $166 million or 48% of its loan portfolio in commercial real estate, and $62 million or 18% in commercial and industrial, agricultural and farm loans. Steuben also has approximately $98 million or 28% of its total loan portfolio in 1- to 4-family residential real estate loans, including approximately $60 million in home equity loans. Consumer and other loans make up the balance of the loan portfolio of approximately $20 million or 6% of the total loan portfolio. Steuben's trailing 12-month return on average assets was 1.25%. Net interest margin over the same period was 3.68%.

As noted in our press release, shareholders of Steuben Trust Company Corporation will receive, for each share of common stock they own, a combination of $12.60 in cash and 0.8054 shares of Community Bank System, Inc., for a total consideration valued at approximately $63 per share. The purchase multiples for the pending merger are 15.2x the last 12 months earnings and 1.67x stated tangible book value. The operating expense cost savings are estimated at 30%.

The transaction is expected to be $0.08 to $0.09 GAAP accretive on the first full year basis and $0.09 to $0.10 on a cash EPS basis. The transaction is also expected to be tangible book value-accretive. The pro forma consolidated balance sheet is estimated to increase Community Bank's total assets to over $12 billion.

Before I provide additional color on the quarterly earnings, I will provide some commentary on the balance sheet. We closed the third quarter of 2019 with total assets of $11.6 billion. This is up $851.9 million or 7.9% from the end of the second quarter of 2019 due to both the Kinderhook transaction and organic balance sheet growth. Total assets were up $990 million or 9.3% from the end of 2018, and $937.7 million or 7.9% from 1 year earlier.

Average earning assets for the third quarter of 2019 of $9.81 billion were up $379.1 million or 4% when compared to the linked second quarter, and up $473.5 million or 5.1% compared to the third quarter of 2018. Average loan balances in the third quarter of 2019 were up $441 million or 7% compared to linked second quarter of 2019, and up $445.9 million or 7.1% when compared to the third quarter of 2018.

Ending loan balances were also up on a linked quarter comparative basis $569.1 million or 9.1%; $471.7 million attributable to the loans acquired in the Kinderhook transaction; and an additional $97.4 million attributable to organic growth in the company's loan portfolios.

Exclusive of the loans acquired in the Kinderhook transaction, outstanding balances in all the company's loan portfolio segments increased during the quarter. More specifically, the business lending portfolio increased $56.4 million or 2.4% during the quarter, while consumer mortgage balances were up $29.4 million or 1.3% and the consumer indirect and direct portfolios were up $10.8 million or 0.9%. Loan balances outstanding on the home equity portfolio also increased slightly in the quarter.

Average total deposits were up $506.6 million or 6% from the same quarter last year and up $423.5 million or 5% on a linked quarter basis. Total deposits at the end of the third quarter were $9.17 billion, up $704.5 million or 8.3% from the year prior, and up $680.1 million or 8% on a linked quarter basis. Although $571.9 million of growth in the linked quarter is attributable to the Kinderhook transaction, the remaining increase of $108.2 million is attributable to organic growth and deposit balances.

68% of the company's total deposit balances at the end of the quarter were comprised of checking and savings accounts. At September 30, the company's investment portfolio stood at $2.48 billion. This was up $79.5 million or 3.3% from the end of the linked second quarter. During the third quarter, the company increased its holdings of municipal securities, agency securities, mortgage-backed securities and other investments.

At the end of the third quarter, the company's cash equivalents stood at $781.7 million. The tax-equivalent net yield on investment securities and cash equivalents during the third quarter was 2.52%. This compares to 2.54%, one year prior, to 2.58% in the linked second quarter, exclusive of the Federal Reserve Bank dividend. The effective duration of the investment securities portfolio was 2.5 years at September 30, 2019.

Shareholders' equity was up $172.1 million or 10.3% from one year prior, due primarily to an $86.9 million increase in retained earnings and a $64.6 million increase in accumulated other comprehensive income, which included a $74.2 million increase in after-tax market value adjustment on the company's available-for-sale investment portfolio.

The company's Tier 1 leverage ratio was 10.76% at the end of the third quarter, over 2x the well-capitalized regulatory standard. Tangible equity to net tangible assets ended the quarter at a solid 9.68%. This is down from 10.56% at the end of the second quarter due largely to the impact of the Kinderhook transaction, but up 55 basis points from 9.13%, one year prior.

The company recorded GAAP net income of $39.2 million and fully diluted earnings per share of $0.75 during the third quarter of 2019. This compares to net income of $43.1 million and $0.83 in GAAP earnings per share for the third quarter of 2018. During the third quarter of 2019, the company incurred $0.09 of acquisition-related expenses, net of tax effect, due to the Kinderhook transaction. By comparison, during the third quarter of 2018, the company reported $0.02 of incremental earnings per share associated with the acquisition-related recovery.

Operating diluted earnings per share, which exclude acquisition expenses, realized gains on the sale of investment securities, unrealized losses on equity securities and loss on debt extinguishment, were $0.84 in the third quarter of 2019. This compares to operating diluted earnings per share of $0.81 in the third quarter of 2018. The $0.03 or 3.7% increase in operating diluted earnings per share between comparable periods was driven by an increase in net interest income, an increase in noninterest revenues and a decrease in the provision for loan losses, but was offset in part by higher operating expenses and an increase in fully diluted shares outstanding.

Total revenues for the third quarter of $148.4 million were up $6.4 million or 4.5% over the third quarter of 2018. This included a $5.1 million or 5.9% increase in net interest income and a $1.3 million or 2.3% increase in noninterest revenues.

The increase in net interest income was driven by an increase in earning assets, largely due to the Kinderhook acquisition, and a 2 basis point increase in the net interest margin from 3.71% in the third quarter of 2018 to 3.73% in the third quarter of 2019. The increase in noninterest revenues was driven by an increase in all 3 of the company's nonbanking fee businesses: employee benefit services, wealth management and insurance.

Exclusive of $4.9 million of realized gains on the sale of securities recorded during the second quarter, total revenues increased $4.2 million or 2.9% on a linked quarter basis, $3 million attributable to an increase in net interest income, and $1.2 million attributable to an increase in noninterest revenues.

The company's net interest margin was down 7 basis points as compared to the linked second quarter, which included a $0.9 million Federal Reserve semiannual dividend payment, or the equivalent of 4 basis points of net interest margin. All other factors, including the addition of the Kinderhook earning assets and liabilities, organic loan growth during the quarter, changes in the company's funding mix and the two 25-basis-point decreases in the prime lending rate between the periods, resulted in a 3 basis point decrease in net interest margin on a linked quarter basis.

The company's total cost of funds -- excuse me, total cost of deposits remained well below peer industry averages for the third quarter at 26 basis points, reflective of the company's very solid base of core deposits.

Noninterest revenues in our financial services businesses, including employee benefit services, insurance services and wealth management services, were up $1.5 million or 4% between comparable annual quarters. Banking noninterest revenues were up $0.2 million or 1.1% over the prior year and $0.7 million or 4.2% on a linked quarter basis.

Noninterest revenues contributed 38.6% of the company's total operating revenues during the third quarter similar to the first 2 quarters of 2019 and full year 2018 results.

Total operating expenses, excluding $6.1 million of acquisition-related expenses, were up $4.8 million or 5.6% on an annual quarter comparative basis. This increase included a $5 million or 9.8% increase in salaries and employee benefits, and a $0.3 million, less than 1% increase -- net increase in all other expenses, partially offset by a $0.5 million decrease in the amortization of intangible assets.

On a linked quarter basis, total operating expenses, excluding acquisition-related expenses, were up $0.9 million or 1%. During the third quarter, the FDIC awarded the company a $0.7 million assessment credit for its proportional share of excess deposit insured fund reserves. In addition, the company's marketing and business development expenses decreased $0.5 million on a linked quarter basis.

We reported $1.8 million in the provision for loan losses during the third quarter of 2019. This compares to $2.2 million reported in provision for loan losses in the third quarter of 2018, a $0.4 million decrease between comparable periods.

The effective income tax rate for the third quarter of 2019 was 21.1%, up from 21% in the third quarter of 2018. The company reported greater amounts of income tax benefits related to stock-based compensation activity in the third quarter of 2018 as compared to the third quarter of 2019. Exclusive of stock-based compensation and tax benefits, the company's effective tax rate was 21.5% in the third quarter of 2019.

Our asset quality remains strong. At the end of the third quarter of 2019, nonperforming loans, comprised of both legacy and acquired loans, totaled $28.7 million or 0.42% of total loans. We recorded net charge-offs of $1.6 million or 10 basis points annualized on the loan portfolio during the third quarter of 2019. This compares to net charge-offs of $1.7 million or 11 basis points during the third quarter of 2018. At the end of the quarter, the company's total OREO properties were less than $2 million, and the internal loan risk rate portends stable asset quality.

In summary, we believe the company remains very well positioned for the future. The company's strong asset quality, capital reserves, liquidity, core funding base and strong nonbanking business revenues provide a solid foundation for continued growth and dividend capacity. The company's current market valuation also provides an excellent currency for potential future mergers and acquisitions. We look forward to moving forward with the Steuben team on integration efforts over the coming months as well as increasing our service capacity in our Western New York markets. Thank you.

I will now turn it back to Angel to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Alex Twerdahl of Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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First off, congrats on landing another acquisition. Just curious, how long does it take you guys to do the due diligence process on a bank the size of Steuben kind of from start to deal announcement?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [3]

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I would say, Alex, it depends on the institution and how readily they can gather materials up. In this case, they were very efficient. And so the due diligence period was fairly nominal, but they could certainly extend for a greater period of time depending on the capacity of the counterparty to provide information.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Okay. Just trying to figure out the cadence of these deals, what it's going to be in the future years. Talking about sort of specific organic trends, you had some loan growth for the first time -- or some better loan growth, I should say, and the best in a number of quarters. This quarter, I know, is helped a little bit by seasonality in the municipal business.

But was growth more a function of the lack of payoffs that you've been seeing in the -- in past quarters? I think the pipeline kind of translated into some better growth this quarter than what we've been seeing. Or is it a contribution from Kinderhook? Or is there something else that we should be thinking about up there?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [5]

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Yes. I think, Alex, in the third quarter, we had pretty good performance from Vermont. We had good performance in the Capital District of Albany. And also the southern region of New York was very good. So Syracuse, Rochester, Western New York, Finger Lakes was also very good.

If you look at it year-over-year, PA has been very good, and likewise, kind of the southern and western parts of New York, and the Capital District again has been very good year-over-year. So it really depends, and it can kind of change quarter-to-quarter.

With respect to early payoffs, I think we did get fewer this quarter, which was good. I think just the number and the size was a little bit less this quarter which was good. So I think we -- if you look over the last several years, we have substantially improved our organic generation capabilities, and some of that is a function of as it got a little bit larger, we've gotten greater expertise in certain elements of credit.

We have the capacity by virtue of our credit discipline and our ability to kind of understand larger credits to do slightly larger credits and manage effectively larger relationships and syndication kind of club deals with others. So I think all those things have played into that. But we clearly have improved our organic loan generation ability over the last couple of years.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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Okay. And the pipeline going into the fourth quarter and early 2020 is still healthy?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [7]

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It's still really good, yes. So we would expect to see continued decent performance going into the fourth quarter.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [8]

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Good. And then just switching gears, just to touch on the margin here. Even with the acquisitions and the Fed dividend, et cetera, it bounced around a little bit. But over the last couple of years, your margin's been pretty steady, kind of 3.65 to 3.80.

In the -- with the face of now 2 Fed cuts, another 1 potentially next week, and maybe another 1 this year, is -- I mean, do you have enough tools? Because on the way up, obviously, the deposits were a huge benefit. On the way down, they're not going to be as much of a benefit. Are there enough tools with the short-term nature of your securities portfolio and kind of as stuff comes due and the reinvestment rates, et cetera, to keep the margin within that range over the foreseeable future?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [9]

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Yes. So Alex, I think we've kind of given general expectations around 3.70. Last quarter, we came in a little higher. This quarter, loan yields held up fairly well. In the quarter, I think we're down on a net basis, 1 -- down 1 basis points net quarter-over-quarter, and that was against the headwinds of the decreases that the FOMC put through.

Just to kind of give you some color, we have about $1 billion in loans that are subject to repricing either linked to prime, or to a lesser extent, LIBOR. So when we get a decrease from the FOMC in prime rate, there's the impact.

The other side of that equation is we have $9 billion in deposits. And so we have the ability, in some instances, to contain those costs and potentially reduce some of the higher cost deposits in that mix. If you recall, prior to the cycle that started in late 2015, and for that matter, a portion of that cycle, our cost of funds was 10 basis points. We're sitting at 26 today, so I think there's still some opportunity to decrease some of our costs. We also paid off the TruPS this quarter, so that's going to help a little bit. So I think there's a couple of tools left.

The other thing I would note is that we do have a substantial residential mortgage portfolio. And even though we do have some borrowers "in the money" relative to secondary market rates, the nonconforming nature of our portfolio tends to slow prepayment activity relative to the rest of the market. So that portfolio holds up pretty well even when market rates come down.

And we did book this quarter, as we booked new loans, we booked those at about kind of par with our existing book yield. So as the new loans went on, they went on pretty much close to our -- very close to our book yields this quarter. If you recall, on prior quarters, it was a little bit higher. But all-in, we've kind of maintained the new loan yields at levels very similar to our book yields.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [10]

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Okay. That's pretty helpful. And just to kind of hone in on the deposit piece of it, the 26 basis points, obviously, not a ton of room to go down. Following up on your thoughts that maybe they will go down, I mean, do you think they can go down in the fourth quarter after 2, potentially, 3 cuts this year? Or is there still going to be a little bit of a lag and maybe some costs actually moving higher into the end of the year?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [11]

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Good question, Alex. My expectation is that they'd be similar in the fourth quarter as compared to the third. But if rates stay down on the short end, and for that matter, kind of in the mid-part of the range, I would expect that over time, they will start to drift down in 2020.

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Operator [12]

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(Operator Instructions) We'll now take our next question from Russell Gunther of Davidson.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [13]

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Wanted to follow up on the expense outlook here, which I believe you said that you'd expect the cost saves from Kinderhook to meet, potentially exceed. Just curious if you could give us a sense for what's sort of in the run rate already from those related cost saves and how that should trend going forward.

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [14]

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Yes. Russell, we realized the majority, I'll say, of the run rate cost saves in the third quarter. They're generally baked in at this point. We potentially have some other modest cost savings in the fourth quarter, but it's a little too early to kind of call it on a full year basis, so we're kind of holding our general guidance at around 30% and $0.08 a share in earnings per share accretion. But in effect, we've realized our operating expense savings on Kinderhook.

And on an all-in basis, we actually came in this quarter, I think, even slightly above our -- or better than our expectations around all-in operating expenses. Obviously, the FDIC insurance premium refund or credit actually helped us a little bit. We also consciously drove down some other operating expenses. We also had a little lesser net results in some of our property-related write-downs and those types of expenses during the quarter. So our 90 -- less than $90 million -- about $91.5 million, including the FDIC expenses, is sort of ahead of our expectations. I think 93 is a more general sense of the fourth quarter. And beyond that, we start to get back to inflationary trends.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [15]

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Got it. Okay. Very helpful. And then on the revenue side of things, just an update, if you could, in terms of the outlook within your employee benefit services.

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [16]

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Well, I would say we expect it to continue to grow, as it has for 15 years. I think one of the challenges, just as that business gets bigger, growing at the same rate gets more difficult. But we've had pretty solid and steady growth in that business now that the run rate and revenue's almost at $100 million.

And so I think that business will continue to grow. It might grow at a slightly smaller percentage basis. I'm not sure it's going to grow at a smaller dollar volume basis, which is helpful because there's a certain amount of fixed cost there that's not inconsiderable, so you can expand the margin. The margin on that business is actually much higher than it was 10 years ago; and 10 years ago, it was pretty good.

So I think also we have some other new revenue line opportunities in that business that we will continue to explore. So -- and some of them are -- have reasonably significant potential growth. So there's certain capabilities we have in that business that we think we can continue to evolve and develop and put into the market that will be helpful. So I think those businesses will continue to grow, Russell. I think probably at a smaller percentage pace. But I would expect not necessarily the smaller dollar base.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [17]

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Got it. I appreciate that, Mark, very helpful. I guess just as a follow-up, the potential new revenue lines within that vertical, is that something that would necessitate acquisitions, related acquisitions? Or can be done kind of organically?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [18]

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I think it could. I think we would probably not look at paying a lot for something. That space right now, the private equity firms are playing in that space in a very meaningful way and have essentially bid up prices in that space to a point where it makes a lot less sense for a strategic buyer than it does a financial buyer.

But we have tremendous operational capacity in that business. And we have the ability to develop solutions based on our existing platforms to leverage additional service capacity into the market. So it could be. I mean, we've looked at, I'll call them, smaller acquisitions that already kind of have a developed platform that we could leverage better. We've also had conversations about existing opportunities that we can build out our current platform to serve. Some of these opportunities are fairly significant, I would say. So I think we have some pretty good runway still left in that business going forward.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [19]

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I appreciate your thoughts there, Mark. Last one for me, guys. You disclosed the impact of seasonal as it relates to the mark in this deal. Just curious, any preliminary thoughts you could share? Or just an update on timing for when we might get a look at the full disclosure as impacts the pro forma balance sheet?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [20]

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Russell, good question. We are working on additional disclosures for this quarter's Q. So we're going to expand our disclosure. Our model is built. We've kind of run it through our -- on a parallel basis, for a couple of quarters now. We had our validation completed, and we'll be making some additional disclosures in the Q, as I said.

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Operator [21]

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We'll take our next question from Collyn Gilbert of KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [22]

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Just a few housekeeping questions. I'm sorry, I missed it. What did you say, Joe, the impact was of the FDIC savings this quarter?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [23]

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About $700,000, to the good.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [24]

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Okay. And will that -- would you start -- have you absorbed all your credits as it relates to that so that then costs will be -- start to be incurred in the fourth quarter again? Or how will that play through?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [25]

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Yes. There's additional credits potentially available depending on how the fund performs. So if the fund performs above its target benchmark for reserves, we would expect that sort of impact to occur for another 2 quarters. And we would likely exhaust the credit after a couple more quarters.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [26]

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Okay. Okay. All right, that's helpful. And then just on the deposit growth side, I know you had indicated overall what the impact was from Kinderhook. But you guys saw some really good noninterest-bearing deposit growth this quarter. So just trying to understand the movement within some of those segments.

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [27]

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Yes, I think it was small. You typically get variations in the public funding, and we have, give or take, $1 billion or so in public funds, and that can change quarter-to-quarter by a couple hundred million dollars or so. So we like to look at kind of public funding separately from the nonpublic. We continue, over the course of the past year, to have very good growth in kind of the core checking, savings, money market, nonpublic funds. It never moves dramatically, but it's kind of a slow and continual cadence of low single-digit growth in that core deposit base. As Joe said, about 68% of our deposits right now are in checking and savings accounts that have actually very long lives in our market.

So nothing tremendous, Collyn, as I say. I don't think our shareholders want us growing our deposits 10% because we're not in those markets, and that means we paid up to acquire them. So we try to do it the old-fashioned way in our markets. But we just have a continued cadence of growth in the core deposit part of the deposit base, which obviously is very good.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [28]

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Okay. Okay. That's helpful. And then just another housekeeping item. It looks like you guys have folded in the mortgage banking line into deposit services -- on deposit services -- deposit service charges. What -- just curious as a breakout there, and if you know why that is. Is it just because you're going to deemphasize that line going forward?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [29]

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Good question. I think just in totality, we thought it was just easy to put those 2 line items together because we don't have a substantial mortgage banking business in the sense that we don't sell a significant part of our portfolio to the secondary market. It's just not a line of business that we actively have been in. And originating and selling mortgages, we've portfolio-ed the lion's share of our mortgages over the years.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [30]

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Okay. So not a big variance we should assume in this quarter's line versus what you've done historically? It's just you folded it in?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [31]

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Yes. It's down a little bit on the mortgage banking side, but not all that significant to the total revenues of the company, for sure.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [32]

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Okay. Okay. And then just 2 sort of a little bit more big picture questions. Just as it relates to the margin, as we look out into 2020 and assume we sort of stay in this low rate environment, what -- is there a point where you feel like the margin can kind of bottom? Or how do you sort of see it broadly playing out as we look into 2020? With assuming that the last Fed cut comes in the first quarter of 2020, sorry.

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [33]

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Yes. I mean, if we have 2 more Fed cuts, it will likely negatively impact the margin in 2020. As I think was pointed out earlier in the call, even in the post-crisis era, we tended to keep our margin kind of in that 3.60 range, low 3.60s to mid-3.60s. Expectations would be that we would probably maintain it in the 3.60s level, at least through most of 2020. Obviously, if the yield curve stays flat to inverted and low for a very long period of time, that will become more difficult to sustain in years beyond 2020.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [34]

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Okay. Okay. That's helpful. And then just on the M&A front, with Steuben and further opportunities, do you see more deals or the supply of potential deals increasing similar to a profile that Steuben has? Or how do you sort of see M&A playing out for you guys?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [35]

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Yes. I think we will have -- I think there's a pretty long runway of opportunities for us into the future. And we try to be very disciplined about the partners that we participate with. Steuben is a good example. It might not be as big as other things we could do, but if you look at -- it's a very high-performing institution for its size. I mean, the ROA is over 120. The efficiency ratio is 60. The asset quality is clean. They have a nice trust department. So it's in our footprint. We have some branch overlap. It's just -- it's a very good profile of the kind of partner that we are interested in.

So I think there's a number of those across our footprint. I would just kind of repeat, historically, our acquisition strategy has been to be disciplined, do high-value, lower-risk kind of things where the risk return profile is asymmetric. And Steuben, as did Kinderhook, clearly fit that profile.

If you look at it, we are now in New York, Pennsylvania, Vermont, Massachusetts. And that's a fairly big geographic footprint for us to continue to identify and work with others on opportunities. And also, we would look to kind of contiguous markets as well. So -- or you can't go very far north and east of where we are, we can move a little bit south and west. And so we've had conversations with institutions in adjacent markets that are south and west of us as well, and I suspect that will continue.

It's important for us, the organic execution is important for us. I think historically, we relied too much on M&A for the earnings growth that we were getting. We needed to improve on that. I think we have improved on that. And we'll continue to see the benefits of that greater capacity around organic execution going forward. But I also think that M&A opportunities, these kind of high-value, lower-risk opportunities, if you look at our history over the last 10 or 15 years, a lot of the balance sheet growth has come from M&A. And I think we've been able to be disciplined about it and extract the value for shareholders out of the execution on those -- out of those transactions.

So it's -- as I've always said, it's not about being big. I mean, this has got nothing to do with scale. I'd rather be smaller than bigger. But in a regulated cap -- in an industry with regulated capital, if you want to get operating performance improvement, you have to get a little bit bigger over time. But if you look at our return metrics, have also improved over time.

So I think that's -- that will be the strategy going forward. I think we continue to have lots of opportunities. It doesn't matter whether it's a somewhat larger institution or smaller institution, it has to be something that kind of fits our profile, or we won't do it. So we don't need to take those risks. I think we trade at a above-average multiple in the market for a reason, and I don't think we're going to do something that's undisciplined or chase growth for the sake of growth to put our shareholders at risk in any way. So we'll continue to be disciplined and we'll continue, I suspect, to buy high-value acquisition opportunities going forward.

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Operator [36]

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Our next question comes from the line of Erik Zwick of Boenning and Scattergood.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [37]

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A couple of questions on the Steuben transaction. First, was this a competitive bid situation, or a negotiated transaction?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [38]

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I'm not going to comment at this juncture, Erik. We just announced, so I will -- I guess, there's probably more to be disclosed going forward.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [39]

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Understood. That's fine. And then just wanted to make sure I heard the comments clear. With the 30% targeted cost savings, that does not currently incorporate any targeted branch closures that you may revisit that a later time, did I hear that correctly?

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [40]

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That's right.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [41]

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Okay. And then just looking at their net interest margin. It looks like it's been pretty stable over the past year or so. Given the outlook for potentially a couple more Fed cuts and for the yield curve to stay flat, would you expect any major changes to their margin between now and the targeted deal closing? And I guess the heart of my question, just kind of zero in on the pro forma impact to the pro forma margin of the company.

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [42]

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Yes. Erik, I think it would be -- it's going to be similar to the same headwinds that we're facing and the industry is facing. In other words, my expectations would not be that the margin will head north and go up, but it potentially would drift down a little bit with the FOMC cuts, but nothing really out of alignment with the industry in general.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [43]

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Okay. And then maybe just kind of 1 detailed follow-up on that. It looks like they've got about 20% of their deposits in jumbo time, and just given your strong loan-to-deposit ratios, or if opportunity to let some of those run off and help you withstand the headwinds that we've just discussed?

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Joseph E. Sutaris, Community Bank System, Inc. - Executive VP, CFO & Treasurer [44]

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Yes, I mean, there are some jumbo CDs that are priced at market. And I think as those come up for renewal, we'll have to evaluate the overall relationship and profitability with each of those situations. But historically, we have not paid through the market for deposit funding. I would expect that we're going to maintain our discipline around that going forward. So expectations are that that Jumbo book is probably not going to grow and may drift down a little bit over future quarters.

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Operator [45]

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Gentlemen, there are no further questions at this time. I'd like to hand it back over to you for closing, please.

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [46]

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Very good. Thank you all again for joining our call, and we will talk to you again in January. Thank you.

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Operator [47]

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And this concludes today's call. We thank you for your participation. You may now disconnect your lines, and have a wonderful day, everyone. Take care.

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Mark E. Tryniski, Community Bank System, Inc. - President, CEO & Director [48]

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Thank you.