Q3 2023 Community Bank System Inc Earnings Call

[music].

Right.

Thanks, Bob.

Good day.

Welcome to the community Bank 2023 third quarter earnings Conference call.

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After todays presentation, there will be an opportunity to ask questions. Please.

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I would now like to turn the conference over to the meter cut off or not.

Chief operating officer of community Bank. Please go ahead.

Thank you Melisa and good morning, everybody welcome to our conference call for the third quarter of 2023.

As Mark noted in the press release, the company's revenue performance was strong in the quarter. In fact, our revenue has been quite consistent over the past five quarters, regardless of all the macroeconomic and banking industry noise.

This is a great example of the diversification of our business and to focus on lowering volatility for our investors.

On the flip side this quarter, we had expense pressures that were above our expectations as well some of those are transient some of those are due to the general inflation pressures, which should abate somewhat of a function of the continuous investments in the company over.

Over the past 24 months, we have invested in our organic capabilities across all of our businesses and those investments run through the P&L.

These organic investments are contributing to the growth in our outstanding from the banking business. The revenue performance in our benefits insurance and wealth businesses and position us even better for the future.

Our businesses are strong and healthy supported by a strong balance sheet.

The end of the quarter, our funding and liquidity are up compared to the beginning of the year.

Our cycle to date deposit beta is 13% and our tier one leverage capital has almost doubled the well capitalized standards that is in spite of the thermals and the banking industry. This year with that I will pass it onto Joe.

Thank you <unk> good morning, everyone.

As inventory noted the company's earnings results were down a bit in the third quarter fully diluted GAAP earnings per share were <unk> 82 cents in the quarter, which were eight cents lower than the prior year's third quarter and seven cents lower than the linked second quarter results fully diluted operating earnings per share and non-GAAP measure as defined in the press release, we're also 82 cents in the quarter.

<unk> per share lower than the prior year's third quarter and nine cents per share lower than the linked second quarter results. The <unk> decrease in operating earnings per share on a year over year basis were primarily driven by higher operating expenses. The nine cent decrease in operating earnings per share on a linked quarter basis was driven by a decrease in net interest income and increases in the provision for credit loss.

Losses, and operating expenses offset in part by any fight.

Excuse me an increase in noninterest revenues and a decrease in income taxes.

Selective of our diversified revenue business battled the company's total revenues in the third quarter of $175 $4 million were generally consistent with the prior year's third quarter total revenues of $175 $6 million in the linked second quarter total revenues of $175 $3 million. These results were driven by decreases in net interest income.

The comparable periods due to higher funding costs were largely offset by increases in noninterest revenues.

The company recorded net interest income of $107 $8 million in the third quarter of 2023, this was down $1 $5 million or one 4% on a linked quarter basis, and $2 $6 million or two 4% on a year over year basis. The third quarter result was consistent with our expectations of a sideways outcome for a few quarters.

Funding cost increases outpaced loan portfolio related rate and volume improvements.

Company's total cost of funds in the third quarter of 2023 was 88 basis points as compared to 67 basis points in the linked second quarter. The 21 basis point increase in funding costs in the quarter outpaced a 12 basis point increase in earning asset yields resulting in an eight basis point decrease in the companys fully tax equivalent net interest margin from $3 one.

8% in the second quarter to $3, one zero percent in the third quarter a.

The year over year increase in noninterest revenues totaling $2 $3 million or three 6% was driven by a $2 $1 million seven 6% increase in employee benefit services revenues zero point $8 million or six 9% increase in insurance services revenues zero point $4 million or five 8% increase.

In wealth management services revenues offset in part by $1 million or five 3% decrease in banking service revenues. The increase in employee benefit services revenues was driven by conversion of new business and a significant year over year increase in total participants under administration, along with a modest increase from market appreciation the increase an insurer.

In services revenues are reflective of our strong premium market organic expansion along with acquired growth between the periods. The increase in wealth management services revenues are reflective of a slightly more favorable investment market conditions, which drove an increase in assets under management. The decrease in banking noninterest revenues are reflective of the company's implementation of certain deposit.

Fee changes, including the elimination of not sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022.

Reflective of an increase in loans outstanding and a stable economic forecast the company recorded a provision for credit losses of $2 $9 million during the third quarter comparatively the company reported a $5 $1 million provision for credit losses in the third quarter of the prior year and zero point $8 million in the linked second quarter of 2023.

The company reported $116 $5 million in total operating expenses in the third quarter of 2023 compared to $108 $2 million of total operating expenses in the prior year's third quarter, the $8 $3 million seven 7% increase between the periods was mainly driven by higher compensation employee benefits expense data processing communique.

<unk> expenses business development, and marketing and other expenses, the $4 $5 million six 8% increase in salaries and employee benefits expense was primarily driven by merit and market related increases employee wages higher employee medical expenses and certain executive retirement expenses, the $1 $3 million or nine 1% increase in data processing and communications.

Fences reflected the company's continued investment in customer facing and back office digital technologies business development, and marketing expenses increased $1 million or 28% due to the companys investment in digital initiatives and higher levels of targeted advertisers intend to generate deposit inflows.

Other expenses were up $1 $5 million or 23, 1%, primarily due to increase in insurance expenses and non service related components of net periodic pension credits.

Total operating expenses were up $3 5 million or three 1% on a linked quarter basis, largely driven by $2 7 million out of three 9% increase in salaries and employee benefit expenses and a $1 $2 million eight 3% increase in data processing and communication expenses the effective tax rate for the third quarter of 2023 was 21, 2% down from 20.

And 2% in the third quarter of 2002, and 21, 4% in the linked second quarter.

The Companys total assets were $15 three $9 billion at September 32023, representing a $208 $2 million or one 3% decrease from one year prior and a $273 million one 8% increase from the end of the second quarter of 2023, ending loans increased 270.

$9 3 million or 3% during the quarter and $906 5 million or 10, 6% over the prior year the increase in loans outstanding in the third quarter was driven by an $81 $2 million or two 1% increase in the business lending portfolio and $198 1 million or three 7% increase in the company's consumer.

Loan portfolios the increase in ending loans year over year was driven by organic loan growth and the company's business lending portfolio totaling $425 million or 12% and growth in all four consumer loan portfolios totaling $486 million or nine 6% the.

The company's ending total deposits were up $159 million or one 2% from the end of the second quarter interest bearing deposits increased $233 $6 million from two 6% during the quarter, while noninterest bearing deposits decreased $74 $6 million or one 9% on a year to date basis, ending total deposits were up.

$18 $5 million of 0.1% the Companys deposit base is well diversified across customer segments comprised of approximately 61% consumer balances, 26% business balances and 13% municipal balances and broadly dispersed with an average consumer deposit account balance of approximately $12000.

And average business deposit relationships approximately $60000.

The company's cycle to date deposit beta is 13% reflective of a higher proportion of checking and savings accounts, which represents 70% of total deposits and the composition and stability of the customer base. The weighted average age of the Companys non maturity deposit accounts approximately 15 years and the company is not currently carrying any brokered or wholesale deposits on its back.

Alex sheet, the Companys cycle to date interest bearing deposit beta is 18% and the total funding beta is 15% during the quarter. The company secured $300 million in term borrowings at the federal home loan Bank of New York at a weighted average cost of $4 six 9% to fund continued loan growth.

The company's liquidity position remains strong readily available sources of liquidity, including cash and cash equivalents funding availability at the federal Reserve bank discount window unused borrowing capacity at the federal home loan Bank of New York and Unpledged investment Securities totaled $4 eight $1 billion at the end of the third quarter, which is up from four <unk> to <unk>.

$3 billion at the end of the second quarter during the third quarter. The company pledged additional loan collateral at the Federal Reserve bank to further enhance its borrowing capacity.

These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits net of collateralized and intercompany deposits the company's loan to deposit ratio to start at the end of the third quarter was $72 five present, providing future opportunity to migrate lower yielding investments securities balances into higher yielding loans at September 30.

2023, all the companies in the bank's regulatory capital ratios significantly exceeded well capitalized standards more specifically the company's tier one leverage ratio was 944% at the end of the third quarter, which substantially exceeded the regulatory well capitalized standard of 5% the company's net tangible equity to net tangible assets ratio a non-GAAP measure.

[noise] was $4 eight 1% at the end of the third quarter as compared to $5 three 4% at the end of the second quarter and 4.08% one year prior.

During the during the quarter the third quarter the company repurchased 100000 shares of its common stock at an average price of $51 per share pursuant to its board approved 2023 stock repurchase program.

At June 32023, the company's allowance for credit losses totaled $64 9 million or 69 basis points of total loans outstanding. This compares to $63 3 million or 69 basis points of total loans outstanding at the end of the second quarter of 2023, and $64 million 71 basis points of total loans outstanding at September .

<unk> 2022 during the third quarter. The company reported net charge offs of $1 $2 million or five basis points of average loans annualized annualized net charge offs in the year based on our year to date basis are also five basis points.

At September 32023, nonperforming loans totaled $36 $9 million or 39 basis points of total loans outstanding. This is up from 36 basis points at the end of the second quarter and 38 basis points. One year. Prior loans 30 to 89 days delinquent were 51 basis points of total loans outstanding at September 32023 up from.

<unk> 47 basis points at the end of the second quarter of 2003 and up from 33 basis points one year. Prior overall, the company's asset quality remained strong and stable on the quarter.

We believe the company's strong liquidity profile regulatory capital reserves stable core deposit base, historically strong asset quality and revenue profile provide a solid foundation for future opportunities and growth looking forward. We are encouraged by the momentum in our business and prospects for continued organic loan growth, we believe funding cost.

<unk> are abating, providing the company an opportunity to increase net interest income in the fourth quarter. In addition, new business opportunities and the company's financial services businesses remain strong as noted in our press release. The company has taken actions to optimize the customer service staffing levels and its retail business, which are expected to contain branch related operating expense <unk>.

As for the next few quarters estimated severance and related expenses of $1 2 million five will be incurred and reflected in the fourth quarter results. Thank you now I'll turn it back tomorrow lease to open the line for questions.

Yes.

Oh excuse me I will turn it over to Mark to make a few comments my apologies. Thank you Joe.

Good morning, everyone and thank you for joining the call today, given my impending retirement and a couple of months I won't be commenting on the quarter, but I did want to make a couple of brief comments before we answer questions.

First of all our investors.

Thank you for your trust and confidence in Us and our company over so many years.

What we do is done through the lens of shareholder value with the objective of providing above average returns with below average risk and that will continue to be our primary operating priority.

Two our analysts.

Thank you for your engagement effort and understanding of our company and always doing your best with imperfect information.

I would also like to thank our board of directors for their trust and confidence in me over the past 17 years, it's been a privilege and the joy of my professional life to lead this company and work with such an engaged carrying and shareholder focused board.

Finally to our employees. Thank you for all you have done and will continue to do to make this a great company. If your efforts pride and passion in serving our customers our communities our shareholders and each other we are truly the lifeblood of this organization.

Community Bank system is incredibly well positioned for the future we have for tremendous businesses and the best leadership and operating teams we have ever had.

<unk> confidence in <unk> and I'm very much looking forward to watching the continued progress and success of the company under his capable leadership.

Thank you, everyone and best wishes to all of you for personal and professional prosperity.

I will now turn it over to him our lease for questions.

Thank you very much.

And.

Oh Wow.

The question and answer session.

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You are using a speakerphone please pick up your handset before pressing the keys.

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At this time let.

Let me pause momentarily to assemble the roster.

Yeah.

And our first question comes.

Comes from Nick <unk> from <unk>.

Nick Please go ahead.

Good morning, everyone and best wishes to you Mark.

Thanks, Nick Good morning, Nick.

Good morning, So you touched on it in the release and in your remarks, but can you provide more detail then on the de Novo initiatives. What markets are you targeting and at this point do you have a sense for how many locations you plan to open as you re optimize the branch network.

Sure, Nick it's a limiter or so.

We're we're embarking on.

Continued through organic growth and in all of our larger markets. So we have entered them commercially and we've been in them to some degree on the retail side for a number of years now but on the tail.

Our success on the commercial business, we're going to be expanding on the retail side as well kind of in earnest in Buffalo, Rochester, Syracuse Lehigh Valley NPA.

Southern New Hampshire, probably a little bit in the capital district as well. So those are kind of the areas. We're looking at.

It varies by market in terms of how many locations.

What we're going to be.

Opening but right now I think in the next 18 months or so.

We can pencil in about 12 to 15 locations.

And across those markets might be.

A couple of more depending if we find the right the right.

Alright locations at the same time as Joe noted we are.

Reconfiguring our existing network.

Staffing levels and the purpose of all of this is for this initiative to be self funding in many ways.

And just provide us with a much better much more productive I would say.

Go forward retail presence.

That's great color and maybe just a related follow up can you help us think about the overall expense run rate going forward and how much of this quarter's elevation is likely to persist.

Yeah.

Yeah, so with respect to expenses.

Yes, I think the inventory I mentioned, there are some which we anticipate as being sort of transient.

Some of which are really reflective of our investment in the organic growth machine over the last last couple of years.

And some of which it was really related to I'll call. It wage related inflationary pressures that we had to endure if you will in 2022.

So our full year expectation for 23 versus <unk> 22 is as I think we've said earlier somewhere between 5% to 9% looks like it's trending to something closer to eight.

Eight four.

On a full year run rate basis, but the expectation is that we would settle back into something kind of in the mid single digit.

Run rate increased year over year on a full year basis, you know, there's always a bit of volatility.

Quarter to quarter, sometimes it's just timing if you will on a particular quarter and obviously this quarter was a little bit harder hit with some <unk>.

Some transient expenses than we've had in the past, but our expectation I think for 2024 is kind of mid single digits on operating expense increases on a full year basis.

That's very helpful. And then lastly for me just given the strong loan growth and an increase in borrowings. This quarter can you share with us your thought process and appetite for executing another securities restructuring.

I think Nick at this point, given where rates are and what we have.

<unk> left in the portfolio the math is pretty challenging.

We're looking at that in the sense of is it a positive net present value transaction. So if we are accelerating cash flows and at the end of the day, we're all better off by getting our money sooner than later, we will consider it which is what we did earlier this year as a reminder, we sold roughly three year tenured securities.

And we're getting the cash flows back in two years. So we've got essentially a year worth of positive value on that transaction.

That's when the tenure was in the threes.

And I think given where the 10 years today.

And kind of the front end of the curve as well those numbers just don't don't don't pencil out.

Thank you for taking my questions.

Okay.

And our next question is coming from Steve Moss from Raymond James Steve. Please proceed.

Dimitar Karaivanov: Matthew Breese, Alexander Twerdahl, Mark Tryniski, Joseph Sutaris Matthew Breese, Alexander Twerdahl, Mark Tryniski, Joseph Sutaris, Alexander Twerdahl Matthew Breese, Alexander Twerdahl, Mark Tryniski, Joseph Sutaris, Alexander Twerdahl Mark Tryniski, Joseph Sutaris, Alexander Twerdahl, Mark Tryniski, Joseph Sutaris Like to turn the conference over to Dimitar Karaivanov, Chief Operating Officer of Community Bank Please, go ahead Thank you, Marles and good morning, everybody. Welcome to our conference call for the third quarter of 2023 As Mark noted in the press release, the company's revenue performance was strong in the quarter.

Good morning.

Thanks, Steve and good morning, Steve.

And Mark Congratulations on retirement best wishes.

Hi.

Just wanted to.

Follow up on the loan side of things here very strong quarter for growth.

We see this pace continue for another quarter or could we see some moderation here just given the extra moving rates even in the last couple of weeks here.

I think Steve if you look.

Break it down by portfolio.

The commercial pipeline is still strong, but not as strong as it was at the end of.

The second quarter, so youll, probably see a bit of a pullback there mortgage is going to be seasonally a little bit weaker as well in the fourth quarter.

And I think the same applies for for auto and it sounds that right now.

That flow and kind of what we're charging there.

As a little bit less so I think it's still going to be a very strong quarter in terms of growth but.

But I don't think its going to be closer to this past quarter, which was close to a record for us in terms of total loan growth.

Right.

Curious to empower work.

What rates are you guys doing for loan yields youre, putting on the books.

I think the blend to trade for the third quarter was 720.

Okay.

And then just on the deposit pricing moderating here just curious.

Gerry do you imply further slowdown in interest bearing deposit costs.

Just any incremental color you can give around the pace will slow down or kind of where you think deposit costs could shake out in next couple of quarters.

Dimitar Karaivanov: In fact, our revenue has been quite consistent over the past five quarters regardless of all the macroeconomic and banking industry noise. This is a great example of the diversification of our business and the focus on lowering volatility for our investors. On the flip side, this quarter we had expense pressures that were above our expectations as well. Some of those are transient. Some of those are due to the general inflation pressures which should abate and some are a function of the continuous investments in the company.

Yes. So we did we did experience a little bit of a slowdown in costs in Q3 versus Q2, and I think on the Q2 call. We you know we use the word abate and we expect that those those pressures to abate a bit.

We are seeing some evidence of that.

So it's not we still are seeing increasing costs, but kind of our expectations is that our belief is that we maybe have crossed over into <unk>.

Dimitar Karaivanov: Over the past 24 months, we have invested in our organic capabilities across all of our businesses and those investments run through the PNL. These organic investments are contributing to the growth in our outstanding in the banking business, the revenue performance and our benefits, insurance and wealth businesses, and position as even better for the future. Our businesses are strong and healthy supported by a strong balance sheet. As of the end of the quarter, our funding and liquidity are up compared to the beginning of the year. Our cycle to date deposit beta is 13% and our tier one leverage capital is almost double the well capitalized standard. That is in spite of the thermals in the banking industry this year.

Positive.

Positive territory in other words, we hit the trough on net interest income in Q3 at least that's our expectations and that we would start to sort of come out of that if you will in Q4 and hopefully through 2024, you know obviously the wildcard in the deck is just deposit funding, it's kind of held in well for us I mean, we're kind of flat on a full.

Year basis.

Which which is okay.

If we see a turn in the tide, obviously, if you flipped from a what is roughly a little under 100 basis points in terms of your your deposit funding costs and you're flipping over arching position.

Joseph Sutaris: With that, I will pass it on to Joe. Thank you, Dimitar.

That could change, but right now we believe we are we have kind of hit the crossover point or the trough in the third quarter, then we should see some NII expansion in.

Joseph Sutaris: Good morning, everyone. As Dimitar noted, the company's earnings results were down a bit in the third quarter. Fully diluted gap earnings per share were 82 cents in the quarter, which were 8 cents lower than the prior year's third quarter and 7 cents lower than the length second quarter results. Fully diluted operating earnings per share and non-gap measures defined in the press release were also 82 cents in the quarter, 8 cents per share lower than the prior year's third quarter and 9 cents per share lower than the length second quarter results.

In Q4, not necessarily margin expansion.

<unk> mentioned, the new loans went on it a little north of 7%, we took down some funding kind of in the high fours and that generated about 250 basis point kind of.

You know I'll call it marginal spread if you will on the new volume.

So I can't necessarily be additive to NIM on a go forward basis, but it should be additive to net interest income.

Joseph Sutaris: The 8 cents decrease in operating earnings per share on a year over your basis were primarily driven by higher operating expenses. The 9 cents decrease in operating earnings per share on a link quarter basis was driven by a decrease in net interest income and increases in the provisions for credit losses and operating expenses offset in part by an increase in non-interest revenues and a decrease in income taxes. Reflective of our diversified revenue business model, the company's total revenues in the third quarter of 175.4 million dollars were generally consistent with the prior year's third quarter total revenues of 175.6 million dollars and the total periods due to higher funding costs were largely offset by increases in non-interest revenues.

Okay, Great and then on the employee benefits services good quarter from a revenue standpoint.

Quite a bit of cross wins here, especially in the last couple of months just curious you know.

Youre seeing year over year growth, but maybe do.

You would come off of those high just given what we've seen in the bond market and some volatility we're having an equity cure.

Yes, I think Steve I think it's hard to predict that line.

Too much because as you know it is tied to market values.

If you look at the aggregate portfolio, it's a retirement business. So not surprisingly kind of resembles a 60 40 type of split.

Joseph Sutaris: The company recorded net interest income of 107.8 million dollars in the third quarter of 2023. This was down 1.5 million dollars or 1.4% on a link quarter basis and 2.6 million dollars or 2.4% on a year over your basis. The third quarter result was consistent with our expectations of a sideways outcome for a few quarters as funding costs increases outpaced loan portfolio related rate and volume improvements. The company's total cost of funds in the third quarter of 2023 was 88 basis points as compared to 67 basis points on a link second quarter.

So theres a fair amount of bonds that are trading at a at a lower value today than they were during the third quarter.

With that said.

We have also continuing the organic momentum so if you if you.

Joseph Sutaris: The 21 basis point increase in funding costs in the quarter outpaced a 12 basis point increase in earning asset yields resulting in a 8 basis point decrease in the company's fully tax equivalent net interest margin from 3.18% in the second quarter to 3.10% in the third quarter. The year over your increase in non-interest revenues totaling 2.3 million dollars or 3.6% was driven by 2.1 million dollars or 7.6% increase in employee benefit services revenues.

If there is a bit of a pullback in that line I don't think its going to be that big.

And in fact, if asset values stabilize.

I think we can have as good of a quarter in the fourth quarter.

Okay great.

All the color thanks, very much guys.

Thank you Steve.

And we will proceed now with the question from Alex.

From Piper Sandler Alex. Please go ahead.

Hey, good morning, all and again I'll reiterate congrats to you Mark it's been a pleasure working with you over the last decade, or so and I certainly wish you all the best in the next chapters of your life.

Joseph Sutaris: The 0.8 million dollar or 6.9% increase in insurance services revenues and a 0.4 million dollar or 5.8% increase in wealth management services revenues offset in part by 1 million dollar or 5.3% increase in banking service revenues. The increase in employee benefit services revenues was driven by conversion of new business and a significant year over your increase in total participants under administration along with a modest increase from market appreciation. The increase in insurance services revenues are reflective of a strong premium market organic expansion along with acquired growth between the periods.

Thanks, Alex.

I wanted to ask about this this branch optimization program.

And you know you guys have a top in class deposit profile and I always sort of assumed are associated that with the branch network and sort of what you have built from a legacy standpoint, how do you think through the branch optimization and closing branches and then opening into new markets without painting the quality.

Of the of the deposit profile.

So Alex to give you some color in the past.

Joseph Sutaris: The increase in wealth management services revenues are reflective of a slightly more favorable investment marking conditions which drove an increase in assets under management. The decrease in banking non-interest revenues are reflective of the company's implementation of certain deposit fee changes including the elimination of non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022. Reflective of an increase in loans outstanding in the stable economic forecast the company recorded a provision for credit losses at 2.9 million dollars during the third quarter.

Four or five years, we've consolidated closed 50 branches.

Some of those acquired some of them our own so we've already.

I had a fairly sizable number of branch closures, which has not really impacted the quality of our deposit base.

And <unk>.

Clearly as we move into the larger markets, we're going to have different strategies for winning market share in deposits and theres going to be here at <unk>.

Joseph Sutaris: Comparatively the company recorded a $5.1 million provision for credit losses in the third quarter of the prior year and 0.8 million dollars in the length second quarter of 2023. The company recorded $116.5 million in total operating expenses in the third quarter of 2023 compared to $108.2 million of total operating expenses in the prior year's third quarter. The $8.3 million, $7.7% increase between the periods was mainly driven by higher compensation employee benefits, expense, data processing, communication expenses, business development and marketing and other expenses.

<unk> between volume and rate in the larger markets Theyre more competitive.

With that said if you just think about the quantum of what we're doing here.

Branch network and 13 billion of deposits.

15 <unk>.

Branches, let's call it at whatever number you want to assume they get to a larger market, which should be fairly good.

Good.

He is not going to meaningfully change.

Quality of our aggregate blended deposit base, which we believe will continue to be.

Joseph Sutaris: The company was driven by merit and market related increases employee wages, higher employee medical expenses and certain executive retirement expenses. The $1.3 million, $9.1% increase in data processing and communication expenses reflect of the company's continued investment in customer facing and back office digital technologies. Business development and marketing expenses increased to $1 million or 28% due to the company's investment in digital initiatives and higher levels of targeted advertisers and tend to generate deposit inflows.

One of the best in the country.

Okay.

And then maybe you said it earlier, maybe I missed it but just in terms of the timeframe. It sounds like you are closing a bunch of branches. This quarter, that's going to result in some severance in 2023.

And then how long before some of these markets get up and running and I guess does that wind up I guess back to the expense question can you just sort of lay out sort of exactly what that means over the next couple of years, you know I I get used at a high level guidance for next year, but just kind of specifically says.

Joseph Sutaris: Other expenses were up $1.5 million for $23.1% primarily due to increase insurance expenses and non-service related components of net periodic pension credit. Total operating expenses were up $3.5 million or $3.1% on a link quarter basis, largely driven by $2.7 million or $3.9% increase in sales employee benefit expenses and a $1.2 million or $8.3% increase in data processing and communication expenses. The effective tax rate for the third quarter of 2023 was 21.2% down from 22% in the third quarter of 22 and 21.4% in the link second quarter.

Associated with this with this program.

Yeah, So I think the way to.

Think about the expenses.

Of of the expansion is.

And the timing of it.

One the timing varies because you've got to sign leases.

Just four for a few months so we've got a number of locations identified.

Joseph Sutaris: The company's total assets were $15.39 billion at September 30, 2023 representing a $208.2 million or $1.3% decrease for one year prior and a $278.3 million or $1.8% increase from the end of the second quarter of 2023. Ending loans increased $279.3 million or $3% during the quarter and $906.5 million or $10.6% over the prior year. The increase in loans outstanding in the third quarter was driven by an $81.2 million or $2.1% increase in the business blending portfolio and $198.1 million or $3.7% increase in the company's consumer loan portfolios.

Most of them are just remodeling or existing branches into the large banks abandoned.

We're going to be going into but still you have leases you have to.

Redo the branch a little bit sort of location.

You have to hire people and then you open the branch. So you are talking about nine months of a process. If you were to start today in most cases.

In some cases, there is more work to be done. So that's why we think of it over kind of an 18 month period.

And in that timeframe I think what.

What our expectation is is that everything else that we're doing with.

Joseph Sutaris: The increase in ending loans year over year was driven by organic loan growth in the company's business blending portfolio totaling $420.5 million or $12% and growth in all four consumer loan portfolios totaling $486 million or $9.6%. The company's ending total deposits were up $159 million or $1.2% from the end of the second quarter, inter-spairing deposits increased $233.6 million or $2.6% during the quarter while the nine interest rates decreased $74.6 million or $1.9%.

The branch network and the existing retail business.

Including what we did this quarter is going to offset the cost for a net zero.

Okay.

And then it seems based on the markets and sort of the expansion that you mentioned earlier that youre going into it seems like a pretty clear signal of that organic.

Now maybe officially maybe it was a quarter or two ago officially overtaken M&A is sort of the primary growth mechanism for community is that a fair characteristic.

Joseph Sutaris: On a year-to-date basis ending total deposits were up $18.5 million or $0.1%. The company's deposit base is well diversified across customer segments comprised of approximately 61% consumer balances, 26% business balances and 13% municipal balances and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship for approximately $60,000. The company's cycle-to-date deposit beta is 13%, reflective of a high proportion of checking and saving accounts which represents 70% of total deposits and a composition stability of the customer base.

I think the fair characteristic is that it will be a mix going forward and as we've communicated to just be less reliant on M&A and Thats why youre going to see some of these expenses every once in a while pop up a little bit more unusual in a given quarter because we're now investing through the <unk>.

Al versus investing through through the balance sheet, and I think given where rates are today.

Given the time that the regulators take from a from a bank approval transaction.

Kind of timeline perspective.

Joseph Sutaris: The weighted average age of the company's non maturity deposit accounts approximately 15 years and the company is not currently carrying any broker or wholesale deposits on its balance sheet. The company's cycle-to-date interest-bearing deposits beta is 18%, and the total funding beta is 15%. During the quarter the company's secure $300 million in term barring to the federal home loan bank of New York at a weighted average cost of 4.69% to fund continued loan growth.

The math on the M&A side, it's just harder and we frankly can't wait for that in order to grow our company. So we need to find ways to to.

To follow our success, which has been great on the commercial side and now we're going to follow it on the retail side.

That doesn't preclude any M&A happening trial that period because in <unk>.

Take any of the markets, we're looking at to expand an opening three or four or five branches in any of those markets is not going to be the end game for us. So we're going to continue to be looking for M&A and all of our markets, but it just will be a complement to what we're doing organically as opposed to the only way of of of <unk>.

Joseph Sutaris: The company's liquidity position remains strong, readily available sources of liquidity, including cash and cash equivalence, funding availability at the Federal Reserve Bank's discount window, unused borrowing capacity at the Federal Home Loan Bank of New York, and unpluged investment securities told them $4.81 billion at the end of the third quarter, which is up from $4.23 billion at the end of the second quarter. During the third quarter, the company pledged additional loan collateral at the Federal Reserve Bank to further enhance its borrowing capacity.

Going forward.

Great. Thank you for taking my questions.

Okay.

Okay.

Joseph Sutaris: These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits net of collateralized and intercompany deposits. The company's loan to deposit ratio at the end of the third quarter was 72.5% providing future opportunity to migrate lower yielding investments here to balances into higher yielding loans. At September 30, 2023, all the companies in the Banks Regulatory Capital Ratio significantly exceeded well capitalized standards. More specifically, the company's Tier I leverage ratio was 9.44% at the end of the third quarter, which substantially exceeded the regulatory well capitalized standard of 5%.

And our next question comes from Chris O'connell from K B W. Chris. Please go ahead.

Good morning.

Congratulations Mark on the retirement and best wishes on the next chapter.

Wanted to start off to see with <unk>.

What your thoughts are on the insurance business and given recent peer transactions in the market.

You know, whether that's something that.

You would ever consider selling.

And if so just what your thoughts are in terms of the cost benefit analysis and what goes into that thought process.

Joseph Sutaris: The company's net tangible equity and net tangible asset ratio non-gab measure was 4.81% at the end of the third quarter is compared to 5.34% at the end of the second quarter and 4.08% one year prior. During the quarter, the third quarter, the company repurchased 100,000 shares of its common stock and the average price of $51 for share pursuant to its board approved 2023 stock repurchase program. At June 30, 2023, the company's allowance for credit losses told 64.9 million dollars for 69 basis points at total loans outstanding.

Good morning, Chris.

Well, our Tulsa and.

An extremely valuable business.

Roughly five four times revenue seems to be going multiple these days.

And $45 million of revenue.

It's a very very valuable business, which as a reminder is not reflected anywhere on the balance sheet. The same way with our benefits business our wealth business.

So as it relates to the value to to us and to our shareholders that is the value.

Joseph Sutaris: This compares to 63.3 million dollars for 69 basis points of total loans outstanding at the end of the second quarter of 2023 and 60.4 million dollars for 71 basis points of total loans outstanding at September 30, 2022. During the third quarter, the company recorded net charge of $1.2 million or five basis points of average loans annualized annualized net charge also near and base on a year to date basis are also five basis points at September 30, 2023, non performing loans total 36.9 million dollars for 39 basis points of total loans outstanding.

And we look at our company as a.

Precious collection of businesses that work in different ways through an economic cycle I mentioned in the beginning that our revenue has been essentially the same right around $175 million over the past five quarters, and just think about what's occurred through that timeframe.

<unk> had NII expanding way up you had NII contracting way down and you had market values contracting than going sideways than going up now contracting again.

Joseph Sutaris: This is up from 36 basis points at the end of the second quarter and 38 basis points one year prior loans 30 to 89 days of length when we're 51 basis points of total loans outstanding at September 30, 2023, up from 47 basis points at the end of the second quarter of 23 and up from 33 basis points one year prior.

Our revenue has not budged, if we were just in one of those lines of businesses. We will have a much tougher time sustaining that revenue.

And the low volatility and the predictability of our company. So we think that it adds tremendous value in the insurance business the benefits business in the wealth business.

Joseph Sutaris: Overall, the company's asset quality remains strong and stable on the quarter. We believe the company's strong liquidity profile regulatory capital reserves stable core deposit base historically strong asset quality and revenue profile providing solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum and our business and prospects for continued organic long growth. We believe funding costs, pressures are abating providing the company an opportunity to increase net interest income in the fourth quarter.

It matches tremendous added to the banking business and tremendous add to the aggregate company. So.

We just think it's really valuable.

Okay got it I mean.

Just to be clear I mean is it something that you I mean all of these.

See you guys see a lot of value with it internally is it something that you have explored or looked into or.

Or is it whereas the value. So high you know to you on an organic basis that you had.

Joseph Sutaris: In addition, new business opportunities and the company's financial services businesses remain strong. As noted in our press release, the company has taken actions to optimize the cost for service staffing levels and its retail business which are expected to contain branch related operating expenses for the next few quarters estimated severance and related expenses of a million to a million five will be incurred and reflected in the fourth quarter results.

It gets more valuable in house.

We have not because we like to focus on keeping our most valuable businesses to our company and our investors.

And we don't think that we can replace that kind of a business.

Nor can we buy it again, so it's something that we have that is precious and we intend to grow it which we have done.

Operator: Thank you. Now I'll turn it back to our least open the line for questions. Oh, excuse me.

Pretty successfully and that was a 20 <unk> business when we acquired it in 2016.

Mark Tryniski: I will turn it over to Mark to make a few comments. My apologies. Thank you, Joe.

And I think it's on track for well over double that this year.

Mark Tryniski: Good morning, everyone. Thanks for joining us today.

Mark Tryniski: Given my impending retirement in a couple of months, I won't be coming on the quarter, but I did want to make a couple of brief comments before we answer questions. First to our investors, thank you for your trust and confidence in us and our company over so many years. All that we do is down to the lens of shareholder value. With the objective of providing above average returns with below average risk, and that will continue to be our primary operating priority. To our analysts, thank you for your engagement, effort, and understanding of our company and always doing your best with imperfect information.

Great I appreciate the color.

And then on the Oh that 300 million a.

H L. P that you guys thought.

<unk> 469, what was the.

Maturity or duration on that.

Yes.

Chris This is Joe it's about a call it a.

Three and a half year average life, we locked in some amortizing advances in some some fixed components effectively that matched the effective average life of.

The loans that we booked generally and it also bridges us to.

Mark Tryniski: I would also like to thank our board of directors for their trust and confidence in me over the past 17 years. It's been a privilege and the joy of my professional life to lead this company and work with such an engaged, caring, and shareholder focused board.

Some of the securities cash flows and some of the out years.

Okay, great and.

And on the remainder of the borrowings on balance sheet, which I believe are a customer repurchase agreements.

Mark Tryniski: Finally, to our employees, thank you for all you have done and will continue to do to make this a great company and for your efforts, pride, and passion in serving our customers, our communities, our shareholders in each other. We are truly the lightblood of this organization.

What was the rate on those this quarter.

Hum.

Socially Chris they tend to run in.

Close to so.

Municipal book, largely and it's kind of in the twos.

Mark Tryniski: Community Bank System is incredibly well positioned for the future. We have four tremendous businesses in the best leadership and operating teams we have ever had. I have absolute confidence in Dimitar and I'm very much looking forward to why we are watching the continued progress and success of the company under his capable leadership.

From an overall cost perspective.

Some of that is operating accounts for some of that is more.

Call it.

Great sensitive repurchase agreements, but they're all with our customers, which I think is important.

Mark Tryniski: Thank you, everyone, and best wishes to all of you for personal and professional prosperity. Thank you very much.

<unk>, we look at that is <unk>.

As it's more akin to.

Customer deposits just happens to be set up in a repurchase structure.

Got it thanks.

And then lastly can you remind us as to what the securities cash flows are coming on all of that in Q4, and then into 2024 as well please.

Operator: And we will start the question and answer session. And if you want to ask a question, please press star then one on your touch on phone. If you are using a speaker phone, please pick up your handset before pressing the keys. And if at any time your question has been addressed and you would like to withdraw your question, please press star two.

Yeah. So securities cash flows are pretty nominal in Q4.

17, and $18 million. So just a couple of sort of trickling amortizing payments and in 2024, it's about $60 million and if you recall, Chris when we did the repositioning we brought forward two.

Operator: At this time, let me pause momentarily to assemble the roster.

2024, and 2025 cash flows because the inverted curve and the opportunity that we have so.

Nicholas Cucharale: And our first question comes from Nick Guiterale from Havvy Group. Nick, please go ahead.

So effectively what is remaining for 2024 cash flows are basically amortizing cash flows off of our MBS portfolio largely.

Mark Tryniski: Good morning, everyone, and best wishes to you, Mark. Good morning, Nick. Good morning.

Great.

Just what the duration of the RFS and the HCM Booker is right now.

Dimitar Karaivanov: So you touched on it in the release and in your remarks, but can you provide more detail on the de novo initiatives? What markets are you targeting? And at this point, do you have a sense for how many locations you plan to open as you re-optimize the branch network?

Yeah. So the RFS duration is about.

Six years.

In the HTM duration is about.

Dimitar Karaivanov: Sure, Nick, it's Dimitar. So we're embarking on a continued organic growth in all of our larger markets. So we have entered them commercially. And we've been in them to some degree on the retail side for a number of years now, but on the tail of our success on the commercial business, we're going to be expanding on the retail side as well. Kind of a nurse in Buffalo, Rochester, Syracuse, Lehigh Valley and PA, southern New Hampshire, probably a little bit in the capital district as well.

Dimitar Karaivanov: So those are kind of areas we're looking at. Um. If there is by market in terms of how many locations and what we're going to be opening but right now I think in the next 18 months or so we can pencil in about 12 to 15 locations across those markets might be a couple more depending if we find the right locations. At the same time as John Audet we are reconfiguring our existing network and staffing levels and the purpose of all of this is for this initiative to be self funding in many ways and just provide us with a much better, much more productive I would say go forward retail presence.

About 11 years.

Thank you.

Thanks for taking my questions.

Youre welcome.

Yes.

And we proceed with our question from Matthew Breese from Stephens Matthew. Please go ahead.

Thank you good morning, and Mark Congrats on a long and successful career and best wishes to you in retirement.

Thanks, Matt.

On the question front, you know first I was hoping you could touch on.

The auto book there are some data points out there just showing kind of.

Gradually deteriorating.

Condition delinquencies and I was curious if youre seeing any signs that on your end and how should we be thinking about charge offs within this book.

I think Matt.

As a reminder, our book is.

Prime and Super Prime essentially.

Average FICO is 750.

Youre looking at.

Values.

Income levels that are.

In the 32 inches in <unk>.

And the credit performance over multiple cycles has been outstanding so.

If you actually look at our charge offs year to date and Joe can correct me here, but I think it's in the twenties.

Yes.

Operator: That's great color.

17 18 basis.

Joseph Sutaris: Maybe just a related follow-up can you help us think about the overall expense run rate going forward and how much of this quarter's elevation is likely to persist? Yeah so with respect to expenses you know as I think Dimitar mentioned there are some which you know we anticipate is being sort of transient some of which are you know really reflective of our investment in you know the organic growth machine over the last last couple of years and some of which it was really related to I'll call it wage related you know inflationary pressures that we had to endure if you will in 2022.

Basis points so.

Frankly, better than we expected and frankly better than.

Our historical average so we continue to believe that the historical average of kind of 35 basis points plus or minus.

Five.

Is is a number that we expect in terms of loss rates in that on that paper.

But we continue to be surprised so far about the strength of our type of borrowers and we are well aware of.

Kind of a subprime delinquency rates, which I think are at an all time high as it relates to auto but we just those are not not our customers.

Joseph Sutaris: So you know our you know full-year expectation for 23 versus 22 is as I think we've said earlier somewhere between 5 and 9% looks like it's trending to you know something closer to 8 for on a full-year run rate basis but the expectation is that we would settle back into something kind of in the mid-single digit you know run rate increased year-over-year on a full-year basis you know there's always a bit of volatility you know quarter to quarter sometimes it's just you know timing if you will in a particular quarter and obviously you know this quarter was a little bit harder hit with some some transient expenses than than we've had in the past but our you know expectation I think for 2024 is kind of mid-single digits on operating expense increases on a full-year basis.

Yes, and just for a little additional color. There is if we look at kind of the delinquency 30 to 89 days its been pretty flat for about five quarters now it does fluctuate from quarter to quarter.

And if you actually go back to kind of our.

Normalized loss rates pretty.

Pre COVID-19 basis, they were kind of in the mid thirties and as <unk> said, you know A&P paper grade paper and they've been running about half of that so.

We normalize if we normalize.

The expectations are kind of the mid <unk>.

30 basis points 40 basis points of net charge offs, which.

As will be half of the we'd expect that is going to be half of the industry.

Joseph Sutaris: That's very helpful and then lastly for me just given the strong long growth and an increase in borrowings this quarter can you share with us your thought process and appetite for executing in other securities restructure. I think Nick at this point given where rates are and what we have left in the portfolio the math is pretty challenging you know we're looking at that in the in the sense of is it a positive net present value transaction so if we're accelerating cash flows in the end of the day we're all better off by getting our money sooner than later we will consider it which is what we did earlier this year as a reminder we sold roughly three-year tenored securities and we're getting the cash flows back in two years so we've got essentially a year worth of positive value on that transaction that's when the 10 year was in the trees and I think given where the 10 years today and kind of the front end of the curve as well those numbers just don't don't don't In our next question is coming from Steve Moss from Raymond James.

Average.

Got it alright, I appreciate all that color.

Just another one loan growth remains very solid given sort of like you said near record levels. This quarter and I know, we've talked a lot about hiring on your end.

That said I was hoping you could discuss.

Overall economic vibrancy across your markets and whether beyond just added lending capacity, you're seeing improving trends on the ground and if theres any markets you would highlight in particular.

Yes broadly our markets remain in very good shape.

Literally in every in every category.

Some of it is the customers with traffic and then some of it is the markets and.

There has been a bit of a.

Sure.

An uptick in upstate New York in terms of investments and activity.

Certainly we're seeing it in Central New York.

Quite a bit and thats not really just micron related in fact very little of it is micro unrelated us right now.

But our markets are strong across the board on northeast <unk> is doing very well as well.

New England remains one of the best markets in the country as it relates to credit.

Stephen Moss: Steve, please proceed. Good morning. Good morning, Steve.

So.

It is very positive we're not seeing we're not seeing a lot of cracks.

Stephen Moss: And Mark, congratulations in retirement and best wishes. I just wanted to, you know, follow up on the loan side of things here, you know, very strong quarter for growth. You know, could we see this pace continue for another quarter or, you know, could we see some moderation here, just given the extra moving rates even in the last couple of weeks here? I think Steve, if you look at any break it down by portfolio, the commercial pipeline is still strong, but not as strong as it was at the end of the second quarter.

Stephen Moss: So you'll probably see a bit of a pullback there. Mortgage is going to be seasonally a little bit weaker as well in the fourth quarter. And I think the same applies for auto in the sense that right now, that flow and kind of what we're charging there is a little bit less. So I think it's still going to be a very strong quarter in terms of growth. But I don't think it's going to be close to this past quarter, which was close to record for us in terms of total long growth.

We are seeing some of our borrowers putting down more money if they need to in order to make make numbers work.

With higher rates, but they have they have money to do so.

The cash.

Cash levels and our commercial borrowers remained strong.

And certainly we're not seeing.

Much in the way of of challenges on the on the consumer side.

Understood Great. Okay, and then Joe you had mentioned that you expect NII.

Upside from here, but potentially some NIM compression.

I was curious to what extent you expect near term NIM pressure and where might we see that that point of stability as you look out.

Yes, it's a good question Matt.

As I mentioned.

If deposits hanging there, which so far they seem like they are for us. They are if they are fairly stable.

We kind of believe we hit the crossover point for net interest income in Q4.

Stephen Moss: Right. And curious, Tim, you know, where, what rates are you guys doing for a loan? You'll be there putting on the books. I think the blended trade for the third quarter was 720. Okay. And then just on the deposit pricing moderating here, it's curious, you know, you seem to imply, you know, further slow down and it's just very deposit cost. You know, just any incremental car you can get around, you know, the pace of slow down or kind of, you know, where you think deposit cost could shake out in the next couple of quarters.

On the margin side of it obviously for.

I think our margin for the quarter was 310.

New business is going on at $2 50, something the next.

The next cycle of loan growth is if we can lock into 50 will probably take that but obviously, it's going to negatively impact impact margin.

But our expectation really is that we've also just sort of start to come out of the trough in Q4.

Just as we kind of looked at kind of as we exited the quarter, we started to see.

Kind of that dynamic change a bit as they see.

The increases on loan interest income were sort of outpacing the funding cost increases.

Stephen Moss: Yeah. So we did, we did experience a little bit of a slow down and costs in Q3 versus Q2. And I think in on the Q2 call, we, you know, we use the word of bait that, you know, we expect that those, those pressures to a bait a bit. We are seeing some evidence of that. It's, it's not, you know, we still are seeing increasing costs. But, you know, kind of our expectations is that our belief is that we've maybe have crossed over into positive, you know, positive territory.

Sure.

That's obviously a couple of months.

So it's not quite a trend yet, but our expectations are that that trend will continue.

And that will see expansion in Q4.

I don't know what rate the rate environment will be in Q1 of next year in Q2 of next year, but assuming that the rate environment is comparable to what it is now.

Stephen Moss: In other words, we hit the trough on man interest income in Q3. At least that's our expectations and that we would start to sort of come out of that, if you will, in Q4 and hopefully through 2024. You know, obviously the wild card in the deck is just, you know, deposit funding. It's kind of held in well for us. I mean, we're kind of flat on a full year basis, which is okay.

Our expectation is that we would just continue to see some some potential expansion NII again, just to be aware that some of it is dependent on the stability and growth of the deposit base.

Okay got it and then last one for me just going back to the whole.

<unk> common equity discussion and well aware your kind of views on on the tangible common equity to tangible assets ratio.

Stephen Moss: But, you know, if we see a turn in the tide, obviously, if you flip from a, you know, what is roughly a little under a hundred basis points in terms of your deposit funding cost. You're going to flip in a barring position. You know, that could change. But right now we believe we are, we have kind of hit the cross over point or the trough in the third quarter. And then we should see some NII expansion in Q4, not necessarily margin expansion.

Just that the market seems to be reacting a bit to it.

And I'm curious if that it does have an impact or change in your thinking around capital adequacy as measured by.

Tangible common equity tangible assets.

It does not change our view on capital adequacy, which remains well well above.

Stephen Moss: You know, as Dimitair mentioned, the new launch went on at a little north at 7%. You know, we took down some funding kind of in the high fours that generated about a 250 basis point, kind of, you know, we'll call it marginal spread, if you will, on the new volume. You know, so that's not going to necessarily be additive to near amount of go forward basis, but it should be additive to mandatory. Okay, great.

The regulatory capital levels that are required for a well capitalized institution and doesn't change how we run the business it doesn't change.

Ability to service customers.

As you can see our balance sheet is in tremendous shape.

And again as we just touched on a couple of minutes ago.

Stephen Moss: And then on the employee benefits services, you know, good quarter from a revenue standpoint, quite a bit of crosswinds here, especially in the last couple of months, just curious, you know, you're seeing year over your growth, but maybe, you know, we come off as high as just given, you know, what we've seen in the bond market and some volatility we're having in equities here. Yeah, I think Steve, I think if it's hard to predict that line too much because, you know, it is tight to market values.

The amount of value in our company that is not reflected anywhere in that one single number is just.

Huge.

We talked about the value of the insurance business, you can take that and multiply by three for the value of the benefits business then you've got the wealth business.

So.

Looking at just one number that reflects only one small sliver of the balance sheet as well as is.

To us not a way to economically run the business.

Stephen Moss: And, you know, if you look at the aggregate portfolio, it's a retirement business, so we're not surprisingly kind of resembles a 60-40 type of split. So there's a fair amount of bonds that are trading at a lower value today than they were during the third quarter. With that said, we have also continuing the organic momentum, so if you, if you, if there's a bit of a pullback in that line, I don't think it's going to be that big. And in fact, if asset values stabilize, I think we could have as good a quarter in the fourth quarter. Okay, great. Appreciate all the color. Thanks very much, guys.

The other thing I would just just point out is that.

I don't know how anyone can run our business based on that ratio given that if you think about what's occurred in the past two or so years.

We've done nothing but make money.

For our shareholders.

And we have not.

Dividend out a huge amount of money or don't have huge amount of buybacks or deluded ourselves in any other way. The point here is that we've continued to add retained earnings to the balance sheet and the starting point for that ratio was quite a bit higher so we've done nothing but make money and.

That ratio changes every quarter so.

Alexander Twerdahl: And we will proceed now with a question from Alex, or at all, from 5% Alex, please go ahead. Hey, good morning, all. And again, are all reiterate congrats to you, Mark. It's been a pleasure working with you over the last decade or so. And certainly wish you all the best in the next chapters of your life. Thanks Alex.

That's why it's hard for us to really manage a business based on an external market factors.

Got it I appreciate all the thoughts there.

I'll leave it there thanks for taking my questions.

Thank you and we have a follow up question from Chris O'connell, Chris. Please go ahead.

Dimitar Karaivanov: You know, I wanted to ask about this branch optimization program. And you know, you guys have a top in class deposit profile and I always sort of assumed or associated that with the branch network and sort of what you have built from a legacy standpoint, how do you think through the branch optimization and closing branches and then opening into new markets without tainting the quality of the deposit profile. So Alex, to give you some color in the past four or five years, we've consolidated close to 50 branches, some of those acquired some of them our own.

Yeah.

Next question.

I was wondering you had.

A little bit more share repurchases. This quarter you have plenty left in the plan before year end.

Is that something that you intend to continue to do in the fourth quarter.

Yeah, So so Chris.

I'd say potentially yes, and probably <unk>.

<unk> be fairly nominal in terms of the.

A grand scheme of our outstanding shares and even within the repurchase authority, which was $2 7 million shares for 2023.

Obviously with the valuation down it makes some sense now to repurchase.

Dimitar Karaivanov: So we've already had a fairly sizable number of branch closures, which has not really impacted the quality of our deposit base. And clearly as we move into the larger markets, we're going to have different strategies for winning market share and deposits and there's going to be a trade off between volume and rate in the larger markets. They're more competitive. With that said, if you just think about the the quantum of what we're doing here on a 200 branch network and 13 billion of deposits, 15 branches, let's call it at whatever number you want to assume they get to in a larger market, which should be fairly good.

Repurchasing some shares probably slightly above what otherwise would be equity plan.

<unk> if you will so we've just generally try to keep our share count flat, there's an opportunity to take it down a bit just because of where the prices, but I don't were not going to we're not intending to embark on a large.

Repurchase plan here and at least this quarter, we'd like to keep a little powder dry for for other opportunities.

So, we'd rather kind of lean into growth more than we would.

Buyback our own shares.

Got it.

And just on the on the cash built up liquidity build this quarter locking in the borrowings here.

Is that something that you expect to kind of rightsize itself fairly rapidly next quarter back back towards the levels that you've been in the past few quarters.

Dimitar Karaivanov: But it's not going to meaningfully change the quality of our aggregate blended deposit base, which we believe will continue to be one of the best in the country. And then, you know, maybe you said it earlier and maybe I missed it, but just in terms of the time frame, it sounds like you're closing a bunch of branches this quarter that's going to result in some severance in 2023. And then how long before some of these markets, you know, get up and running and I guess, does that wind up I guess, you know, back to the expense question, can you just sort of lay out sort of exactly what that means over the next couple of years, you know, I get you sort of high level guidance for next year.

Do you think some of that will stick around and kind of come in over time.

Or just stay flat, depending on how long growth that shakes out.

Yeah. So so Chris we are I think we finished the quarter at a little over $200 million in cash equivalents, we do have a bit of a <unk>.

The seasonal pattern in Q3 and Q4 in tax collection.

My expectation is that typically all.

Seeing Q1, less so but into Q2, we start to see some of that drift.

Drift down a bit but right now we expect that those kind of cash equivalents could carry some of the loan growth into Q4.

Dimitar Karaivanov: But just kind of specifically associated with this with this program. Yeah, so I think the way to think about the expenses of the expansion is and the timing of it. One of the timing varies because you got to sign leases, you know, we've been at this for a few months. So we've got a number of locations identified. Most of them are just remodeling or existing branches, the large banks abandoned that we're going to be going into.

And then we will have to reassess and in Q1, but our expectation a longer term basis is that.

Dimitar Karaivanov: But still you have leases, you have to redo the branch a little bit or location, you have to hire people and then you open the branch. So you're talking about nine months of a process if you were to start today in most cases. In some cases, there's more work to be done. So that's why we think of it over kind of an 18 month period.

As we continue to lean into loans and grow loans and if deposit growth does not keep pace with that over the next couple of years, we're going to continue to probably.

Lever up on some term funding until we get bridge to our securities cash flows in 2006 and 'twenty seven.

Great and then just last one for me.

Can you just remind us as to.

I believe there is some seasonality in the insurance business into the fourth quarter.

<unk> down the Vickie.

Remind us the typical magnitude there.

Okay.

Yes, it does vary a bit Chris but typically the renewal periods are January one and July 1st so that usually results in a little higher run rate in.

In Q1 and Q3.

That's just typical insurance renewal periods. So typically we drift down a little bit in Q2 and Q4 in <unk>.

Dimitar Karaivanov: And in that timeframe, I think what our expectation is is that everything else that we're doing with the branch network and existing retail business, including what we did this quarter is going to offset the cost for net zero. Okay, and then it seems based on the markets and sort of the expansion that you they mentioned earlier that you're going into, it seems like a pretty clear signal that organic has now maybe officially maybe the quarter to go officially overtaken MNA is sort of the primary growth mechanism for for community.

Not sure I could peg, an exact number but it could be down a million or two in a quarter.

And then back up in the subsequent quarter, but.

The longer term run rate, which I think dimitar indicated is about it's about $45 million right now in the markets are hard.

For insurance premiums and.

That that translates into higher commission levels.

So our expectations around just kind of.

Absent any sort of acquisitions is that the organic growth rate on commissions as we.

We have a pretty solid outlook on that into 2024.

Dimitar Karaivanov: Is that a fair characteristic? I think the fair characteristic is that it will be a mix going forward and as we've communicated to just be less reliant on MNA and that's why you're going to see some of these expenses every once in a while pop up a little bit more unusual in a given quarter because we're now investing through the PNL versus investing through through the balance sheet. And I think given where rates are today given the time that the regulators take from a bank approval transaction, kind of timeline perspective, the math on the MNA side is just harder and we frankly can't wait for that in order to grow our company.

Great I appreciate you taking the follow ups. Thank you.

Welcome.

Yeah.

And this concludes our question and answer session as well as this conference. Thank you very much for attending today's presentation. You may now disconnect.

Okay.

Dimitar Karaivanov: So we need to find ways to to follow our success which has been great on the commercial side and now we're going to follow it on the retail side and that doesn't preclude any MNA happening throughout that period because in take any of the markets we're looking at to expand and opening three or four or five branches and any of those markets is not going to be the end game for us. So we're going to continue to be looking for MNA in all of our markets but it just will be a complement to what we're doing organically as opposed to the only way of growth going forward.

Operator: Great, thank you for taking my questions.

Chris Facono: And our next question comes from Chris Facono from KBW. Chris, please go ahead. Good morning.

Mark Tryniski: And congratulations, Mark, on the retirement and best switches on the next chapter. I wanted to start off to see what your thoughts are on the insurance business and given recent pure transactions in the market, whether that's something that you would ever consider selling. And if so, just what your thoughts are in terms of the cost and benefit analysis and what goes into that thought process. Good morning, Chris. Well, our culture is an extremely valuable business.

Mark Tryniski: You know, roughly at 5.4 times revenue seems to be going multiple days and 45 million dollars of revenue. It's a very, very valuable business, which is a reminder is not reflected anywhere on the balance sheet, the same way with our benefits business or wealth business. So as it relates to the value to us and to our shareholders, that is the value. And we look at our company as a precious collection of businesses that work in different ways through an economic cycle.

Mark Tryniski: I mentioned in the beginning that our revenue has been essentially the same right around 175 million dollars over the past five quarters and just think about what's occurred through that timeframe. You had NII expanding way up. You had NII contracting way down. And you had market values contracting, then going sideways, then going up now contracting again. And our revenue has not butched. If we were just in one of those lines of businesses, we will have a much tougher time sustaining that revenue and the low volatility and the predictability of our company.

Mark Tryniski: So we think that it adds tremendous value, the insurance business, the benefits business, the wealth business. It matches tremendous value to the banking business and tremendous value to the aggregate company. So we just think it's really valuable. Okay, got it. I mean, just to be clear, I mean, is it something that you, I mean, obviously, you know, you guys see a lot of value with it internally. Is it something that you have, you know, an order looked into?

Mark Tryniski: Or is it, where is the value so high, you know, to your organic basis that, you know, you think it's more valuable in house. We have not because we, we like to focus on keeping our most valuable businesses to our company and our investors. And we don't think that we can replace that kind of a business nor could we buy it again. So it's something that we have that is precious and we intend to grow it, which we have done pretty successfully. That was a 20 million dollar business when we acquired it in 2016. And I think it's on track for well over double that this year.

Chris Facono: Great, appreciate the color.

Joseph Sutaris: And then on the 300 million of the FHLB that you guys locked in at 469, what was the maternity or duration on that?

Joseph Sutaris: Yeah, so it's a criticism, Joel. It's about a three and a half year average life. We've been locked in some amortizing advances and some fixed components effectively that matched the, you know, effective average life of the loans that we've booked generally. And it also bridges us to some of the security cash flows in some of the out years.

Joseph Sutaris: Okay, great.

Joseph Sutaris: And on the remainder of the borrowings on balance sheet, which I believe are customer repurchase agreements, what was the rate on those this quarter? Precisely, Chris, they tend to run in close to municipal book largely and it's kind of in the twos from an overall cost perspective. Some of that is operating accounts, some of that is more, you don't call it rate-sensitive, repurchase agreements, but they're all with our customers, which I think is important. Internally, we look at that as it's more akin to a customer deposit just happens to be set up in a repurchase structure.

Joseph Sutaris: Got it, thanks.

Joseph Sutaris: And then lastly, here's your mind as to what the securities cash flows are coming on off at Q4 and then into 2024 as well, please. Yeah, so securities cash flows are pretty nominal in Q4, about $17 and $18 million, so just a couple of, you know, sort of trickling amortizing payments. And in 2024, it's about $60 million and if you recall, Chris, when we did the repositioning, we brought forward 2024 and 2025 cash flows because the inverted curve and the opportunity that we had, so effectively what is remaining for 2024 cash flows are basically amortizing cash flows off of our MBS portfolio largely.

Joseph Sutaris: Great.

Joseph Sutaris: And do you have just, you know, what the duration of the AFS and the HCM book is right now? Yeah, so the AFS duration is about six years and the HCM duration is about 11 years.

Matthew Breese: Thank you.

Matthew Breese: Thank you for taking my question. And we proceed with a question from Matthew Breeze from Stevens. Matthew, please go ahead.

Matthew Breese: Thank you. Good morning. And Mark, congrats on a long and successful career and best wishes to you in retirement.

Matthew Breese: I'm the question front. First, I was hoping you could touch on the auto book. There's some data points out there just showing gradually deteriorating conditions, delinquencies, and I was curious if you're seeing any signs that are on your rent and how she would be thinking about charge-offs within this book.

Mark Tryniski: I think Matt, as a reminder, our book is prime and super prime, essentially, the average bicycle is 750. You're looking at values, you know, dead-to-income levels that are kind of in the 30s, 20s and 30s. And the credit performance over multiple cycles has been outstanding. So, if you actually look at our charge-offs year-to-date, Joe can correct me here, but I think it's in the 20s. Yeah, basis points. So, frankly, better than we expect it, and frankly, better than our historical averages.

Mark Tryniski: So, we continue to believe that the historical average of kind of 35 basis points plus or minus, you know, five is a number that we expect in terms of loss rates on that paper, but we continue to be surprised so far about the strength of our type of borrowers. And we are well aware of the kind of the subprime delinquency rates, which I think are at an all-time high, as it relates to auto, but we just, those are not our customers.

Mark Tryniski: Just for a little additional color there is, if we look at kind of the delinquency 30s, 89 days, it's been pretty flat for about five quarters. It does fluctuate from quarter to quarter. And if you actually go back to kind of normalized loss rates on a pre-COVID basis, they were kind of in the mid-30s. And as Dimitar said, A and B paper, great paper, and they've been running about half of that.

Mark Tryniski: So, if we normalize, if we normalize, the expectations are kind of mid-30 basis points, 40 basis points of net charge-offs, which will be half of the, I would expect that's going to be half of the industry average.

Dimitar Karaivanov: Got it. All right, I appreciate all that color. Just another one, you know, Long Road remains, you know, very solid. Dimitar, like you said, near record levels is quarter. And I know we've talked a lot about hiring on year end. That said, I was hoping you could discuss the, you know, overall economic vibrancy across your markets and whether beyond just added lending capacity, you're seeing improving trends on the ground. And if there's any markets you'd highlight in particular.

Dimitar Karaivanov: Yeah, I mean, broadly, our markets remain a very good shape, literally in every in every category. You know, some of it is the customers with traffic and some of it is the markets. And there's been a bit of an uptick in upstate New York in terms of investments and inactivity. Certainly we're seeing it in central New York quite a bit. And that's not really just micron related. In fact, very little of it is micron related right now.

Dimitar Karaivanov: But our markets are strong across the board. You know, Northeast PA is doing very well as well. New England remains one of the best markets in the countries it relates to credit. So it is very positive. We're not seeing a lot of cracks. We are seeing some of our borrowers putting down more money. They need to in order to make numbers work with higher rates. But they have money to do so. The cash levels and our commercial borrowers remain strong. And certainly we're not seeing much in the way of challenges on the consumer side.

Joseph Sutaris: Understood. Great. Okay.

Joseph Sutaris: And then Joe, you would mention that you expect, you know, NII, you know, upside from here, but potentially some new compression. I was curious to what extent you expect near-term new pressure. And where might we see that that points the ability of you to look out? Yeah, that's a good question, Matt. You know, as I mentioned, the, you know, if the positives hang in there, which so far they seem like they are for us, they're fairly stable.

Joseph Sutaris: You know, we kind of believe we hit the cross over point for net interest income in Q4. Or, you know, the margin side of it, obviously, for, you know, we, I think our margin for the quarter was 3, 10, new businesses going on at 250 something, you know, the next, you know, the next cycle of long growth is, is if we can, you know, lock into 50 will probably take that. But obviously it's going to negatively impact impact margin.

Joseph Sutaris: But our expectation really is that we will just sort of start to come out of the trough in Q4. You know, just as we kind of looked at kind of, you know, as we exited the quarter, we started to see kind of that, that dynamic change a bit as the, you know, the increases on loan interest income or sort of outpacing the funding cost increases. You know, I'm not sure, you know, that that's, that's obviously a couple months, you know, so it's not quite a trend yet.

Joseph Sutaris: But our expectations are that that trend will continue and that we'll see expansion in Q4. And, you know, I don't know what rate the rate environment will be in, you know, in Q1 of next year and Q2 of next year, but assuming that the other rate environment is, you know, comparable to what it is now. I think our expectation is that we would just continue to see some potential expansion and I, again, just, you know, to be aware some of it is dependent on the stability and growth of the deposit base.

Mark Tryniski: Okay, got it. And then last one for me is just going back to the whole tangible common equity discussion and, you know, well aware, you're kind of views on on the tangible common equity tangible assets ratio. It's just that the market seems to be reacting a bit to it. And I'm curious if that does have an impact or changes you're thinking around, you know, capital adequacy is measured by tangible common equity tangible assets.

Mark Tryniski: It does not change our view on capital adequacy, which remains well, well above the regulatory capital levels that are required for well capitalized institution. It doesn't change how we run the business. It doesn't change, you know, our ability to service customers. As you can see, our balance sheet is in tremendous shape. And again, as we just touched on a couple of minutes ago. The amount of value in our company that is not reflected anywhere in that one single number is just huge.

Mark Tryniski: We talked about the value of insurance business, you can take that and multiply it by three for the value of the benefits business, then you've got the wealth business. So looking at just one number that reflects only one small sliver of the balance sheet as well is to us not a way to economically run the business. The other thing I would just point out is that I don't know how anyone can run a business based on that ratio, given that if you think about what's occurred in the past two or so years, we've done nothing but make money for our shareholders and we have not, you know, given an out of huge amount of money or done a huge amount of buybacks or deluded ourselves in any other way.

Mark Tryniski: The point here is that we've continued to add retained earnings to the balance sheet and the starting point for that ratio was quite a bit higher. So we've done nothing but make money and that ratio changes every quarter. So that's why it's hard for us to really manage a business based on external market factors.

Matthew Breese: Got it. I appreciate all the thoughts there.

Operator: I'll leave it there. Thanks for taking my questions.

Chris O'connell: Thank you and we have a follow-up question from Chris O'Connell. Chris, please go ahead. This question, I was wondering, you know, you had a little bit more sharing purchases this quarter. You have plenty of often the plan before your end. Is that something that you intend to continue to do in the fourth quarter? Yeah, so Chris, I would say potentially yes and probably, you know, continue to be fairly nominal in terms of the, you know, grand scheme of our outstanding shares and even within the repurchase authority, which was 2.7 million shares for 2023.

Chris O'connell: You know, obviously with the valuation down, it makes some sense now to repurchase, getting repurchasing some shares, probably slightly above what, you know, otherwise would be equity plan, you know, creep, if you will. So we've just generally tried to keep our share count flat. There's an opportunity to take it down a bit just because of where the price is.

Joseph Sutaris: But we're not intending to embark on a large, you know, repurchase plan here in at least this quarter. We like to keep a little powder dry for other opportunities. And that's, you know, so we'd rather kind of lean into growth more than we would to, you know, to buy back our own shares. Got it. And just on the cash build-up liquidity build this quarter, you know, locking in the borrowing here, is that something that you expect to kind of right size itself fairly rapidly next quarter back towards the, you know, the levels that you've been in the past few quarters.

Joseph Sutaris: Or do you think some of that will stick around and kind of come in over time or just stay flat depending on, you know, how long growth shakes out. Yeah, so Chris, I think we finished a quarter of a little over $200 million in cash equivalence. We do have a bit of seasonal pattern in Q3 and Q4 and tax collection. My expectations is that typically, I'll say in Q1 or less so, but in Q2, we start to see some of that drift down a bit, but right now we expect that those kind of cash equivalence could carry some of the long growth into Q4, and then we'll have to reassess in Q1.

Joseph Sutaris: But our expectation, the longer term basis is that as we continue to lean into loans and grow loans, and if the positive growth does not keep pace with that over the next couple of years, we're going to continue to probably lever up on some term funding until we get one for me.

Joseph Sutaris: Can you just remind us as to, I believe there's some seasonality in the insurance business into the fourth quarter where it comes down a bit, can you just, you know, remind us as the typical magnitude there? Yeah, it does vary a bit, Chris, but typically the renewal periods are January 1st and July 1st, so that usually results in a little higher run rate in Q1 and Q3. That's just typical insurance renewal period, so typically we drift down a little bit in Q2 and Q4, and I'm not sure I can pick an exact number, but it could be down a million or two in a quarter, and then back up in the subsequent quarter.

Joseph Sutaris: But the longer term run rate, which I think the inventory indicator is about $45 million right now, and the markets are hard for insurance premiums, and that translates into higher commission levels. So our expectations around just kind of the, you know, absent any sort of acquisitions is that the organic growth rate on commissions is, you know, a pretty solid outlook on that into 2024. Great, appreciate you taking the follow-ups. Thank you.

Operator: And this concludes our question and answer session, as well as this conference. Thank you very much for attending today's presentation. You may now disconnect.