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 Security 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 report 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.

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 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 non-public 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 only 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 are 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 the 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 to Kinderhook and Steuben transactions should be nicely additive to 2020. Joe?

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 Kindrehook transaction early in the quarter, increased our dividend $0.03 per share, redeemed $22.7 million of Trust Preferred Securities, navigated two interest rate cuts by the Fed, entered into a definitive agreement to acquire Steuben Trust Corporation and produced the 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 our acquisition of 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 $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 would produce 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%,…

Thank you. [Operator Instructions]. And our first question will come from the line of Alex Twerdahl of Sandler O'Neill. Please go ahead

Hey good morning guys.

Good morning, Alex

Good morning, Alex.

Just 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?

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 can certainly extend for greater periods of time depending on the capacity of the counterparty to provide information.

Okay. Just trying to figure out the cadence of these deals is going to be in the future years. Talking about sort of specific organic trends had some loan growth for the first time, or some better loan growth I should say, the best in a number of quarters. This quarter, I know it’s helped a little bit by seasonality in the municipal business, but was growth more a function of the lack of pay offs that you've been seeing in the 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 of Kinderhook or is there something else that we should be thinking about there?

Yes, I think Alex in the third quarter we had pretty good performance from Vermont. We had good performance in the Capital District Albany and also the southern region of New York was very good. So Syracuse, Rochester, Western New York, Finger Lakes was also was very good. If you look at it year-over-year P.A. has been very good, and likewise kind of the southern and western parts of New York and the capital district [Indiscernible] has been very good year-over-year. So it really depends and it can kind of change quarter-to-quarter with respect to early payouts. 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. Some of that is a function of as I've gotten 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 credit to do slightly larger credits and manage effectively larger relationships and syndication kind of club deals with others, so I think all of those things have played into that, but we clearly have improved our organic loan generation ability over the last couple of years.

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

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

And then, just switching gears just to touch on the margin here, even with the acquisitions in the Fed dividend et cetera, it bounced around a little bit, but over the last couple of years your margins been pretty steady kind of 365 to 380. And with the face of now two fed cuts and other one potentially next week and maybe even another one this year, I mean, do you have enough tools? Because on the way up obviously deposits were huge benefit. On the way down they're not going to be as much of a benefit. Are there enough tools with short-term nature of your securities portfolio and kind of the stuff comes due and the reinvestment rates et cetera and it keep the margin within that range over the foreseeable future?

So, Alex, I think we've kind of given general expectations around 370. Last quarter, we came a little higher. This quarter, loan yields held up fairly well. The quarter, I think were down on net basis one -- down one basis point net quarter-over-quarter and that was against the headwinds of decreases that the FOMC put through. Just to kind of give you some color. We have about a $1 billion in loans that are subject to repricing either linked to prime or to lesser extend LIBOR. So, when we get a decrease from the FOMC in primary, they have 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 costs 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 are 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 troughs this quarter. So that's going to help a little bit, so I think there's couple of tools left. The other think I would notice 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 non-conforming 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 book those at about kind of par with our existing book yield. So as new loans went on, they went on pretty much close to or every 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 new loan yields levels very similar to our book yields.

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

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

Great. Thanks for taking my questions.

Thank you Alex.

Thanks, Alex.

[Operator Instructions]. And we'll now take our next question from Russell Gunther of Davidson. Please go ahead.

Hey, good morning, guys.

Good morning, Russel.

Good morning, Russel.

Wanted to follow-up on the expense outlook here, which I believe you've 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 sort of in the run rate already from those related costs saves and how that should trend going forward?

Yes. Russell, we've 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 the 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 – and in fact 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 million is a more general sense of the fourth quarter and beyond that we start to I guess get back to inflationary trends.

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?

Well, I would say we expected to continue to grow as it has for 15 years. I think, one the challenge just as the emphasis gets bigger, growing at the same rate gets more difficult, but we've been pretty solid and steady growth in that business. Now that the run rate and revenues almost $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 its going to grow at a smaller dollar volume basis, which is helpful to get a certain amount of fixed cost there. That's nothing considerable. So you can expand the margin and the margin on that business is actually much higher than it was 10 years ago. And 10 years goes its 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 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 we expect that necessary in the smaller dollar base.

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 it can be done kind or organically?

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 appoint where it makes a lot less sense for a strategic buying than it does in 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 call them smaller acquisitions that already kind of have the platform that we can leverage better. We've also had conversations about existing opportunities that we can build out our 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.

I appreciate your thoughts there, Mark. Thank you for that. Last one from me guys, you had 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 it impacts the pro forma balance sheet?

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

Very good. Thank you, guys for taking my questions.

Thanks Russell.

Thank you.

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

Thanks. Good morning gentlemen.

Good morning, Collyn.

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?

Just quarter about $700,000 to the goods.

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?

Yes. There's additional credit is 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 two quarters, and we would likely exhaust the credit after a couple of more quarters.

Okay. Okay, all right. That's helpful. And then just on the deposit growth side, I know you'd indicated overall with the impact was from Kinderhook, but you guys saw some really good non-interest bearing deposit growth this quarter. So just trying to understand the movement within some of those segments?

Yes. I think it was -- 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 the couple hundred million dollars or so. So, we like to look at kind of public funding separately from the non-public. We continued over the course. We've had very good growth in kind of the core checking and savings money market, non-public funds. It never moves dramatically, but it kind of a slow and continual cadence of low single digit growth in that core deposit base. As Joe said, about 68% of our deposit right now are in checking and savings account and have actually very long lives in our markets, so, nothing tremendous, Collyn. I don't think shareholders want us to growing our deposits 10% because we're not in those markets and that means we paid up to acquire them. So we're trying to do it in 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.

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. We're just curious, is it breakout there? And if you know why that is? Is it just because you're going to deemphasize that line going forward?

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

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

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.

Okay, okay. And then, just too sort of a little bit more 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, 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? We're assuming that the last Fed cut comes in the first quarter of 2020, sorry.

Yes. I mean, if we have two more Fed cuts, it will likely negatively impact the margin in 2020. I think it was pointed out earlier in the call even in the post crisis here we tend to keep our margin kind of in that 360 [ph] range, both 360, low 360s to mid-360s. Our expectations would be that we would probably maintain it in the 360s level based through our most of 2020. Obviously, if the yield-curve stays flat to inverted and low for very long period of time that will become more difficult just to stay in years beyond 2020.

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

Yes. I think we will have – I think there's a pretty long runway of opportunities for us in the future and we try to be very disciplined about the partners that we're participating with. Steuben is a good example. It might not be as big as other thing we can do, but you can look at – it’s a very high performing institution for it size. I mean, the ROAs over 120 [ph], the efficiency ratio 60, the asset quality is clean. They have a nice trust department, so it's in our footprint. We have some branch overlap. Its just -- it’s a very good profile of the kind of partner that we're interested in. So, I think there is a number of those across our footprint. I would just kind of repeat historically our acquisition strategy has been to be disciplined due high value, lower risk kind of things where the risk return profile was asymmetric and Steuben -- as did Kinderhook clearly fit that profile. If you look at 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, you can go very far north and east to where we are. We can move a little bit south and west, and so we've had conversation with institutions and 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 rely too much on M&A for the earnings growth that we were getting. We need it to improve on that. I think we have improved…

Okay, that's great. That's what all I had. Thanks guys.

Thanks Collyn.

Thanks Collyn.

Our next question comes from the line of Erik Zwick of Boenning & Scattergood. Please go ahead sir.

Good morning guys.

Good morning, guys.

Couple of questions on the Steuben transaction. First, was it’s a competitive bid situation or a negotiated transaction?

I'm not going to comment at this junction, Erik, we just announced, so I will –I guess its probably more to be disclosed going forward.

Understood. That's fine. And then, I just want to make sure. I hear the comments clear with the 30% targeted cost savings that is not currently incorporate any targeted branch closures that you may revisit at our later time. Did I hear that correctly?

That's right.

Okay. And then just look at there net interest margin, looks like its been pretty stable over that in the past year, given the outlook for potentially they come fed cuts into the yield curve stay flat, would you expect any major changes to their margins between now and targeted deal closing? And I guess the hear of my question, just kind of zeroing on the pro forma impact to that pro forma margin of the company?

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 hit north and go up, but potentially would drift down a little bit with the FOMC cuts, but nothing really ahead of alignment with the industry in general.

Okay. And maybe just kind of one 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, opportunity to let some of those run off and help you withstand at the headwinds that we've just discussed?

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 jumbo book is probably not going to grow and may drift down a little bit over future quarters.

Great. Thanks for taking my questions.

Thanks Erik.

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

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

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.