Community Financial System, Inc. Q3 FY2020 Earnings Call

Welcome to the Community Bank System Third Quarter 2020 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual 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. They will be joined by Joseph Serbun, Executive Vice President and Chief Banking Officer, for the question-and-answer session. Gentlemen, you may begin.

Thank you, Jason. Good morning, everyone. Thank you as well for joining our Q3 conference call, and we hope you and your families are well. This quarter was certainly different than the last, with less day-to-day and sometimes minute-to-minute focus on COVID, PPP, loan deferrals and the Steuben acquisition, and we seem to have settled into a reasonably effective operating cadence. Our operating earnings for the quarter were a bit better than we might have expected given the yield curve and muted credit demand, but our nonbanking businesses had a strong quarter. In fact, year-to-date, they're up 4% on the top line and over 6% on the bottom line, so a very solid performance for those businesses. The quarter was also very good for mortgage banking, credit, deposit growth, consumer deposit fees, and the Steuben acquisition was also very additive to our performance. The only real negative in the quarter, notwithstanding the litigation accrual that Joe will discuss further, was credit demand, excluding mortgage lending. The total loan book was up about 1% with slight declines in every business. The mortgage business was quite strong, and we sold over $100 million of lower-rate conforming production into the secondary market, where premiums are, at the present moment, very generous. So overall, we're satisfied with the quarter and with current operating trends given the environment. As we head into the last quarter of the year and into 2021, we will continue to be mindful and focused on the potential headwinds, including credit, the economic environment and interest rates. Despite the forward headwinds, we think we're in pretty good shape to capitalize on opportunities that we expect lie ahead. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the earnings results for the third quarter of 2020 were very solid, especially in light of the economic challenges and industry headwinds we faced throughout the year. The company recorded $0.79 in fully diluted GAAP earnings per share for the third quarter. Excluding $0.04 per share for litigation reserve expense net of tax effect and $0.02 per share for acquisition-related expenses net of tax effect, fully diluted operating earnings per share were $0.85 for the quarter. These results were $0.01 per share higher than the third quarter of 2019 fully diluted operating earnings per share of $0.84 and $0.09 higher than the linked second quarter 2020 fully diluted operating earnings per share of $0.76. The company's adjusted pretax pre-provision net revenue per share of $1.10 was consistent with the third quarter of 2019 and $0.02 per share higher than the linked second quarter results. I will next touch on the company's balance sheet before providing additional details on the company's earnings performance for the quarter. The company closed the third quarter of 2020 with total assets of $13.85 billion. This was up $401.1 million or 3% from the end of the linked second quarter and up $2.25 billion or 19.4% from a year earlier. Similarly, average interest-earning assets for the third quarter of 2020 of $11.96 billion were up $852.5 million or 7.7% from the linked second quarter of 2020 and up $2.15 billion or 21.9% from 1 year prior. The very large increase in total assets and average interest-earning assets over the prior 12 months was driven by the second quarter of 2020 acquisition of Steuben Trust Corporation and large inflows of government stimulus-related funding and PPP originations. Ending loans at September 30, 2020, were $7.46 billion, up $605.5 million or 8.8% from 1 year prior due to the Steuben acquisition and the origination of $507.4 million of PPP loans. Ending loans were down $69.4 million or 0.9% from the end of the linked second quarter due to a decline in business activities in the company's markets due to the COVID-19 pandemic. The company's average total deposits were up $823 million or 8.1% on a linked-quarter basis and up $2 billion or 22.6% over the third quarter of 2019. A significant portion of these funds were invested in overnight federal funds sold, which increased average cash equivalents in the quarter to $1.3 billion, $635.1 million or 95.4% higher than the third quarter of 2019 and $478 million or 58.1% higher than the linked second quarter balances. The company's capital reserves and liquidity profile remained strong in the third quarter. The company's net tangible equity to net tangible assets ratio was 9.92% at September 30, 2020. This was down from 10.08% at the end of the second quarter, but up from 9.68% 1 year prior. The company's Tier 1 leverage ratio was 10.21% at the end of the third quarter, which remained over 2x the well-capitalized regulatory standard of 5%. The company has an abundance of liquidity resources and is extremely well positioned to fund future loan growth. The company's funding base is largely comprised of low-cost core deposits. At September 30, 2020, checking and savings account balances represented 71.3% of the company's total deposit base. The combination of the company's cash and cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available-for-sale investment securities portfolio provided the company with over $4.8 billion of immediately available sources of liquidity. The company recorded total revenues of $152.6 million in the third quarter of 2020, an increase of $4.3 million or 2.9% from the prior year's third quarter. The increase in total revenues between the periods was driven by increases in net interest income, banking-related noninterest revenues and noninterest revenues derived from our financial services businesses. Net interest income was up $1.7 million or 1.9% between comparable annual quarters, driven by a $2.15 billion or 21.9% increase in average assets between the periods, offset in part by a 61 basis point decrease in net interest margin. The company's fully tax-equivalent net interest margin was 3.12% in the third quarter of 2020 as compared to 3.73% in the third quarter of 2019. A precipitous drop in market interest rates and the significant increases and change in the composition of earning assets between the periods, including a $635.1 million increase in average cash equivalents, negatively impacted the company's net interest margin. Noninterest banking revenues were up $1.2 million or 6.9% from $17.9 million in the third quarter of 2019 to $19.1 million in the third quarter of 2020. This was driven by a $4 million increase in mortgage banking revenue, offset in part by a $2.8 million decrease in deposit service and other banking fees. Employee benefit services revenues were up $0.8 million or 3.4% from $24.3 million in the third quarter of 2019 to $25.2 million in the third quarter of 2020, driven by increases in plan administration and recordkeeping revenues and employee benefit trust revenues. Wealth management insurance services revenues were also up $0.5 million or 3.6% between comparable annual quarters. Similarly, total revenues were up $7.7 million or 5.3% on a linked-quarter basis due to a $1 million or 1.1% increase in net interest income, a $4.8 million or 33.4% increase in banking noninterest revenues and a $2 million or 5.1% increase in revenues from our financial services businesses. The substantial increase in banking noninterest revenues was driven by a $2.5 million increase in mortgage banking income due to an increase in secondary market mortgage sales activities, a $2.3 million increase in deposit service and other banking fees as the deposit transaction activity levels rebounded in the third quarter. The company recorded $1.9 million in the provision for credit losses during the third quarter of 2020. This amount was significantly less than the amounts recorded in the prior two quarters of 2020 and only $100,000 greater than the amount recorded in the third quarter of 2019. The decrease in the provision for credit losses during the third quarter as compared to the prior two quarters was due to improving economic conditions, modest levels of delinquent nonperforming loans, a decrease in loans outstanding, low levels of net charge-offs and a large decrease in the number and amount of the company's loan balances subject to borrower forbearance. The company recorded loan net charge-offs of $1.3 million or 7 basis points annualized during the third quarter of 2020. Comparatively, low net charge-offs in the third quarter of 2019 were $1.6 million or 10 basis points annualized. On a year-to-date basis, the company reported net charge-offs of $3.7 million or 7 basis points annualized. This compares to $5.4 million or 11 basis points annualized for the 9-month period ended September 30, 2019. Exclusive of $0.8 million of acquisition-related expenses and $3 million of litigation reserve charges, the company recorded $93.2 million of operating expenses in the third quarter of 2020. This compares to $90.9 million in operating expenses reported in the third quarter of 2019, exclusive of $6.1 million of acquisition-related expenses, and $87.5 million in operating expenses in the linked second quarter of 2020, exclusive of $3.4 million of acquisition-related expenses. Although the company continued to experience reduced levels of business activities during the third quarter of 2020 due to the ongoing COVID-19 pandemic, the resumption of certain marketing and business development activities and the incremental costs associated with operating a larger organization as a result of the acquisition of Steuben in the second quarter of 2020 resulted in a $2.3 million or 2.6% net year-over-year increase in operating expenses between the comparable third quarters. This increase in operating expenses between the quarters was attributable to a $1.2 million or 2.2% increase in salaries and employee benefits, a $1.4 million or 13.3% increase in data processing and communications expenses, a $0.3 million or 3.4% increase in occupancy and equipment expense, offset in part by a $0.2 million or 2.3% decrease in other expenses and a $0.4 million or 9.6% decrease in the amortization of intangible assets. The $5.7 million or 6.5% increase in operating expenses between the third quarter of 2020 and the linked second quarter was driven by a $2.6 million or 4.7% increase in salaries and employee benefits, a $1.3 million or 11.7% increase in data processing and communications expense, a $0.4 million or 3.9% increase in occupancy and equipment expense and a $1.4 million or 16.4% increase in other expenses. The effective tax rate for the third quarter of 2020 was 20.3%, consistent with the linked second quarter. During the third quarter, the company accrued $3 million or $0.04 per fully diluted share net of tax effect in litigation reserves related to a class action suit brought against the company for its deposit account overdraft disclosures. The company anticipates it will execute a settlement agreement with the plaintiff on the matter in the fourth quarter. The agreement will be subject to the final approval of the court, and the company does not anticipate that additional reserves will be required for this matter in future periods. From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-19-impacted borrowers and develop loss mitigation strategies on a case-by-case basis, including, but not limited to, the extension of forbearance arrangements. At September 30, 2020, 216 borrowers, representing $193 million or 2.6% of loans outstanding, were active under COVID-related forbearance. As of last week, the outstanding loan balances under active forbearance dropped below $125 million. Although these trends are favorable, the company anticipates that the number of delinquent nonperforming loans will increase over the coming quarters. At September 30, 2020, nonperforming loans increased to 43 basis points or 0.43% of total loans outstanding. This compares to 0.42% of total loans outstanding at the end of the third quarter of 2019 and 0.36% at the end of the linked second quarter of 2020. Total delinquent loans, which includes nonperforming loans and loans 30 or more days delinquent, of total loans outstanding was 0.79% at the end of the third quarter of 2020. This compares to 0.85% at the end of the third quarter of 2019 and 0.72% at the end of the linked second quarter of 2020. The company's allowance for credit losses increased from $64.4 million or 0.86% of total loans outstanding at June 30 to $65 million or 0.87% of total loans outstanding at September 30, 2020. The allowance for credit losses at September 30 represented over 10x the company's trailing 12 months of net charge-offs. Operationally, we will continue to adapt to the changing market conditions and remain very focused on asset quality and credit loss mitigation. We anticipate assisting the substantial majority of the company's PPP borrowers with forgiveness requests in the fourth quarter of 2020 and throughout 2021. The eligibility of the borrowers' forgiveness requests and the SBA's ability to provide loan forgiveness in a timely manner is uncertain at this time. For these reasons, it is uncertain as to the timing in which the company's remaining $11.3 million in net deferred PPP fees will be recognized through the income statement. Loan demand may also be impaired by weak economic conditions. We are also uncertain as to whether or not the high levels of deposit liabilities will be maintained, spent down or increased by further additional stimulus. Since the ultimate effect of the COVID-19 pandemic on the company's credit losses remains uncertain, the decrease in the provision for credit losses during the third quarter should not be interpreted as a trend or utilized to forecast provision in future quarters. Although the credit metrics that management historically utilizes to determine expected loan losses remained subdued in the third quarter, the company anticipates increases in delinquency and nonperforming loan balances in future quarters as it is unlikely that all COVID-affected borrowers will resume full payment of contractual amounts upon the expiration of their forbearance agreements. Although we have begun to deploy portions of our cash equivalent balances into investment securities to increase interest income on a going-forward basis and provide a hedge against the sustained low interest rate environment and anticipate recognizing the substantial majority of deferred PPP fees over the next several quarters, we also expect net interest margin pressures to persist and remain well below our historical levels. Fortunately, the company's diversified noninterest revenue streams, which represent approximately 38% of the company's total year-to-date revenues, remain strong and are anticipated to mitigate some of the margin compression. In addition, the company's management team is actively developing and implementing various earnings improvement initiatives, including potential revenue enhancements and cost reduction measures intended to favorably impact future earnings. The company's dividend capacity remains strong. Accordingly, the company expects to continue to pay a quarterly dividend consistent with past practice. Undoubtedly, the COVID-19 crisis has changed the near-term outlook for society in general as well as expectations around economic conditions. With this said, we will continue to support our stakeholders in a thoughtful, disciplined and compassionate manner. I believe the company is well prepared to endure its impacts. Thank you. I will now turn it over to Jason to open the line for questions.

The first question comes from Alex Twerdahl from Piper Sandler.

First off, I just wanted to continue some of the last comments that you were talking about, Joe, with respect to the NIM and NII, and obviously, a pretty challenging environment from an interest rate standpoint. I was wondering if you can talk a little bit through some of the levers that you guys have over the next couple of quarters to keep NII moving in the right direction. I know there's going to be some noise with PPP, but if we sort of back out the accelerated accrual of the fee income as it comes in, what do you have out there to actually keep that number going higher?

Well, Alex, you touched on it pretty accurately. It is a challenge. The interest rate environment is not kind to banks right now with a very flat yield curve. So if that persists for an extended period of time, it will be a challenge for the entire industry, and I think it's already being recognized in the last couple of quarters. With that said, the balance sheet and the earning asset balances have grown significantly. We expect that some of that money will stick around, so we will begin to deploy some of that into longer-term securities to effectively throw an anchor out there from a net interest income perspective for a longer-term period to protect us from continued downward pressure on the margin. So moving some of those funds from a 10 basis point yield up to something likely north of 1% will at least be helpful. Also, loan demand has not been very strong given the economic conditions, but our loan yields have held in the quarter on a blended basis. We averaged a little over 4% for new loan generation. So obviously, we still have a pretty good credit spread in that piece. But overall, it will be challenged if the rate environment stays where it is, we don't get slope in the yield curve and we don't have a significant increase in loan demand. You mentioned the PPP factors; they will create some volatility in reported net interest margin and net interest income through most of 2021. As I mentioned, we still have a little over $11 million of deferred fees to recognize next year.

Okay. And then I think you talked about applying some securities investments to put cash to work. I wasn't sure if you've done some of that already in the fourth quarter and kind of how much we could expect of that 10 basis points to north of 1% in our models for the fourth quarter, if there's any way to get a handle on the magnitude of that.

Yes. We have started the process of investing some of that cash. We have some maturities in the fourth quarter, and we also are investing some of that excess cash. So on a net basis, we expect to increase securities balances by roughly $500 million to $600 million in the quarter, essentially taking about that amount from cash equivalents and deploying into instruments yielding somewhat higher rates. There will likely still be some cash on the balance sheet. The permanence of that is uncertain and we also don't know if there's another round of stimulus coming, so we will monitor those items as we move into 2021. The expectation is that we'll have roughly $500 million to $600 million more net in securities balances at the end of the fourth quarter.

Okay. Great. And then what about on the liability side in terms of borrowings? You still have a small amount of borrowings on the balance sheet. Are any of those coming due or repayable in the near term?

We do have some trust preferred securities, about $75 million. They're in the window to redeem, so we'll be evaluating that in 2021. That is one item we're looking at. The other borrowings you're probably referring to are repurchase agreements, which are repurchase agreements with customers, largely our public funds customers in our Vermont markets. We generally view those, even though they're technically borrowings, as customer relationships and more deposit-like. So no anticipated reductions in those relationships and those borrowings.

Okay. And then just finally for me, looking at fee income—we had one full quarter—deposit service and other banking fees still seem a little depressed in the third quarter versus a year ago. With the acquisition, it should be a bit higher. Should we expect a full rebound in the fourth quarter in that line item? And how are you thinking about mortgage banking on a go-forward basis? Is this level maybe not sustainable until 2021, but is the pipeline still pretty full? Do you expect to sell an equivalent amount in the fourth quarter?

I would not expect a full rebound in the fourth quarter for our banking fee line items. Many consumers remain reticent to spend. We've seen some pickup in transaction activities and fewer overdraft occurrences than in prior quarters, so I would not anticipate a full rebound immediately. Perhaps by the middle of next year we'll see some of those noninterest deposit service fees rebound. Regarding mortgage banking revenues, we saw very attractive premiums and pricing in the mortgage market over the last couple of quarters and chose to sell some originations into the secondary market. We need earning asset yields at reasonable levels over the coming quarters, so we would expect to wind down some of the mortgage banking activities and potentially look to hold some of those originations in the portfolio in future quarters.

The next question comes from Russell Gunther from D.A. Davidson.

I wanted to start with questions around the expenses. First, a little more acute in terms of the drivers of the increase in the data processing line. What was the rationale for that this quarter? And how do you expect that to trend? And then a bigger picture follow-up in terms of comments on taking a look at the expense base and any opportunities to take some expenses out of the run rate and help support positive operating leverage?

Russell, with respect to the data processing and communications line, I don't think there's anything that would lead us to believe this is an elevated ongoing run rate. It's largely a timing issue relative to the same quarter last year. Much of it is in communications due to additional branches and centers — more data lines to maintain — and some higher payment processing costs. I don't view it as a concerning trend other than normal growth-related inflationary pressures. With respect to overall core operating expenses, including Steuben on a normalized level, the expectation was a run rate somewhere between $95 million and $96 million for the balance of 2020. With initiatives to minimize expense growth next year, I think that is a fair run rate for 2021, all-in including Steuben. So $95 million to $96 million of operating expense run rate is reasonable.

Okay. No, that's very helpful, Joe. Then switching gears a bit: you touched on challenges with organic growth balances and macro uncertainty. As you think about the trajectory of loan growth into the fourth quarter and into 2021, are there pockets of strength that could help support positive growth next year? How are you thinking about loan balances going forward?

Russell, I'll take that. To give perspective, our current pipeline in the residential mortgage line of business is running about $265 million, which is a good number. The commercial pipeline is running about $250 million to $300 million, which is a little light. On the indirect side, there's plenty of supply if you are willing to buy deep and buy low; we don't intend to buy deep or buy low, so we probably won't see much growth there. The commercial portfolio has pockets of opportunity, primarily in multifamily sectors and in our larger markets like Syracuse, Buffalo, Rochester and the Albany capital district. I don't expect it to be overly robust. We expect the pipeline to hang around the $250 million to $300 million range. Historically we were closer to $455 million and that's dropped off as a result of COVID.

The next question comes from Erik Zwick from Boenning and Scattergood.

First, I wanted to ask about the employee benefits business. It has been a great source of revenue for the bank, especially with net interest income headwinds. Could you provide an update on the growth strategy for that business? Also, what is the typical term of a customer contract and does the sales cycle align with the traditional end-of-year benefit cycle or is it more of an ongoing, full-year effort?

Strategically, it's the same approach we've always used: continue to be disciplined about growing that business both organically and through high-value M&A opportunities. We'll continue to pursue that strategy. The revenue run rate for that business is close to $100 million and includes several pieces: collective trust, 401(k) platform, actuarial consulting and others. They integrate well together. On the organic side, over the last few years we've refined cross-selling across those businesses to support each other, so organic growth is driven both by new market opportunities and cross-selling to existing customers. We should assess how much organic growth is outside the current customer base versus inside; that's a fair question. Much of our effort is internal cross-selling to existing customers, which often involves CFOs, HR directors, and investment managers. The growth strategy will be internal cross-selling, organic market growth, and high-value M&A. We like the mix of businesses. The 401(k) business is more mature, and we've invested in other lines that are growing more rapidly than that core business. We'll continue to pursue opportunities in growing sectors. Year-to-date the business is having an excellent year — up roughly 6% to 8% in earnings year-to-date. We're also seeing more M&A activity in that space in recent quarters, which is positive for us.

I appreciate the detailed answer. Looking at Page 15 in the supplemental deck on the health care and social assistance portfolio, about 10% of the portfolio still had forbearance at the end of the quarter, which seems higher than some other portfolios. You mentioned overall forbearance continued to come down over the past few weeks. Has that continued in this portfolio? Are any segments more stressed or recovering better?

Erik, as of October 22, in the health care and social assistance portfolio we had 7 deferrals totaling $15 million. Looking at the breakout on Page 15, the only segment of concern would be nursing facilities because of COVID and restrictions placed upon them. Everybody else in that portfolio is performing well. I'm not suggesting care facilities aren't performing; it's just that nursing facilities are higher concern due to the population they serve and the COVID-related restrictions.

The next question comes from Chris O'Connell from KBW.

You have a very strong capital and liquidity position. As you think about that and the current stock price, are you considering buybacks at all? If you aren't considering buybacks now, why not, and what would get you involved?

That's a good question. Our challenge with buying in shares is that given our valuation and price, it is dilutive to tangible book value. Additionally, we've been an active acquirer over a long period and prefer to preserve some capital for M&A. At this time, we'd rather use excess capital for accretive M&A transactions than for stock repurchases.

Got it. Following that, you mentioned increased M&A conversations and opportunities in the fee side of the business. How are those conversations or opportunities looking on the bank side?

M&A activity on the bank side has been slower. Boards and management teams are grappling with the new environment, COVID-related impacts, credit concerns and the yield curve. Also, smaller banks' multiples are down, making strategic partnerships less likely — if your stock is much lower than earlier in the year, it's hard to transact. The environment will get more challenging, particularly related to interest rates and possibly weaker credit demand. Many banks have fewer levers than we do; they rely heavily on credit growth. We have more diversified levers. Over the next 18 months discussions around strategic partnerships will likely grow, but currently most teams are focused on managing through the near term. Changes in administration or regulatory regime could also alter the environment and create opportunities in 2021.

If a deal came to you in the next three or four months, would you have the tools, resources and information to evaluate and execute on it given the credit environment? Or would you prefer to wait another quarter or two?

I'd be fine taking a look at any opportunity that met our general criteria: a higher-quality franchise, a good fit for us, and capable of creating sustainable economic value for shareholders. If the target has the kind of portfolio data and reporting we require, we would have enough information to evaluate it. A lot depends on the level of granularity they can provide, but we would certainly consider compelling opportunities.

One last question: you made good progress on the deferral bucket — down to about $125 million. What's left in the deferral bucket are credits from significantly impacted sectors. Have you made loss assumptions you can share for those higher-impact deferrals? Do you see them translating into actual losses as you work through them?

As we approach potential subsequent rounds with some borrowers, we'll evaluate them for nonperforming and nonaccrual status and take those decisions on a case-by-case basis. We hope some borrowers will see improvements and resume pre-COVID cash flows, but realistically, in our markets heading into winter there will be challenges, particularly for hospitality borrowers.

Chris, to add some context: in the second quarter we had roughly $700 million in deferrals, or 9.4% of the total portfolio. In the third quarter that dropped to $192 million or 2.6%. As of last Friday, we were down to about 1.6% or $121 million. We've made significant progress. Some accounts on deferral will not all make it and could become delinquent; we will apply our standard loss mitigation processes. We will continue to work through each deferral individually to determine classification and approach to minimize potential loss.

The next question comes from Matthew Breese from Stephens Inc.

A couple of follow-up questions. On the lodging book, have you seen any nearby transactions that give you confidence or concern about underlying collateral values? Also, what was the all-in PPP income for the quarter?

A couple of data points on the lodging portfolio: our current weighted-average loan-to-value is less than 55%. Speaking with some industry specialists and appraisers, we estimate property values may have declined roughly 20% or a bit more due to COVID. We canvassed our portfolio: 2020 year-to-date occupancy averaged 42%, benefiting from a stronger June through September; September ran about 52% occupancy. If society remains open, these hospitality operators have a reasonable opportunity to weather this. The majority of our portfolio pre-COVID comprised known operators with strong management, liquidity and lower leverage, and we expect many will make it through. Not all will, but the lion's share have a real chance.

Do you think LTVs under 55% provide the bank enough protection, if there is a sale, to avoid charge-offs? It sounds like, so far, you feel OK about that.

Yes, correct.

What was the all-in PPP income for the quarter?

$3 million. That includes interest and the recognition of deferred fees.

Last question: Mark, you talked about M&A and don't expect anything near term, but as the environment persists and your currency advantage remains intact, would you consider taking advantage of that to do a larger deal? I know it's important that Community Bank System DNA survives — would you consider a larger transaction, even an MOE, if it presented itself?

Unlikely. The risk/reward profile of an MOE or a larger transaction is not generally conducive to our long-term value-creation objectives. You can model many things, and an MOE can be additive to EPS, but it is not necessarily sufficient to achieve a double-digit annualized return to shareholders. Smaller transactions tend to be more profitable, higher-value and lower-risk. I'd prefer multiple small transactions rather than one large one because the risk/reward is different. We have a capable team for integration and conversions, and we would rather pursue deals in the half-billion to a couple-billion range. There may be a couple of $4 billion institutions that could meet our criteria, but those are rare. For the most part, we'll look for opportunities within our footprint or contiguous markets in the smaller size range.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tryniski for any closing remarks.

No closing remarks other than thank you all for joining. We will talk to you in January, and I hope you are well over the wintertime. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.