Community Financial System, Inc.

Good day and welcome to the Community Bank System second quarter 2021 earnings conference call. Please note that this presentation contains forward-looking statements within the provisions of the Private Security Litigations Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, market, and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from those results discussed in these statements. These risks are detailed in the company's annual report and on Form 10-K with the Security and Exchange Commission. Today's call's presenters are Mark Treninsky, President and Chief Executive Officer, and Joseph Sataris, Executive Vice President and Chief Financial Officer. They will be joined by Joseph Serban, Executive Vice President and Chief Banking Officer, for the question and answer session. Gentlemen, you may begin.

Thank you, Paul. Good morning, everyone, and thank you for joining our second quarter conference call. Hope you're all well. I'll start with a brief comment on earnings, and Joe will provide more detail. The quarter was about as we expected with the reported earnings strength driven by a reserve release. Beyond that, the margin continues to be a headwind, but credit overall, deposit fees, and the strength of our financial services, businesses are tailwinds. From a business line perspective, commercial is flat, ex-PPP and muni loans, but the pipeline is growing back post-COVID quicker than we expected. That's good news. The mortgage business is strong with the biggest pipeline we have ever had, but payoffs are elevated also, so the book is growing more slowly than it might otherwise. The indirect lending business had a great Q2 with outstandings up 8% over Q1. Deposit service fees continue to rebound from the pandemic impact and were up 18% from the depressed Q2 of 2020. And like the entire industry, deposits are up. Our financial services businesses were the star performers of the quarter with combined revenues up 14% and pre-tax earnings up 25% over 2020. We were also pleased to announce earlier this month the acquisition of Fringe Benefits Design of Minnesota, provider of retirement plan administration and consulting services of offices in Minneapolis and South Dakota. The benefit space is very active right now in terms of opportunities, and we expect more to come. The benefits of a diversified revenue model have never been so apparent. As we announced last week, our board has approved a $0.01 per quarter increase in our dividend, which marks the 29th consecutive year of dividend increases, and we think a validation of our disciplined and diversified business model. As we announced in March, we have appointed Dimitar Kuryvinov as our Executive Vice President for Financial Services and Corporate Development, and he began this role in June. He joined us from Lazard, where he was a Managing Director in the Financial Institutions Group and has over a dozen years of experience in investment banking, serving clients in the banking, benefits, and fintech space. I've known and worked with Dimitar for nearly his entire career, and I'm thrilled to have him on board supporting our growth initiatives. Looking ahead, we will be doing our best to manage the changing winds. We have the headwind of margin pressure, but growth, credit, the momentum of our financial services businesses, and liquidity deployment are all tailwinds. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the second quarter earnings results were solid with a fully diluted gap in operating earnings per share of $0.88. The gap earnings results were 22 cents per share or 33.3% higher than the second quarter of 2020 gap earnings results and 12 cents per share or 15.8% better on an operating basis. The improvement in earnings per share was led by lower credit related costs and a significant increase in non-interest revenues, particularly in the company's non-banking businesses. Comparatively, the company reported gap earnings and operating earnings per share of 97 cents in the first quarter of 2021. The company recorded total revenues of $151.6 million in the second quarter of 2021, a $6.7 million or 4.6% increase over the prior year's second quarter revenues of $144.9 million. The increase in total revenues between the periods was driven by a $5.3 million or 13.7% increase in financial services business revenues and a $1.2 million or 8.6% increase in banking-related non-interest revenues. Net interest income of $92.1 million was up $0.2 million or 0.2% over the second quarter of 2020 results. Total revenues were down $0.9 million or 0.6% from the late quarter, first quarter, driven by a $1.9 million decrease in net interest income offset in part by higher non-interest revenues. Although net interest income was up slightly over the same quarter last year, the results were achieved on a lower net interest margin outcome. The company's tax equivalent net interest margin for the second quarter of 2021 was 2.79%. This compares to 3.03% in the first quarter of 2021 and 3.37% one year prior. Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low-yield cash equivalents being maintained on the company's balance sheet. The tax equivalent yield on earning assets was 2.89% in the second quarter of 2021 as compared to 3.15%. in the linked first quarter at 3.56% one year prior. During the second quarter, the company recognized $3.9 million of PPP-related interest income, including $2.9 million of net deferred loan fees. This compares to $6.9 million of PPP-related interest income recognized in the first quarter, including $5.9 million of net deferred loan fees. The company's total cost of deposits remained low, averaging 10 basis points during the second quarter of 2021. Employee benefit services revenues were up $3.4 million, or 14.2%, over the prior year's second quarter, driven by increases in employee benefit trust and custodial fees. Wealth management revenues were also up $1.9 million, or 29.2%, driven by higher investment management, advisory, and trust services revenues. Insurance services revenues were consistent with prior year's results. The increase in banking-related non-interest revenues was driven by a $2.3 million or 17.6% increase in deposit service and other banking fees, offset in part by a $1 million decrease in mortgage banking income. During the second quarter of 2021, the company reported a net benefit in the provision for credit losses of $4.3 million. This compares to a $9.8 million provision for credit losses reported in the second quarter of 2020, 3.2 million of which was due to the acquisition of Steuben Trust Corporation, with the remaining 6.6 million largely driven by pandemic-related factors. During the second quarter of 2021, the company reported three basis points of net low recoveries, and the post-vaccine economic outlook remained positive. In addition, at the end of the second quarter, there were only 12 borrowers representing $2.4 million in loans outstanding that remained in the pandemic-related forbearance. This compares to 47 borrowers in pandemic-related forbearance representing $75.6 million at the end of the first quarter and 3,700 borrowers with approximately $700 million of loans outstanding one year earlier. These factors broke down the expected loan losses resulting in the reporting of a net benefit and provision of credit losses for the quarter. The company recorded $93.5 million in total operating expenses in the second quarter of 2021 as compared to $87.5 million. in the second quarter of 2020, excluding $3.4 million of acquisition-related expenses. The $6 million, or 6.9% increase in operating expenses, was attributable to a $3.2 million, or 5.8% increase in salaries and employee benefits, a $1.9 million, 17.8% increase in data processing communications expense, and a $0.7 million, 7.7% increase in other expenses. and a $0.5 million, 5.3% increase in occupancy and equipment expense offset in Part V, a $0.3 million, 7.9% decrease in the amortization of intangible assets. The increase in salaries and employee benefits expense was driven by increases in merit-related employee wages, higher payroll taxes, including increases in state-related unemployment taxes, higher employee benefit-related expenses, and the student acquisition. Other expenses were up due to the general increase in the level of business activities, including increases in business development marketing expenses. The increase in data processing communications expenses was due to the second quarter 2020 student acquisition and a company's implementation of new customer-facing digital technologies and back office systems between comparable periods. Increase in occupancy and equipment expenses driven by the student acquisition. In comparison, the company reported $93.2 million of total operating expenses in the first quarter of 2021, $0.3 million or 0.3% lower than the second quarter of 2021 total operating expenses. The effective tax rate for the second quarter of 2021 was 23.1%, up from 20.3% in the second quarter of 2020. The increase in the effective tax rate was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021. Company closed the second quarter of 2021 with total assets of $14.8 billion. This was up $181.1 million or 1.2% from the end of the first quarter and up $1.36 billion or 10.1% from a year earlier. Average interest earning assets for the second quarter of 2021 of $13.37 billion were up $680.6 million or 5.4% from the first quarter of 2021. and up $2.27 billion to 20.4% from one year prior. The very large increases in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Stupan and large inflows of government stimulus-related deposit funding and PPP originations. The company's ending loan balances of $7.24 billion were down 124.2 million or 1.7% from the end of the first quarter, Excluding the net decrease in PPP loans of $126.1 million and the seasonal decrease in municipal loans totaling $41.2 million, ending loans increased $43.1 million, or 0.6%. As of June 30, 2021, the company's business lending portfolio included 317 first-draw PPP loans with a total balance of $72.5 million and 2,254 second-draw PPP loans with a total balance of $212.3 million. The company expects to recognize through interest income the majority of its remaining first draw net deferred PPP fees totaling $0.9 million during the third quarter of 2021, and the majority of its second draw net deferred PPP fees totaling $9.2 million over the next few quarters. On a linked quarter basis, the average book value of the investment securities portfolio increased $290.2 million of 7.9% from $3.67 billion during the first quarter to $3.96 billion during the second quarter. With this said, the company has largely remained on the sidelines with respect to deploying excess liquidity until market interest rates become more attractive. During the second quarter, the company's average cash equivalents of $2.07 billion represented approximately 16% of the company's average earning assets. This compares to $1.67 billion in average cash equivalents during the first quarter of 2021 and $823 million in the second quarter of 2020. The $408 million or 24.5% increase in average cash equivalents during the quarter was driven by the continued inflow of federal stimulus funds, the origination of second draw PPP loans and first draw PPP loan forgiveness. The company's capital reserves remained strong in the second quarter. The company's net tangible equity and net tangible assets ratios was 9.02% at June 30th, 2021. This was down from 10.08% a year earlier, but up 8.48% at the end of the first quarter. Company's Tier 1 leverage ratio was 9.36% at June 30, 2021, which is nearly two times the well-capitalized regulatory standard of 5%. The company has an abundance of liquidity, the combination of the company's cash and cash equivalents, borrowing availability from the Federal Reserve Bank, borrowing capacity from the Federal Home Loan Bank, and unpledged available-for-sale investment securities. The portfolio provides the company with over 6.1% billion of immediately available source of liquidity. At June 30, 2021, the company's allowance for credit losses totaled $51.8 million, or 0.71% of total loans outstanding. This compares to $55.1 million, or 0.75% of total loans outstanding at the end of the first quarter of 2021, and $64.4 million, or 0.86% of total loans outstanding at June 30, 2020. The decrease in the allowance for credit losses is reflective of an improving economic outlook, very low levels of net charges and a decrease in delinquent loans and loans on pandemic related forbearance. Nonperforming loans decreased in the second quarter to $70.2 million or 0.97% of loans outstanding down from $75.5 million or 1.02% of loans outstanding at the end of the first quarter of 2021, but up from $26.8 million 6% of loans outstanding at the end of the second quarter of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance from accruals and non-accruing status between periods. The specifically identified reserves held against the company's non-performing loans total only $2.8 million at June 30, 2021. Loans 30 to 89 days delinquent totaled 0.25% of loans outstanding at June 30, 2021. This compares to 0.37% one year prior and 0.27% at the end of the first quarter. Management believes the low levels of delinquent loans and charge-offs has been supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic. We remain focused on new loan origination and will continue to monitor market conditions to seek the right opportunities to deploy excess liquidity. Our loan pipelines increased considerably during the second quarter and asset quality remains very strong. We also expect net interest margin pressures to persist or remain well below our pre-pandemic levels, but also believe our abundance of cash equivalents represent a significant future earnings opportunity. We're also fortunate and pleased to have the strong non-banking businesses that support and diversify our streams of non-interest revenue. And lastly, to echo Mark's comments, we're pleased and excited to welcome the customers and employees of FBE to the community bank team. Thank you all, and I'll turn it back to Cole for questions.