Community Financial System, Inc.

Good day and welcome to the Community Bank System Third Quarter 2021 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 in Form 10-K filed with the Securities and Exchange Commission. Today's call presenters are Mark Chernitsky, President and Chief Executive Officer, and Joseph Sotiris, 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, Chad. Good morning, everyone, and thank you for joining our third quarter conference call. We hope everyone is well. I think earnings for the quarter were right in line with our expectations and impacted by the same influences that passed several quarters. Margin continues to be a headwind, like deposit fees, the strength of our financial services, businesses, and credit are tailwinds, and we saw that this quarter. The bigger story for us in the quarter was loan growth. We had growth in every one of our portfolios this quarter, ex-PPP, and our pipelines and market activity continue to be very strong. We're encouraged by these trends and have really good momentum right now across all of our credit businesses. We also increased our securities book in the quarter, given the market opportunity, and that will be additive to future earnings as well. I think Joe will provide more detail on that. The recent strength of our financial services businesses continued in the quarter, with revenues up 17% and pre-tax earnings up 22% over 2020. We also closed on the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement plan administration and consulting services with offices in Minneapolis and South Dakota. Their performance out of the gate has been exceptional, so we expect that will be a productive addition to our benefits business. Our benefits, wealth, and insurance businesses are all performing extremely well right now in what is a very productive growth, pricing, and M&A environment for those businesses. On the human capital front, as we previously announced, I'm delighted that Maureen Gillian-Meyer has joined us as Executive Vice President and Chief Human Resources Officer. She previously held the same role for HSBC USA and will bring tremendous experience, expertise, and business judgment Community Bank System, and we look forward to her contributions to our continuing human capital efforts. Lastly, earlier this month, we announced an agreement to acquire Elmira Savings Bank, a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions of New York State. It's a very nice franchise with a very good mortgage business that we expect will be 15 cents per share accretive on a full year basis, excluding acquisition expenses So a very productive, low-risk transaction. We have targeted a closing date in Q1 of next year. Looking ahead, we like our current momentum across the company and all of our businesses.

Joe? Thank you, Mark, and good morning, everyone. As Mark noted, the third quarter earnings results were solid, with fully diluted gap in operating earnings per share of 83 cents. The GAAP earnings results were $0.04 per share or 5.1% higher than the third quarter 2020 GAAP earnings results, but $0.02 per share or 2.4% below the prior year's third quarter on an operating basis. The decrease in operating earnings per share is driven by a decrease in net interest income and higher operating expenses, as well as increases in income taxes and fully diluted shares outstanding, offset in part by lower credit-related costs and an increase in non-interest revenues, particularly in the company's non-banking financial services businesses. Comparatively, the company recorded fully diluted gap in operating earnings per share of 88 cents in the linked second quarter of 2021. The company recorded total revenues of $156.9 million in the third quarter of 2021, an increase of $4.3 million or 2.8% over the prior year's third quarter. The increase in total revenues between the periods was driven by a $6.9 million or 16.9% increase in financial services revenues offset in part by a $2.2 million decrease in banking-related non-interest revenues and a $0.4 million or 0.4% decrease in net interest income. Total revenues were up $5.4 million or 3.5% from the second quarter 2021 results, driven by a $0.5 million or 0.5% increase in net interest income, a $1.4 million increase in banking-related non-interest revenues, and a $3.5 million or 8% increase in financial services revenues. Total non-interest revenues accounted for 41% of the company's total revenues in the third quarter. Although net interest income was down only slightly from the same quarter last year, the results were achieved in a significantly lower net interest margin outcome. The company's tax equivalent net interest margin for the third quarter of 2021 was 2.74% as compared to 3.12% one year prior, a 38 basis point decrease between the periods. Compared to the company's tax equivalent net interest margin for the second quarter of 2021 was 2.79% or five basis points higher than the third quarter. 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 2.83% in the third quarter of 2021 as compared to 2.89% in the linked second quarter and 3.28% one year prior. During the third quarter, the company recognized $4.3 million of PPP-related interest income, including $3.7 million of net deferred loan fees. This compares to $3 million of PPP-related interest income recognized in the same quarter last year and $3.9 million in the linked second quarter of 2021. On a year-to-date basis, the company has recognized $15.1 million of PPP-related net interest income. The company's total cost of deposits remain low, however, averaging nine basis points nine basis points during the third quarter of 2021. Employee benefit services revenues for the third quarter of 2021 were $29.9 million, $4.8 million, or 18.9% higher than the third quarter of 2020. The improvement in revenues was driven by increases in employee benefit trust and custodial fees, as well as incremental revenues from the acquisition of fringe benefits designed in Minnesota during the quarter. Wealth management revenues for the third quarter of 2021 were $8.3 million, up from $6.9 million in the third quarter of 2020. The $1.4 million, or 20.8% increase in wealth management revenues, was primarily driven by increases in investment management and trust services revenues. Insurance services revenues of $9.2 million were up $0.6 million, or 7.6% over the prior year's third quarter, driven by organic growth factors and the third quarter acquisition of a Boston-based specialty lines insurance practice. Banking non-insurgency revenues decreased $2.2 million, or 11.5%, from $19.1 million in the third quarter of 2020 to $16.9 million in the third quarter of 2021. This was driven by a $3.5 million decrease in mortgage banking income offset in part by a $1.3 million, or 8.3% increase in deposit, service, and other banking fees. On a linked quarter basis, financial services revenues were up $3.5 million, or 8%. reflective of the organic and acquisition-related momentum in these businesses, and banking non-interest revenues were up $1.4 million, or 8.7%. During the third quarter of 2021, the company recorded a net benefit in the provision for credit losses of $0.9 million. This compares to a $1.9 million provision for credit losses recorded in the prior year third quarter. The company's net loan charge-offs were only seven basis points annualized in both periods. During the third quarter of 2021, economic forecasts were more favorable than the third quarter of 2020 economic forecasts driven by the post-vaccine economic recovery, which in combination with elevated real estate and vehicle loan collateral values drove down the expected life of loan losses. On a September 2021 year-to-date basis, the company recorded net charge-offs of $1.1 million, or two basis points annualized. The company recorded $100.4 million in total operating expenses in the third quarter of 2021 as compared to $97 million in total operating expenses in the third quarter of 2020, an increase of $3.4 million or 3.6% between the periods. Operating expenses exclusive of litigation and acquisition related expenses increased $7.2 million to 7.7% between the comparable quarters, $5.6 million of which was driven by an increase in salaries and employee benefits due to acquisition related staffing increases. Merit and incentive-related employee wage increases, higher payroll taxes, and higher employee benefit-related expenses. Other expenses were up $0.9 million, or 8.7%, due to the general increase in the level of business activities. Data processing and communication expenses were also up $0.9 million, or 7.2%, due to the company's implementation of new customer-facing digital technologies and back-office systems between the comparable periods. Occupancy and equipment expense decreased slightly due primarily to branch consolidation activities between the periods. In comparison, the company recorded $93.5 million of total operating expenses in the second quarter of 2021. The effective tax rate for the third quarter of 2021 was 21.1%, up from 20.3% in the third quarter of 2020. The increase in the effective tax rate was primarily attributable to an increase in certain state income taxes that were enacted in the second quarter of 2021. The balance sheet crested $15 billion the $15 billion total asset threshold during the third quarter due to the continued inflows of deposits, which increased $384.8 million, or 3.1%, from the end of the second quarter. The company's low yielding cash and cash equivalents remained elevated, totaling $2.32 billion at the end of the quarter, despite the company purchasing $536.9 million in investment securities during the quarter. Ending loans in September 30, 2021 were $7.28 billion, 38.4 million or 0.5% higher than the second quarter. 2021 ending loans of $7.24 billion and $176.1 million or 2.4% lower than one year prior. Excluding PPP activity, ending loans increased $154.1 million or 2.2% in the third quarter. This increase was driven by growth in all five loan portfolio segments, consumer mortgages, consumer indirect loans, consumer direct loans, home equity, and business lending, excluding PPP. As of September 30, 2021, the company's business lending portfolio included 1,386 PPP loans with a total balance of $165.4 million. This compares to 2,571 PPP loans with a total balance of of $284.8 million at June 30, 2021. The company expects to recognize its remaining net deferred PPP fees, totaling $6.3 million over the next few quarters. The company's capital ratios remain strong in the second quarter. The company's net tangible assets ratio was 8.59% in September 30, 2021. This was down from 9.92% a year earlier and 9.02%. at the end of the second quarter. The company's Tier 1 leverage ratio was 9.22% at September 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 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 $6.18 billion of immediately available sources of liquidity at the end of the third quarter. At September 30, 2021, the company's allowance for credit losses totaled $49.5 million, or 0.68% of total loans outstanding. This compares to $51.8 million, or 0.71% of total loans outstanding at the end of the second quarter of 2021, and $65 million, or 0.87% of total loans outstanding September 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 specific reserves on impaired loans. Non-performing loans decreased in the third quarter to $67.8 million, or 0.93% of loans outstanding, down from $70.2 million to 0.97% of loans outstanding at the length At the end of the linked second quarter of 2021, but up from $32.2 million to 0.43% of loans at the end of the third quarter of 2020, due primarily to the reclassification of certain hotel loans under extended forbearance from approval to non-accruing status between the periods. Loans 30 to 89 days delinquent totaled 0.35% of loans outstanding. At September 30, 2021, this compares to 0.36% one year prior and 0.25% at the end of the linked second quarter of Management believes the low levels of delinquent loans and charge-offs have been supported by extraordinary federal and state government financial assistance provided to consumers throughout the pandemic. During the third quarter of 2021, the company increased its quarterly cash dividend a penny, or 2.4%, to 43 cents per share on its common stock. This increase marked the company's 29th consecutive year of dividend increases. Looking forward, we remain focused on new loan generation and will continue to monitor market conditions to seek the right opportunities to deploy our excess liquidity. Our loan pipelines are robust and asset quality remains very strong. We also expect net interest margin pressures to persist and remain well below our pre-pandemic levels, but also believe our abundance of cash equivalents represents a significant future earnings opportunity. We're also fortunate and pleased to have strong non-banking businesses that have supported and diversified our streams of non-interest revenue. And lastly, to echo Mark's comments, we're pleased and excited to be partnering with Elmira Savings Bank. Elmira has been serving its communities for 150 years and will enhance our presence in five counties in New York's southern pier and Finger Lakes regions. At June 30, 2021, Elmira had total assets of $648.7 million, total deposits of $551.2 million, and loans of $465.3 million. We expect to complete the acquisition in the first quarter of 2022, subject to customary closing conditions, including approval by the shareholders of Elmira Savings Bank and required regulatory approvals. Thank you all, and I'll turn it back to Chad to open the line for questions.