Community Financial System, Inc.

Good morning and welcome to the Community Bank System Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note that this presentation contains forward-looking statements within the provisions of the Private Security Litigation Reform Act of 1995. and 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 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 Trenisky, President and Chief Executive Officer, and Joseph Sataris, Executive Vice President and Chief Financial Officer. We 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 year-end conference call. We hope everyone is well. Earnings for the quarter were very good and right in line with our expectations. We delivered record revenues and nearly record PPNR per share, which was up 6% over the 2020 quarter. Joe will comment further on the quarter, but I would like to add that ex-PPP we had solid growth in both our commercial and our retail portfolios, which were up 8% annualized for both Q3 and Q4. Looking at the whole of 2021, we had a really good year. Obviously, the results were favorably impacted by reserve releases and PPP, but carving those out, we still delivered solid earnings and absorbed nearly all of the margin erosion, which has not been insignificant. Deposit growth for the year was 15%, with both customer count and average balances contributing. Loan growth for the entire year, XPP, was 5%, with commercial flat and consumer up 8%. The strength of our financial services businesses continues. For the year, revenues were up 12% and pre-tax earnings up 20% over 2020, resulting in significant margin expansion. Also during the year, we closed down two benefits acquisitions and five smaller insurance businesses. The acquisition of Elmira Savings Bank, we announced in September, is progressing well. We expect a close on that transaction in Q2. Elmira is 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. Looking ahead to the remainder of the year, we have significant energy and operating momentum right now in both our banking and non-banking businesses. Margin continues to be a headwind, but earning asset growth, the strength of our financial services businesses, and credit are tailwinds. We have begun to focus and invest in our commercial and retail businesses to improve organic execution to include people, systems, and products. We will continue to invest in our digital channels and rationalize our analog channels as we did this year with the consolidation of 15 retail branches. Organic execution in our non-banking businesses has been tremendous, but we will continue to look to acquisition opportunity as well to grow the product breadth, talent, revenue, and earning strength of those businesses. And given the recent and expected ongoing challenges to the banking industry, we are hopeful to have a high-value acquisition opportunity this year as well. We are very much looking forward to 2022. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the fourth quarter results were solid with fully diluted GAAP earnings per share of 80 cents. The GAAP earnings results were $0.06 per share, or 7% below the fourth quarter 2020 GAAP earnings, and $0.03 per share, or 3.6% below linked third quarter results. Fully diluted operating earnings per share, which excludes acquisition-related expenses and other non-operating revenues and expenses, were $0.81 for the quarter, $0.04 per share, or 4.77% below prior year's fourth quarter and two cents per share or 2.4% below linked third quarter results. The decrease in operating earnings per share were driven by increases in the provision for credit losses, operating expenses, income taxes, and fully diluted shares outstanding offset in part by increases in net interest income and non-interest revenues between comparable quarters. The company recorded a $2.2 million provision for credit losses in the fourth quarter of 2021 as compared to a $3.1 million net benefit in the provision for credit losses in the fourth quarter of 2020. Adjusted pre-tax, pre-provision net revenue per share, which excludes the provision for credit losses, acquisition-related expenses, and other non-operating revenues and expenses and income taxes, was $1.09 in the fourth quarter of 2021 as compared to $1.03 a year prior to $1.04 in the linked third quarter. On a full year basis, the company recorded a fully diluted gap in operating earnings per share of $3.48 and $3.49, respectively. These were up 40 cents per share, or 13%, and 25 cents per share, or 7.7%, respectively, over 2020 results. Full year 2021 adjusted pre-tax, pre-provisioned net revenue per share of $4.28 was up 2 cents per share over 2020 results. The company recorded total revenues of $159.7 million in the fourth quarter of 2021, a new quarterly record for the company, and a $9 million or 6% increase over the prior year's fourth quarter. The increase in total revenues between the periods was driven by a $2.3 million or 2.5% increase in net interest income, a $1.6 million, 11% increase in banking-related non-interest revenues, and a $5.5 million, 13.2% increase in financial services revenues, offset in part by a $0.4 million decrease in the gain on debt extinguishment. Total revenues were up $2.8 million, or 1.8% from third quarter 2021 results, driven by a $3.1 million, or 3.4% increase in net interest income. Total non-interest revenues accounted for 40% of the company's total revenues in the fourth quarter. The company's net interest income increased $2.3 million, or 2.5%, over the same quarter last year, despite a significant decrease in its net interest margin. The company's taxable net interest margin for the fourth quarter of 2021 was 2.74%, as compared to 3.05% one year prior, a 31 basis point decrease between the periods. Comparatively, the company's taxable net interest margin for the third quarter of 2021 was also 2.74%. Although net interest margin results remain below the pre-pandemic levels, the company's fourth quarter net interest income expanded over the prior year's fourth quarter and linked third quarter results driven by non-PPP-related organic loan growth, the deployment of excess liquidity from low-yield cash equivalents to higher-yield investment securities, earning asset growth, and the reclassification of several large business lending relationships from non-equal to accruing status. The company's tax-equivalent yield on earning assets was 2.83% in the fourth quarter of 2021, matching third quarter results, and 3.18% in the prior year's fourth quarter. During the fourth quarter of 2021, the company recognized $3.6 million of PPP-related interest income, including $3.3 million of net deferred loan fees. This compares to $3.5 million of PPP-related interest income recognized in the same quarter last year and $4.3 million in the late third quarter of 2021. The company recognized $18.7 million of PPP-related interest income in 2021. The company's total cost of deposits remained low, averaging eight basis points during the fourth quarter of 2021. Employee benefits services revenues for the fourth quarter 2021 were $30.4 million, $3.7 million or 13.7% higher than the fourth quarter 2020. Improvement in revenues was driven by increases in employee benefit trust and custodial fees as well as incremental revenues from the third quarter acquisition of fringe benefits design of Minnesota. Wealth management revenues for the fourth quarter of 2021 were up $8.5 million, were $8.5 million, from $7.5 million in the fourth quarter of 2020. The $1 million, or 13.4%, increase in wealth management revenues was primarily driven by increases in investment management and trust services revenues. Insurance services revenues of $8.5 million were up $0.9 million, or 11.2%, over the prior year's fourth quarter, driven by organic growth factors in the third quarter acquisition of a Boston-based specialty lines insurance practice. Banking non-interest revenues increased $1.6 million, or 11%, from $15 million in the fourth quarter of 2020 to $16.6 million in the fourth quarter of 2021. This was driven by a $1.2 million increase in mortgage banking income and a $0.5 million, or 3%, increase in deposit service and other banking fees. During the fourth quarter of 2021, the company reported a provision for credit loss of $2.2 million. This represents Excuse me. This compares to a $3.1 million net benefit in the provision for credit losses for the fourth quarter of 2020. The company reported net loan charge-offs of $1.7 million for an annualized nine basis points of average loans outstanding during the fourth quarter of 2021 as compared to net charge-offs of $1.3 million for an annualized seven basis points of average loans outstanding for the fourth quarter of 2020. Although economic forecasts remain generally stable during the fourth quarter of 2021, despite the rapid spread of the COVID Omicron variant, the company's allowance for credit losses increased $0.4 million, reflective of a $165.3 million increase in non-PPP loans outstanding and other qualitative factors. Comparatively, in the fourth quarter of 2020, economic forecasts had improved significantly from the prior quarter, resulting in a release of credit reserves in the quarter. On a full year basis, the company reported $2.8 million in net charge-offs or four basis points of average loans outstanding during 2021 as compared to $5 million in net loan charge-offs or seven basis points of average loans outstanding during 2020. On a full year basis, the company reported an $8.8 million net benefit in the provision for credit losses at the Economic Outlook and the loan portfolio's asset quality profile both steadily improved. The company recorded $100.9 million of total operating expenses in the fourth quarter of 2021 compared to $95 million of total operating expenses in the prior year's fourth quarter. The $5.9 million or 6.2% increase in operating expenses was primarily attributable to a $4.9 million or 8.5% increase in salaries and employee benefits driven by increases in merit and incentive-related employee wages, staffing increases due to recent acquisitions, higher payroll taxes, including increases in state-related unemployment taxes and higher employee benefit-related expenses. Acquisition-related expenses were also up $0.4 million between the comparable annual quarters due to the pending Elmira Savings Bank acquisition and other recent financial services acquisitions. The effective tax rate for the fourth quarter of 2021 was 23%. and 21.4% on a full year basis, up from 20.9% and 20.1% respectively from the equivalent prior year periods. The increase in the effective tax rate was primarily attributable to an increase in certain state income taxes that were enacted through the periods and a decrease in the proportion of tax exempt revenues in relation to total revenues. The company crested $15.5 billion in total assets during the fourth quarter, driven by the continued inflows of deposits, which increased to $187.3 million, or 1.5% from the end of the third quarter. Ending loans at December 31, 2021, were $7.37 billion, $91.1 million, or 1.3% higher than the third quarter 2021 ending loans of $7.28 billion. and $42.3 million or 0.6% lower than one year prior. Excluding PPP loan activity, ending loans increased $165.3 million or 2.3% during the fourth quarter of 2021 and $334.5 million or 4.8% on a full year basis. Loans outstanding out of PPP loans have grown organically by more than 2% in both the third and fourth quarters of 2021. As of December 31st, 2021, the company's business lending portfolio includes 722 PPP loans with a total balance of $87.9 million. The company expects to recognize the majority of its remaining net deferred PPP fees, totaling $3.1 million over the first and second quarters of 2022. Although the company's low yielding cash equivalents remained elevated, totaling $1.72 billion at December 31, 2021, the company deployed a significant portion of its excess liquidity during the fourth quarter by purchasing $668 million of investment securities at a weighted average purchase yield of 1.41%. These activities continued into January with the purchase of an additional $757.6 million of investment securities at a weighted average purchase yield of 1.56%. The company's capital ratios remain strong in the fourth quarter. The company's Tier 1 leverage ratio was 9.09% at December 31st, 2021, which is nearly two times the well-capitalized regulatory standard of 5%, while the net tangible equity and net tangible assets ratio was 8.69% at December 31st, 2021. The company has an abundance of liquidity. The combination of the company's cash equivalents, barring availability to the Federal Reserve Bank, barring capacity to the Federal Home Loan Bank, and unpleasant availability for sale investment securities portfolio provided to me with $6.63 billion of immediately available source liquidity at the end of the fourth quarter. At December 31st, 2021, the company's allowance for credit losses totaled $49.9 million or 0.68% of total loans outstanding. This compares to $49.5 million or 0.68% of total loans outstanding at the end of the third quarter of 2021 and $60.9 million or 0.82% of total loans outstanding at December 31st, 2020. The $0.4 million increase in the allowance for credit losses during the fourth quarter is reflective of non-PPP-related loan growth and other qualitative factors. Non-performing loans decreased in the fourth quarter to $45.5 million, with 0.62% of loans outstanding down from $67.8 million, or 0.93% of loans outstanding at the end of the linked third quarter of 2021, at $76.9 million, or 1.04% at the end of the fourth quarter of 2020. The significant decrease in non-performing loans during the fourth quarter is primarily due to the reclassification of certain hotel loans from non-actual status to accruing status. Loans 30 to 89 days delinquent totaled 0.38% of total loans outstanding at December 31st, 2021. This compares to 0.47% one year prior and 0.35% in delinquent third quarter. We believe that the company's asset quality remains strong, but acknowledge that the historically low levels of net charge-ups experienced in 2021 and generally benign credit environment were supported by the extraordinary federal and state government financial assistance provided to businesses and consumers throughout the pandemic. Looking forward, we are encouraged by the momentum in our business. The company generated solid organic loan growth in 2021, especially in the third and fourth quarters. The financial services businesses have been growing and performing very well. Asset quality remains strong, and we've been active in deploying our excess liquidity as interest rates have climbed in recent weeks. In 2022, we will remain focused on new loan generation. We'll continue to monitor market conditions to seek additional opportunities to deploy excess liquidity. And lastly, to echo Mark's comments, we are pleased and excited to be partnering with Elmira Savings Bank. Elmira has been serving its communities for 150 years, and we will enhance our presence in five counties in New York, Southern Tier, and Finger Lake regions. We initially anticipated completing the acquisition in late first quarter 2022, but now expect to close the second quarter 2022. The integration efforts are going very well, and we sincerely appreciate the efforts of our colleagues at Elmira Savings Bank to make the transition as seamless as possible for its customers. Thank you. I will now turn it back to Chad to open the line for questions.