Community Financial System, Inc.

Good morning and welcome to the Community Bank System first quarter 2022 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. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. Please note, today's event is being recorded. And also 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 company, 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 Trenisky, President and Chief Executive Officer, and Joseph Sotiris, Executive Vice President and Chief Financial Officer. They will be joined by Dimitar Kravinov, Executive Vice President of Financial Services and Corporate Development for the question and answer session. Gentlemen, at this time you may begin.

Thank you, Chad. Good morning, everyone, and thank you for joining our first quarter conference call. Hope everyone is well. I think earnings for the quarter were very solid across the board. Margin continues to be a lessening headwind in loan growth expenses, deposit fees, and the continuing strength of our financial services businesses or tailwinds. Loan performance continues to be really good. We had annualized growth of 4%. In a quarter that is seasonally negative for us, and which continues a favorable trend to the second half of 21. Commercial and consumer mortgages led the way on the strength of solid execution by our teams, and the pipeline remains very strong. In fact, our commercial pipeline right now is over 50% higher than it's ever been. Joe will comment further on margin, but we were also encouraged by the 40 basis point increase in originated loan yields this quarter over last. We expected it would take until the end of the year for originated loan yields to exceed the portfolio yields, but the current trend suggests that will happen sooner. Also, our deposit costs ticked down to eight basis points this quarter, and since our deposit base is 75% checking and savings, we do expect our low beta funding costs will be contributory to margin expansion going forward. The recent strength of our financial services business has continued in the quarter. with revenues up 13% and pre-tax earnings up 8% over 2021. Our benefits, wealth, and insurance businesses are all performing extremely well right now, and given their organic growth momentum and new business pipelines, we expect that trend to continue. As we announced last week, we have received regulatory approval for the pending Elmira Savings Bank transaction, a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions, 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 that we expect to close early next month. Looking ahead, we expect our current operating momentum to continue, particularly as it relates to our commercial banking business. Over the past quarter, we've added many experienced and talented bankers to our leadership and front lines including in New England, upstate New York, and the Lehigh Valley in Pennsylvania. We also expect the seasonally strong consumer mortgage and indirect lending businesses to accelerate, subject to inventory availability in those businesses. Lastly, I would like to give a shout-out to the entire Community Bank team for being recognized by Newsweek as the sixth most trusted bank in the nation in their annual feature of America's Most Trusted Companies. Trust is our product, and we could not be more proud of this recognition of our team's efforts. Joe? Thank you, Mark, and good morning, everyone.

As Mark noted, the first quarter results were solid with fully diluted GAAP earnings per share of 86 cents. The GAAP earnings results were 11 cents per share, or 11.3% below the first quarter 2021 GAAP earnings, and 6 cents per share, or 7.5% higher than linked fourth quarter results. Fully diluted operating earnings per share, which excludes acquisition-related expenses and other non-operating revenues and expenses, were $0.87 for the quarter, $0.10 per share, or 10.3% below the prior year's first quarter, and $0.06 per share, or 7.4% higher than the linked fourth quarter results. The $0.10 decrease in operating earnings per share as compared to the first quarter of 2021 was driven by increases in the provision for credit losses, operating expenses, income taxes, and the fully diluted share is outstanding. offset in part by increases in net interest income and non-interest revenues. A $5.2 million decrease in PPP-related revenues between the periods and a $6.6 million increase in the provision for credit losses were responsible for a $0.17 decrease in fully diluted operating earnings per share net of tax over comparable periods. The company recorded $0.9 million in the provision for credit losses in the first quarter of 2022 as compared to $5.7 million net benefit in the provision for credit losses in the first quarter of 2021 as the U.S. economy emerged from the depths of the pandemic. The company PPP-related interest income totaled $1.7 million in the first quarter of 2022 as compared to $6.9 million of PPP-related interest income in the first quarter of 2021. The Sixth Sense or a 7.4 percent increase in operating earnings per share over the linked fourth quarter results were largely given by a decrease in the provision for credit losses, higher non-interest revenues, and lower operating expenses. Adjusted pre-tax, pre-provision net revenue per share, which excludes the provision for credit losses, acquisition-related expenses, other non-operating revenues and expenses and income taxes were $1.12 in the first quarter of 2022 as compared to $1.09 in both the prior year's first quarter and the linked fourth quarter. The company recorded total revenues of $160.5 million in the first quarter of 2022, a new quarterly record for the company and an $8.1 million or 5.3% increase over the prior year's first quarter. The increase in total revenues between the periods was driven by a $0.9 million, 1% increase in net interest income and a $7.2 million or 12.2% increase in non-interest revenues. Non-interest revenues accounted for 41% of the company's total revenues during the first quarter of 2022. Comparatively, total revenues were up $0.9 million or 0.5% over fourth quarter 2021 results due to a $1.8 million or 2.7% increase in non-interest revenues, partially offset by a $0.9 million or 0.9% decrease in net interest income driven by a $1.9 million decline in PPP-related interest income. The company recorded net interest income of $94.9 million in the first quarter of 2022. This compares to $94 million of net interest income recorded in the first quarter of 2021. Although the company's earning asset yields decreased 34 basis points over the prior year's first quarter due to lower market interest rates on new loan originations and investment securities, and the previously mentioned decrease in PPP-related interest income, net interest income increased by $0.9 million, or 1%. This result was driven by lower funding costs, a significant increase in the average earning assets, and 11 basis point increase in investment yields, including cash equivalents, as the company meaningfully shifted the composition of earning assets away from low-yield cash equivalents to higher-yield investment securities between the periods. Comparatively, the company recorded net interest income of $95.7 million during the fourth quarter of 2021, $0.9 million higher than the first quarter of 2022 results, The company's tax equivalent net interest margin was 2.73% in the first quarter of 2022 as compared to 3.03% in the prior year's first quarter and 2.74% in the late fourth quarter. Employee benefits services revenues for the first quarter of 2022 were $29.6 million, up $3.1 million, or 11.5% in comparison to the first quarter of 2021. Improvement in revenues was driven by increases in employee benefits, trust, and custodial fees, as well as incremental revenues from the acquisition of fringe benefits designed in Minnesota, Inc. during the third quarter of 2021. Wealth management revenues for the first quarter of 2022 were $8.6 million, up from $8.2 million in the first quarter of 2021. The increase in wealth management revenues was primarily driven by increases in investment management trust service revenues. The company recorded insurance service revenues of $10.4 million in the first quarter of 2022, which represents a $2.3 million or 27.7% increase over the prior year's first quarter, driven by organic expansion as well as the second quarter 2021 acquisition of a Florida-based personal lines insurance agency and the third quarter 2021 acquisition of a Boston-based specialty lines insurance practice. Banking non-interest revenues increased $1.4 million, or 9%, from $15.6 million in the first quarter of 2021 to $17 million in the first quarter of 2022. This was driven by a $1.9 million, 13.1% increase in deposit service and other banking fees, offset in part by a $0.5 million decrease in mortgage banking revenue. Comparatively, the company's financial services business revenues increased $1.3 million, or 2.7% over the linked fourth quarter results, while banking-related non-interest revenues were up $0.4 million, or 2.8%. During the first quarter of 2022, the company recorded a provision for credit losses of $0.9 million. This compares to a $5.7 million net benefit recorded in the provision for credit loss in the first quarter of 2021. The company recorded net loan charge-offs of $0.5 million in the annualized three basis points of average loans outstanding during the first quarter of 2022 as compared to net loan charges of $0.4 million and annualized two basis points of average loans outstanding in the first quarter of 2021. Although economic forecasts remain generally consistent with the prior quarter, companies' allowance for credit losses increased $0.3 million from the end of the fourth quarter of 2021, due in part to a $90.7 million increase in non-PPP loans outstanding. Comparatively, in the first quarter of 2021, economic forecasts had improved significantly, resulting in a release of reserves in that quarter. Although asset quality remains strong, the company will continue to closely monitor the effects an inflationary environment will have on both the company's consumer and business borrowers. The company recorded $99.8 million in total operating expenses in the first quarter of 2022, compared to $93.2 million in total operating expenses in the prior year's first quarter, and The $6.6 million, 7% increase in operating expenses was primarily driven by a $4 million, 7% increase in salaries and employee benefits, and a $2 million, or 23.1% increase in other expenses. The increase in salaries and employee benefits expenses was driven by increases in merit and incentive-related employee wages, higher payroll taxes, and higher employee benefits-related expenses, offset in part by a decrease in full-time equivalent staff between the periods. Other expenses were up due to a general increase in the level of business activities, including increases in business development and marketing expenses, insurance, professional fees, and travel-related expenses. In comparison, the company reported $100.9 million in total operating expenses in the fourth quarter of 2021. The effective tax rate for the first quarter of 2022 was 21.4%, up from 18.6% in the first quarter of 2021. The company recorded a significantly higher level of income tax benefit related to stock-based compensation activity in the first quarter of 2021 as compared to the first quarter of 2022, which drove down the effective tax rate. Exclusive of stock-based compensation benefits, the company's effective tax rate was 22.3% in the first quarter of 2022 as compared to 21.4% in the first quarter of 2021, primarily attributable to an increase in certain state income taxes. The company's total assets increased to $15.63 billion at March 31, 2022. This represented a $1.01 billion or 6.9% increase from one year prior and a $73.2 million or 0.5% increase from the end of the linked fourth quarter. The substantial increase in the company's total assets during the prior 12-month period was primarily due to large inflows of government stimulus-related deposit funding. Average deposit balances increased $1.52 billion, or 13.1%, between the first quarter of 2021 and the first quarter of 2022. Likewise, average earning assets increased $1.54 billion, or 12.2%, over the same period. This included a $2.25 billion, or 61.4%, increase in the average book value of the investment securities due to the company's security purchase activities, and a $30.4 million, 0.4% increase in average loans outstanding, partially offset by a $735.8 million or 44.1% decrease in average cash equivalents. On a linked quarter basis, average earning assets increased $275.2 million or 2% due to the continued net inflows of deposits. Ending loans at March 31st, 2022 of $7.42 billion or $48.6 million or 0.7% higher than fourth quarter of 2021 and $53.9 million or 0.7% higher than one year prior. The increase in ending loans year over year was driven by increases in consumer mortgage, consumer indirect, consumer direct, and home equity loans offset in part by a decrease in business lending due primarily to forgiveness of PPP loans. Exclusive of PPP loans, ending loans increased $410.3 million or 5.9% over the prior 12-month period and $90.7 million or 1.2% over the prior quarter. Although the company's low-yield cash equivalents remain significantly higher than pre-pandemic levels, totaling $840.6 billion at March 31, 2022, the company deployed a significant portion of its excess liquidity during the first quarter by purchasing $1.26 billion of investment securities. The company's regulatory capital ratios remain strong in the fourth quarter. The company's Tier 1 leverage ratio was 9.09% at March 31, 2022, which is nearly two times the well-capitalized regulatory standard of 5%. During the quarter, the company recorded $271.4 million in after-tax other comprehensive loss driven by the client and the market value of the companies available for sale investment securities portfolio. The company has an abundance of liquidity, the combination of Companies' cash, cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank, and the unpledged available-for-sale investment securities portfolio provided the company with $6.41 billion of immediately available sources of equity at the end of the first quarter. On March 31, 2022, the company's allowance for credit losses totaled $50.1 million, or 0.68% of total loans outstanding. This compares to $49.9 million, or 0.68% at the end of the fourth quarter of 2021, and $55.1 million, or 0.75% a year prior. The small increase in the allowance for credit losses during the first quarter is reflective of non-PPP-related loan growth and certain qualitative factors. On March 31, 2022, non-performing loans or $36 million or 0.49% of total loans outstanding. This compares to $45.5 million or 0.6%, 62% of total loans outstanding at the end of the fourth quarter of 2021 and $75.5 million or 1.02% of total loans outstanding at one year earlier. The decrease in non-performing loans as compared to the prior year's first quarter and fourth quarter is primarily due to the reclassification of certain pandemic impacted hotel loans from non-accrual status back to accruing status. Loans 30 to 89 days delinquent were 0.35% of total loans outstanding at March 31st, 2022, down slightly from 0.38% at the end of the fourth quarter of 2021, but up from 0.27% one year earlier. We believe the company's asset quality remains strong, but acknowledge that the historically low levels of net charge-ups experienced over the prior 12 months were supported by 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 generates solid organic loan growth over the previous three quarters. The financial services businesses have been growing and performing very well. Asset quality remains strong, and the loan pipeline is robust. In 2022, we will remain focused on new loan generation, managing the company's balance sheet, and rapidly changing interest rate environment while continuing to pursue accretive, low-risk, and strategically valuable emergence and acquisition opportunities And lastly, to echo Mark's comments, we look forward to partnering with Elmira Savings Bank and sincerely appreciate the efforts of our colleagues at Elmira Savings Bank to make the transition as seamless as possible for its customers. Elmira has been serving its communities for 150 years and will enhance our presence in the five counties in New York's southern tier and Finger Lakes regions. Thank you. I will now turn it back over to Chad to open the line for questions.