Community Financial System, Inc.

Welcome to the Community Bank System's second quarter 2022 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 and Form 10-K filed with the Securities and Exchange Commission. Today's presenters are Martin Chinisky, President and Chief Executive Officer, and Joseph Soutaris, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.

Thank you, Rocco. Good morning, everyone. Hope all is well, and thank you for joining our second quarter conference call. Operating earnings for the quarter were very strong and similar to last year on a reported basis, but excluding PPP and reserve release from 21 results, this year's quarter is up 13% over last year. Last quarter I referred to margin as a lessening headwind, but in Q2 it turned into a tailwind as originated loan yields increased substantially and total cost of funds were unmoved at nine basis points. resulting in a 16 basis point expansion in net interest margin for the quarter. As pleased as we are with margin results, the highlight of the quarter in my view was the performance of our credit businesses, which continue to be historically strong for us. Organic loan growth for the quarter was 4.2% and year over year was over 10%. Given the investments and talent we have made in our commercial and mortgage businesses and the current pipelines, we expect growth to continue. The recent strength of our benefits, wealth, and insurance business is moderated in the quarter, with revenue growth slowing to 7%, largely due to financial market-related impacts, and margin actually declined slightly. Pipeline activity, particularly in the benefits business, remains very strong, and the insurance market continues to harden, which will be supportive of forward revenue and margin growth in that business. I won't say a lot about the Elmira Savings Bank transaction other than we closed in May, It went extremely well, and we continue to expect 15 cents per share of accretion on a full year basis, ex-acquisition expenses. We also announced recently an increase in our dividend, which marks the 30th consecutive year of dividend increases. Looking ahead, we fully expect our current operating momentum to continue, particularly as it relates to credit generation. We continue to add experienced and talented bankers, and the commercial pipeline is at an all-time high. We expect margin expansion will continue and credit quality to remain strong. So as we sit here today, I like our prospects for the second half of 2022. Joe? Thank you, Mark.

Good morning, everyone. As Mark noted, the second quarter earnings results were solid. Fully diluted gap earnings per share were 73 cents while operating earnings per share, which exclude acquisition-related charges, were 85 cents in the quarter. These compare... These compared to fully diluted GAAP and operating earnings per share of 88 cents in the second quarter of 2021. A $2.8 million decrease in PPP-related revenues between the periods and a $6.4 million increase in the provision for credit losses excluding acquisition-related provision were responsible for a 13-cent decrease in fully diluted operating earnings per share net of tax over comparable periods. The company recorded a $2.1 million provision for credit losses in the second quarter of 2022, excluding acquisition-related provision. This compares to a $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021 as the U.S. economy emerged from the depths of the pandemic. Fully diluted GAAP earnings per share were 86 cents in the first quarter of 2022, and operating earnings per share For 87 cents excluding a penny per share of acquisition expenses the two cents or 2.3% decrease in operating earnings per share from the link first quarter results. was largely driven by higher operating expenses, a higher provision for credit losses and lower non interest revenues offset in part by decrease in net interest income and decrease in income taxes. 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, was $1.13 in the second quarter of 2022, 7 cents or 6.6% higher than the prior year's second quarter, and a penny per share higher than the linked first quarter. The company reported total revenues of $167.2 million in the second quarter of 2022, a new quarterly record for the company. and a $15.7 million or 10.3% increase over the prior year's second quarter. The increase in total revenues between the periods was driven by an $11 million or 12% increase in net interest income and a $4.6 million or 7.8% increase in non-interest revenues. Non-interest revenues accounted for 38% of the company's total revenues during the second quarter of 2022. Comparatively, total revenues were up $6.7 million or 4.2% over first quarter 2022 results due to an $8.3 million or 8.7% increase in net interest income, partially offset by a $1.6 million or 2.4% decrease in non-interest revenues. The company reported net interest income of $103.1 million in the second quarter of 2022 as compared to $92.1 million in the second quarter of 2021. Between comparable periods, the company's average interest earning assets increased $1.1 billion, or 8.2%, and the tax equivalent net interest margin was up 10 basis points from 2.79% in the second quarter of 2021 to 2.89% in the second quarter of 2022. The margin expansion was primarily driven by a shift in the composition of earning assets from lower yielding cash equivalents to higher yielding investment securities and loans, including significant organic loan growth between the periods. The tax equivalent average yield on interest earning assets in the second quarter of 2022 was 2.97%. Eight basis points higher than the tax equivalent average yield on interest earning assets of 2.89% in the second quarter of 2021, despite a decrease in PPP related interest income. while the cost of interest-bearing liabilities decreased from 15 basis points to 13 basis points. Comparatively, the company recorded net interest income of $94.9 million during the first quarter of 2022, $8.3 million less than the second quarter of 2022 results, while the tax equivalent net interest margin was 2.73%. The company's total cost of funds was nine basis points in the second quarter, consistent with the linked first quarter, and one basis point lower than the second quarter of the prior year. Employee benefits services revenues for the second quarter of 2022 were $28.9 million, up $1.4 million or 5.3% in comparison to the second quarter of 2021. The improvement in revenues was driven by increases in employee benefits, trust and custodial fees, as well as incremental revenues from the acquisition of furnished benefits designed in Minnesota during the third quarter of 2021. Wealth management revenues for the second quarter of 2022 or $8.1 million down slightly from $8.2 million in the second quarter of 2021. The company reported insurance services revenues of $9.8 million in the second quarter of 2022, which represents a $1.6 million or 19.1% increase over the prior year's second quarter driven by both organic expansion and the acquisition of several insurance practices and books of business between the periods. Banking non-interest revenues increased $1.7 million, or 11%, from $15.5 million in the second quarter of 2021 to $17.2 million in the second quarter of 2022, due primarily to an increase in deposit service and other banking fees. Comparatively, financial services revenues decreased $1.8 million from the linked first quarter due to lower asset-based fiduciary revenues in the employee benefits and services and wealth management businesses. According to the second quarter of 2022, the company reported a provision for credit losses of $6 million, $3.9 million of which was due to the acquisition of Elmira. This compares to $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021. The company's allowance for credit losses increased $5.4 million from the end of the first quarter of 2022 to $55.5 million, but remained consistent with The prior quarter at 68 basis points of total loans outstanding. The company reported net loan charge-offs of $0.4 million or an annualized two basis points of average loans outstanding during the second quarter of 2022 as compared to net loan recoveries of $0.6 million or an annualized three basis points of average loans outstanding for the second quarter. On a year-to-date basis, the company has recorded net loan charges of $0.9 million, or an annualized two basis points of average loans outstanding. The company reported $110.4 million in total operating expenses in the second quarter of 2022, or $106.1 million in core operating expenses exclusive of acquisition-related expenses. This compares to $93.5 million of total and core operating expenses in the prior year's second quarter. The $12.5 million or 13.4% increase in core operating expenses was attributable to a $7.5 million or 13% increase in salaries and employee benefits, a $3.4 million or 36.5% increase in other expenses, as well as increases in data processing and communication expenses, occupancy and equipment expenses, and intangible asset amortization totaling $1.6 million. The increase in salaries and benefits expense was driven by increases in merit incentive-related employee wages, acquisition-related staffing increases, higher payroll taxes, and higher employee benefit-related expenses. The other non-compensation expenses were up due to the general increase in the level of business activities, including costs incurred to pursue several new business opportunities in the company's non-banking businesses, and incremental expenses associated with operating an expanded franchise due to several non-bank acquisitions between the periods and the second quarter acquisition of Elmira Savings Bank. Comparatively, the company reported $99.8 million of total operating expenses in the first quarter of 2022. The $10.6 million or 10.6% increase in total operating expenses on a late quarter basis is largely attributable to a $4 million increase in acquisition-related expenses, a $3.8 million, 6.1% increase in salaries and employee benefits, and a $2.3 million increase in other expenses. The effective tax rate for the second quarter of 2022 was 21.6% down from 23.1% in the second quarter of 2021. In the second quarter of 2021, the company's effective tax rate was driven up by an increase in certain state income taxes that were enacted during the period. During the second quarter, the company completed its acquisition of Elmira Savings Bank in connection with the acquisition of the company at eight branch locations and acquired total deposits of approximately $522 million and total loans of approximately $437 million, including $20.8 million in non-PCD marks. The company also booked $8 million of core deposit and changeable assets. The company's total assets were $15.49 billion at June 30, 2022, representing a $686.5 million or 4.6% increase from one year prior and $138.1 million or 0.9% decrease from the prior quarter end. The increase in the company's total assets during the prior 12-month period was primarily due to a net inflows of deposits between the periods. And the Elmire acquisition average deposit balance has increased $1.03 billion or 8.4% between the second quarter of 2021 and the second quarter of 2022. Likewise, average earning assets were up from $13.37 billion in the second quarter of 2021 to $14.47 billion in the second quarter of 2022, representing a $1.1 billion 8.2%. This included a $2.32 billion, 58.6% increase in average full value investment securities, and a $383.9 million, or 5.2% increase in average loans outstanding, partially offset by a $1.6 billion, or 77.2% decrease in average cash equivalents. On a late quarter basis, average earning assets increased $235.3 million, or 1.7%, due primarily to the Elmira acquisition. Despite the acquisition during the second quarter of 2022, total assets decreased from the prior quarter and due primarily to the net alpha of municipal deposits holding $368.4 million due in part to seasonal factors and a $268.2 million decrease in the market value adjustment on the available for sale investment securities portfolio due to an increase in market interest rates. Ending loans at June 30th, 2022 of $8.14 billion. were $722.4 million, or 9.7% higher than the first quarter of 2022, and $900.5 million, or 12.4% higher than one year prior. The increase in ending loans year over year was driven by increases in all categories of loans, including consumer mortgage, consumer indirect, business lending, home equity, and consumer direct loans, due to the Elmira acquisition and net organic growth, despite a $259.9 million decrease in PPP loans. The increase in loans outstanding on a linked quarter basis was driven by the Elmira acquisition and solid organic growth across all five home-based loan portfolios. On a full year basis, ending loans increased $900.5 million or 12.4%. Excluding loans acquired in connection with the Elmira acquisition and PPP loans, ending loans increased $723.4 million or 10.4% year-over-year. The company's regulatory capital ratios remain strong in the second quarter. The company's Tier 1 leverage ratio was 8.65% at June 30, 2022, which substantially exceeds the well-capitalized regulatory standard of 5%. During the quarter, the company reported $196.7 million in after-tax other comprehensive loss driven by the decline in the market value of the company's available-for-sale investment securities portfolio. The company has an abundance of liquidity. The combination of the company's cash and cash equivalents, BARG, available at the Federal Reserve Bank, BARG capacity at the Federal Home Loan Bank, and unpledged available for sale investment securities portfolio provide the company with over $5.8 billion of immediately available sources of liquidity at the end of the second quarter. Asset quality remains strong in the second quarter. At June 30, 2022, non-performing loans worth $37.1 million, or 0.46% of total loans outstanding, This compares to $36 million or 0.49% of total loans outstanding at the end of the first quarter of 2022 and $70.2 million or 0.97% of total loans outstanding one year earlier. The decrease in non-performing loans as compared to the prior year's second 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 0.29% of total loans outstanding at June 30, 2022, down slightly from 0.35% at the end of the first quarter of 2022, but up from 0.25% one year earlier. Looking forward, we are encouraged by the momentum in our business. The company generates strong organic loan growth over the prior four quarters, then an interest margin expanded meaningfully in the quarter. Asset quality remains strong and the loan pipeline is robust. In addition, the pipeline of new business opportunities in the financial services businesses remains strong. In 2022, we remain focused on new loan generation, managing the company's funding strategies in a rapidly changing interest rate environment while continuing to pursue accretive, low-risk, and strategically valuable merger and acquisition opportunities. And lastly, we sincerely appreciate the efforts of the bank staff and the former Elmira Savings Bank staff for seamlessly integrating the two companies. Thank you. Now I will turn it back over to Rocco to open the line for questions.