Community Financial System, Inc.

Welcome to the Community Bank System Third 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 risk 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 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 Dmitry Karayevichnov, Executive Vice President of Financial Services and Corporate Development, for the question and answer session. Gentlemen, You may begin. Please go ahead.

Thank you, Marlise. Good morning, everyone. Hope all is well, and thank you all for joining our third quarter conference call. As you can see from the release, this was one of the best operating quarters we have ever reported. In fact, I believe it is the best quarter we've ever reported, absent last year's post-COVID reserve releases in PPE revenues in Q1. Earnings for the quarter were driven by improvement across the board, including solid loan growth, a growing margin, higher non-interest revenues in our banking and insurance segments, an improved efficiency ratio, and solid credit quality. Loan growth was across all of our portfolios, and that momentum continues. 5% growth in the quarter follows 4% growth in Q2, so it continues to be a performance highlight delivered by our credit generation teams. The larger loan loss provision was driven almost entirely by loan growth, in deteriorating qualitative factors in the CECL model. Deposit costs remain contained and average balances were flat for the quarter with public fund outflows of about $300 million offset by growth in consumer and business balances of $300 million. Overall, GAAP EPS is up 8% over last year and PPNR is up 20%. Both numbers would be even greater ex-PPP revenues in last year's quarter. So we could not be more pleased with this quarter's results and believe we are well positioned heading into Q4 as well in terms of our pipelines and margin expectations. Looking forward, we expect our current operating momentum to continue. Obviously, this is an unpredictable and volatile environment, but given our stable core funding base, a higher rate environment will continue to be additive to our results. 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 90 cents. These results are up 7 cents or 8.4% over the third quarter 2021 results of 83 cents per share. The improvement in operating results was largely driven by a significant improvement in the company's net interest income, an increase in non-interest revenues, and a decrease in weighted average shares outstanding between the periods. offset in part by increases in operating expenses, the provision for credit losses, and income taxes. Adjusted pre-tax, pre-provision net revenue, or adjusted PPNR per share, which excludes the provision for credit losses, acquisition-related expenses, other non-operating revenues and expenses, and income taxes, was $1.25 in the third quarter, up 21 cents or 20.2% over the prior year's third quarter. Adjusted PPNR per share was also up 12 cents or 10.6% over the link's second quarter result of $1.13. The company recorded total revenues of $175.6 million in the third quarter of 2022. This was up $18.7 million or 11.9% over the prior year's third quarter and established a new quarterly record for the company. Net interest income, the primary driver of the company's revenue growth, was up 17.8% or 19.2% over the prior year's third quarter due to market interest rate related tailwinds, strong loan growth, and investment securities purchases between the periods. The company's average interest earning assets increased $1.08 billion, or 8%, while a tax equivalent net interest margin increased 29 basis points from 2.74% in the third quarter of 2021 to 3.03% in the third quarter of 2022. Net interest income was also up $7.2 million, or 7%, over linked second quarter results, while the tax equivalent net interest margin expanded to 14 basis points. Although interest expense was up $2.4 million over the prior year's third quarter, the company's average cost of funds was up just six basis points, from 10 basis points in the third quarter of 2021 to 16 basis points in the third quarter of 2022. The company's average cost of deposits remained low at 11 basis points for the quarter. Non-interest revenues increased $0.9 million over the prior year's third quarter, led by a $1.6 million or 9.7% increase in banking-related revenues and a $1.3 million or 7.6% increase in wealth management insurance services revenues. Banking non-interest revenues increased from $16.9 million in the third quarter of 2021 to $18.5 million in the third quarter of of 2022 driven by an increase in deposit service and other banking fees. The increase in wealth management and insurance services revenues was driven primarily by organic and acquired growth in the insurance services business, offset in part by a decrease in wealth management services revenues due to challenging investment market conditions. Employee benefit services revenues were down $2 million or 6.8% as compared to the prior year's third quarter due to a decrease in asset-based employee benefit trust and custodial fees. Although asset quality remains very strong, the company recorded $5.1 million in the provision for credit losses in the third quarter, reflective of strong loan growth and a weaker economic forecast. This compares to a $0.9 million net benefit recorded in the provision for credit losses in the third quarter of 2021. Comparatively, during 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 Savings Bank during the quarter. The company recorded $108.2 million in total operating expenses in the third quarter of 2022 compared to $100.4 million of total operating expenses in the prior year's third quarter. The $7.7 million or 7.7% increase in operating expenses was driven by a $3.3 million or 5.3% increase in salaries and employee benefits, a $2.2 million, 19.8% increase in other expenses, and a $1.2 million, 9.4% increase in data processing and communication expenses. On a combined basis, all other expenses increased $1 million between the comparable periods. In comparison, the company recorded $110.4 million of total operating expenses in the second quarter of 2022, The $2.2 million or 2% sequential decrease in quarterly operating expenses was largely attributable to a $4 million decrease in acquisition-related expenses, partially offset by increases in salaries and employee benefits, data processing and communication expenses, and other expenses. The effective tax rate for the third quarter of 2022 was 22%. The company's average earning assets increased 1.2%. $0.8 billion, or 8% over the prior year, from $13.53 billion in the third quarter of 2021 to $14.61 billion in the third quarter of 2022. This included a $2.07 billion, or 49.4% increase in the average book value of investment securities, and a $1.06 billion, or 14.6% increase in average loans outstanding, partially offset by a $2.05 billion decrease in average cash equivalents. Average deposit balances, which includes $522.3 million of deposits acquired in the Elmira acquisition, increased $830.9 million, or 6.6% over the same period. On a linked quarter basis, average earning assets increased to $140.5 million, or 1%. Ending loans increased $398.9 million, or 4.9% during the third quarter, and $1.26 billion, or 17.3% over the prior 12-month period. Exclusive of $437 million of loans acquired in connection with the second quarter acquisition of Elmira, ending loans outstanding have increased $824 million, or 11.3%, over the prior 12-month period, despite a $156.2 million decrease in PPP loans. During the third quarter, the company originated over $750 million of new loans at a weighted average rate of just under 5%. Comparatively, the book yield of when the company's loan portfolio was 4.22% during the third quarter. Asset quality remains strong in the third quarter. At September 30, 2022, non-performing loans were $32.5 million, or 0.38% of total loans outstanding. This compares to $37.1 million, or 0.46% of total loans outstanding at the end of the linked second quarter of 2022, and $67.8 million, or 0.93% of total loans outstanding one year earlier. The decrease in non-performing loans as compared to the prior year's third quarter was 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 0.33% of total loans outstanding at September 30th, 2022, up slightly from 0.29% at the end of the second quarter of 2022, but down slightly from 0.35% one year earlier. The company's regulatory capital ratios remain strong in the third quarter. The company's Tier 1 leverage ratio of 8.78% was up 13 basis points in the quarter. This significantly exceeds 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 capacity at the Federal Reserve Bank, borrowing availability at the Federal Home Loan Bank, An unplugged available for sale investment securities portfolio provided a company with over $5.2 billion of immediately available sources of liquidity at the end of the third quarter. The company's loan to deposit ratio at the end of the third quarter was 63.4%, providing future opportunity to migrate lower yield investment security balances into higher yield loans. Looking forward, we are encouraged by the momentum in our business. The company generates strong organic loan growth over the prior five quarters. The net 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 remain strong. In Q4 and 2023, we will 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. Thank you. I will now turn it back to Marlies to open the line for questions.