Community Financial System, Inc.

Welcome to the Community Bank System fourth quarter and full year 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. During this call, should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. Please also note that this call is being recorded today. Today's call presenters are Mark Chernisky, President and Chief Executive Officer, and Joseph Suteris, Executive Vice President and Chief Financial Officer. They will also be joined by Dimitar Kharivanov, Executive Vice President and Chief Operating Officer for the question and answer session. Gentlemen, you may begin the call.

Thank you, Joe. 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. In fact, our best quarter ever, ex-reserve releases last year. We reported record revenues, record PPNR, and record GAAP EPS ex-acquisition expenses. Loan growth was very strong across all our portfolios, up 12% annualized over the third quarter, and the deposit base remained sound with respect to retention and rate. Joe will comment further on the quarter, but it was a good one. Looking at the whole of 2022, we likewise had a record year, not just financially, but for our commercial, mortgage, and installment lending businesses as well. The investments we made over the past 18 months, particularly in our commercial and mortgage businesses, have proven fruitful. The commercial business grew organically 18% in 2022. The mortgage business was up 7%, and the installment business grew at 28%. Our non-banking businesses also had significant organic growth but were negatively impacted by the market declines, with the exception of one group, our insurance business, whose revenues were up 17%. Our wealth business, which is entirely levered to the market, was only down 4% against a market that was down 19.5%. And our benefits business, which is about half levered to the market, actually grew 1%. So these businesses had a fabulous year despite the market and at this point are a coiled spring for the future. Looking ahead to the remainder of the year, we expect to execute well across all of our businesses. A significant focus will be on funding. We have $800 million of overnight borrowings, which is not ideally where we want to be when we also have $5 billion in lower-yielding securities. So we have some thoughts on addressing that going forward into 2023 and beyond, some of which Joe will touch on further. We will continue to invest in digital and rationalize analog, as we did this past year with the consolidation of 12 retail branches, bringing the total over the past three years to 15% of our total network. Excluding acquisitions, we have fewer FTEs than we did in 2021. We implemented new commercial and cash management platforms. Our operations teams are working to implement workflow automation that is expected to save up to 60,000 hours of manual effort. So we are focused across the company on technology solutions for our customers and for our operating efficiency. Lastly, and most important, we have the best talent in this company we've ever had, and so we'll continue to get better in everything we do. particularly as we also now have the products, technology, and service capacity to compete very effectively with the larger banks across our markets. This has created a significant new organic market opportunity for us that we have not previously possessed. In summary, it was a great quarter. It was a great year. We're exceptionally well positioned, and we look forward to 2023. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the company's fourth quarter earnings results were solid with fully diluted gap earnings per share of 97 cents and fully diluted operating earnings per share of 96 cents. Gap earnings per share were up 17 cents or 21.3% over the fourth quarter of 2021, while operating earnings per share were up 15 cents or 18.5% over the same period. The improvement in operating results was largely driven by a significant improvement in the company's net interest income and a decrease in weighted average shares outstanding between the periods, offset in part by a small decrease in non-interest revenues and increases in operating expenses, the provision for credit losses and income taxes. On a full year basis, fully diluted GAAP earnings per share were down 2 cents per share or less than 1%, while operating earnings per share were up 9 cents or 2.6% despite a $23.6 million or $0.34 per share increase in the provision for credit losses and a $15.4 million or $0.22 per share decrease in PPP-related revenues. Adjusted pre-tax, pre-provision net revenue or adjusted PPNR per share, which excludes from net income the provision for credit losses, acquisition of related expenses, other non-operating revenues and expenses and income taxes, was $1.29 in the fourth quarter of 2022, up 20 cents or 18.3% over the prior year's fourth quarter. Adjusted PPNR per share was also up 4 cents or 3.2% over the length third quarter result of $1.25. On a full year basis, adjusted pre-tax pre-provision net revenue was up 50 cents or 11.7% from $4.28 in 2021 to $4.78 in 2022. The company recorded total revenues of $175.9 million in the fourth quarter of 2022. This was up $16.3 million, or 10.2%, over the prior year's fourth quarter and established a new quarterly record for the company. Net interest income increased $16.5 million, or 17.2%, over the prior year's fourth quarter due to market interest-related tailwinds, strong loan growth, and investment security purchases between the periods, while non-interest revenues decreased $0.2 million to 0.4%. The company's average interest earning assets increased $905.5 million, or 6.5%, while the tax equivalent net interest margin increased 28 basis points from 2.74% in the fourth quarter of 2021 to 3.02% in the fourth quarter of 2022. Net interest income was also up $1.8 million or 1.7% over the length third quarter results, while the tax equivalent net interest margin decreased one basis point. Although interest expense was up $8.8 million over the prior year's fourth quarter, the company's average cost of funds was up just 24 basis points, from nine basis points in the fourth quarter of 2021 to 33 basis points in the fourth quarter of 2022. Given a 425 basis point cycle-to-date increase in the federal funds rate, federal funds rate. This represents a total funding beta of 6%. Similarly, the company's average cost of deposits for the quarter remained low at 18 basis points, representing a cycle-to-date deposit beta of 2%. The $0.2 million, 0.4% decrease in non-interest revenues between the comparable annual quarters was driven by a $2.6 million or 5.6% decrease in the financial services business revenues offset in in part by a $2.4 million or 14.5% increase in banking non-interest revenues. Despite organic customer growth in 2022, employee benefit services revenues were down $1.4 million or 4.5% due to a decrease in asset-based employee benefit trust and custodial fees. Wealth management insurance services revenues were down $1.2 million or 7.5% due primarily to challenging investment marketing conditions. The increase in banking non-initiative revenues was driven by an increase in deposit service fees. The company recorded $2.8 million in the provision for credit losses in the fourth quarter, reflective of strong loan growth and a weaker economic forecast. This compares to a $2.2 million provision for credit losses recorded in the fourth quarter of 2021. On a full year basis, the company reported $14.8 million in the provision for credit losses, reflective of $1.44 billion of loan growth in 2022, the Elmira Savings Bank acquisition, and weaker economic forecasts. By comparison, the company recorded an $8.8 million net benefit in the provision for credit losses in 2021 due to an improving economic outlook as the country rebounded from the pandemic. The company recorded $105.9 million in total operating expenses in the fourth quarter of 2022 compared to $100.9 million of total operating expenses in the prior year's fourth quarter. The $4.9 million, 4.9% increase in operating expenses was driven by increases in salaries and employee benefits, data processing and communication expenses, occupancy and equipment expenses, and other expenses offset in part by lower acquisition related expenses. The $1 million, 1.6% increase in salaries and employee benefits expense was driven by increases in merit related employee wages, acquisition related additions to staff, and higher payroll taxes. offset in part by lower incentive compensation and employee benefit related expenses. The $0.8 million, 5.9% increase in data processing communication expenses with the company's continued investment in customer facing and back office digital technologies between the comparable periods. Occupancy and equipment expense increased $0.9 million or 8.9% due to inflationary pressures. The Elmira acquisition in the second quarter of 2022 offset in part by branch consolidation activities between the periods. Other expenses were up $3.4 million or 31.7% due to the acquisitions and general increase in the level of business activities between the periods, including business development, marketing expenses, and travel-related expenses. In comparison, the company reported $108.2 million of total operating expenses in the third quarter of 2022, The $2.3 million, 2.2% sequential decrease in quarterly operating expenses was largely attributable to a $2.1 million decrease in salaries and employee benefits. The effective tax rate for the fourth quarter of 2022 was 22%. The company's average earnings and assets increased $905.5 million, or 6.5%, over the prior year from 13.96%. in the fourth quarter of 2021 to $14.87 billion in the fourth quarter of 2022. This included a $1.29 billion or 26.5% increase in the average book value of the investment securities and a $1.41 billion or 19.3% increase in average loans outstanding, partially offset by a $1.79 billion decrease in average cash equivalents. Average deposit balances were up 348%. $2.4 million, or 2.7%, over the same period, which included $522.3 million of deposits acquired in the Elmira acquisition. On a linked quarter basis, average earning assets increased $254.6 million, or 1.7%, while average deposits decreased $154.4 million, or 1.2%. Ending loans increased $265.8 million, or 3.1% during the fourth quarter, and $1.44 billion, or 19.5% 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 increased $998.7 million, or 13.5% over the prior 12-month period. During the fourth quarter, the company originated over $560 million of new loans at a weighted average rate of just under 6%. Comparatively, the book deal on the company's loan portfolio was 4.39% during the fourth quarter. Asset quality remained strong in the fourth quarter. At December 31, 2022, non-performing loans were $33.4 million, or 0.38% of total loans outstanding. This compares to $32.5 million, or 0.38% of total loans outstanding at the end of the link quarter of 2022 and $45.5 million or 0.62% of total loans outstanding one year earlier. The decrease in non-performing loans as compared to the prior year's fourth quarter was primarily due to the reclassification of certain pandemic-infected hotel loans from non-accrual status back to accruing status. Loans 30 to 89 days delinquent were 0.51% of total loans outstanding at December 31, 2022, up from 33 basis points at the end of the third quarter of 2022 and 38 basis points one year earlier. The company recorded $3.3 million or four basis points annualized of net charge-offs during 2022. The company's regulatory capital ratios remained strong in the fourth quarter. The company's Tier 1 leverage ratio was 8.79%, which significantly exceeded the well-capitalized regulatory standard of 5%. In addition, the company's net tangible equity and net tangible assets ratio increased 56 basis points during the quarter from 4.08% at the end of the third quarter to 4.64% at the end of the fourth quarter. During the fourth quarter, the company reclassified certain U.S. Treasury securities with a book value of $1.42 billion and a market value of $1.08 billion from its available-for-sale investment securities portfolio to its held-to-maturity investment securities portfolio. while the reclassification had no economic earnings or regulatory impact, enables the company to more effectively manage overall capital levels if interest rates rise above year-end levels in the coming quarters. The company continues to maintain a strong liquidity profile. 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, and unplugged investment securities provide the company with approximately $4.9 billion of immediately available source liquidity at the end of the fourth quarter. The company's loan-to-deposit ratio at the end of the fourth quarter was 67.7%, providing future opportunity to migrate lower yield investment security balances into higher yield loans. During 2023, the company anticipates receiving over $600 million of investment security principal cash flows to support its funding needs. Looking forward, we are encouraged by the momentum in our business. The company generates strong organic loan growth over the prior six quarters. Asset quality remains solid and the loan pipeline is robust. In addition, new business opportunities in the financial services businesses remain strong. In 2023, we'll remain focused on new loan generation, managing the company's funding strategies in a rapidly changing interest rate environment while continuing to pursue a credo of low risk and strategically valuable merger and acquisition opportunities. Thank you. Now I'll turn it back to Joe to open the line for questions.