Community Financial System, Inc.

Welcome to the Community Bank System First Quarter 2023 Earnings Conference. 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 Security and Exchange Commission. Please note this conference is being recorded. Today's call presenters are Mark Cherninsky, President and Chief Executive Officer, and Joseph Soteras, Executive Vice President and Chief Financial Officer. They will be joined by Dimitar Karabinov, Executive Vice President and Chief Operating Officer, for the question and answer session. Gentlemen, you may begin.

Thank you. Good morning, everyone, and thank you for joining our first quarter conference call. It certainly has been an eventful quarter for the industry. I typically comment on earnings first, but it feels like I should start with the balance sheet. First off, the events of the weekend of March 10th had virtually no impact on us beyond the minimal level of customer inquiries that We proactively reached out to our larger consumer, commercial, and municipal customers with no movement at all in those deposits or relationships. Total deposits were actually up almost 100 million during the quarter, mostly CDs, with the mix otherwise being remarkably consistent. Our uninsured deposits are 17 percent of total deposits, and our average consumer and commercial account balances are 12,000 and 60,000, respectively. We have no broker or wholesale deposits of any kind. We did need to move rates in the quarter, which raised our deposit funding costs up to 31 basis points, and as of the end of March, our full cycle deposit beta is 5%. Joe will speak further on this topic, but we have $4.7 billion of immediately available liquidity. Loan growth in the quarter was solid at $173 million, mostly business and auto lending. and asset quality remains exceptional. Earnings for the quarter were lower than we expected, due mainly to expenses and the elimination of some retail fees, both of which Joe will discuss further. But year over year, we've delivered greater net interest income and record revenues from our non-banking businesses, which continue to grow despite capital market conditions. Looking ahead, we think our funding and liquidity are really well positioned, and we have another $350 million of Treasury securities maturing next month that will be additive to margin and earnings. We have one of the best deposit bases of any bank in the U.S. Our lending businesses are all executing really well, and we expect that to continue. Credit quality remains exceptional, and our lending portfolios are highly diversified and highly granular. and our non-banking businesses continue to grow despite capital market conditions. So I think we are extremely well positioned for the future and expect our performance to reflect that regardless of the operating environment. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, fully diluted gap earnings per share were 11 cents in the quarter. This compares to a fully diluted gap earnings per share of 86 cents in the first quarter of 2020. in 97 cents in the linked fourth quarter of 2022. During the quarter, the company strategically repositioned its balance sheet by selling available for sale investment securities with a market value of $733.8 million, the proceeds of which were used to pay down expensive overnight bargains to provide the company with greater flexibility to manage balance sheet growth and deposit funding. In connection with the repositioning, the company recognized a pre-tax realized loss on sale of $52.3 million, resulting in a $0.75 per share after tax loss on the sale. Excluding a loss on the sale of investment securities, acquisition-related expenses, and gain on debt extinguishment, the company's fully diluted operating earnings per share for the quarter was $0.86. This compares to $0.87 of fully diluted operating earnings per share in the first quarter of 2022 and $0.96 in the linked fourth quarter. The penny decrease in operating earnings per share on a year-over-year basis was driven by a decrease in banking-related non-interest revenues, an increase in the provision for credit losses and higher operating expenses partially offset by increases in net interest income and financial services business revenues, and decreases in income taxes and fully diluted shares outstanding. Ten cents per share decrease in operating earnings per share on a linked quarter basis was largely driven by an increase in operating expenses and lower deposit service fees. First quarter 2023 adjusted pre-tax, pre-provision net revenue per share, which is a non-GAAP measure as defined in our earnings release, of $1.16 was up four cents as compared to the first quarter of 2022 and down 13 cents as compared to the fourth quarter of 2022. The company recorded total revenues of $124.5 million in the first quarter of 2023, a decrease of $36 million or 22.4% from the prior year's first quarter, The decrease in total revenues between the periods was primarily driven by the previously mentioned loss on sale of securities during the quarter. Total operating revenues, which excludes net realized and unrealized securities gains and losses and gain on debt extinguishment, were $176.6 million in the first quarter of 2023, an increase of $16.1 million, or 10%, from the prior year's first quarter, driven primarily by an increase in net interest income. Comparatively, total revenues were down $51.4 million or 29.2% from the fourth quarter of 2022 results, but up $0.7 million or 0.4% on an operating basis. The company reported net interest income of $111 million in the first quarter of 2023. This was up $16.2 million or 17% over the prior year's first quarter. The company's tax equivalent net interest margin increased by 47 basis points from 2.73 percent in the first quarter of 2022 to 3.20 percent in the first quarter of 2023. The taxable yield on average interest earning assets was up 82 basis points over the prior year's first quarter, while the average cost of funds increased 35 basis points over the same period. Comparatively, the company's net interest margin increased 18 basis points on a linked quarter basis, while net interest income decreased $1.2 million due in part to a lower day count in the quarter. Excluding the impact of the loss on sale of investment securities and the gain on debt extinguishment, non-interest revenues decreased $0.1 million between the comparable annual quarters. A $1.1 million increase in insurance services revenues in the quarter was offset by a $0.6 million decrease in banking-related revenues a $0.2 million decrease in employee benefits services revenues, and a $0.4 million decrease in wealth management revenues. The decrease in banking-related non-insurers revenues was driven by a decrease in debit interchange revenues and overdraft occurrences, as well as the recent implementation of certain deposit fee changes, including the elimination of non-sufficient funds and available funds fees. Despite the organic growth in the employee benefits services In the employee services business, excuse me, and wealth management businesses, revenues were down due to market-related headwinds. On a linked quarter basis, non-interest revenues excluding the loss on the sale of securities and gain on debt extinguishment increased $1.9 million, or 2.9%. An increase in revenues in all three of the financial services businesses totaling $4.4 million, or 10%, was partially offset by a $2.6 million, or 13.6%. percent decrease in banking-related non-interest revenues. During the first quarter of 2023, the company recorded a provision for credit losses of $3.5 million driven by a weaker economic forecast combined with a $172.9 million increase in loans outstanding. Comparatively, the company recorded a provision for credit losses of $0.9 million during the first quarter of 2022 and $2.8 million in the fourth quarter of 2022. The company record $114 million in total operating expenses in the first quarter of 2023 compared to $99.8 million in total operating expenses prior year's first quarter. The $14.2 million increase in operating expenses was primarily attributable to a $9.8 million increase in salaries and employee benefits and a $4.2 million increase in other expenses. The increase in salaries and employee benefits expense was driven by increases in merit, severance, and incentive-related employee wages, including minimum wage-related compression on the lower end of the company's pay scale, acquisition-related and other additions to staffing, higher payroll taxes, and higher employee benefit-related expenses. Other expenses were up due to an increase in insurance costs, including larger FDIC insurance expenses. higher professional fees, business development, travel, and marketing expenses, along with incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition in the second quarter of 2022. In comparison, the company reported $105.9 million of total operating expenses in the fourth quarter of 2022, $8.2 million or 7.7 percent increase in total operating expenses between the fourth quarter of 2022 and the first quarter of 2023, was largely attributable to a $7.4 million, 11.5% increase in salaries and employee benefits, and a $0.7 million, 5% increase in other expenses. For the remaining three quarters of 2023, management anticipates that total operating expenses excluding any future acquisition activities will remain generally in line with first quarter levels. Said another way, on a full calendar year, year-over-year basis, The company anticipates total operating expenses to increase between 5% and 9%. The effective tax rate for the first quarter of 2023 was 16.9%, down from 21.4% in the first quarter of 2022. Excluding the impact of tax benefits related to stock-based compensation activity, the effective tax rate was 21.4% in the first quarter of 2023, down from 22.3% in the first quarter of 2022. The company's total assets were $15.26 billion at March 31st, 2023, representing a $369.9 million or 2.4% decrease from one year prior and a $579.7 million or 3.7% decrease from the end of the fourth quarter of 2022. The book value of average interest earning assets decreased $662.1 million or 4.5% during the first quarter, primarily to a decrease in the average book value of the investment securities, partially offset by higher average loan balances. At the end of the quarter, the book value of interest-earning assets was $14.03 billion, comprised of $8.98 billion of loans, $5.02 billion of investment securities, and $28 million of cash equivalents. Ending loans increased $1.56 billion, or 21%, over the prior year, and $172.9 million, or 2%, during the quarter. The increase in ending loans year-over-year was driven by increases in all loan categories due to net organic growth and the on-law acquisition. The increase in loans outstanding on the link quarter basis was driven by a $102.3 million, or 2.8%, increase in business lending. a $70.7 million, 1.4 percent net increase in the company's consumer loan portfolios. The company's liquidity position remains strong. The company's funding base is largely comprised of core non-interest-bearing demand deposit accounts and interest-bearing checking, savings, and money market deposit accounts with customers that operate, reside, or work within our branch footprint. At March 31st, 2023, the company's readily available source of liquidity totaled $4.69 billion. including cash and cash equivalent balances net afloat of $109.7 million, $1.54 billion of funding availability at the Federal Reserve Bank's discount window, $1.84 billion of unused borrowing capacity at the Federal Home Loan Bank of New York, and $1.2 billion of unplugged investment securities that could be pledged as collateral for additional borrowing capacity. These sources of immediately available liquidity represent over 200% of the company's uninsured deposits and that of collateralized deposits, which are estimated at $2.3 billion. The company's ending total deposits were up $98 million from the end of the fourth quarter, or approximately 1%. Deposit base is well diversified across customer segments, comprised of approximately 63% consumer balances. 25 percent business balances, and 12 percent municipal balances, and broadly dispersed with average consumer deposit account balance of $12,000 and average business deposit relationship of approximately $60,000. The company's cycle-to-date deposit data is 5 percent reflective of a high proportion of non-interest bearing deposits, which represent 30 percent, over 30 percent of total deposits, and a composition and stability of the customer base, while the cycle-to-date total funding data At the end of the quarter, 74% of the company's total deposit balances were in checking and savings accounts, and the weighted average age of the company's non-maturity deposit accounts is approximately 15 years. The company does not currently have any brokerage or wholesale deposits on its balance sheet. The company's loan-to-deposit ratio at the end of the first quarter was 68.5%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. In addition, during the remaining three quarters of 2023, the company anticipates receiving over $600 million of investment security principal cash flows to support its funding needs. On March 31, 2023, all the companies in the bank's regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.06%, at March 31st, 2023, which substantially exceeds the regulatory well-capitalized standard of 5%. The company's net tangible equity and net tangible assets ratio was 5.41% at March 31st, 2023, up 77 basis points from the end of the fourth quarter of 2022. During the first quarter, the company repurchased 200,000 shares of its common stock pursuant to its board-approved 2023 stock repurchase program. At March 31, 2023, the company's allowance for credit losses totaled $63.2 million, with 0.70% of total loans outstanding. This compares to $61.1 million, with 0.69% of total loans outstanding at the end of the fourth quarter of 2022, and $50.1 million, with 0.68% of total loans outstanding at March 31, 2022. During the first quarter of 2023, the company reported net charge loss of $1.5 million, or seven basis points of average annual loans, annualized. This compares to three basis points of annualized net charge-offs in the first quarter of 2022, and nine basis points in the fourth quarter of 2022. At March 31st, 2023, non-performing loans, over $33.8 million, or 0.38% of total loans outstanding, loans 30 to 89 days delinquent, or 0.35% of total loans outstanding at March 31st, 2023, down from 0.51% at the end of the fourth quarter of 2022. We believe the company's strong liquidity profile, capital reserves, core deposit base, asset quality, and revenue profile provide a solid foundation for future opportunities for growth. Looking forward, we are encouraged by the momentum in our business. The company continued to organically grow its loan portfolios, and asset quality remains strong. The company's granular, Main Street-focused deposit base and strong liquidity profile are expected to support future growth in our banking business. In addition, new business opportunities in the financial services business has remained strong. Thank you all, and I'll turn it back to Danielle to open the line for questions.