Community Financial System, Inc.

and welcome to the community banks 2023 third quarter earnings conference call all participants will be in 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 please note this event is being recorded i would now like to turn the conference over to Dmitry Karaivanov, Chief Operating Officer of Community Bank. Please, go ahead.

Dmitry Karaivanov, Chief Operating Officer of Community Bank Thank you, Marlies, and good morning, everybody. Welcome to our conference call for the third quarter of 2023. As Mark noted in the press release, the company's revenue performance was strong in the quarter. In fact, our revenue has been quite consistent over the past five quarters, regardless of all the macroeconomic and banking industry noise. This is a great example of the diversification of our business and the focus on lowering volatility for our investors. On the flip side, this quarter we had expense pressures that were above our expectations as well. Some of those are transient. Some of those are due to the general inflation pressures, which should abate, and some are a function of the continuous investments in the company. Over the past 24 months, we have invested in our organic capabilities across all of our businesses, and those investments run through the P&L. These organic investments are contributing to the growth in our outstanding in the banking business, the revenue performance in our benefits, insurance, and wealth businesses, and position us even better for the future. Our businesses are strong and healthy, supported by a strong balance sheet. As of the end of the quarter, our funding and liquidity are up compared to the beginning of the year. Our cycle-to-date deposit data is 13%, and our Tier 1 leverage capital is almost double the well-capitalized standard. That is in spite of the turmoil in the banking industry this year. With that, I will pass it on to Joe.

Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's earnings results were down a bit in the third quarter. Fully diluted gap earnings per share were $0.82 in the quarter, which were $0.08 lower than the prior year's third quarter and $0.07 lower than than the linked second quarter results. Fully diluted operating earnings per share and non-GAAP measures defined in the press release were also 82 cents in the quarter, 8 cents per share lower than the prior year's third quarter, and 9 cents per share lower than the linked second quarter results. The 8 cent decrease in operating earnings per share on a year-over-year basis were primarily driven by higher operating expenses. The $0.09 decrease in operating earnings per share on a linked quarter basis was driven by a decrease in net interest income and increases in the provision for credit losses and operating expenses, offset in part by an increase in non-interest revenues and a decrease in income taxes. Reflective of our diversified revenue business model, the company's total revenues in the third quarter of $175.4 million were generally consistent with the prior year's third quarter total revenues of $175.6 million. and the linked second quarter total revenues of $175.3 million. These results were driven by decreases in net interest income between the comparable periods due to higher funding costs, but were largely offset by increases in non-interest revenues. The company recorded net interest income of $107.8 million in the third quarter of 2023. This was down $1.5 million or 1.4% on a linked quarter basis and $2.6 million or 2.4% on a year-over-year basis. The third quarter result was consistent with our expectations of a sideways outcome for a few quarters as funding costs increases outpaced loan portfolio-related rate and volume improvements. The company's total cost of funds in the third quarter of 2023 was 88 basis points as compared to 67 basis points in a linked second quarter. The 21 basis point increase in funding costs in the quarter outpaced a 12 basis point increase increase in earning asset yields resulting in an eight basis point decrease in the company's fully taxed equivalent net interest margin from 3.18% in the second quarter to 3.10% in the third quarter. The year-over-year increase in non-interest revenues totaling $2.3 million or 3.6% was driven by a $2.1 million or 7.6% increase in employee benefit services revenues, a $0.8 million or 6.9% increase in insurance services revenues, and a $0.4 million or 5.8% increase in wealth management services revenues, offset in part by a $1 million or 5.3% decrease in banking service revenues. The increase in employee benefit services revenues was driven by conversion of new business and a significant year-over-year increase in total participants under administration, along with a modest increase for market appreciation. The increase in insurance services revenues are reflective of a strong premium market organic expansion, along with acquired growth between the periods. The increase in wealth management services revenues are reflective of the slightly more favorable investment market conditions, which drove an increase in assets under management. The decrease in banking non-interest revenues are reflective of the company's implementation of certain deposit fee changes, including the elimination of non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022. Reflective of an increase in loans outstanding and a stable economic forecast, the company recorded a provision for credit losses of $2.9 million during the third quarter. Comparatively, the company recorded a $5.1 million provision for credit losses in the third quarter of the prior year and $0.8 million in the linked second quarter of 2023. The company recorded $116.5 million in total operating expenses in the third quarter of 2023 compared to $108.2 million of total operating expenses in the prior year's third quarter in The $8.3 million, 7.7% increase between the periods was mainly driven by higher compensation employee benefits expense, data processing communication expenses, business development and marketing, and other expenses. The $4.5 million, 6.8% increase in salaries and employee benefit expense was primarily driven by merit and market-related increases in employee wages, higher employee medical expenses, and certain executive retirement expenses. The $1.3 million or 9.1% increase in data processing and communication expenses reflected the company's continued investment in customer-facing and back-office digital technologies. Business development and marketing expenses increased $1 million or 28% due to the company's investment in digital initiatives and higher levels of targeted advertisements intended to generate deposit inflows. Other expenses were up $1.5 million, or 23.1%, primarily due to increase in insurance expenses and non-service-related components of net periodic pension credit. Total operating expenses were up $3.5 million, or 3.1% on a link quarter basis, largely driven by a $2.7 million, or 3.9% increase in salaries and employee benefit expenses, and a $1.2 million, or 8.3% increase in data processing and communication expenses. The effective tax rate for the third quarter of 2023 was 21.2%, down from 22% in the third quarter of 22 and 21.4% in the linked second quarter. The company's total assets were $15.39 billion at September 30, 2023, representing a $208.2 million or 1.3% decrease from one year prior and a $278.3 million or 1.8% increase from the end of the second quarter of 2023. Ending loans increased $279.3 million, or 3% during the quarter, and $906.5 million, or 10.6% over the prior year. The increase in loans outstanding in the third quarter was driven by an $81.2 million, or 2.1% increase in the business lending portfolio, and $198.1 million, or 3.7% increase in the company's consumer loan portfolios. The increase in ending loans year over year was driven by organic loan growth in the company's business lending portfolio, totaling $420.5 million, or 12%, and growth in all four consumer loan portfolios, totaling $486 million, or 9.6%. The company's ending total deposits were up $159 million, or 1.2%, from the end of the second quarter. Interest-bearing deposits increased $233.6 million, or 2.6%, during the quarter, while non-interest-bearing deposits decreased $74.6 million, or 1.9%. On a year-to-date basis, ending total deposits were up $18.5 million, or 0.1%. The company's deposit base is well diversified across customer segments, comprised of approximately 61% consumer balances, 26% business balances, and 13% municipal balances. and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $60,000. The company's cycle to date deposit data is 13%, reflective of a high proportion of checking and savings accounts, which represents 70% of total deposits, and the composition and stability of the customer base. The weighted average age of the company's non-maturity deposit accounts is approximately 15 years, and the company does not currently carry any broker or wholesale deposits on its balance sheet. The company's cycle-to-date interest-bearing deposits beta is 18%, and the total funding beta is 15%. During the quarter, the company secured $300 million in term borrowings at the Federal Home Loan Bank of New York at a weighted average cost of 4.69% to fund continued loan growth. The company's liquidity position remains strong, readily available sources of liquidity, including cash and cash equivalents, funding availability at the Federal Reserve Bank's discount window, unused borrowing capacity at the Federal Home Loan Bank of New York, and unplugged investment securities totaled $4.81 billion at the end of the third quarter, which is up from $4.23 billion at the end of the second quarter. During the third quarter, the company pledged additional loan collateral at the Federal Reserve Bank to further enhance its borrowing capacity. These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the third quarter was 72.5%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At September 30, 2023, all the companies and the bank's regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.44% at the end of the third quarter, which substantially exceeded the regulatory well-capitalized standard of 5%. The company's net tangible equity and net tangible assets ratio non-GAAP measure was 4.81% at the end of the third quarter as compared to 5.34% at the end of the second quarter and 4.08% one year prior. During the quarter, the third quarter, the company repurchased 100,000 shares of its common stock at an average price of $51 per share pursuant to its board-approved 2023 stock repurchase program. At June 30, 2023, the company's allowance for credit losses totaled $64.9 million for 69 basis points of total loans outstanding. This compares to $63.3 million for 69 basis points of total loans outstanding at the end of the second quarter of 2023. and $60.4 million to 71 basis points of total loans outstanding at September 30, 2022. During the third quarter, the company recorded net charge-offs of $1.2 million, or five basis points of average loans annualized. Annualized net charge-offs on a year-to-date basis are also five basis points. At September 30, 2023, non-performing Loans totaled $36.9 million or 39 basis points of total loans outstanding. This is up from 36 basis points at the end of the second quarter and 38 basis points one year prior. Loans 30 to 89 days delinquent were 51 basis points of total loans outstanding in September 30, 2023, up from 47 basis points at the end of the second quarter of 23 and up from 33 basis points one year prior. Overall, the company's asset quality remains strong and stable on the quarter. We believe the company's strong liquidity profile, regulatory capital reserves, stable core deposit base, historically strong asset quality, and revenue profile provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum in our business and prospects for continued organic loan growth. We believe funding cost pressures are abating, providing the company an opportunity to increase net interest income in the fourth quarter. In addition, new business opportunities in the company's financial services businesses remain strong. As noted in our press release, the company has taken actions to optimize the customer service staffing levels in its retail business, which are expected to contain branch-related operating expenses for the next few quarters. Estimated severance and related expenses of $1 million to $1.5 million will be incurred and reflected in the fourth quarter results. Thank you. Now I'll turn it back to Marlise to open the line for questions. Oh, excuse me. I will turn it over to Mark to make a few comments. My apologies.