Community Financial System, Inc.

good day and welcome to the community bank system fourth quarter 2023 earnings conference call all participants will be in a listen only mode should you need assistance please signal conference specialists by pressing the star key followed by zero after today's presentation there will be an opportunity to ask questions to ask a question you may press star than one on your touchtone phone and to withdraw your question please press star than two please note this event is being recorded I would now like to turn the conference over to Mr. Dimitar Kravinov, President and Chief Executive Officer of Community Bank Systems. Please go ahead, sir.

Thank you, Chuck. Good morning, everyone, and thank you for joining Community Bank Systems Q4 2023 earnings call. The fourth quarter was an unusually noisy one for us. The company achieved record revenues in the quarter with strong and balanced performance across all of our four businesses. In fact, when looking at the full year 2023, Three of our four businesses, banking, employee benefit services, and insurance services had record revenue performance. In addition, our balance sheet remains highly liquid and well capitalized. Our diversified business model and emphasis on below average risk served us very well during a very volatile year. With that said, we also had a meaningful increase in expenses in 2023, which was particularly prominent this past quarter due to a number of elevated items. While this increase was well above our expectations, it does not reflect the core earnings power of the company going forward. With this noisy quarter behind us, as we look forward into 2024, we're optimistic about every one of our businesses. In our banking business, we continue to gain market share supported by more than $4 billion of available liquidity, low cost of funds, excellent credit quality, and robust regulatory capital levels. The opportunity to serve clients across our footprint has never been better, and our teams and balance sheet are open for quality business. In our employee benefit services business, we have a strong pipeline of client onboardings, and our reputation is quickly growing at the national level. We were recently named top five record keeper for all market sizes by the National Association of Plan Advisors. In addition, current market values provide a tailwind into 2024 after two years of headwinds. Our insurance services business, which grew 18% in 2023, is well positioned to continue to benefit from hard insurance markets, organic initiatives, and roll-up M&A activities. We were recently ranked as a top 75 PNC agency in the country and one of the nation's largest bank-owned insurance operations. Our wealth business also had a positive revenue year in 2023, and our assets under management are back to their previous peak levels from the end of 2021. That, plus the increased focus and investments in the business, position us well to regain momentum in 2024. Simply put, our focus for 2024 is to continue the revenue growth while moderating the cost pressures and achieving positive operating leverage. We're also hopeful for a more constructive M&A environment in 2024. I will now pass it on to Joe for more details on the quarter.

Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's earnings results were down in the fourth quarter due largely to certain elevated non-interest expenses. Fully diluted GAAP earnings per share were 71 cents in the quarter, down 26 cents from the prior year's fourth quarter, and 11 cents lower than the linked third quarter results. Fully diluted operating earnings per share and non-GAAP measure were $0.76 in the quarter, $0.20 per share lower than the prior year's fourth quarter, and $0.06 per share lower than the linked quarter results. During the fourth quarter, the company recorded $123.3 million in non-interest expenses. This included $2.2 million of acquisition-related contingent consideration expenses. a $1.2 million restructuring charge related to the company's previously announced branch optimization strategy, a $1.5 million expense accrual related to the FDIC special assessment, $1 million of executive-related retirement expenses, as well as elevated fraud losses. On a full-year basis, the company's core operating expenses, which excludes acquisition-related expenses and restructuring charges, were up 10.2%. This increase was not only driven by upward pressure on market wages, and some of the previously mentioned charges, but are also reflective of the front foot investments the company made in its leadership team, talent across all lines of business, data systems, and risk management capabilities. The company's management expects the full year 2024 core operating expenses will moderate back to a mid-single-digit growth rate off a full year 2023 core operating expense base of approximately $460 million. The company recorded $177 million of total revenues in the fourth quarter, establishing a new quarterly record for the company. Comparatively, the company recorded total revenues of $175.9 million in the same quarter in the prior year and $175.4 million in the linked third quarter. The increase in total revenues over the prior year's fourth quarter was driven by a $4.1 million or 6.4% increase in non-interest revenues, partially offset by a $3 million or 2.7% decrease in net interest income. As Dimitar noted, the revenues were up in all lines of business on a full-year basis, and management believes the company is well-positioned to grow total revenues again in 2024. The company recorded net interest income of $109.2 million in the fourth quarter. This was up $1.4 million or 1.3% on a linked quarter basis, but down $3 million or 2.7% from the fourth quarter of 2022. Pressure on funding costs have not fully abated, but increases in both the outstanding balances and the yield on the company's loan portfolio largely offset the increase in funding costs between the periods. The company's total cost of funds in the fourth quarter of 2023 was 1.08% as compared to 88 basis points in the length third quarter. The 20 basis point increase in funding costs in the quarter outpaced a 17 basis point increase in earning asset yields, resulting in a three basis point decrease in the company's fully taxable net interest margin from 3.10% in the third quarter to 3.07% in the fourth quarter. On a full-year basis, non-interest revenues, excluding investment securities losses and gain on debt extinguishment, increased $8.2 million, or 3.2%. This result is reflective of the company's diversified business model. Banking-related non-interest revenues decreased $1.9 million, or 2.7%, in 2023 due primarily to the company's decision to eliminate non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022, while total revenues in all three of the company's non-banking businesses, employee benefit services, insurance services, and wealth management services were up year over year. Reflective of an increase in loans outstanding, a stable economic forecast, an increase in delinquent and non-performing loans, the company recorded a provision for credit losses of $4.1 million during the fourth quarter. Comparatively, the company recorded a $2.8 million provision for credit loss in the fourth quarter of the prior year and $2.9 million in the length third quarter. The effective tax rate for the fourth quarter of 2023 was 22.8% up from 22% in the fourth quarter of 2022. On a full year basis, the effective tax rate was 21.6% in 2023 as compared to 21.7% in 2022. Ending loans increased $254.5 million or 2.7% during the quarter and $895.2 million or 10.2% over the prior year. The increase in loans outstanding in the fourth quarter was primarily driven by increases in the business lending and consumer mortgage portfolios. The increase in ending loans year-over-year was driven by organic loan growth in the company's business lending portfolio totaling $438.7 million, or 12%, and growth in all four consumer loan portfolios totaling $456.5 million, or 8.8%. The company's ending total deposits were down $102.7 million, or 0.8%, from the end of the third quarter, driven by net outflow of municipal deposits. On a full year basis, ending total deposits were down $84.2 million, or 0.6%. The company's cycle to date deposit data is 17%, reflective of a high proportion of checking and savings accounts, which represents 68% of total deposits, and the composition and stability of the customer base. During the fourth quarter, the company secured $100 million in term borrowings at the Federal Home Loan Bank of New York at a weighted average cost of 4.55% to fund continued loan growth. Comparatively, during the fourth quarter, the weighted average rate on new loan originations was 7.57%. The company's liquidity position remains strong, readily available source 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 $4.83 billion at the end of 2023. 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 75.1%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At December 31st, 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 9.37% at the end of 2023, which substantially exceeded the regulatory well-capitalized standard of 5%. The company's net tangible equity to net tangible assets ratio was 5.78% at the end of of the year as compared to 4.81% at the end of the third quarter and 4.64% one year prior. During the fourth quarter, the company repurchased 107,161 shares of its common stock at an average price of approximately $41 per share and 607,161 shares on a full year basis at an average price of approximately $49 per share. At December 31st, 2023, the company's allowance for credit losses totaled $66.7 million. an increase from $64.9 million in the third quarter of 2023 and $61.1 million one year prior, but remained stable at 69 basis points of total loans outstanding. During the fourth quarter of 2023, the company recorded net charge-off to $2.3 million, or 10 basis points of average loans annualized. The company's full-year 2023 net charge-off ratio was six basis points of average loans. At December 31st, 2023, non-performing loans totaled $54.6 million or 56 basis points of total loans outstanding. This was up from $36.9 million or 39 basis points at the end of the third quarter and $33.4 million or 38 basis points one year prior. There were three additional business lending relationships that were transferred to non-accrual status in the fourth quarter, all of which are well secured with no specific loss content identified. Loans 30 to 89 days delinquent were 50 basis points of total loans outstanding at December 31, 2023, as compared to 51 basis points at both the end of the third quarter of 23 and one year prior. Overall, the company's asset quality remains strong. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically strong asset quality provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum in all of our businesses and prospects for continued organic growth. We believe funding cost pressures will abate in 2024, setting the table for expansion of net interest income, particularly in the last three quarters of the year. In addition, recent asset appreciation in both the stock and bond markets provide a tailwind for revenue growth in the employee benefit services and wealth management services businesses. That concludes my prepared comments. Thank you. Now I will turn it back to Chuck Openline for questions.