Community Financial System, Inc. (CBU) Earnings Call Transcript & Summary

Good afternoon. Welcome to the 2020 Annual Meeting of Shareholders for Community Bank Systems Inc. Today's discussion may include forward-looking statements. Various risks and uncertainties could cause Community Bank's actual results to differ materially from those predicted, and these risks are detailed in its SEC filings, including the 2019 annual report and Form 10-Q for the first quarter. I will now turn the meeting over to the Chair of the company's Board, Sally Steele.

Good afternoon, ladies and gentlemen, and welcome to the 2020 Annual Meeting of the Shareholders of Community Bank System, Inc. I hope you are all safe and healthy. I am Sally Steele, Chair of the Board of Directors, and I will be presiding over this meeting. In light of the public health concerns caused by the pandemic, we are broadcasting this meeting via live webcast. This is the first-ever virtual meeting of the company, and we intend to return to in-person meetings with our shareholders next year. We appreciate your understanding and for your participation today. Before I go any further, let me note that the agenda and rules of conduct are posted on the web portal for your reference, along with the other materials related to this meeting. On behalf of Community Bank's Board, we hope that you are coping well in this difficult and challenging time. We are living in unprecedented time and the human impact is tragic, and our thoughts are with those who have been impacted by the virus and all of the health care and other essential workers who are on the front line, helping those in need. We respect and admire their selflessness. As an essential business, we've been working tirelessly to support our customers, employees and the communities where we do business during this challenging time, by providing the same level of banking, wealth management, insurance and employee benefit administration services that our customers expect. I've been amazed by Community Bank's response and the efforts of the management team and all of the employees during this crisis. I want to express my thanks and let the shareholders know that our employees have risen to the occasion. Community Bank has been part of the solution and has acted swiftly to make necessary changes and to react to recently implemented government programs. To protect our employees, we have closed our lobbies, offering banking services through the branches' drive-through windows and by-appointment-only, face-to-face meetings. Encouraging all employees who are capable of working from home to keep safe by sheltering in place and rearranging workspaces and hours for those employees who, by the nature of their essential jobs, are unable to work from home. We continue to monitor the guidance provided by the health professionals and are committed to protecting our employees while fulfilling our obligations to the communities where we do business and to provide safe and reliable financial services. At this time, I call the meeting to order. If shareholders have not voted prior to today, I will point out that you can vote at any time during this meeting by clicking on the Voting button on the web portal and following the instructions there. [Operator Instructions] Shareholders may submit questions regarding the proposals to be voted upon today and other matters outlined in the meeting's rules of conduct. In order to address questions regarding the proposals to be voted upon today, we ask shareholders to please submit any questions they may have about the proposals now so that they can be answered during the business portion of this meeting. Only shareholders after the close of business on March 23, 2020, the record date or their duly authorized proxies are entitled to submit questions and vote at the annual meeting. [Operator Instructions] Questions from multiple shareholders on the same topic or that are otherwise related may be grouped, summarized and answered together. Present today on the call is Mark Tryniski, the President and Chief Executive Officer. Also on the telephone are many of -- are all of our Directors. Please allow me to mention them by name. Brian Ace, Mark Bolus, Jeffrey Davis, Neil Fesette, Michael Kallet, Kerrie MacPherson, John Parente, Raymond Pecor, Rick Stickels, Mark Tryniski and Jack Whipple. Also joining us today is Todd Williams, a representative from our accounting firm, PricewaterhouseCoopers. He will also be available to answer any questions that may be directed to him. I will now ask Danielle Cima, the Corporate Secretary, to report on the notice delivered for this meeting and the establishment of a quorum in order to properly conduct business.

As noted in the proxy -- the notice and proxy statements for this meeting, the record date for today's meeting is the close of business March 23, 2020. The Notice of Meeting was mailed to the shareholders on or about April 1, 2020. Broadridge Financial Services has delivered an affidavit of mailing to the company showing that notice of this meeting was properly given. In addition, the supplemental notice regarding the holding of a virtual meeting was filed with the SEC on April 29, 2020. A copy of the notice, supplemental notice and the affidavit will be maintained in the company's record. Finally, as required by Delaware Law, the list of shareholders on the record date is available on this web portal. The shareholder list shows that holders of 51,975,984 shares of common stock of the company are entitled to vote at this meeting. We are informed by Joe Getman, the company's General Counsel and the inspector of elections for this meeting, that 47,317,770 shares, or approximately 91% of the shares entitled to vote, are represented in person or by proxy at the meeting today. Based on the percentage of the total shares of the company held by record -- by holders of record now present at the meeting, either in person or by proxy, a quorum is present under the terms of our bylaws.

Thank you, Danielle. We will now move to the business before this meeting and review the matters to be voted upon by the shareholders. Shareholders who have already voted do not need to take any action unless they wish to change their vote. If you have not voted, I will again remind you that you should now vote as the polls will soon close. The following 4 proposals will be voted upon at this meeting: proposal 1 is the election of Directors. The first item of business today is the election of Directors. As noted in the proxy statement, the Board has approved and recommended that shareholders vote in favor of the proposal to declassify the Board of Directors to provide for the annual election of Directors as described in the proxy statement as proposal #2. In the event that proposal #2 is approved by the shareholders at today's meeting, the entire slate of Directors will be elected for a 1-year term beginning today until the 2021 Annual Meeting. In the event that proposal 2 is not approved, the Board's Governance Committee has nominated the following 4 Directors to serve for a 3-year term until the 2023 Annual Meeting. Those Directors are Brian Ace, Michael Kallet, John Parente and Jack Whipple. The Board recommends you to vote for all the Directors nominated. Proposal #2 is the declassification of the Board. The second item of business is the proposal to amend the company's certificate of incorporation to declassify the Board of Directors. As noted, the Board recommends that you vote for this proposal as it is consistent with best governance practices. The third item of business, which is required by the Dodd-Frank Act is a solicitation of the shareholders to obtain an advisory vote on our compensation pay program and policies, which is commonly known as the say-on-pay advisory vote. The Board recommends that you vote for this proposal. Finally, we are seeking shareholder approval to ratify the appointment of PricewaterhouseCoopers as the company's independent registered public accounting firm for 2020. The Board recommends that you vote for this proposal. This now concludes the presentation of items to be voted upon at the meeting. We will address any questions related to the proposal. [Voting]

There are no posts.

So there are no active questions. So we -- now that everyone has had the opportunity to vote and post questions about the proposals, the polls will now close. I will now turn the meeting over to Mark Tryniski to provide some remarks about the company.

Thank you, Sally, and good afternoon to everyone for joining us today for our first, and hopefully last, virtual annual meeting. We intended to hold the meeting this year in Albany to acknowledge and celebrate the Kinderhook transaction that closed last summer, but COVID-19 necessitated this change in format. I'm hopeful that we can convene at this time next year in Albany. We have abbreviated our presentation this year, but have attached to the main webcast page the company's performance summary as well as our 2019 annual report, which I would encourage you to review as needed. 2019 was a really good year for the company. To start with the summary, we delivered record operating earnings, closed down the Kinderhook acquisition, announced the Steuben transaction and raised the dividend for the 27th consecutive year. So it was a busy but very productive year for our shareholders. Our operating earnings, which exclude acquisition expenses and securities... [Audio Gap] Record for us, as I said, but up only marginally over 2018. The reason for that was an incremental $7 million of Durbin impact to our revenue in 2019, representing an $0.11 per share headwind coming into the year. We're very pleased that we were able to absorb this significant regulatory cost and still deliver higher earnings in 2019. Organic loans and deposit growth was also very good, and we delivered continued growth in all of our nonbanking businesses, including benefits, wealth and insurance. We closed on the Kinderhook transaction in July, which added 11 branches and $640 million of assets to our existing commercial banking and insurance businesses in the greater Albany region. We really like the demographics and market opportunity in the capital district and continue to grow our presence and our market share. We also think our footprint there may provide additional M&A opportunities within or adjacent to these markets. Then in October, we announced the acquisition of Steuben Trust Company, a high performing bank and trust business headquartered in Hornell, New York. Steuben will add 11 branches and about $560 million of assets across 6 counties in Western New York, further strengthening our existing market franchise in the region. We've received all regulatory approvals and expect to close on the merger in mid-June. 2019 was a very good year in nearly every respect, but unknowingly important as we headed into 2020. Our first quarter performance in 2020 was likewise very strong. I believe the second-best earnings quarter we've ever reported, absent the adjustment to the loan loss reserve related to COVID-19. Our core loan and deposit-generating activities were actually much better than we typically experienced in the winter season, and our nonbanking businesses were also strong in the first quarter, growing revenue 6% and earnings even more than that. Also in the first quarter, we announced that Scott Kingsley, our Chief Operating Officer, would be retiring from the company effective June 30. Scott served in that role for 1.5 years after having served as Chief Financial Officer since 2004. At that same time, we announced that Joe Serbun was appointed to the role of Executive Vice President and Chief Banking Officer. Joe started his career with Community Bank in 2008 and previously served as Chief Credit Officer. We thank Scott for his service to the company and wish Joe luck in his new role. That covers the obligatory review of 2019 and Q1 2020 performance, which feels a bit less meaningful in the current environment. The standard disclaimer that past performance is not an indicator of future results has taken on a new meaning for everyone. Our response organizationally to COVID-19 was similar to many other banks. We have as many people working from home as possible. We closed our branch lobbies. We instituted social distancing and policies around travel, sick time, masks and cleaning protocols. We've been working quite effectively in this mode for about 8 weeks and have continued to serve our customers and our communities well in the process. In support of our customers, we provided payment forbearance to 5,700 of our borrowers and made small business loans under the Federal Paycheck Protection Program to 3,300 customers totaling $500 million. As of this week, we have started to slowly bring our people back to work with enhanced protocols around their safety and well-being and also expect to open our branches in the first week of June. I would like to thank our employees for their patience and their perseverance, and our senior management team for their leadership and tireless efforts during this challenging time. Their collective focus on our people, our customers and our business has never wavered. I would also like to acknowledge and thank Sally Steele for her steadfast leadership of our Board and all of our Directors for their engagement, their support of our people and for their focus on shareholder value. Special welcome to our newest Director, Kerrie MacPherson, who joined the Board in November. She's a tremendous addition to the company, and we look forward to her continued contributions. COVID-19 is a health and an economic crisis with the ultimate impact of both being difficult to predict. There are certainly considerable resources being committed to address both, which gives me optimism for the future. Likewise, we have limited visibility currently with respect to the impact on our customers and on Community Bank System. But I have good reason for more optimism, which is that we have incredible financial strength. We entered this pandemic with record levels of earnings, liquidity and capital. We have revenue diversification and earnings from our nonbanking businesses. We have a tremendous core deposit base. And perhaps most important, we have solid underwriting and asset quality underlying our loan portfolios. But the greatest strength of this company is not financial, it's our people. Our people are talented, they're committed and they care. They care about our customers, they care about our communities and they care about each other. That is the most relevant and important endorsement I can make about the future of your company. To our shareholders, thank you for your trust and confidence. We will do our very best to continue to earn that trust and confidence and to provide exceptional returns on your investment in Community Bank System. Thank you.

Thank you, Mark. At this time, I ask Joe Getman, who is serving as the inspector of elections to provide the report on the voting results.

The preliminary vote results have been tabulated based on polls cast at this meeting. The preliminary shareholder vote with respect to proposal 2, to declassify the company's Board of Directors, has been approved with over 80% of the outstanding shares cast in favor of this proposal. Therefore, the proposal has been approved resulting in the Board of Directors being elected annually to serve 1-year terms, starting with this year's election. With respect to the election of Directors, the entire Board of Directors has been reelected for a 1-year term under the newly amended provisions of the certificate of the incorporation. Each of the nominees has received over 96% of the votes cast at the meeting in favor of their election. With respect to the say on pay advisory vote, 35,211,673 shares were cast in favor, and 7,186,197 shares were cast against the proposal. As a result, approximately 83% of the shares voted were in favor of this proposal. Finally, with respect to item 4, the shareholders have ratified the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for 2020, with over 46,762,800 shares, or 98% of the votes cast, in favor of the appointment. The final voting results will be filed with the SEC on a Form 8 report within the next 4 business days.

Thank you, Joe. Based on the report of the inspector of elections, I declare that the slate of candidates presented are elected as Directors of the company and shall serve for 1-year terms until the annual meeting in 2021 or until their successors are duly elected and qualified, that the amendment of the certificate of incorporation to declassify the Board has been approved and that PricewaterhouseCoopers LLP have been ratified as the company's independent registered public accounting firm for 2020. I'm also pleased to note that our shareholders have supported the advisory vote on our compensation program with over 83% of the shares voting in favor. The Board of Directors and management team value your participation and input today, and we appreciate the support and confidence of the company's shareholders. There being no further business to come before the meeting, I now declare that the meeting stands adjourned. We would, however, like to open our question-and-answer session of the meeting. I will turn the meeting over to Mark to answer any questions.

I understand, Madam Chair, we have received no questions. So that would conclude our Q&A session.

As always, speaking on behalf of the full Board, I want to affirm that the Board as well as management of the company takes our duties very seriously on behalf of the shareholders, and we appreciate the strong support shown today. Let me also thank management and all of our employees as they have and continue to provide customer-driven service through this difficult time. We truly appreciate all of their efforts during this unprecedented period. Again, thank you for attending today's meeting and for your continuing support of the company.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.