Community Financial System, Inc.

Good day, and welcome to the Community Bank System first quarter 2024 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. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, This event is being recorded. I would now like to turn the conference over to Dimitar Karabanov, President and Chief Executive Officer of Community Bank System. Please go ahead.

Thank you, Nick, and good morning, everyone, and thank you for joining the Community Bank System Q1 2024 earnings call. This quarter was a good illustration of the benefit of our diversified financial model. Our market-sensitive recurring fee income businesses showcased their strength and fully offset margin pressure in our banking business, leading to another quarter of record revenue for the company. We normalized the expense growth rate while continuing to invest in all of our businesses. Our below average risk profile remains firmly rooted in the low credit risk intensity and exceptional liquidity of our balance sheet. During the quarter, we also modestly increased our qualitative assessment of future uncertainty and proactively added to our reserves. In our banking business, growth continued in our commercial, mortgage, and consumer installment portfolios. Strong loan growth of $179 million was more than fully funded through deposit growth of $424 million. Market share gain opportunities remain attractive across our footprint, as many competitors are limited by their liquidity profiles. Pipelines remain excellent, with particular strength in CNI compared to prior quarters. We also formally announced our branch expansion plans with 14 locations expected to open in the next five quarters, two in Buffalo, three in Rochester, three in Syracuse, two in the Capital Region, two in the Lehigh Valley, one in Springfield, Massachusetts, and our first location in New Hampshire. In our employee benefit services business, we are now benefiting from both new client counts and market appreciation. Revenue growth was 7.9%, and we also closed on the acquisition of creative plan designs during the quarter. Looking forward, the organic momentum remains strong and market values remain supportive. Our insurance services business was relatively flat in terms of revenue performance due to the timing of certain commercial premiums and lower contingency revenue. However, both the organic and inorganic growth opportunities remain attractive for 2024. Our wealth business had a record revenue quarter with double digit gain in revenue and increased inflows. Our wealth team is energized and focused on increasing penetration levels while also launching a number of new service offerings on a nationwide basis. Overall, I'm encouraged by our operational execution this quarter as evidenced by the improvement in pre-tax pre-provision net revenues over the prior two quarters. In terms of capital deployment, We closed on both a number of smaller acquisitions in our fee income businesses and also repurchased 750,000 shares at what we deemed to be very attractive levels given the intrinsic earnings power of our company. I will now pass it on to Joe for more details.

Thank you, Dimitar, and good morning, everyone. The company recorded $0.76 of GAAP-diluted earnings per share in the first quarter. This compares to 11 cents in the first quarter of 2023 and 63 cents in the linked fourth quarter of 2023. As a reminder, during the first quarter of 2023, the company recorded a $52.3 million pre-tax realized loss on the sales of certain available for sale investment securities in connection with the company's balance sheet repositioning strategy, which negatively impacted capital earnings per share by 75 cents in that quarter. Operating diluted earnings per share, which excludes certain non-operating revenues and expenses as delineated in this morning's press release, were 82 cents in the first quarter and linked fourth quarter as compared to 92 cents in the first quarter of the prior year. The 10-cent decrease in operating diluted earnings per share from the prior year's first quarter was driven by a decrease in net interest income and increases in the provision of credit losses, operating expenses, and income taxes offset in part by an increase in operating non-interest revenues. On a linked quarter basis, a decrease in operating expenses and an increase in non-interest revenues were offset by a decrease in net interest income, a higher provision for credit losses, and an increase in income taxes. Operating pre-tax, pre-provision net revenue per share, as defined in the press release, was $1.18 for the first quarter. This was up 5 cents per share over the linked fourth quarter, but 4 cents per share below the prior year's first quarter. During the first quarter, the company recorded total revenues of $177.3 million. This established a new quarterly record for the company and highlights our diversified business model. Higher levels of operating non-interest revenues in our banking, employee benefit services, and wealth management services businesses overcame declines in net interest income and insurance services revenues in both the linked quarter and the prior quarter. The company recorded net interest income of $107 million in the first quarter as compared to $109.2 million in the linked fourth quarter, Despite solid loan growth in the quarter and an improvement in the yield on interest earning assets, pressure on funding costs did not abate. During the quarter, the company continued to experience a migration of customer deposit balances from lower rate checking and savings accounts to higher rate money market and time deposits, increasing the cost of deposits 16 basis points in the quarter from 98 basis points in the late fourth quarter to 1.14% in the first quarter. When combined with higher borrowing costs, the company's total cost of funds increased 23 basis points from 1.08% in the linked fourth quarter to 1.31% in the first quarter. This outpaced a 13 basis point increase in interest earning asset yields, resulting in a nine basis point decrease in the company's fully taxed equivalent net interest margin from 3.07% in the fourth quarter of 2023 to 2.9% in the first quarter of 2024. Comparatively, the company reported net interest income of $111 million in the first quarter of 2023. We believe the first quarter net interest income result of $107 million represents bottom for the company in 2024, and the outlook remains positive for net interest income expansion on a full year basis. As mentioned previously, operating non-interest revenues were up in three of our four businesses on both an annual quarter and a linked quarter basis. Banking-related non-interest revenues were up $1.8 million, or 11.1%, over the same quarter of the prior year, driven by increases in debit interchange and ATM fees and loan placement and advisory revenues, while employee benefits services and wealth management services revenues were up $2.3 million, or 7.9%, and $1 million, or 11.7%, respectively, over the same period, driven by favorable investment market conditions and employee benefits benefit plan participant growth. Insurance services revenues were down approximately $400,000 or 3.6% due to timing differences on certain commercial policy renewals and insurance carrier related contingency revenues. On a length quarter basis, banking related non-insurance revenues were up slightly while employee benefit services revenues and wealth management services revenues increased $1.7 million or 5.6% and $1.3 million or 16.5% respectively. Insurance services revenues were down approximately $500,000 or 4.2%. During the first quarter, the company reported $118.1 million in non-interest expenses. This represents a $4 million or 3.5% increase from the prior year's first quarter and an $11 million or 8.5% decrease from the linked fourth quarter results. Total operating non-interest expenses, which excludes certain non-operating expenses as detailed in the company's press release, or $114.4 million in the quarter as compared to $110.3 million in the prior year's first quarter and $116.4 million in the late fourth quarter. As mentioned on last quarter's earnings call, although the company will continue to make front-footed investments in its leadership team, talent across all lines of business, data systems, and risk management, operating expense growth is expected to moderate in 2024. The first quarter results were consistent with these expectations. The company recorded... a $6.1 million provision for credit losses during the first quarter of 2024. This compares to $3.5 million in the prior year's first quarter and $4.1 million in the linked fourth quarter. Although the company's credit metrics remain strong, during the first quarter, the company built loss reserves reflective of an increase in our qualitative assessment of future uncertainty. The company's allowance for credit losses stood at $70.1 million, or 71 basis points of total loans outstanding at the end of the first quarter, up $3.4 million for two basis points in the quarter, and up $6.9 million for one basis point over the prior year's first quarter. The effective tax rate for the first quarter of 2024 was 22.9%, up from 16.9% in the first quarter of 2023. Excluding the impact of tax expense and benefits related to stock-based compensation activity and income tax credit amortization, the effective tax rate for the first quarter of 2024 was 22%. up from 21.4% in the first quarter of 2023. Ending loans increased $178.9 million or 1.8% during the first quarter. This marks the 11th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities. Although outstanding balances in the consumer mortgage and consumer indirect segments increased in the first quarter despite seasonal headwinds, the primary driver of loan growth in the quarter was the $135.8 million, or 3.3%, increase in the company's business lending portfolio. The company's ending total deposits increased $423.9 million, or 3.3%, during the first quarter of 2024, driven by seasonal inflows of municipal deposits. Ending deposits also increased $241.4 million, or 1.8%, from one year prior. Although funding costs continued to increase in the first quarter, as previously noted, non-interest bearing and low rate checking and savings accounts continue to represent almost two-thirds of total deposits and the company's cycle to date deposit data of 20% continues to be one of the best in the banking industry and reflects the strength of the company's core deposit base. 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 $4.6 billion at the end of the first quarter. These sources of immediately available liquidity represent over 200% of the companies' estimated uninsured deposits and that of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the first quarter was 74%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At the end of the first quarter, all the companies in the bank's regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.01%, which substantially exceeded the regulatory well-capitalized standard of 5%. During the first quarter, the company repurchased 750,000 shares of its ComSoc at an average price of approximately $46 per share. The company recorded net charge loss of $2.8 million or 12 basis points of average loans annualized during the first quarter. This is up slightly from 10 basis points in the length of fourth quarter and seven base points in the same quarter of the prior year with increases primarily attributed to consumer indirect loan, the indirect loan portfolio. At March 31st, 2024, non-performing loans totaled $49.4 million or 50 basis points of total loans outstanding. This represents a decline from 54.6 million or 56 basis points of total loans at the end of the linked fourth quarter. Non-performing loans were $33.8 million or 38 basis points of total loans one year prior. Loans 30 to 89 days to link were also down on the linked quarter basis from $48.4 million or 50 basis points of total loans at the end of 2023 to $42.1 million or 43 basis points of total loans at the end of the first quarter. Overall, the company's asset quality remains strong in the quarter. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically strong asset quality provide a fundamentally solid foundation for future opportunities and growth. Looking forward, we are very encouraged by the revenue outlook in all four of our businesses. We will continue to lean into growth and prudently deploy capital in alignment with the interests of our shareholders. That concludes my prepared comments. Thank you all, and I'll turn it over to Nick to open the line for questions.