Community Financial System, Inc.

Good day and welcome to the Community Financial System Incorporated third quarter 2024 earnings conference call. All participants will be in a 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 your telephone keypad. 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 Karabinov, President and Chief Executive Officer. Please go ahead.

Dimitar Karabinov Thank you, Danielle. Good morning, everybody, and thank you for joining our third quarter earnings call. I would characterize the quarter as one with solid operating performance as evidenced by our PPNR of $1.29 per share, which was consistent with the prior quarter and grew 11.2% compared to last year's third quarter. Bottom line earnings were impacted by a couple of items, which I wanted to touch on before we get into each business unit. The first item is the increase in our provision expense. We've been observing the general industry trends towards normalization of credit for a few quarters now, and as you may recall, we added some reserves back in the first quarter of this year. Since then, that industry trend has continued. If you look at the industry-wide loan classifications of special mention and substandard balances, they're now close to long-term averages. We also have the Federal Reserve embarking on an easing cycle, which is typically a late cycle development and comes with expectations for increased unemployment, which is the main driver of credit costs. Our own credit experience continues to be one of low losses and minimal delinquencies, and the quantitative results in our CISO models have remained steady. With that said, we considered it prudent and conservative to add to our reserves at this point in time. The second main item that drove differences to the prior quarter was an increase in the accrual for performance-based incentive compensation expense. We typically refine our estimate in the third quarter with a look towards the full year results as compared to prior year, and that drove most of the delta in that expense line compared to the last quarter. Now turning to underlying business performance. Our banking business had a strong quarter. Net interest income surpassed the prior peak from the fourth quarter of 2022, and we're now up on a year-to-date basis compared to 2023. This positions us well for the fourth quarter, and I expect that we will continue our annual net interest income growth streak, which dates back to 2006. Balance sheet growth was excellent on both sides, and pipelines remain in good shape. I will note that long growth this quarter was a bit higher than trend, driven by a couple of larger closings, which are relationships we've been working on for multiple quarters. Just last week, we celebrated the opening of our first branch from our strategic branch expansion plan, which we announced late last year. Our Hanover Square branch in Syracuse is now open and off to a great start, and we're progressing well on the other 17 locations. Our benefit administration business did very well as well. Both revenues and profitability expanded, and outlook remains bright. BPIS was recognized for the third year in a row as a top five record keeper across multiple categories by the National Association of Plan Advisors. Our insurance services business also reached a new high in revenues. We've been hard at work in reorganizing the business and creating the infrastructure to support the excellent revenue growth in the future. This has impacted profitability here to date, but should position us better for 2025 and beyond. One group was also recently recognized as the 66th largest broker in the U.S., by the insurance journal, an improvement from being ranked number 75 last year. Our wealth management services business also performed well. Organic growth has been supported by very strong market growth, and we've been using the revenue gains to reinvest back in the business by adding sales capacity and addressing some geographical presence gaps. In aggregate, I would say that I'm particularly encouraged by two things. Number one, our ability to continue to attract both leadership and execution talent with a few key hires this quarter across all businesses. And number two, the momentum with new client acquisition across all businesses. We continue to operate from a position of strength and actively gain market share. Quick comment on M&A. We continue to be an active participant and had a number of opportunities in this past quarter. Ultimately, the risk and reward equation did not work for us due to various reasons, but the opportunity set remains interesting. This covers predominantly our banking and insurance verticals and to a lesser degree benefits. We will continue to be active and continue to keep our risk and reward principles in line with our investment thesis. Lastly, I wanted to note the investor day we hosted last month at the New York Stock Exchange. Excuse me. I want to thank all of our investors and analysts for tremendous interest and encourage those of you who weren't able to attend to view the recorded event and presentation on our investor relations website. With that, I will turn it over now to Joe for additional color on the quarter.

Thank you, Dimitar, and good morning, everyone. The third quarter was a solid one for the company. Earnings per share of 83 cents were up a penny over the third quarter of the prior year, but down 8 cents on a linked quarter basis. The year-over-year increase in earnings per share were driven by increases in both net interest income and non-interest revenues and a decrease in fully diluted shares outstanding, but were largely offset by increases in non-interest expenses, the provision for credit losses, and income taxes. The decrease in linked quarter earnings results were driven by increases in the provision for credit losses and non-interest expenses offset in part by increases in net interest income and non-interest revenues and a decrease in income taxes. Similarly, operating diluted earnings per share were $0.88 in the quarter, or a penny higher than the same quarter in the prior year, but $0.07 lower than the linked second quarter results, while operating pre-tax pre-provision net revenue per share of $1.29 was up $0.13 or 11.2% over the prior year's third quarter and consistent with linked quarter results. Third quarter results were marked by new quarterly records and total operating revenues, net interest income, bank-related non-interest operating revenues, employee benefit services revenues, and insurance services revenues. More specifically, the company recorded total operating revenues of $189.1 million in the third quarter. This was up $13.7 million, or 7.8%, from one year prior, and up $5.9 million, or 3.2%, from the linked second quarter, and marked the fifth consecutive quarter of increases in total operating revenues. The company recorded net interest income of $112.7 million in the third quarter. This represents a $3.4 million or 3% increase over linked second quarter results and also marks the second consecutive quarter of net interest income expansion. An improvement in the yield on interest-earning assets supported by loan growth and subsiding pressure on funding costs helped drive improvement in both net interest income and net interest margin in the quarter. During the quarter, the cost of deposits was 1.23%, which was consistent with the linked second quarter, while the total cost of funds increased seven basis points from 1.37% in the second quarter to 1.44% in the third quarter, due to an increase in borrowed funds costs. The company's fully tax-equivalent net interest margin increased one basis point from 3.04% in the linked second quarter to 3.05% in the third quarter. The outlook remains positive for continued net interest income expansion in the fourth quarter and on a full year basis. Operating non-interest revenues were up in all four businesses compared to the prior year's third quarter and represented over 40% of total operating revenues. Banking-related operating non-interest revenues were up $3 million, or 17.1% over the same quarter of the prior year. driven by increases in mortgage banking revenues and deposit service and other banking fees, including interest rate swap fee revenues. Employee benefit services revenues were up $3.2 million, or 10.7%, over the prior year's third quarter, reflective of an increase in the total participants under administration and growth in asset-based fees. Insurance services revenues were up $1.5 million, or 12.7%, reflective of both acquired and organic growth, while wealth management services were up $1 million, or 12.1%, reflective of more favorable market conditions over the same period. On a linked quarter basis, operating non-interest revenues were up $2.6 million, or 3.5%, driven by higher revenues in all four businesses. During the third quarter, the company recorded $124.2 million in non-interest expenses. This represents a $7.7 million or 6.6% increase from the prior year's third quarter, driven primarily by a $7.3 million or 10.4% increase in salaries and employee benefits, expenses due to merit and market-related increases in employee wages, higher incentive plan costs, and acquisitions between the periods. Total non-interest expenses were also up $5.2 million or 4.4% over the length's second quarter results. On a year-to-date basis, total operating non-interest expenses were up $18.7 million, or 5.6%, consistent with the mid-single-digit growth rate pension during prior quarterly earnings calls. Reflective of an increase in loans outstanding and qualitative factor adjustments, the company recorded a $7.7 million provision for credit losses during the third quarter of 2024. This compares to $2.9 million in the prior year's third quarter and $2.7 million in the linked second quarter. The effective tax rate for the third quarter of 2024 was 23%, up from 21.2% in the third quarter of 2023. The lower effective tax rate in the prior year was largely driven by the balance sheet repositioning completed during 2023. Ending loans increased $227.8 million, or 2.3%, during the third quarter. This marks the 13th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities. This included growth in both the business lending and consumer lending portfolios. Ending loans are up $801.6 million or 8.5% from one year prior. The company's ending total deposits increased $338.3 million or 2.6% during the third quarter, driven by seasonal inflows of municipal deposits. Third quarter deposit funding costs of 123 basis points were flat compared to the linked second quarter results. Non-interest bearing and lower rate checking and savings accounts continue to represent almost two-thirds of the company's total deposits. The company's full cycle deposit beta of 24% was one of the best in the banking industry during the Fed's 2022 to 2024 rate hiking phase. It reflects the stability of the company's core deposit base. Ending deposits were also up $445.4 million, or 3.4% from one year prior. The company's liquidity position remains strong. Readily available source of liquidity, including unplugged cash and cash equivalents and investment securities, funding availability at the Federal Reserve Bank's discount window, and unused borrowing capacity at the Federal Home Loan Bank of New York totaled $4.49 billion at the end of the third quarter. These sources of immediately available liquidity represent approximately 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 76.1%. 76.1%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. At the end of the third quarter, all the companies in the bank's regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio is 9.12%, which substantially exceeds the regulatory well-capitalized standard of 5%. At September 30, 2024, non-performing loans totaled $62.8 million, or 61 basis points of total loans outstanding. This represents a $12.3 million, 11 basis point increase from the end of the link second quarter, due primarily to the transfer of one loan relationship to non-accrual status. Comparatively, non-performing loans were $36.9 million, or 39 basis points of total loans outstanding one year prior. Loans 30 to 89 days delinquent were also up slightly on the linked quarter basis from $45.1 million or 45 basis points of total loans at the end of the second quarter to $47.2 million or 46 basis points of total loans outstanding at the end of the third quarter. The company recorded net charge-offs of $2.8 million or 11 basis points of average loans annualized during the third quarter. This is up from $1.2 million or five basis points in the same quarter of the prior year. The company's allowance for credit losses was $76.2 million, or 74 basis points of total loans outstanding at the end of the third quarter, up $4.7 million from the end of the second quarter and up $11.2 million from one year prior. Although credit loss reserves increased during the third quarter due to qualitative factors, overall the company's asset quality remains strong. The allowance for credit losses at the end of the third quarter represented over eight times the company's trailing 12-month net charge-offs. 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 revenue outlook in all four of our businesses and prospects for continued organic growth. We will continue to play offense, lean into growth, and deploy capital in the best manner possible for our shareholders. Thank you. Now I will turn it back over to Danielle to open the line for questions.