Community Financial System, Inc.

Good day and welcome to the Community Financial System, Inc. Fourth 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 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 Krivonov, President and Chief Executive Officer. Please go ahead.

Thank you, Mike. Good morning, everybody, and thank you for joining our fourth quarter and full year 2024 earnings call. This was a very solid quarter for us with operating PPNR of $1.40 per share, which grew 8.5% compared to the prior quarter and 23.9% compared to last year's fourth quarter. Those are excellent numbers. There is a lot to be pleased about, such as margin expansion and excellent liquidity, strong fee performance, strong credit, and well-managed expenses. I will leave all the quarterly details to Joe and would like to really focus on our overall 2024 performance and 2025 outlook. As we look back upon 2024, I'm pleased with the performance of our company. In a year where the overall KRX index is projected to have lower earnings to the tune of approximately 5%, we actually grew operating PPNR per share by 8.2% and operating earnings per share by 2.2%. The delta between the two is mostly due to our increase of ACL from 69 base points of loans at the end of 2023 to 76 base points of loans at 2024, which prepares us better for the future and also a negative variance on the effective tax rate. The drivers of our outperformance are a great example of the power of our diversified company, and I will go into more details below. In the banking and corporate segment, 2024 operating PPNR grew by 5.6%. Net interest income grew for the 18th consecutive year, and fee income grew by 11.8% as the number of initiatives we've been working on for the past couple of years are now delivering results. Loans grew by 7.5%, or more than double the expected growth of both the banking industry and our local peers. In other words, we gained a lot of market share. Commercial lending was particularly strong with double-digit growth, while mortgage and home equity both grew over 6%. The investments we've been making in people and processes continue to bear fruit. Overall lending growth was $728 million, and overall deposits grew by $514 million, or 4%, also an excellent result in a difficult environment. In the latter part of the year, we saw commercial and personal deposits resume their historical performance, and that gives us hope for future periods. In 2024, the Federal Reserve ended its hiking cycle, and we can now confidently state that we had the lowest cost of funds in the KRX index during the period with a deposit beta of 22%. Speaking of liquidity, We also boosted our borrowing capacity and now have $5.8 billion of available liquidity to tap, or 246% of net uninsured deposits, a level that I believe is truly peer-leading. Credit quality remains very strong with 2024 charge-offs of 10 basis points, which is roughly half of that of the KRX index. And as mentioned, our ACL now represents over seven years of coverage at these levels. In the employee benefit services business, we had an excellent year. Revenue has expanded by 11.8%, and operating income expanded by 11.9%. We're managing a record amount of assets, have a record number of participants, and are seeing real tangible benefits of our growing nationwide reputation. We also successfully deployed capital and integrated a couple of acquisitions. This segment drove the majority of the improvement for the overall company earnings in 2024, and given its uniqueness for us compared to peers, really stands out. In the insurance services segment, we grew revenues by 6.7% and continued to expand and strengthen the footprint via acquisitions. We added strong capacity in the north country, where we also have the leading banking footprint, and this past quarter entered the Buffalo market, where we can now benefit from our commercial presence and expanding retail presence on the bank side. Operating earnings were impacted by elevated expenses, and we're very focused on that in 2025. The wealth management services business also had a very strong year. Revenue growth of 14.9% and operating income growth of 22.9% were truly excellent. Of note, we had over $1 billion of new advisory sales in 2024, and the benefit of many of those will be realized in 2025 and beyond. The business is energized, active, and collaborating effectively with the banking business. The 2024 was very good, and now on to 2025. My expectations for 2025 is that we will continue to gain market share across the board, continue to attract excellent talent, and continue to grow the reputation of our businesses. As I think about each business, my outlook is as follows. In the banking business, I expect that growth will remain solid, though likely will moderate from latest levels. We have consistently guided towards mid-single digits and have consistently outperformed in the past couple of years, due to the market and competitive opportunities we saw to attract talent and clients. Those opportunities still exist, but I expect that we will have more competitors who are back after being essentially frozen since 2022 due to liquidity concerns. The flip side of that is that I also see half a dozen of our competitors who recently announced transactions which may force them to manage capital and concentrations more actively. So we may see elevated opportunities in particular in CRE lending. Time will tell. but as always, it is important to have a balance sheet that serves as a source of strength. For now, mid-single digit seems appropriate. Funding will remain as always our top priority, and we have a number of initiatives which are still ramping up. And with a loan-to-deposit ratio of 78%, we have plenty of capacity as is. We continue to expect that credit costs will trend back up to historical averages and thus have been slowly inching up our ACL, and I expect some of that to continue. We will also be opening up 16 more branches, and that will cause some increasing expenses in the interim investment phase. Most of those will occur in the second and third quarter, so I expect some increased marketing and operating expenses in those periods. As we have committed previously, we will also be consolidating a similar number of branches and managing other expenses tightly in order to exit 2025 with a cleaner expense run rate. Just bear in mind it will be a bit more volatile this year than prior years on a quarter-to-quarter basis. In the employee benefit services business, We're entering 2025 on the heels of outstanding revenue and operating income growth, high asset values, and a nationwide reputation. The growth momentum is very good, and assuming asset values stay in line, we would be looking for mid to high single-digit revenue expansion. We're going to be making some additional investments in products and people, especially in our trust and fund administration vertical, which are important for future periods but will impact expense growth in 2025. In the insurance services segment, Our main focus in 2025 is operating efficiency. We have gained a lot of revenue growth over the past few years and spent most of 2024 laying out the new organizational structure and responsibilities. M&A will continue to be a focus and supplement organic growth with overall expectation of revenue growth in the mid to high single digits. In the wealth management services business in 2025, we're launching new products on a nationwide basis and actively adding producers while continuing to increase penetration across our client base. Assuming asset values stay where they are, revenue growth is likely to be closer to high single digits, as we have also a couple of producer departures to work through, though none of those will meaningfully impact operating earnings performance due to their associated expenses. In the aggregate, I'm very optimistic about our performance in 2025 and beyond. The foundational work and investment that has been put in place since 2021 has muted our bottom line performance since then, while revenues continue to improve in line with our diversified business model. In 2024, we outperformed the KRX index in earnings performance, and my expectation is that we will continue to deliver above average returns while managing to a below average risk profile. These were definitely longer than my usual remarks, and now it's finally time to pass it on to Joe.

Thank you, Dimitar. Good morning, everyone. As Dimitar noted, the company's fourth quarter performance was strong. Gap earnings per share of 94 cents were up 31 cents or 49% over the fourth quarter of the prior year and up 11 cents or 13% over linked third quarter results. Operating earnings per share and operating pre-tax, pre-provision net revenue per share were also up significantly on both year-over-year and linked quarter basis. The company recorded operating earnings per share of $1.00 in the fourth quarter as compared to 82 cents one year prior and 88 cents in the link third quarter. Fourth quarter operating PPNR per share of $1.40 was up 27 cents per share or 23.9% from one year prior and 11 cents per share or 8.5% on a link quarter basis. Full year gap earnings per share, operating earnings per share and operating PPNR per share were up 40.4%, 2.2% and 8.2% respectively. Strong revenue growth underpinned these results. In the fourth quarter, the company recorded total operating revenues of $196 million. This was up $19.1 million, or 10.8% from one year prior, and up $6.9 million, or 3.7% from the length third quarter. These results marked the sixth consecutive quarter of increases in total operating revenues while establishing new quarterly highs for net interest income, employee benefit services revenues, and wealth management services revenues. On a full year basis, total operating revenues increased $41.3 million or 5.9%. The company recorded net interest income of $120 million in the fourth quarter. This represents a $7.2 million or 6.4% increase over the linked third quarter result and a $10.8 million or 9.9% improvement over the fourth quarter of 2023 and also marks the third consecutive quarter of net interest income expansion. An improvement in the yield on interest-earning assets supported by continued loan growth and lower funding costs helped drive increases in both net interest income and net interest margin in the quarter. During the quarter, the company's cost of deposits was 1.23%, which was consistent with the prior two quarters, while the total cost of funds decreased six basis points from 1.44% in the third quarter to 1.38% in the fourth quarter due to a decrease in borrowed funds costs. The company's fully taxed equivalent net interest margin increased 15 basis points from 3.05% in the late third quarter to 3.2% in the third quarter. As Dimitar mentioned, 2024 also marked the 18th consecutive year the company increased net interest income, and the outlook remains positive for continued net interest income expansion in 2025. Operating non-interest revenues were up in all four businesses compared to the prior year's fourth quarter, and represented 38.6% of total operating revenues. Banking-related operating non-interest revenues were up $1.9 million, or 10.2% over the same quarter of the prior year, driven by increases in mortgage banking revenues and deposit service and other banking fees, including customer interest rate swap fee revenues. Employee benefit services revenues were up $3.9 million, or 13.1% over the prior year's fourth quarter, reflective of an increase in total participants under administration and growth in asset-based fees. Insurance services revenues were up $0.6 million or 5% over the prior year's fourth quarter driven by recent acquisitions, while wealth management services were up $2 million or 24.9% reflective of more favorable market conditions and growth in investment advisory accounts. On a linked quarter basis, operating non-interest revenues were down $0.3 million or 0.4%. During the fourth quarter, the company recorded $125.5 million in total non-interest expenses. This compares to $129.1 million of total non-interest expenses in the prior year's fourth quarter. The $3.6 million or 2.8% decrease between the periods was mainly driven by several non-operating expenses incurred in the prior year's fourth quarter, totaling $9.2 million. Excluding the impact of these non-operating items, Non-interest expenses increased $5.6 million or 4.7% for the prior year's fourth quarter, primarily driven by increases in salaries and employee benefits and data processing and communication expenses. On a full year basis, total operating non-interest expenses increased $24.1 million or 5.4%, consistent with the mid-single-digit growth rate mentioned during prior quarterly earnings calls. Reflective of an increase in loans outstanding and qualitative factor adjustments, the company recorded a $6.2 million provision for credit losses during the fourth quarter of 2024. This compares to $4.1 million in the prior year's fourth quarter and $7.7 million in the late third quarter. On a full year basis, the company recorded $22.8 million in the provision for credit losses as compared to $11.2 million in 2023. The effective tax rate for the fourth quarter of 2024 was 22.8%, down from 23% in the fourth quarter of 2023. On a full year basis, the company's effective tax rate was 22.9%. Ending loans increased $180.7 million, or 1.8%, during the fourth quarter. This marks the 14th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities and expansion into undertapped markets within our Northeast footprint. This included growth in the business lending, consumer mortgage, home equity, and consumer direct lending portfolios, offset in part by a decrease in the consumer indirect loan portfolio due to seasonal factors. Ending loans were up $727.8 million, or 7.5% from one year prior, reflective of growth in all five lending portfolios. The company's ending total deposits decreased $34.5 million, or 0.3%, during the fourth quarter, driven by a decrease in municipal deposits. Fourth quarter deposit funding costs of 123 basis points were flat compared to the prior two quarters. Non-interest bearing and low rate checking and savings accounts continue to represent almost two-thirds of the total deposits, reflective of the core characteristics of the company's deposit base. Ending deposits were up $513.6 million, or 4% from one year prior, driven by increases in municipal and business deposits. The company did not hold any broker deposits on its balance sheet during 2024. 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, total of $5.77 billion at the end of the fourth quarter. These sources of immediately available liquidity represent over 240% 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 year was 77.6%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. At the end of the year, all the companies and the bank's regulatory capital ratios significantly exceeded well-capitalized standards. Excuse me. More specifically, the company's Tier 1 leverage ratio was 9.19%, which substantially exceeded the regulatory well-capitalized standard of 5%. Non-performing loans totaled $73.4 million, with 70 basis points of total loans outstanding. At the end of the year, this represents a $10.5 million or nine basis point increase from the end of the link third quarter. Comparatively, non-performing loans were $54.6 million or 56 basis points of total loans outstanding one year prior. Loans 30 to 89 days delinquent were also up on the link quarter basis from $47.2 million or 46 basis points of total loans outstanding at the end of the third quarter to $55.9 million or 54 basis points of total loans outstanding at the end of the fourth quarter. The company recorded net charge-offs of $3.2 million or 12 basis points of average loans annualized during the fourth quarter. This is up from $2.3 million or 10 basis points in the same quarter of the prior year. On a full year basis, the company recorded net charge-offs of $10.1 million or 10 basis points of average loans outstanding. The company's allowance for credit losses was $79.1 million or 76 basis points of total loans outstanding at the end of the fourth quarter. up $2.9 million from the end of the third quarter and up $12.4 million for a year prior. Although credit loss reserves increased during the fourth quarter due to qualitative factors, overall the company's asset quality remains solid. The allowance for credit losses at the end of the fourth quarter represented over seven times the company's full year 2024 net charge-offs. We believe the company's diversified revenue profile, strong liquidity, Regulatory capital reserves, stable core deposit base, and historically good asset quality provide a solid foundation for continued growth in 2025. Thank you. Now I'll turn it back to Mike to open the line for questions.