Community Financial System, Inc.

Good day and welcome to the Community Financial System Inc. First Quarter 2025 Earnings Conference Call. All participants will be in the 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 that this event is being recorded. I would now like to turn the conference over to Dimitar Geraevanov, President and CEO. Please go ahead.

Thank you, Sagar. Good morning, everyone, and thank you for joining our first quarter earnings call. I would like to start this call by acknowledging Joseph Terrace's upcoming retirement in July. Joe joined us through the acquisition of Uber and cumulatively has been with our company for 30 years. That is quite the accomplishment, and we're very grateful for his contributions. Joe's integrity and humility have been a pillar for us over that period, and I also want to thank him personally for being a great partner for me in the past four years. I'm also very happy that our company's performance allows people to have rewarding and productive careers and retire earlier than most. Joe, congratulations. I would also like to welcome Mariah Loss as our new Chief Financial Officer. Mariah joins us with a very dynamic background in finance and a very strong mind for driving business performance. Equally as importantly, she fully embodies our values of humility, integrity, teamwork, and excellence. Mariah, welcome. Now on to business. We had a productive quarter. Results were consistent with last quarter, even with a shorter calendar, seasonal slowdowns, lower asset values, and creeping uncertainty. Operating return on assets was 1.28%, and operating PPNR per share was up 18.6% on a year-over-year basis. Looking at each one of the business units in more depth, our banking business is benefiting from continued repricing of assets, while funding costs are also moving lower, leading to margin expansion. Deposits benefited from seasonal municipal flows, while loans were essentially flat as growth in commercial and mortgage was more than offset by weakness in auto lending, which was mostly seasonal and pricing-driven. We continue to focus on appropriate risk-reward in terms of both credit quality and rate, and saw some increased aggressiveness by competitors on both fronts. With that said, pipelines in commercial and mortgage, while a bit lower than last year, are still solid, and we believe that mid-single-digit growth for those portfolios is still on track for this year. It may just be at the lower end of the range, depending on overall economic activity. Indirect auto lending remains more of a wild card, given aggressive competition and impact of tariffs. Our employee benefit services business also had a solid quarter, and business momentum is strong. Current asset values will likely have an impact in 2025, but we're also working hard on the underlying unit growth. Our insurance services business had an excellent quarter, with expenses flat and revenues up meaningfully, leading to sizable margin expansion. Some of the revenue growth was due to timing of contingency payments, but we still remain on track to deliver meaningful operating leverage for the rest of the year as well. In fact, insurance was the main driver of strong performance this quarter for the overall company. Our wealth management services business results in line with last quarter and up meaningful year over year. Similarly to our employee benefits business, we may experience revenue headwinds the rest of the year tied to asset values. In summary, I feel good about the ability of our diversified company to grow revenues regardless of the economic and market generations. If you look at last year, for example, our market-sensitive businesses, employee benefit services, and wealth management services drove the majority of the overall improvement for the company. This year so far, it's looking like the bank and insurance will take the baton. That is how our company is designed, and it is times like these when we shine. I also feel great about our continued ability to attract talent, and we had one of our best quarters in talent acquisition across all units, banking, benefits, insurance, and wealth. I will also note that the current economic uncertainty is as high as it's been in many years and is the time to be extra prudent and make sure we're truly getting paid for taking on risk while strengthening reserves. Our business is diversified and highly profitable. Our balance sheet is excellent. and we're ready to capitalize on the right opportunities. I will now pass it on to Mariah to deliver the detailed financial highlights. Mariah?

Mariah Meachum- Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's first quarter performance was solid. GAAP earnings per share of 93 cents were up 17 cents, or 22 percent, over the first quarter of the prior year and down 1 cent, or 1 percent, over linked fourth quarter results. Operating earnings per share and operating pre-tax, pre-provision net revenue per share were also up significantly year over year while remaining relatively consistent with last quarter. The company recorded operating earnings per share of 98 cents in the first quarter as compared to 82 cents one year prior and $1 in the linked fourth quarter. First quarter operating PPNR per share of $1.40 was up 22 cents or 18.6% from one year prior and was consistent on a linked quarter basis. Strong revenue growth and improvements in core operating performance of all four businesses underpin these year-over-year improvements. The company recorded total operating revenues of $196 million in the first quarter. This was up $18.7 million, or 10.6%, from one year prior and was consistent with the record result established in the linked fourth quarter. This quarter established new quarterly highs for net interest income and insurance services revenues as Dimitar also highlighted. The company's net interest income was 120.2 million in the first quarter. This represents a 0.2 million increase over the linked fourth quarter result and a 13.2 million, or 12%, improvement over the first quarter of 2024 and marks the fourth consecutive quarter of net interest income expansion. 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 1.17 percent, a decrease of six basis points from the prior two quarters, and drove a decrease of five basis points in the total cost of funds from 1.38 percent in the linked fourth quarter to 1.33 percent in the first quarter. The company's fully tax equivalent net interest margin increased four basis points from 3.20 percent in the linked fourth quarter to 3.24 percent in the first quarter. The company has increased its net interest income for 18 consecutive years, 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 first quarter and represented 38.7% of total operating revenues. Banking-related operating non-interest revenues were up 0.9 million, or 4.7%, over the same quarter of the prior year, driven by increases in mortgage banking revenues. Employee benefit services revenues were up 0.9 million, or 2.9%, over the prior year's fourth quarter, reflective of an increase in the total participants under administration and growth in asset-based fees. Insurance services revenues were up 3.1 million, or 27.8%, over the prior year's first quarter, driven by contingent commissions and recent acquisitions, while wealth management services were up 0.7 million, or 7.1%, reflective of more favorable market conditions and growth and investment advisory accounts. On a linked quarter basis, operating non-interest revenues were down 0.3 million or 0.4% due in part to two fewer days in the current quarter. The company recorded a 6.7 million provision for credit losses during the first quarter reflective of an increase for a specific reserve on one non-owner occupied CRE loan placed on non-accrual during the fourth quarter of 2023. This compares to $6.1 million in the prior year's first quarter and $6.2 million in the linked fourth quarter. During the first quarter, the company recorded $125.3 million in total non-interest expenses. This compares to $118.1 million of total non-interest expenses in the prior year's first quarter. The $7.2 million, or 6.1% increase between the periods, was primarily driven by increases in salaries and employee benefits, including the impact of annual merit-based salary increases, data processing, and communication and occupancy and equipment expenses. The increase also included approximately 0.9 million associated with the bank's de novo branch expansions. Additional de novo-related expenses are expected to be incurred in the remaining three quarters of 2025. The effective tax rate for the first quarter of 2025 was 22.8%, down slightly from 22.9% in the first quarter of 2024. Ending loans decreased 11.2 million, or 0.1%, during the first quarter, driven by a net decrease in the consumer indirect lending portfolio, which was partially offset by growth in the business lending and consumer mortgage portfolios. Although this result ends the company's streak of 14 consecutive quarters of loan growth, the company continues to invest in its organic loan growth capabilities and expects continued expansion into the undertapped markets within our northeast footprint. Ending loans were up $537.6 million, or 5.4%, from one year prior, primarily due to growth in the business lending and consumer mortgage portfolios. The company's ending total deposits increased 453.3 million or 3.4% during the first quarter and 540 million or 4% from one year prior driven by an increase in municipal deposits. Public funds deposits increased to 2.341 billion at the end of the first quarter up, 408.5 million from one year prior and up 354.8 million from the end of the linked fourth quarter. Non-interest bearing and lower 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. The company did not hold any brokered or wholesale deposits on its balance sheet during the quarter. The company's liquidity position remains strong. Readily available sources of liquidity, including unrestricted cash and cash equivalents, unpledged 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 $5.9 billion at the end of the first quarter. These sources of immediately available liquidity represent over 250% 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 first quarter was 75%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. All the companies and the banks' regulatory capital ratios continue to significantly exceed well-capitalized standards. More specifically, at the end of the first quarter of the company's Tier 1 leverage ratio was 9.29%, which substantially exceeded the regulatory well-capitalized standard of 5%. Non-performing loans totaled 75 million or 72 basis points of total loans outstanding. This represents a 1.6 million or two basis point increase from the end of the linked fourth quarter. Comparatively, non-performing loans were 49.5 million or 50 basis points of total loans outstanding one year prior. Loans 30 to 89 days delinquent were also up on a linked quarter basis from 55.9 million or 54 basis points of total loans at the end of the fourth quarter to 59.2 million or 57 basis points of total loans at the end of the first quarter. The company recorded net charge-offs of 3.2 million or 13 basis points of average loans annualized during the first quarter. This is up slightly from 2.8 million, or 12 basis points, in the same quarter of the prior year. The company's allowance for credit losses was 82.8 million, or 79 basis points, of total loans outstanding at the end of the first quarter, up 3.7 million during the quarter, and up 12.7 million from one year prior. The allowance for credit losses at the end of the first quarter represented over seven times the company's trailing 12-month net charge-off. Looking forward, 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 earnings growth in the remaining three quarters of 2025. That concludes my prepared earnings comments. I would like to take the opportunity now to introduce myself and thank Joe for his guidance through the transition period. Joe, you are exceptional at what you do, and you will be missed. I would also like to thank Dimitar and the entire management team for their support over the last few weeks. It's an honor to join such a talented team, and I'm genuinely excited to help grow this portfolio. It's been a whirlwind 30 days, and while I still have a lot to learn, I can tell you the future of this company is very bright. And with that, Dimitar, Joe, and I will now take questions. Sagar, I will now hand it back to you to open the line.