Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Financial System, Inc. (the “Company” or “CFSI”) as of and for the three months ended March 31, 2025 and 2024, although in some circumstances the fourth quarter of 2024 is also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 35. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2025, “last year” and equivalent terms refer to calendar year 2024, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.
This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption “Forward-Looking Statements” on page 57.
Critical Accounting Policies and Estimates
As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management considers its critical accounting estimates those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company’s financial condition or results of operations. Management believes that the critical accounting estimates include the allowance for credit losses; actuarial assumptions associated with the pension, post-retirement and other employee benefit plans; and the carrying value of goodwill and other intangible assets. A summary of the critical accounting policies and estimates used by management is disclosed in the MD&A on pages 38-40 of the most recent Form 10-K (fiscal year ended December 31, 2024) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2025. There have been no material changes other than those described below regarding the Allowance for Credit Losses. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on page 9 of this Form 10-Q.
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Allowance for Credit Losses
The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, and median household income net of inflation. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During the first quarter of 2025, the Company updated the ACL model to add 2024 data into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. In addition, management adjusted the weighting of the three economic scenarios, increasing the weight for the downside scenario from 30% to 40% and decreasing the weight of the upside scenario from 30% to 20%, to capture additional economic uncertainty, and added additional reserves for business lending to capture additional risk in the portfolio due to the increase in size and volume of new business loans. The change in weighting of the economic scenarios increased the ACL by $0.7 million as compared to the previous weighting and the additional business lending qualitative factor increased the ACL by $2.2 million as compared to the previous factor.
One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 20% and 40%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at March 31, 2025 were 5.2% and 1.3%, respectively, compared to 4.8% and 1.8%, respectively, at December 31, 2024. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.3% and an average unemployment rate of 7.0%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three months ended March 31, 2025 by approximately $3.4 million, and decrease net income by $2.6 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate at the same time that economic conditions are changing, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators, and this is reflected in the current methodology that would produce changes to the allowance that are less significant as compared to economic metric-based modeling that is more directly correlated, and therefore sensitive to fluctuations in historical and projected national economic activity.
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Supplemental Reporting of Non-GAAP Results of Operations
The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis. Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, unrealized gain on equity securities and amortization of intangible assets. Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisition activity. In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, unrealized gain on equity securities and amortization of intangible assets from income before income taxes. Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with Current Expected Credit Loss (“CECL”) allowance methods, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax profiles. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.
Executive Summary
The Company’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services, including employee benefit services, insurance services and wealth management services, to retail, commercial, institutional and governmental customers. The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”). The Company’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, trust administration and wealth management services through its Nottingham Financial Group operating unit and insurance services through its OneGroup NY, Inc. (“OneGroup”) subsidiary.
The Company’s core operating objectives are: (i) maintain diverse revenue streams to achieve positive operating results in all four of the Company’s business units: banking and corporate, employee benefit services, insurance services, and wealth management services, (ii) utilize technology to deliver customer-responsive products and services and improve efficiencies, (iii) increase the noninterest component of total revenues through both organic and acquisition strategies, (iv) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, de novo expansions and divestitures/consolidations, (v) build profitable loan and deposit volume using both organic and acquisition strategies, and (vi) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and mitigate interest rate and liquidity risk and optimize net interest income generation.
Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives, results and financial condition include, but are not limited to: net income and earnings per share; return on assets and equity; components of net interest margin; noninterest revenues; noninterest expenses; asset quality metrics; loan and deposit growth; capital management; performance of individual banking and financial services units; performance of specific product lines and customers; liquidity and interest rate sensitivity; enhancements to customer products and services and their underlying performance characteristics; technology advancements; market share; peer comparisons; the performance of recently acquired businesses and the performance of recently opened and consolidated branch offices.
First quarter net income increased $8.7 million, or 21.4% as compared to the first quarter of 2024 and earnings per share of $0.93 for the first quarter of 2025 increased $0.17 from the first quarter of 2024. The increase in net income and earnings per share for the quarter reflected increases in net interest income and noninterest revenues, partially offset by increases in the provision for credit losses, noninterest expenses and income taxes.
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Net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, increased 26 basis points between the first quarter of 2024 and the first quarter of 2025. The yield on average interest earning assets increased 27 basis points compared to the prior year first quarter driven by an improvement in the yield on average loans. The yield on average loans for the first quarter increased 33 basis points compared to the first quarter of 2024 while the yield on average investments, including cash equivalents, decreased one basis point compared to the prior year. The Company’s total cost of funds increased two basis points from the year earlier period, as the rate paid on interest-bearing deposits increased three basis points and the rate paid on borrowings decreased 18 basis points.
Loan balances increased on both an average and ending basis as compared to the prior year first quarter, reflective of organic loan growth between the periods. Deposit balances also increased on both an average and ending basis as compared to the first quarter of 2024 due primarily to growth in governmental deposit balances. Investment balances, excluding cash equivalents, increased on both an average basis and ending basis between the first quarter of 2024 and the first quarter of 2025, driven by purchases of mortgage-backed securities between the periods. Over the same period, the balance of cash equivalents decreased on an average basis and was impacted by the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the first quarter of 2024, while cash equivalents increased on an ending basis driven by net deposit inflows. Borrowing balances decreased on an average basis and increased on an ending basis compared to the prior year’s first quarter. The decrease on an average basis was reflective of the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the prior year’s first quarter while the increase on an ending basis was due to Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods to support the funding of loan growth.
The Company recorded a $6.7 million provision for credit losses during the first quarter of 2025, $0.6 million higher than the first quarter of 2024, primarily due to an increase in a specific allocation on one non-owner occupied CRE loan relationship previously placed in nonaccrual status during the fourth quarter of 2023 as well as qualitative adjustments associated with increased economic uncertainty. Asset quality remained strong in relation to the banking industry and longer term performance, but net charge-off, nonperforming and delinquent loan ratios increased in comparison to the first quarter of 2024 levels. Net charge-offs of $3.2 million remained relatively low at an annualized 0.13% of average loans, but were $0.4 million, or an annualized one basis point of average loans, higher than levels for the first quarter of 2024. Nonperforming loans as a percentage of total loans increased 22 basis points to 0.72% between the first quarter of 2024 and the first quarter of 2025, primarily driven by the business loans associated with three customers being downgraded from accruing to nonaccrual status between the periods. The 30 to 89 day delinquent loan ratio increased 14 basis points versus one year ago to 0.57% primarily due to increases in delinquent balances in the business lending loan portfolio.
Banking services noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $0.8 million, or 4.7%, as compared to the prior year’s first quarter, primarily due to an increase in mortgage banking revenues. Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $4.7 million, or 9.0%, as compared to the prior year’s first quarter, due to a $3.1 million increase in insurance services revenues, a $0.9 million increase in employee benefit services revenues and a $0.7 million increase in wealth management services revenues.
Noninterest expenses increased $7.2 million, or 6.1%, between the first quarter of 2024 and the first quarter of 2025, primarily due to a $3.4 million increase in salaries and employee benefits, a $1.8 million increase in data processing and communications expenses and a $1.4 million increase in occupancy and equipment expenses. The increase in salaries and employee benefits was primarily driven by merit and market-related increases in employee wages and incentive compensation. The increase in data processing and communications expenses was reflective of continued investment in customer-facing and back-office technologies including investments being made in the development of artificial intelligence applications along with additional technology to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents. Occupancy and equipment expenses increased due to higher winter weather-related property maintenance costs along with incremental expenses associated with the Bank’s de novo branches opened between the periods.
First quarter operating net income, a non-GAAP measure, increased $8.3 million, or 19.0%, as compared to the first quarter of 2024. Operating earnings per share, a non-GAAP measure, of $0.98 for the first quarter increased $0.16 compared to the first quarter of 2024 while operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.22 compared to the prior year’s first quarter. These results demonstrate improvement in the Company’s core operating performance between the periods.
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Net Income and Profitability
As shown in Table 1, net income for the first quarter of $49.6 million increased $8.7 million, or 21.4%, as compared to the first quarter of 2024. Earnings per share of $0.93 for the first quarter of 2025 increased $0.17, or 22.4%, compared to the first quarter of 2024. The increase in net income and earnings per share was due to increases in net interest income and noninterest revenues and a decrease in the number of fully diluted shares outstanding, partially offset by increases in the provision for credit losses, noninterest expenses and income taxes. Operating net income, a non-GAAP measure, of $52.1 million for the first quarter increased $8.3 million, or 19.0%, as compared to the first quarter of 2024. Operating earnings per share, a non-GAAP measure, of $0.98 for the first quarter increased $0.16 compared to the first quarter of 2024. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.
As reflected in Table 1, first quarter net interest income of $120.2 million increased $13.2 million, or 12.4%, from the comparable prior year period. The increase was primarily the result of higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth.
The provision for credit losses of $6.7 million for the first quarter of 2025 increased $0.6 million as compared to the $6.1 million provision for credit losses in the first quarter of 2024. The increase in the provision for credit losses is reflective of a $3.8 million increase for a specific reserve on one non-owner occupied CRE loan relationship as previously mentioned and increased economic uncertainty.
First quarter noninterest revenues were $76.0 million, an increase of $5.7 million, or 8.2%, from the first quarter of 2024. Total operating noninterest revenues, a non-GAAP measure, were $75.8 million in the first quarter of 2025, an increase of $5.5 million, or 7.9%, from the prior year’s first quarter. The increase was driven by a $0.8 million increase in banking noninterest revenues and a $4.7 million increase in financial services noninterest revenues, comprised of increases in insurance services revenues of $3.1 million, or 27.8%, employee benefit services revenues of $0.9 million, or 2.9%, and wealth management services revenues of $0.7 million, or 7.1%.
Noninterest expenses of $125.3 million for the first quarter reflected an increase of $7.2 million, or 6.1%, from the first quarter of 2024. The increase in noninterest expenses for the quarter was mainly driven by higher salaries and employee benefits, data processing and communications and occupancy and equipment expenses, including costs associated with multiple small financial services acquisitions and the recent and pending opening of 17 de novo branches.
Income tax expense in the first quarter of 2025 increased $2.5 million compared to the prior year first quarter as pre-tax income increased $11.3 million and the effective tax rate, excluding the impact of tax benefits related to stock-based compensation activity and amortization of income tax credit investments, increased to 23.1% from 22.0% due to a higher projection for full-year pre-tax income and a decrease in the proportion of nontaxable interest income to total interest income.
A condensed income statement is as follows:
Table 1: Condensed Income Statements
Three Months Ended
March 31,
(000’s omitted, except per share data)
2025
2024
Net interest income
$
120,212
$
106,990
Provision for credit losses
6,690
6,148
Noninterest revenues
76,036
70,285
Noninterest expenses
125,290
118,084
Income before income taxes
64,268
53,043
Income taxes
14,654
12,171
Net income
$
49,614
$
40,872
Diluted weighted average common shares outstanding
53,130
53,467
Diluted earnings per share
$
0.93
$
0.76
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Net Interest Income
Net interest income is the amount by which interest, dividends and fees on interest-earning assets (loans, investments and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company’s depositors and interest paid on borrowings. Net interest margin is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities as a percentage of interest-earning assets.
Net interest income totaled $120.2 million for the first quarter of 2025 compared to $107.0 million for the first quarter of 2024. As shown in Table 2, fully tax-equivalent net interest income, a non-GAAP measure, for the first quarter was $121.1 million, a $13.1 million, or 12.1%, increase from the same period last year. The increase resulted from a $586.7 million increase in average interest-earnings asset balances, a 27 basis point increase in the yield on average interest-earning assets and a two basis point decrease in the rate paid on average interest-bearing liabilities, partially offset by a $563.2 million increase in average interest-bearing liability balances. As reflected in Table 3, the favorable impacts of the volume increase in average interest-earning asset balances of $6.3 million, the increase in the yield on average interest-earning assets of $8.5 million and the decrease in the rate paid on average interest-bearing liabilities of $0.7 million were partially offset by the unfavorable net interest income impact of the volume increase in average interest-bearing liability balances of $2.4 million. The net interest margin of 3.21% and fully tax-equivalent net interest margin of 3.24%, a non-GAAP measure, for the first quarter of 2025, both increased 26 basis points from the first quarter of 2024, driven by higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth.
The higher yield on average interest-earning assets for the quarter was the result of an increase in the yield on average loans, partially offset by a decrease in the yield on average investments including cash equivalents. The yield on average loans for the first quarter increased by 33 basis points compared to the first quarter of 2024, reflective of an increase in the proportion of higher rate new loan originations and the increase of certain variable and adjustable-rate loan yields. The first quarter of 2025 yield on average investments, including cash equivalents, decreased one basis point compared to the prior year, due to a decrease in the yield on cash equivalents, partially offset by the net effect of the sales and maturities of lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods. The current quarter’s yield on average investments, excluding cash equivalents, increased 10 basis points due to the aforementioned investment securities sales, maturities and purchases.
The average book balance of investments in the first quarter, including cash equivalents, decreased $27.6 million, or 0.6%, as compared to the corresponding prior year period due to a $99.7 million decrease in average cash equivalents, partially offset by a $72.0 million, or 1.6%, increase in average investment balances, reflective of purchases of investment securities between the periods. Investment purchases outpaced sales, maturities, calls and principal payments during the first quarter of 2025, driven by $45.3 million of government agency mortgage-backed securities purchases classified as held-to-maturity. Average loan balances were $614.3 million, or 6.3%, greater than the prior year’s first quarter balances with increases in all five major loan portfolios due to solid organic growth.
The first quarter of 2025 rate on average interest-bearing liabilities decreased two basis points compared to the prior year first quarter, reflective of an 18 basis point decrease in the rate paid on average borrowings, partially offset by a three basis point increase in the rate paid on average interest-bearing deposits. The increase in the rate paid on average interest-bearing deposits was reflective of market-related rate changes and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types between the periods. The decrease in the rate paid on average borrowings was primarily the result of lower market interest rates between the periods and types of borrowings utilized by the Company, including Bank Term Funding Program borrowings that were executed and subsequently repaid in the first quarter of 2024.
Average interest-bearing deposits increased $589.6 million between the first quarter of 2024 and the first quarter of 2025, with increases in all interest-bearing deposit account types, driven primarily by inflows from governmental customers. The Company continues to be proactive in managing customer relationships with depositors, particularly larger consumer, commercial and governmental customers. The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), the Federal Reserve Bank of New York (“Federal Reserve” or “FRB”), securities sold under agreement to repurchase (customer repurchase agreements) and finance lease liabilities, decreased $26.4 million compared to the prior year quarter due to a $217.6 million decrease in average Federal Reserve Bank Term Funding Program borrowings and a $39.8 million decrease in average customer repurchase agreements, partially offset by a $194.7 million increase in average term FHLB borrowings, a $27.7 million increase in average overnight borrowings and an $8.6 million increase in average finance lease liabilities. The Company was not in an overnight borrowing position at March 31, 2025.
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Table 2 below sets forth information related to average interest-earning assets and average interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 25.1% in 2025 and 24.4% in 2024. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan swap, prepayment, late and other fees and the accretion of acquired loan marks. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.
Table 2: Quarterly Average Balance Sheet
Three Months Ended
Three Months Ended
March 31, 2025
March 31, 2024
Avg.
Avg.
Average
Yield/Rate
Average
Yield/Rate
(000's omitted except yields and rates)
Balance
Interest
Paid
Balance
Interest
Paid
Interest-earning assets:
Cash equivalents
$
130,649
$
1,387
4.30
%
$
230,299
$
3,084
5.39
%
Taxable investment securities (1)
4,211,921
20,583
1.98
%
4,071,256
18,818
1.86
%
Nontaxable investment securities (1)
419,746
3,460
3.34
%
488,381
4,065
3.35
%
Loans (net of unearned discount) (2)
10,402,985
143,111
5.58
%
9,788,707
127,706
5.25
%
Total interest-earning assets
15,165,301
168,541
4.51
%
14,578,643
153,673
4.24
%
Noninterest-earning assets
1,274,056
1,218,224
Total assets
$
16,439,357
$
15,796,867
Interest-bearing liabilities:
Interest checking, savings and money market deposits
$
7,899,568
20,261
1.04
%
$
7,594,083
19,846
1.05
%
Time deposits
2,152,113
19,024
3.59
%
1,868,000
16,939
3.65
%
Customer repurchase agreements
250,142
860
1.39
%
290,006
1,253
1.74
%
Overnight borrowings
57,192
647
4.58
%
29,489
412
5.62
%
FHLB and other borrowings
602,838
6,643
4.47
%
399,511
4,576
4.61
%
Federal Reserve short-term borrowings
0
0
0.00
%
217,582
2,643
4.88
%
Total interest-bearing liabilities
10,961,853
47,435
1.75
%
10,398,671
45,669
1.77
%
Noninterest-bearing liabilities:
Noninterest checking deposits
3,519,962
3,570,902
Other liabilities
173,896
146,083
Shareholders' equity
1,783,646
1,681,211
Total liabilities and shareholders' equity
$
16,439,357
$
15,796,867
Net interest earnings
$
121,106
$
108,004
Net interest spread
2.73
%
2.44
%
Net interest spread (FTE) (non-GAAP)
2.76
%
2.47
%
Net interest margin on interest-earning assets
3.21
%
2.95
%
Net interest margin on interest-earning assets (FTE) (non-GAAP)
3.24
%
2.98
%
Fully tax-equivalent adjustment (3)
$
894
$
1,014
(1) Averages for investment securities are based on amortized cost basis and the yields do not give effect to changes in fair value that is reflected as a component of noninterest-earning assets, shareholders’ equity and deferred taxes.
(2) Includes nonaccrual loans. The impact of interest and fees not recognized on nonaccrual loans was immaterial.
(3) The FTE adjustment represents taxes that would have been paid had nontaxable investment securities and loans been fully taxable. The adjustment enhances the comparability of the performance of assets that have different tax liabilities.
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As discussed above and disclosed in Table 3 below, the change in net interest income (FTE basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.
Table 3: Rate/Volume
Three months ended March 31, 2025
versus March 31, 2024
Increase (Decrease) Due to Change in (1)
(000’s omitted)
Volume
Rate
Net Change
Interest earned on:
Cash equivalents
$
(1,146)
$
(551)
$
(1,697)
Taxable investment securities
664
1,101
1,765
Nontaxable investment securities
(566)
(39)
(605)
Loans (net of unearned discount)
8,247
7,158
15,405
Total interest-earning assets (2)
6,327
8,541
14,868
Interest paid on:
Interest checking, savings and money market deposits
788
(373)
415
Time deposits
2,520
(435)
2,085
Customer repurchase agreements
(158)
(235)
(393)
Overnight borrowings
326
(91)
235
FHLB and other borrowings
2,247
(180)
2,067
Federal Reserve short-term borrowings
(2,643)
0
(2,643)
Total interest-bearing liabilities (2)
2,445
(679)
1,766
Net interest earnings (2)
$
4,461
$
8,641
$
13,102
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component.
(2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components.
Noninterest Revenues
The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and digital banking channels (performed by CBNA); 2) employee benefit trust, collective investment fund, transfer agency, actuarial, benefit plan administration and recordkeeping services (performed by BPAS and its subsidiaries); 3) wealth management services, comprised of trust services (performed by the Nottingham Trust division within CBNA), broker-dealer and investment advisory products and services (performed by Nottingham Investment Services, Inc. (“NISI”) and Nottingham Wealth Partners, Inc.) and asset management services (performed by Nottingham Advisors, Inc.), collectively referred to as Nottingham Financial Group; and 4) insurance and risk management products and services (performed by OneGroup). Additionally, the Company has other transactions that impact noninterest revenues, including realized and unrealized gains or losses on investment securities.
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Table 4: Noninterest Revenues
Three Months Ended
March 31,
(000’s omitted)
2025
2024
Employee benefit services
$
32,622
$
31,698
Insurance services
14,201
11,109
Wealth management services
9,862
9,210
Deposit service charges and fees
7,844
7,573
Debit interchange and ATM fees
6,462
6,678
Mortgage banking
998
345
Other banking revenues
3,802
3,656
Subtotal
75,791
70,269
Unrealized gain on equity securities
245
16
Total noninterest revenues
$
76,036
$
70,285
Noninterest revenues/total revenues
38.7
%
39.6
%
Operating noninterest revenues/operating revenues (FTE basis) (non-GAAP) (1)
38.5
%
39.4
%
(1) Operating noninterest revenues, a non-GAAP measure, excludes unrealized gain on equity securities from total noninterest revenues. Operating revenues, a non-GAAP measure, is defined as net interest income on a FTE basis plus noninterest revenues, excluding unrealized gain on equity securities. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.
As displayed in Table 4, noninterest revenues were $76.0 million in the first quarter of 2025. This represents an increase of $5.7 million for the quarter in comparison to the same 2024 timeframe, with increases across all four banking and financial services noninterest revenue sources. Operating noninterest revenues, a non-GAAP measure that excludes unrealized gain on equity securities from total noninterest revenues, were $75.8 million in the first quarter, an increase of $5.5 million, or 7.9%, from the same quarter last year. The increase in operating noninterest revenues, a non-GAAP measure, was driven by increases in insurance services revenues, employee benefit services revenues, banking noninterest revenues and wealth management services revenues.
Employee benefit services revenues increased $0.9 million, or 2.9%, as compared to the prior year first quarter, driven by new business and increases in total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation. Insurance services revenues increased $3.1 million, or 27.8%, for the first quarter of 2025 as compared to the first quarter of 2024, reflective of higher contingent commission revenues and acquired growth in commission revenues. Wealth management services revenues increased $0.7 million, or 7.1%, as compared to the prior year first quarter as favorable investment market conditions drove an increase in assets under management between the periods.
Banking noninterest revenues of $19.1 million for the first quarter of 2025 increased $0.9 million, or 4.7% as compared to the corresponding prior year period. The increase from the prior year’s first quarter was due to an increase in mortgage banking revenues of $0.6 million as sales of secondary market eligible residential mortgage loans rose in the current year and changes in market interest rates drove a higher gain on mortgage servicing rights and derivatives on loans held for sale, an increase of $0.2 million in commercial swap fees, and a $0.1 million increase in other banking revenues.
The ratio of noninterest revenues to total revenues was 38.7% for the first quarter of 2025 compared to 39.6% for the prior year’s first quarter. The decrease was the result of the increase in net interest income outpacing the increase in noninterest revenues as compared to the prior year’s first quarter.
The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 38.5% for the quarter ended March 31, 2025 versus 39.4% for the equivalent period of 2024. The decrease was driven by a 12.1% increase in fully tax-equivalent net interest income, a non-GAAP measure, while operating noninterest revenues, a non-GAAP measure, increased 7.9%.
Noninterest Expenses
Table 5 below sets forth the quarterly results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.
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Table 5: Noninterest Expenses
Three Months Ended
March 31,
(000’s omitted)
2025
2024
Salaries and employee benefits
$
76,442
$
73,063
Data processing and communications
16,122
14,348
Occupancy and equipment
12,698
11,362
Business development and marketing
3,130
3,045
Legal and professional fees
4,849
4,341
Amortization of intangible assets
3,482
3,576
Litigation accrual
(50)
119
Acquisition expenses
1
35
Other
8,616
8,195
Total noninterest expenses
$
125,290
$
118,084
Noninterest expenses/average assets
3.09
%
3.01
%
Operating noninterest expenses (1) /average assets (non-GAAP)
3.01
%
2.91
%
Efficiency ratio (GAAP)
63.8
%
66.6
%
Operating efficiency ratio (non-GAAP) (2)
61.9
%
64.1
%
(1) Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, litigation accrual and amortization of intangibles. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.
(2) Operating efficiency ratio, a non-GAAP measure, is calculated as operating noninterest expenses as defined in footnote (1) above divided by net interest income on a FTE basis plus noninterest revenues excluding unrealized gain on equity securities. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.
As shown in Table 5, the Company recorded noninterest expenses of $125.3 million for the first quarter of 2025, representing an increase of $7.2 million, or 6.1%, from the prior year’s first quarter. The increase in noninterest expenses was attributable to a $3.4 million, or 4.6%, increase in salaries and employee benefits, a $1.8 million, or 12.4%, increase in data processing and communications expenses, a $1.3 million, or 11.8%, increase in occupancy and equipment expenses, a $0.5 million, or 11.7%, increase in legal and professional fees, a $0.2 million, or 2.6%, increase in other expenses and a $0.1 million, or 2.8%, increase in business development and marketing. The increases in these noninterest expenses were partially offset by a $0.1 million, or 2.6%, decrease in the amortization of intangible assets. Operating noninterest expenses, a non-GAAP measure, increased $7.5 million, or 6.6%, between the comparable quarters.
The increase in salaries and benefits expense was driven by merit and market-related increases in employee wages and incentive compensation. Data processing increases were reflective of the Company’s continued investment in key technologies, including artificial intelligence applications and customer payment fraud and cybersecurity risk management software. Increases in occupancy and equipment expenses were primarily due to higher property maintenance costs along with incremental expenses associated with the Bank’s de novo branches opened between the periods.
The Company’s GAAP efficiency ratio was 63.8% for the first quarter of 2025, 2.8 percentage points favorable to the comparable quarter of 2024. This resulted from total revenues increasing 10.7%, due to increases in both net interest income and noninterest revenues, while total noninterest expenses increased 6.1% due to the factors noted above. Annualized current quarter noninterest expenses as a percentage of average assets increased eight basis point over the first quarter of the prior year as noninterest expenses increased 6.1% due to the factors noted above and average assets increased 4.1% primarily due to the aforementioned organic loan growth.
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The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 61.9% for the first quarter of 2025, 2.2 percentage points favorable to the comparable quarter of 2024. This resulted from operating revenues (FTE), a non-GAAP measure as described above, increasing by 10.4% while operating noninterest expenses, a non-GAAP measure as described above, increased a lesser 6.6%. Current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets were 10 basis points higher than the prior year. First quarter operating noninterest expenses, a non-GAAP measure as defined above, increased 6.6% year-over-year, while average assets increased 4.1% primarily due to the aforementioned organic loan growth.
Income Taxes
The first quarter 2025 effective income tax rate was 22.8%, compared to 22.9% for the first quarter of 2024. The Company recorded $0.5 million of tax benefit associated with stock-based compensation and $0.3 million of tax expense associated with the amortization of income tax credit investments in the first quarter of 2025 compared with $0.2 million tax expense associated with stock-based compensation and $0.3 million of tax expense associated with the amortization of income tax credit investments in the first quarter of 2024. Total income tax expense was $14.7 million and $12.2 million for the first quarter of 2025 and first quarter of 2024, respectively. The effective tax rates, excluding the stock-based compensation tax benefits and amortization of income tax credit investments, were 23.1% for the first quarter of 2025 and 22.0% for the first quarter of 2024, an increase of 1.1 percentage points. This increase was primarily due to a higher full-year 2025 pre-tax income projection as compared to the prior year, and a decrease in the proportion of nontaxable interest income to total interest income.
Investments
The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.30 billion at the end of the first quarter, an increase of $83.0 million, or 2.0%, from December 31, 2024 and $149.2 million, or 3.6%, higher than March 31, 2024. The book value (excluding unrealized gains and losses) of investment securities increased $31.4 million from December 31, 2024 and increased $79.5 million from March 31, 2024, driven by government agency mortgage-backed securities purchases. During the first quarter of 2025, the Company purchased $44.8 million of government agency mortgage-backed securities with an average yield of 5.35%, which the Company classified as held-to-maturity. These additions were offset by $16.2 million from investment maturities, calls, and principal payments during the first three months of 2025. Additionally, there was $9.5 million of net accretion on investment securities during the first quarter of 2025. The effective duration of the investment securities portfolio was 6.0 years at the end of the first quarter of 2025, as compared to 6.2 years at the end of 2024 and 6.8 years at the end of the first quarter of 2024.
The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At March 31, 2025, the investment portfolio (excluding held-to-maturity investment securities) had a $353.0 million net unrealized loss, a $51.6 million decrease from the $404.6 million net unrealized loss at December 31, 2024 and a $69.7 million decrease from the $422.7 million net unrealized loss at March 31, 2024. This increase is reflective of movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, sales and maturities that occurred during the past 12 months.
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The following table sets forth the carrying value for the Company’s investment securities portfolio:
Table 6: Investment Securities
March 31,
December 31,
March 31,
(000’s omitted)
2025
2024
2024
Available-for-Sale Portfolio:
U.S. Treasury and agency securities
$
2,134,917
$
2,083,786
$
2,055,517
Obligations of state and political subdivisions
378,486
386,495
460,149
Government agency mortgage-backed securities
299,791
301,224
332,479
Corporate debt securities
7,771
7,697
7,440
Government agency collateralized mortgage obligations
5,950
6,512
8,279
Total available-for-sale portfolio
2,826,915
2,785,714
2,863,864
Held-to-Maturity Portfolio:
U.S. Treasury and agency securities
1,146,066
1,138,743
1,116,458
Government agency mortgage-backed securities
247,771
206,412
101,014
Total held-to-maturity portfolio
1,393,837
1,345,155
1,217,472
Equity and Other Securities:
Equity securities with readily determinable fair value
2,599
2,354
388
Federal Home Loan Bank common stock
38,909
45,408
29,866
Federal Reserve Bank common stock
33,331
33,442
33,568
Equity securities without readily determinable fair value
5,752
6,313
6,956
Total equity and other securities
80,591
87,517
70,778
Total investments
$
4,301,343
$
4,218,386
$
4,152,114
Loans
Loans ended the first quarter at $10.42 billion, $11.2 million, or 0.1%, lower than December 31, 2024 and $537.6 million, or 5.4%, higher than March 31, 2024.
Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and governmental customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $319.8 million, or 7.6%, from March 31, 2024, and $34.8 million, or 0.8%, from December 31, 2024, driven by net organic growth over both periods. As compared to December 31, 2024, multifamily increased $77.7 million, or 10.7% and business non-real estate loans, including commercial and industrial lending, increased $37.6 million, or 3.3%, while non-owner occupied commercial real estate decreased $74.2 million, or 4.2%, and owner-occupied commercial real estate decreased $6.3 million, or 0.7%. The change from December 31, 2024 includes $68.1 million of construction loans that were reclassified from non-owner occupied to multifamily during the first quarter of 2025. While certain macroeconomic concerns persist related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to these portfolios is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 24% of total loans and 191% of total bank-level regulatory capital. Commercial real estate (“CRE”) lending represents 74.0% of the total business lending portfolio at March 31, 2025 while other commercial and industrial lending represents the remaining 26.0% of total business lending. The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 17.7% of total business lending, followed by office and lodging, at 8.5% and 7.2%, respectively. The Company’s largest owner-occupied lending concentration by industry is retail trade at 6.2% of total business lending, followed by arts, entertainment and recreation at 1.9% and health care and social assistance at 1.8%. These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 14% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.
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The business loan balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s strong liquidity profile relative to competitors that creates opportunities to gain market share. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong credit quality and producing profitable margins. The Company intends the composition of its growth in its business lending portfolio over the remainder of 2025 to be proportionally higher for business non-real estate lending than commercial real estate lending compared to what was experienced by the Company over the past several years, with the intent of keeping CRE loans’ share of the total business portfolio relatively constant. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category. To assist business lending customers in managing their interest rate risk, the Company enters into interest rate swaps which have associated interest rate and credit risk; for additional detail on the Company’s use of interest rate swaps, see Note K beginning on page 30 of this Form 10-Q.
The following table presents the concentration by borrower type of the Company’s CRE loan balances as of March 31, 2025 and December 31, 2024:
Table 7: Concentrations of CRE Lending by Borrower Type
March 31, 2025
December 31, 2024
(000’s omitted, except percentages)
Amortized Cost
Percentage of Total
Amortized Cost
Percentage of Total
Multifamily and non-owner occupied CRE by property type:
Multifamily
$
801,785
23.9
%
$
724,114
21.5
%
Office
386,873
11.5
%
368,387
11.0
%
Lodging
327,893
9.8
%
336,221
10.0
%
Commercial Construction
323,639
9.6
%
395,482
11.7
%
Retail
257,302
7.7
%
256,351
7.6
%
Other Lessors of CRE
190,988
5.6
%
200,215
6.0
%
Warehouse/Industrial
146,937
4.4
%
149,722
4.5
%
Nursing/Assisted Living
56,144
1.7
%
56,159
1.7
%
Residential Construction
3,364
0.1
%
4,278
0.1
%
All Other
7,773
0.2
%
8,284
0.2
%
Total multifamily and non-owner occupied CRE
2,502,698
74.5
%
2,499,213
74.3
%
Owner-occupied CRE by industry:
Retail Trade
281,845
8.4
%
293,208
8.7
%
Arts, Entertainment and Recreation
87,305
2.6
%
87,709
2.6
%
Health Care and Social Assistance
83,567
2.5
%
85,151
2.5
%
Other Services
82,913
2.5
%
81,688
2.4
%
Real Estate Rental and Leasing
81,078
2.4
%
81,802
2.4
%
Agriculture and Forestry
51,032
1.5
%
51,602
1.5
%
Manufacturing
47,453
1.4
%
49,558
1.5
%
Accommodation and Food Services
42,014
1.2
%
39,385
1.2
%
Wholesale Trade
24,810
0.7
%
25,312
0.8
%
Construction
14,138
0.4
%
16,791
0.5
%
Transportation and Warehousing
11,088
0.3
%
11,547
0.3
%
Professional, Scientific and Technical Services
9,646
0.3
%
7,603
0.2
%
Educational Services
4,546
0.1
%
4,618
0.1
%
All Other
37,086
1.2
%
28,809
1.0
%
Total owner occupied CRE
858,521
25.5
%
864,783
25.7
%
Total CRE
$
3,361,219
100.0
%
$
3,363,996
100.0
%
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Table of Contents
The following table presents the geographic concentrations of the Company’s CRE loan balances by property location (MSA) as of March 31, 2025 and December 31, 2024:
Table 8: Concentrations of CRE by Property Location
March 31, 2025
Multifamily CRE
Owner occupied CRE
Non-owner occupied CRE
Total CRE
Percentage
Percentage
Percentage
Percentage
Amortized
of Total
Amortized
of Total
Amortized
of Total
Amortized
of Total
(000’s omitted, except percentages)
Cost
CRE
Cost
CRE
Cost
CRE
Cost
CRE
MSA:
Albany-Schenectady-Troy, NY
$
109,336
3.3
%
$
107,939
3.2
%
$
242,886
7.2
%
$
460,161
13.7
%
Burlington-South Burlington, VT
183,500
5.5
%
37,261
1.1
%
148,681
4.4
%
369,442
11.0
%
Rochester, NY
33,665
1.0
%
103,440
3.1
%
140,650
4.2
%
277,755
8.3
%
Buffalo-Cheektowaga, NY
38,741
1.2
%
58,730
1.7
%
159,376
4.7
%
256,847
7.6
%
Syracuse, NY
12,185
0.4
%
72,070
2.1
%
144,927
4.3
%
229,182
6.8
%
Scranton Wilkes-Barre, PA
62,271
1.9
%
58,185
1.7
%
100,945
3.0
%
221,401
6.6
%
Utica-Rome, NY
49,517
1.5
%
35,823
1.1
%
56,987
1.7
%
142,327
4.3
%
Glens Falls, NY
43,833
1.3
%
3,699
0.1
%
20,831
0.6
%
68,363
2.0
%
Ithaca, NY
30,816
0.9
%
11,969
0.4
%
23,096
0.7
%
65,881
2.0
%
All Other MSA - NY (1)(2)
42,985
1.3
%
52,526
1.6
%
89,551
2.7
%
185,062
5.6
%
All Other MSA - PA (1)(2)
17,029
0.5
%
62,240
1.9
%
107,486
3.2
%
186,755
5.6
%
All Other MSA (1)
83,362
2.5
%
42,620
1.3
%
225,166
6.7
%
351,148
10.5
%
Non-MSAs:
NY
52,439
1.6
%
162,573
4.8
%
190,289
5.7
%
405,301
12.1
%
All Other Non-MSA
42,106
1.0
%
49,446
1.4
%
50,042
1.5
%
141,594
3.9
%
Total
$
801,785
23.9
%
$
858,521
25.5
%
$
1,700,913
50.6
%
$
3,361,219
100.0
%
December 31, 2024
Multifamily CRE
Owner occupied CRE
Non-owner occupied CRE
Total CRE
Percentage
Percentage
Percentage
Percentage
Amortized
of Total
Amortized
of Total
Amortized
of Total
Amortized
of Total
(000’s omitted, except percentages)
Cost
CRE
Cost
CRE
Cost
CRE
Cost
CRE
MSA:
Albany-Schenectady-Troy, NY
$
104,274
3.1
%
$
104,162
3.1
%
$
250,019
7.4
%
$
458,455
13.6
%
Burlington-South Burlington, VT
172,602
5.1
%
38,500
1.1
%
153,102
4.6
%
364,204
10.8
%
Rochester, NY
30,391
0.9
%
101,207
3.0
%
144,261
4.3
%
275,859
8.2
%
Buffalo-Cheektowaga, NY
37,587
1.1
%
59,919
1.8
%
172,484
5.1
%
269,990
8.0
%
Syracuse, NY
12,372
0.4
%
71,519
2.1
%
145,796
4.3
%
229,687
6.8
%
Scranton Wilkes-Barre, PA
61,857
1.8
%
60,603
1.8
%
101,573
3.0
%
224,033
6.6
%
Utica-Rome, NY
39,294
1.2
%
35,885
1.1
%
63,696
1.9
%
138,875
4.2
%
Ithaca, NY
30,966
0.9
%
12,132
0.4
%
23,481
0.7
%
66,579
2.0
%
All Other MSA - NY (1)(2)
87,605
2.6
%
60,698
1.8
%
107,881
3.2
%
256,184
7.6
%
All Other MSA - PA (1)(2)
17,017
0.5
%
63,142
1.9
%
97,908
2.9
%
178,067
5.3
%
All Other MSA (1)
50,505
1.5
%
43,928
1.3
%
249,527
7.4
%
343,960
10.2
%
Non-MSAs:
NY
53,690
1.6
%
161,967
4.8
%
198,312
5.9
%
413,969
12.3
%
All Other Non-MSA
25,954
0.8
%
51,121
1.5
%
67,059
2.1
%
144,134
4.4
%
Total
$
724,114
21.5
%
$
864,783
25.7
%
$
1,775,099
52.8
%
$
3,363,996
100.0
%
(1)
The MSAs within these captions are individually less than 2% of total CRE exposure.
(2)
The MSAs within these captions include certain counties in adjacent states with a high degree of economic and social integration with the respective core city in New York or Pennsylvania.
Consumer mortgages increased $186.7 million, or 5.6%, from one year ago and increased $14.4 million, or 0.4%, from December 31, 2024, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production. The Company sold $17.6 million and $75.2 million of consumer mortgage production during the first quarter of 2025 and over the last twelve months, respectively. Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Home equity loans increased $35.2 million, or 7.9%, from one year ago and increased $3.8 million, or 0.8%, from December 31, 2024, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in the higher interest rate environment.
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Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), decreased $4.0 million, or 0.2%, from one year ago, and decreased $64.2 million, or 3.3%, from December 31, 2024. The decrease was primarily due to a weather-related reduction in vehicle sales volume in the Company’s footprint. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer installment loans have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.
Asset Quality
The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the first quarter was $82.8 million, an increase of $12.7 million, or 18.2%, from one year earlier and up $3.7 million, or 4.7%, from the end of 2024.
Table 9: Allowance for Credit Losses by Loan Type
March 31, 2025
December 31, 2024
March 31, 2024
Percent of
Percent of
Percent of
Allowance
Total
Allowance
Total
Allowance
Total
for Credit
Loan
for Credit
Loan
for Credit
Loan
(000’s omitted except for percentages)
Losses
Balances
Losses
Balances
Losses
Balances
Business lending
$
42,988
43.6
%
$
37,201
43.2
%
$
29,371
42.7
%
Consumer mortgage
13,679
33.6
%
15,017
33.5
%
14,490
33.5
%
Consumer indirect
19,746
16.4
%
20,895
16.9
%
20,294
17.4
%
Consumer direct
4,033
1.8
%
3,453
1.8
%
3,355
1.9
%
Home equity
1,394
4.6
%
1,548
4.6
%
1,581
4.5
%
Unallocated
1,000
0.0
%
1,000
0.0
%
1,000
0.0
%
Total
$
82,840
100.0
%
$
79,114
100.0
%
$
70,091
100.0
%
As demonstrated in Table 9, the consumer direct and indirect installment loan portfolios carry higher credit risk than the business lending, consumer mortgage and home equity portfolios and therefore the Company allocates a higher proportional allowance to these portfolios. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at March 31, 2025 was consistent with December 31, 2024 and March 31, 2024.
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Allowance for credit losses, nonaccrual loans and loan net charge-off ratios are as follows:
Table 10: Loan Ratios
March 31,
December 31,
March 31,
2025
2024
2024
Allowance for credit losses/total loans
0.79
%
0.76
%
0.71
%
Allowance for credit losses/nonperforming loans
110
%
108
%
142
%
Nonaccrual loans/total loans
0.66
%
0.64
%
0.45
%
Allowance for credit losses/nonaccrual loans
120
%
119
%
156
%
Net charge-offs (annualized) to average loans outstanding (quarterly):
Business lending
0.06
%
0.13
%
0.02
%
Consumer mortgage
0.00
%
0.00
%
0.01
%
Consumer indirect
0.53
%
0.31
%
0.44
%
Consumer direct
0.70
%
0.68
%
1.43
%
Home equity
0.01
%
0.03
%
0.02
%
Total loans
0.13
%
0.12
%
0.12
%
The net charge-offs during the first quarter of 2025 were $3.2 million, $0.4 million higher than the first quarter of 2024, with business lending and consumer indirect experiencing higher net charge-off levels while consumer mortgage, consumer direct and home equity were lower than the prior year. The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2025 was 0.13%, one basis point higher than both the level during the first quarter of 2024 and the fourth quarter of 2024. Net charge-off levels for the first quarter of 2025 were below the Company’s average for the trailing eight quarters for all portfolios except for consumer indirect. While there is additional economic uncertainty in the first quarter of 2025, the Company generally continues to experience low and stable levels of losses as compared to the Company’s 10-year historical averages.
Other real estate owned (“OREO”) at March 31, 2025 was $2.7 million as compared to $1.7 million at March 31, 2024 and $2.8 million at December 31, 2024. At March 31, 2025, OREO consisted of 46 residential properties with a total value of $2.7 million and no commercial properties. This compares to 44 residential properties with a total value of $2.8 million and no commercial properties at December 31, 2024, and 23 residential properties with a total value of $1.3 million and two commercial properties with a total value of $0.4 million at March 31, 2024. The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.
Approximately 55% of the nonperforming loans at March 31, 2025 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type. Of the nonperforming loans in the business lending portfolio, multifamily represents 30% of the balance, non - owner occupied commercial real estate represents 29% of the balance, other commercial and industrial loans represents 24% of the balance and owner - occupied commercial real estate represents 17% of the balance. The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of three business lending relationships that were individually assessed for a specific allocation of the allowance for credit losses.
Approximately 41% of nonperforming loans at March 31, 2025 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years. Although high levels of inflation has had some adverse impact on consumers, the unemployment rate remains low and this has contributed to the credit performance in the consumer mortgage loan portfolio remaining favorable. The remaining 4% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. Consumer installment loans generally have very low non-performing levels because they are usually charged off prior to becoming 90 or more days delinquent or reaching non-accrual status. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 110% at the end of the first quarter, as compared to 108% at year-end 2024 and 142% at March 31, 2024. The decrease in this ratio between the annual quarterly periods was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in nonperforming business loans.
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Despite the recent slight declines in certain asset quality metrics, including net charge-offs and delinquent and nonperforming loans, these levels remain relatively low compared to the banking industry, reflecting the Company’s robust risk management practices and credit quality standards.
The Company’s senior management, special asset officers and business lending management review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted. Based on this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits (greater than $2.0 million exposure) are also reviewed on a quarterly basis by senior management, senior credit administration management, special assets officers and business lending management to monitor their status and discuss relationship management plans. Business lending management reviews the criticized business loan portfolio on a monthly basis.
Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 1.29% at the end of the first quarter of 2025, five basis points above the year-end 2024 ratio of 1.24% and 36 basis points above the March 31, 2024 ratio of 0.93%. The business lending delinquency ratio at the end of the first quarter was 27 basis points above the level at December 31, 2024 and 80 basis points above the level at March 31, 2024. The delinquency rates for the consumer mortgage, consumer indirect and consumer direct portfolios all increased as compared to the levels at March 31, 2024 while the home equity delinquency rate decreased. The consumer direct, consumer indirect, and consumer mortgage delinquency rates were lower than the rate at December 31, 2024 while home equity was consistent.
The Company recorded a $6.7 million provision for credit losses in the first quarter of 2025. The first quarter provision for credit losses was $0.6 million higher than the equivalent prior year period’s provision for credit losses of $6.1 million. The allowance for credit losses of $82.8 million as of March 31, 2025 increased $12.7 million from the level one year ago. The current quarter provision for credit losses is reflective of the Company increasing its qualitative assessment for economic uncertainty as well as an increase in the specific reserve on one non-owner occupied CRE loan relationship placed on nonaccrual status during the fourth quarter of 2023. The allowance for credit losses to total loans ratio was 0.79% at March 31, 2025, eight basis points higher than the level at March 31, 2024 and three basis points higher than the level at December 31, 2024. Refer to Note E: Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.
As of March 31, 2025, the net purchase discount related to the $860.5 million of remaining non-Purchased Credit Deteriorated (“PCD”) loan balances acquired through prior period acquisition transactions was approximately $16.8 million, or 2.0% of that portfolio.
Deposits
As shown in Table 11, average deposits of $13.57 billion in the first quarter were $538.7 million, or 4.1%, higher than the first quarter of 2024. Total average deposit balances increased $96.4 million, or 0.7%, from the fourth quarter of last year, while on an ending basis, total deposits increased $450.3 million, or 3.4%, from December 31, 2024. The mix of average deposit balances changed as the weighting of non-maturity deposits (noninterest checking, interest checking, savings and money markets) to total deposits has decreased from the prior year levels. Average noninterest checking deposits as a percentage of average total deposits was 25.9% in the first quarter compared to 27.4% in the first quarter of 2024 and 26.7% in the fourth quarter of last year. Average non-maturity deposits represented 84.1% of the Company’s average deposit funding base in the first quarter of 2025, while time deposits represented 15.9% of total average deposits. In comparison, time deposits represented 14.3% of total average deposits during the first quarter of 2024 and 16.2% of total average deposits during the fourth quarter of last year due in part to customers responding to changes in market interest rates by moving funds into and out of higher yielding time deposit accounts. The quarterly average cost of deposits was 1.17% for the first quarter of 2025, compared to 1.14% in the first quarter of 2024, reflective of a decline in the proportion of noninterest and low-rate deposit balances. The Company continues to focus on expanding its deposit relationship base through its competitive product offerings, high quality customer service and market expansion initiatives.
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The Company’s deposit base is well diversified across customer segments, which as of March 31, 2025 is comprised of approximately 58% consumer, 25% business and 17% governmental, and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $70,000, while the Company’s total average deposit account balance is under $20,000. In addition, at the end of the quarter, 64% of the Company’s total deposit balances were in checking and low-rate savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years. The total estimated amount of deposits that exceeded the $250,000 insured limit provided by the FDIC, net of collateralized and intercompany deposits, was approximately $2.34 billion at March 31, 2025. This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers and are therefore eliminated in consolidation, and governmental deposits whose uninsured balances are collateralized by certain pledged investment securities. The Bank Call Report estimated uninsured deposit balances at March 31, 2025 are reported gross at $4.75 billion, which includes intercompany account balances of $284.6 million, and collateralized deposits of $2.13 billion. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of ending total deposits at March 31, 2025. These estimates are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC.
Average non-governmental deposits for the first quarter of 2025 decreased $24.6 million, or 0.2%, versus the fourth quarter of 2024 and increased $176.0 million, or 1.6%, versus the year-earlier period primarily driven by the higher average balances of consumer time deposits. Average governmental deposits for the first quarter increased $121.0 million, or 5.9%, from the fourth quarter of 2024 primarily due to the seasonal receipt of property tax payments and increased $362.7 million, or 20.1%, from the first quarter of 2024, reflective of competitive price offerings and expansion of its governmental deposit relationship base due to the Company’s business development efforts. Average governmental deposits as a percentage of total average deposits increased from 13.8% in the first quarter of 2024 to 16.0% in the first quarter of 2025.
Table 11: Quarterly Average Deposits
March 31,
December 31,
March 31,
(000’s omitted)
2025
2024
2024
Noninterest checking deposits
$
3,519,962
$
3,603,416
$
3,570,902
Interest checking deposits
2,984,420
2,903,412
2,863,287
Savings deposits
2,276,515
2,226,716
2,253,091
Money market deposits
2,638,633
2,559,531
2,477,705
Time deposits
2,152,113
2,182,140
1,868,000
Total deposits
$
13,571,643
$
13,475,215
$
13,032,985
Nongovernmental deposits
$
11,404,514
$
11,429,073
$
11,228,535
Governmental deposits
2,167,129
2,046,142
1,804,450
Total deposits
$
13,571,643
$
13,475,215
$
13,032,985
Borrowings
Borrowings, excluding securities sold under agreement to repurchase, at the end of the first quarter of 2025 totaled $595.5 million. This was $141.9 million, or 19.2%, lower than borrowings at December 31, 2024 and $200.3 million above the level at the end of the first quarter of 2024. The increase from the prior year first quarter was primarily due to an increase in other FHLB borrowings of $191.8 million as the Company secured fixed rate FHLB term borrowings in the second and third quarters of 2024 to support the funding of loan growth. The decrease from the end of 2024 was primarily related to a decrease in overnight borrowings of $118.0 million and maturities of other FHLB borrowings primarily associated with the amortizing advances secured in 2023.
During January 2024, the Company secured $300.0 million in short-term borrowings through the Federal Reserve’s Bank Term Funding Program at a rate of 4.87% to fund expected net loan growth. These short-term borrowings matured during March 2024 and the Bank Term Funding Program ceased making new loans as of March 11, 2024.
Securities sold under agreement to repurchase, also referred to as customer repurchase agreements, represent collateralized governmental and commercial funding from customers that price and operate similar to a deposit instrument. Customer repurchase agreements were $266.6 million at the end of the first quarter of 2025, $5.0 million higher than December 31, 2024 and $20.7 million lower than March 31, 2024.
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Shareholders’ Equity and Regulatory Capital
Total shareholders’ equity of $1.83 billion at the end of the first quarter of 2025 represents an increase of $71.2 million from the balance at December 31, 2024. The increase was primarily driven by a decrease in accumulated other comprehensive loss of $43.0 million, net income of $49.6 million and stock-based compensation of $3.0 million, partially offset by common stock dividends declared of $24.3 million. The decrease in accumulated other comprehensive loss was mainly comprised of $42.9 million of other comprehensive income related to the Company’s investment securities portfolio, including a net increase in the after-tax market value adjustment on the available-for-sale investment portfolio as medium and long-term market interest rates decreased between the periods. Over the past 12 months, total shareholders’ equity increased $177.1 million, as net income, an increase in the after-tax market value adjustment on investments, the issuance of common stock in association with the employee stock plans and adjustments to the overfunded status of the Company’s employee retirement plans more than offset common stock dividends declared and common stock repurchase activity.
The dividend payout ratio (dividends declared divided by net income) for the first quarter of 2025 was 49.0%, compared to 58.1% for the first quarter of 2024. The decrease in the dividend payout ratio was primarily driven by an increase in net income between the periods. First quarter dividends declared increased 2.3% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.45 to $0.46 in the third quarter of 2024, while total shares outstanding increased 0.1% as issuances from the Company’s employee stock plans outweighed common stock repurchases. The 2024 dividend increase marked the Company’s 32 nd consecutive year of increased dividend payouts to common shareholders.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s dividend paying ability and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets and certain liabilities and off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company and the Bank are required to maintain a capital conservation buffer (“CCB”), composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios. The required capital conservation buffer is 2.5% as of March 31, 2025, December 31, 2024 and March 31, 2024. Therefore, to satisfy both the minimum risk-based capital ratios and the CCB as of those dates, the Company and the Bank must maintain:
(i) Common equity Tier 1 capital to total risk-weighted assets (“Common equity tier 1 capital ratio”) of at least 7.0%,
(ii) Tier 1 capital to total risk-weighted assets (“Tier 1 risk-based capital ratio”) of at least 8.5%, and
(iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets (“Total risk-based capital ratio”) of at least 10.5%.
In addition, the Company and Bank must maintain a ratio of ending Tier 1 capital to adjusted quarterly average assets (“Tier 1 leverage ratio”) of at least 5.0% to be considered “well capitalized” under the regulatory framework for prompt corrective action.
As of March 31, 2025, December 31, 2024 and March 31, 2024, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”. The regulatory capital ratios for the Company and Bank are presented below.
Table 12: Regulatory Ratios
March 31, 2025
December 31, 2024
March 31, 2024
Community
Community
Community
Financial
Community
Financial
Community
Financial
Community
System, Inc.
Bank, N.A.
System, Inc.
Bank, N.A.
System, Inc.
Bank, N.A.
Tier 1 leverage ratio
9.29
%
7.88
%
9.19
%
7.69
%
9.01
%
7.62
%
Common equity Tier 1 capital ratio
14.40
%
12.27
%
14.23
%
11.96
%
14.15
%
11.92
%
Tier 1 risk-based capital ratio
14.40
%
12.27
%
14.23
%
11.96
%
14.15
%
11.93
%
Total risk-based capital ratio
15.21
%
13.08
%
15.01
%
12.74
%
14.87
%
12.65
%
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The Company’s tier 1 leverage ratio was 9.29% at the end of the first quarter, an increase of 10 basis points from December 31, 2024 and 28 basis points above its level one year earlier. The increase in the Tier 1 leverage ratio in comparison to December 31, 2024 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increasing 2.0%, primarily as a result of net earnings retention, while average assets, excluding intangibles and the market value adjustment on available-for-sale investment securities, increased a lesser 0.9%, primarily due to an increase in cash equivalent balances driven by net deposit inflows. The Tier 1 leverage ratio also increased compared to the prior year’s first quarter as shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increased 7.4% as the impact of net earnings retention outweighed share repurchases, while average assets, excluding intangibles and the market value adjustment, increased a lesser 4.1% primarily due to organic loan growth, investment purchases and an increase in cash equivalent balances driven by net funding inflows.
The shareholders’ equity-to-assets ratio was 10.94% at the end of the first quarter of 2025 compared to 10.76% at December 31, 2024 and 10.45% at March 31, 2024. The tangible equity-to-tangible assets ratio, a non-GAAP measure, of 6.15% increased 0.32 percentage points from December 31, 2024 and increased 0.83 percentage points versus March 31, 2024 (see Table 14 for Reconciliation of Quarterly GAAP to Non-GAAP Measures). The increase in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from one year prior was driven by a $180.4 million, or 22.6%, increase in tangible equity, a non-GAAP measure, as the decrease in accumulated other comprehensive loss related to the investment securities portfolio and net earnings retention outweighed the impact of share repurchases between the periods, while tangible assets, a non-GAAP measure, increased $908.9 million, or 6.1%, due primarily to the interest-earning asset growth described above. The increase in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from December 31, 2024 was driven by a $72.4 million, or 8.0%, increase in tangible equity, a non-GAAP measure, due mainly to a decrease in accumulated other comprehensive loss related to the investment securities portfolio and net earnings retention, while tangible assets, a non-GAAP measure, increased $379.4 million, or 2.4%, primarily due to an increase in cash equivalent balances driven by net deposit inflows.
Liquidity
Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss. The Company maintains appropriate liquidity levels in both normal operating conditions as well as stressed environments. The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective. The Bank has appointed the Asset Liability Committee (“ALCO”) to manage liquidity risk using policy guidelines and limits on indicators of potential liquidity risk. The indicators are monitored using a scorecard with three risk level limits. These risk indicators measure core liquidity and funding needs, capital at risk, and change in available funding sources. The risk indicators are monitored using such metrics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.
Given the uncertain nature of the Company’s customers’ demands, as well as the Company’s desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized when needed. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as borrowings from the FHLB and the FRB and credit lines from correspondent banks. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market. The primary sources of funds are deposits, which totaled $13.89 billion at March 31, 2025. The primary sources of non-deposit funds are customer repurchase agreements and FHLB and FRB overnight advances and term borrowings. At March 31, 2025, there were $266.6 million of customer repurchase agreements, no overnight borrowings, and $586.9 million of FHLB term borrowings outstanding.
The Company’s primary sources of available liquidity include unrestricted cash and cash equivalents, borrowing capacity at the FHLB and FRB, as well as net unpledged investment securities that could be sold, subject to market conditions, or used to collateralize additional funding. Table 13 below details the available sources of liquidity at March 31, 2025. In addition, there was $75.0 million available in unsecured lines of credit with correspondent banks at March 31, 2025. The Company’s sources of immediately available liquidity of $5.94 billion as of March 31, 2025 represent approximately 254% of the Company’s estimated uninsured deposits (deposits in excess of FDIC limits), net of collateralized and intercompany deposits (“net estimated uninsured deposits”), estimated to be approximately $2.34 billion.
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Table 13: Sources of Liquidity
March 31,
December 31,
March 31,
(000’s omitted)
2025
2024
2024
Unrestricted cash and cash equivalents
$
512,911
$
191,894
$
338,381
FHLB borrowing capacity
1,336,752
1,185,087
1,553,080
FRB borrowing capacity
2,689,201
2,670,278
1,135,097
Net unpledged investment securities
1,398,682
1,726,680
1,577,994
Total sources of liquidity
$
5,937,546
$
5,773,939
$
4,604,552
Net estimated uninsured deposits
$
2,339,458
$
2,347,825
$
2,123,794
Total sources of liquidity/net estimated uninsured deposits
254
%
246
%
217
%
To measure intermediate risk over the next twelve months, the Company reviews a sources and uses projection. As of March 31, 2025, there is sufficient liquidity available during the next year to cover projected cash outflows. In addition, stress tests on the cash flows are performed for various scenarios ranging from high probability events with a low impact on the liquidity position to low probability events with a high impact on the liquidity position. The results of the stress tests as of March 31, 2025 indicate the Company has sufficient sources of liquidity for the next year in all simulated stressed scenarios.
To measure longer-term liquidity, a baseline projection of growth in interest-earning assets and interest-bearing liabilities for five years is made to reflect how liquidity levels could change over time. This five-year measure reflects ample liquidity for loan and other asset growth over the next five years.
The possibility of a funding crisis exists at all financial institutions. A funding crisis would most likely result from a shock to the financial system which disrupts orderly short-term funding operations or from a significant tightening of monetary policy that limits the national money supply. Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis. Triggers within the plan and liquidity risk monitor are not by themselves definitive indicators of insufficient liquidity, but rather a mechanism for management to monitor conditions and possibly provide advance warning which could avert or reduce the impact of a crisis. Liquidity triggers are set based on a variety of factors, including Company history, trends, and current operating performance, industry observations, and, as warranted, changes in internal and external economic factors. Indicators include: core liquidity and funding needs such as the core basic surplus, unencumbered securities to average assets, and free FHLB and FRB loan collateral to average assets; heightened funding needs indicators such as average loans to average deposits, average governmental and nongovernmental deposits to total funding, and average borrowings to total funding; capital at risk indicators including regulatory ratios; asset quality indicators; and decrease in funds availability indicators which are a combination of internal and external factors such as increased restrictions on borrowing or downturns in the credit market. The Company has established three risk levels for these liquidity triggers that inform the response based on the severity of the circumstances. Responses vary from an assessment of possible funding deficiencies with no impact on normal business operations to immediate action required due to impending funding problems. For more information regarding the risk factor associated with the possibility of a funding crisis, refer to the discussion under the heading “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024 as filed with the SEC on February 28, 2025.
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Forward-Looking Statements
This report contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning. These statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control). Factors that could cause actual results to differ from those discussed in the forward-looking statements include: (1) adverse developments in the banking industry related to bank failures and the potential impact of such developments on customer confidence and regulatory responses to these developments; (2) current and future economic and market conditions, including the effects of changes in housing or vehicle prices, higher unemployment rates, disruptions in the commercial real estate market, labor shortages, supply chain disruption, inability to obtain raw materials and supplies, U.S. fiscal debt, budget and tax matters, geopolitical matters and conflicts, the effects of announced or future tariff increases, changes in global trade policies, and any changes in global economic growth; (3) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal and state statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System; (4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin including the possibility of a sudden withdrawal of the Company’s deposits due to rapid spread of information or disinformation regarding the Company’s well-being; (5) future provisions for credit losses on loans and debt securities; (6) changes in nonperforming assets; (7) the effect of a fall in stock market or bond prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; (8) risks related to credit quality; (9) inflation, interest rate, liquidity, market and monetary fluctuations; (10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (11) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (12) changes in consumer spending, borrowing and savings habits; (13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts; (14) the ability of the Company to maintain the security, including cybersecurity, of its financial, accounting, technology, data processing and other operating systems, facilities and data, including customer data; (15) effectiveness of the Company’s risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, the Company’s ability to manage its credit or interest rate risk, the sufficiency of its allowance for credit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; (16) failure of third parties to provide various services that are important to the Company’s operations; (17) any acquisitions or mergers that might be considered or consummated by the Company and the costs and factors associated therewith, including differences in the actual financial results of the acquisition or merger compared to expectations and the realization of anticipated cost savings and revenue enhancements; (18) the ability to maintain and increase market share and control expenses; (19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities, capital requirements and other aspects of the financial services industry; (20) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; (21) the outcome of pending or future litigation and government proceedings; (22) the effect of opening new branches to expand the Company’s geographic footprint, including the cost associated with opening and operating the branches and the uncertainty surrounding their success including the ability to meet expectations for future deposit and loan levels and commensurate revenues; (23) the effects of natural disasters could create economic and financial disruption; (24) the effects from changes in governmental leadership which expose the Company and its customers to a variety of political, economic, and regulatory risks, including the risk of changes in laws (including labor, trade, tax and other laws) and the potential for disruption in governmental agencies, services provided by the government, and funding of government sponsored projects; (25) other risk factors outlined in the Company’s filings with the SEC from time to time; and (26) the success of the Company at managing the risks of the foregoing.
The foregoing list of important factors is not all-inclusive. For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to the discussion under the heading “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024 as filed with the SEC on February 28, 2025. Any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
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Reconciliation of GAAP to Non-GAAP Measures
Table 14: GAAP to Non-GAAP Reconciliations
Three Months Ended
March 31,
(000’s omitted, except per share data and percentages)
2025
2024
Operating pre-tax, pre-provision net revenue (non-GAAP)
Net income (GAAP)
$
49,614
$
40,872
Income taxes
14,654
12,171
Income before income taxes
64,268
53,043
Provision for credit losses
6,690
6,148
Pre-tax, pre-provision net revenue (non-GAAP)
70,958
59,191
Acquisition expenses
1
35
Litigation accrual
(50)
119
Unrealized gain on equity securities
(245)
(16)
Amortization of intangible assets
3,482
3,576
Operating pre-tax, pre-provision net revenue (non-GAAP)
$
74,146
$
62,905
Operating pre-tax, pre-provision net revenue per share (non-GAAP)
Diluted earnings per share (GAAP)
$
0.93
$
0.76
Income taxes
0.28
0.23
Income before income taxes
1.21
0.99
Provision for credit losses
0.12
0.12
Pre-tax, pre-provision net revenue per share (non-GAAP)
1.33
1.11
Acquisition expenses
0.00
0.00
Litigation accrual
0.00
0.00
Unrealized gain on equity securities
0.00
0.00
Amortization of intangible assets
0.07
0.07
Operating pre-tax, pre-provision net revenue per share (non-GAAP)
$
1.40
$
1.18
Operating net income (non-GAAP)
Net income (GAAP)
$
49,614
$
40,872
Acquisition expenses
1
35
Tax effect of acquisition expenses
0
(8)
Subtotal (non-GAAP)
49,615
40,899
Litigation accrual
(50)
119
Tax effect of litigation accrual
12
(26)
Subtotal (non-GAAP)
49,577
40,992
Unrealized gain on equity securities
(245)
(16)
Tax effect of unrealized gain on equity securities
57
4
Subtotal (non-GAAP)
49,389
40,980
Amortization of intangible assets
3,482
3,576
Tax effect of amortization of intangible assets
(804)
(787)
Operating net income (non-GAAP)
$
52,067
$
43,769
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Table of Contents
Three Months Ended
March 31,
(000’s omitted, except per share data and percentages)
2025
2024
Operating diluted earnings per share (non-GAAP)
Diluted earnings per share (GAAP)
$
0.93
$
0.76
Acquisition expenses
0.00
0.00
Tax effect of acquisition expenses
0.00
0.00
Subtotal (non-GAAP)
0.93
0.76
Litigation accrual
0.00
0.00
Tax effect of litigation accrual
0.00
0.00
Subtotal (non-GAAP)
0.93
0.76
Unrealized gain on equity securities
0.00
0.00
Tax effect of unrealized gain on equity securities
0.00
0.00
Subtotal (non-GAAP)
0.93
0.76
Amortization of intangible assets
0.07
0.07
Tax effect of amortization of intangible assets
(0.02)
(0.01)
Operating diluted earnings per share (non-GAAP)
$
0.98
$
0.82
Return on assets
Net income (GAAP)
$
49,614
$
40,872
Average total assets
16,439,357
15,796,867
Return on assets (GAAP)
1.22
%
1.04
%
Operating return on assets (non-GAAP)
Operating net income (non-GAAP)
$
52,067
$
43,769
Average total assets
16,439,357
15,796,867
Operating return on assets (non-GAAP)
1.28
%
1.11
%
Return on equity
Net income (GAAP)
$
49,614
$
40,872
Average total equity
1,783,646
1,681,211
Return on equity (GAAP)
11.28
%
9.78
%
Operating return on equity (non-GAAP)
Operating net income (non-GAAP)
$
52,067
$
43,769
Average total equity
1,783,646
1,681,211
Operating return on equity (non-GAAP)
11.84
%
10.47
%
Net interest margin
Net interest income
$
120,212
$
106,990
Total average interest-earning assets
15,165,301
14,578,643
Net interest margin
3.21
%
2.95
%
Net interest margin (FTE) (non-GAAP)
Net interest income
$
120,212
$
106,990
Fully tax-equivalent adjustment (non-GAAP)
894
1,014
Fully tax-equivalent net interest income (non-GAAP)
121,106
108,004
Total average interest-earning assets
15,165,301
14,578,643
Net interest margin (FTE) (non-GAAP)
3.24
%
2.98
%
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Table of Contents
Three Months Ended
March 31,
(000’s omitted, except per share data and percentages)
2025
2024
Operating noninterest revenues (non-GAAP)
Noninterest revenues (GAAP)
$
76,036
$
70,285
Unrealized gain on equity securities
(245)
(16)
Total operating noninterest revenues (non-GAAP)
$
75,791
$
70,269
Operating noninterest expenses (non-GAAP)
Noninterest expenses (GAAP)
$
125,290
$
118,084
Acquisition expenses
(1)
(35)
Litigation accrual
50
(119)
Amortization of intangible assets
(3,482)
(3,576)
Total operating noninterest expenses (non-GAAP)
$
121,857
$
114,354
Operating revenues (non-GAAP)
Net interest income (GAAP)
$
120,212
$
106,990
Noninterest revenues (GAAP)
76,036
70,285
Total revenues (GAAP)
196,248
177,275
Unrealized gain on equity securities
(245)
(16)
Total operating revenues (non-GAAP)
$
196,003
$
177,259
Noninterest revenues/total revenues
Total noninterest revenues (GAAP) – numerator
$
76,036
$
70,285
Total revenues (GAAP) – denominator
196,248
177,275
Noninterest revenues/total revenues (GAAP)
38.7
%
39.6
%
Operating noninterest revenues/operating revenues (FTE) (non-GAAP)
Total operating noninterest revenues (non-GAAP) – numerator
$
75,791
$
70,269
Total operating revenues (non-GAAP)
196,003
177,259
Fully tax-equivalent adjustment (non-GAAP)
894
1,014
Total operating revenues (FTE) (non-GAAP) – denominator
196,897
178,273
Operating noninterest revenues/operating revenues (FTE) (non-GAAP)
38.5
%
39.4
%
Efficiency ratio (GAAP)
Total noninterest expenses (GAAP) – numerator
$
125,290
$
118,084
Total revenues (GAAP) – denominator
196,248
177,275
Efficiency ratio (GAAP)
63.8
%
66.6
%
Operating efficiency ratio (non-GAAP)
Total operating noninterest expenses (non-GAAP) – numerator
$
121,857
$
114,354
Total operating revenues (FTE) (non-GAAP) – denominator
196,897
178,273
Operating efficiency ratio (non-GAAP)
61.9
%
64.1
%
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Table of Contents
Three Months Ended
March 31,
(000’s omitted, except per share data and percentages)
2025
2024
Total tangible assets (non-GAAP)
Total assets (GAAP)
$
16,764,296
$
15,858,670
Goodwill and intangible assets, net
(900,332)
(904,439)
Deferred taxes on goodwill and intangible assets, net
44,644
45,433
Total tangible assets (non-GAAP)
$
15,908,608
$
14,999,664
Total tangible common equity (non-GAAP)
Shareholders’ equity (GAAP)
$
1,834,075
$
1,656,955
Goodwill and intangible assets, net
(900,332)
(904,439)
Deferred taxes on goodwill and intangible assets, net
44,644
45,433
Total tangible common equity (non-GAAP)
$
978,387
$
797,949
Shareholders’ equity-to-assets ratio at quarter end
Total shareholders’ equity (GAAP) – numerator
$
1,834,075
$
1,656,955
Total assets (GAAP) – denominator
16,764,296
15,858,670
Shareholders’ equity-to-assets ratio at quarter end (GAAP)
10.94
%
10.45
%
Tangible equity-to-tangible assets ratio at quarter end (non-GAAP)
Total tangible common equity (non-GAAP) – numerator
$
978,387
$
797,949
Total tangible assets (non-GAAP) – denominator
15,908,608
14,999,664
Tangible equity-to-tangible assets ratio at quarter end (non-GAAP)
6.15
%
5.32
%
Return on tangible equity (non-GAAP)
Net income (GAAP)
$
49,614
$
40,872
Average shareholders’ equity
1,783,646
1,681,211
Average goodwill and intangible assets, net
(900,530)
(902,215)
Average deferred taxes on goodwill and intangible assets, net
44,631
45,315
Average tangible common equity (non-GAAP)
927,747
824,311
Return on tangible equity (non-GAAP)
21.69
%
19.94
%
Operating return on tangible equity (non-GAAP)
Operating net income (non-GAAP)
$
52,067
$
43,769
Average tangible common equity (non-GAAP)
927,747
824,311
Operating return on tangible equity (non-GAAP)
22.76
%
21.36
%
Book value (GAAP)
Total shareholders’ equity (GAAP) – numerator
$
1,834,075
$
1,656,955
Period end common shares outstanding – denominator
52,836
52,765
Book value (GAAP)
$
34.71
$
31.40
Tangible book value (non-GAAP)
Total tangible common equity (non-GAAP) – numerator
$
978,387
$
797,949
Period end common shares outstanding – denominator
52,836
52,765
Tangible book value (non-GAAP)
$
18.52
$
15.12
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.