Community Bank System Q1 2025 Earnings Call Transcript

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Operator

Good day, and welcome to the Community Financial System Inc. First Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

Operator

I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Thank you, Segar. Good morning, everyone, and thank you for joining our first quarter earnings call. I would like to start this call by acknowledging Joe Suterres' upcoming retirement in July. Joe joined us through the acquisition of Wilbur and cumulatively has been with our company for thirty years. That is quite the accomplishment and we're very grateful for his contributions.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Joe's integrity and humility have been a pillar for us over that period. I also want to thank him personally for being a great partner for me in the past four years. I'm also very happy that our company's performance allows people to have rewarding and productive careers and retire earlier than most. Joe, congratulations. I would also like to welcome Mariah Lohs as our new Chief Financial Officer.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Mariah joins us with a very dynamic background in finance and a very strong mind for driving business performance. Equally as importantly, she fully embodies our values of humility, integrity, teamwork and excellence. Mariah, welcome. Now on to business. We had a productive quarter.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Results were consistent with last quarter, even with a shorter calendar, seasonal slowdowns, lower asset values and creeping uncertainty. Operating return on assets was 1.28% and operating PPNR per share was up 18.6% on a year over year basis. Looking at each one of the business units in more depth. Our banking business is benefiting from continued repricing of assets, while funding costs are also moving lower leading to margin expansion. Deposits benefited from seasonal municipal flows, while loans were essentially flat as growth in commercial and mortgage was more than offset by weakness in auto lending, which was mostly seasonal and pricing driven.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

We continue to focus on appropriate risk reward in terms of both credit quality and rate and saw some increased aggressiveness by competitors on both fronts. With that said, pipelines in commercial and mortgage, while a bit lower than last year, are still solid and we believe that mid single digit growth for those portfolios is still on track for this year. It may just be at the lower end of the range depending on overall economic activity. Indirect auto lending remains more of a wildcard given aggressive competition and impact of tariffs. Our Employee Benefit Services business also had a solid quarter and business momentum is strong.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Current asset values will likely have an impact in 2025, but we're also working hard on the underlying unit growth. Our insurance services business had an excellent quarter with expenses flat and revenues up meaningfully leading to sizable margin expansion. Some of the revenue growth was due to timing of contingency payments, but we still remain on track to deliver meaningful operating leverage through the rest of the year as well. In fact, insurance was the main driver of strong performance this quarter for the overall company. Our Wealth Management Services business results in line with last quarter and up meaningfully year over year.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Similarly to our Employee Benefits business, we may experience revenue headwinds the rest of the year tied to asset values. In summary, I feel good about the ability of our diversified company to grow revenues regardless of the economic and market generations. If you look at last year for example, our market sensitive businesses, employee benefit services and wealth management services drove the majority of the overall improvement for the company. This year so far, it's looking like the banking insurance will take the baton. That is how our company is designed and it is times like these when we shine.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I also feel great about our continued ability to attract talent and we had one of our best quarters in talent acquisition across all units, banking, benefits, insurance and wealth. I will also note that the current economic uncertainty is as high as it's been in many years and is the time to be extra prudent and make sure we're truly getting paid for taking on risk while strengthening reserves. Our business is diversified and highly profitable. Our balance sheet is excellent and we're ready to capitalize on the right opportunities. I will now pass it on to Moriah to deliver the detailed financial highlights.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Moriah?

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

Thank you, Dmitar, and good morning everyone. As Dmitar noted, the company's first quarter performance was solid. GAAP earnings per share of $0.93 were up zero one seven dollars or 22% over the first quarter of the prior year and down $01 or 1% over linked fourth quarter results. Operating earnings per share and operating pre tax, pre provision net revenue per share were also up significantly year over year, while remaining relatively consistent with last quarter. The company recorded operating earnings per share of $0.98 in the first quarter as compared to $0.82 1 year prior and $1 in the linked fourth quarter.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

First quarter operating PPNR per share of $1.4 was up $0.22 or 18.6% from one year prior and was consistent on a linked quarter basis. Strong revenue growth and improvements in core operating performance of all four businesses underpin these year over year improvements. The company recorded total operating revenues of $196,000,000 in the first quarter. This was up $18,700,000 or 10.6% from one year prior and was consistent with the record result established in the linked fourth quarter. This quarter established new quarterly highs for net interest income and insurance services revenues as Dmitar also highlighted.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

The company's net interest income was $120,200,000 in the first quarter. This represents a $200,000 increase over the linked fourth quarter result and a $13,200,000 or 12% improvement over the first quarter of twenty twenty four and marks the fourth consecutive quarter of net interest income expansion. Lower funding costs helped drive increases in both net interest income and net interest margin in the quarter. During the quarter, the company's cost of deposits was 1.17, a decrease of six basis points from the prior two quarters and drove a decrease of five basis points in the total cost of funds from 1.38% in the linked fourth quarter to 1.33% in the first quarter. The company's fully tax equivalent net interest margin increased four basis points from 3.2% in the linked fourth quarter to 3.24% in the first quarter.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

The company has increased its net interest income for eighteen consecutive years and the outlook remains positive for continued net interest income expansion in 2025. Operating non interest revenues were up in all four businesses compared to the prior year's first quarter and represented 38.7% of total operating revenues. Banking related operating non interest revenues were up $900,000 or 4.7% over the same quarter of the prior year driven by increases in mortgage banking revenues. Employee benefit services revenues were up $900,000 or 2.9% over the prior year's fourth quarter reflective of an increase in the total participants under administration and growth in asset based fees. Insurance services revenues were up $3,100,000 or 27.8% over the prior year's first quarter driven by contingent commissions and recent acquisitions, while wealth management services were up $700,000 or 7.1% reflective of more favorable market conditions and growth in investment advisory accounts.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

On a linked quarter basis, operating non interest revenues were down $300,000 or 0.4% due in part to two fewer days in the current quarter. The company recorded a $6,700,000 provision for credit losses during the first quarter reflective of an increase for a specific reserve on one non owner occupied CRE loan placed on non accrual during the fourth quarter of twenty twenty three. This compares to $6,100,000 in the prior year's first quarter and $6,200,000 in the linked fourth quarter. During the first quarter, the company recorded $125,300,000 in total non interest expenses. This compares to $118,100,000 of total non interest expenses in the prior year's first quarter.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

The $7,200,000 or 6.1% increase between the periods was primarily driven by increases in salaries and employee benefits including the impact of annual merit based salary increases, data processing and communication and occupancy and equipment expenses. The increase also included approximately $900,000 associated with the bank's de novo branch expansions. Additional de novo related expenses are expected to be incurred in the remaining three quarters of twenty twenty five. The effective tax rate for the first quarter of twenty twenty five was 22.8%, down slightly from 22.9% in the first quarter of twenty twenty four. Ending loans decreased $11,200,000 or 0.1% during the first quarter driven by a net decrease in the consumer indirect lending portfolio, which was partially offset by growth in the business lending and consumer mortgage portfolios.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

Although this result ends the company's streak of fourteen consecutive quarters of loan growth, the company continues to invest in its organic loan growth capabilities and expects continued expansion into the under tapped markets within our Northeast footprint. Ending loans were up $537,600,000 or 5.4% from one year prior, primarily due to growth in the business lending and consumer mortgage portfolios. The company's ending total deposits increased $453,300,000 or 3.4% during the first quarter and $540,000,000 or 4% from one year prior driven by an increase in municipal deposits. Public funds deposits increased to $2,341,000,000 at the end of the first quarter, up $408,500,000 from one year prior and up $354,800,000 from the end of the linked fourth quarter. Non interest bearing and lower rate checking and savings accounts continue to represent almost two thirds of the total deposits reflective of the core characteristics of the company's deposit base.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

The company did not hold any brokered or wholesale deposits on its balance sheet during the quarter. The company's liquidity position remains strong. Readily available sources of liquidity including unrestricted cash and cash equivalents, unpledged investment securities, funding availability at the Federal Reserve Bank's discount window and unused borrowing capacity at the Federal Home Loan Bank of New York totaled $5,900,000,000 at the end of the first quarter. These sources of immediately available liquidity represent over 250% of the company's estimated uninsured deposits net of collateralized and intercompany deposits. The company's loan to deposit ratio at the end of the first quarter was 75% providing future opportunities to migrate lower yielding investment securities into higher yielding loans.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

All the company's and the bank's regulatory capital ratios continue to significantly exceed well capitalized standards. More specifically, at the end of the first quarter, the company's Tier one leverage ratio was 9.29%, which substantially exceeded the regulatory well capitalized standard of 5%. Non performing loans totaled $75,000,000 or 72 basis points of total loans outstanding. This represents a $1,600,000 or two basis point increase from the end of the linked fourth quarter. Comparatively, non performing loans were $49,500,000 or 50 basis points of total loans outstanding one year prior.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

Loans thirty to eighty nine days delinquent were also up on a linked quarter basis from $55,900,000 or 54 basis points of total loans at the end of the fourth quarter to $59,200,000 or 57 basis points of total loans at the end of the first quarter. The company recorded net charge offs of $3,200,000 or 13 basis points of average loans annualized during the first quarter. This is up slightly from $2,800,000 or 12 basis points in the same quarter of the prior year. The company's allowance for credit losses was $82,800,000 or 79 basis points of total loans outstanding at the end of the first quarter, up $3,700,000 during the quarter and up $12,700,000 from one year prior. The allowance for credit losses at the end of the first quarter represented over seven times the company's trailing twelve month net charge offs.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

Looking forward, we believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base and historically good asset quality provide a solid foundation for continued earnings growth in the remaining three quarters of twenty twenty five. That concludes my prepared earnings comments. I would like to take the opportunity now to introduce myself and thank Joe for his guidance through the transition period. Joe, you are exceptional at what you do and you will be missed. I would also like to thank Dimitar and the entire management team for their support over the last few weeks.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

It's an honor to join such a talented team and I'm genuinely excited to help grow this portfolio. It's been a whirlwind thirty days and while I still have a lot to learn, I can tell you the future of this company is very bright. And with that, Dimitar, Joe and I will now take questions. Saigar, I will now hand it back to you to open the line.

Operator

Thank you. We will now begin the question and answer session. Please press then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Frank Schiraldi from Piper Sandler.

Operator

Please go ahead.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Good morning and congrats on the new position, Moriah.

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

Thank you.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

I

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

wanted to start Dimitore, you mentioned I think you mentioned pipelines a little bit lighter maybe from the year ago period. I wonder if you could drill down into that a little bit in terms of how significant the drop off is on the commercial side in terms of pipelines? And then also, if you wouldn't mind, if you could provide any detail around blended new origination yields coming on currently?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Yes. Thank you, Frank. I would kind of probably put it in a couple of buckets. On the commercial side, pipelines are not that dramatically different from last year. It might be a couple of percentage points lower.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

The difference is we're probably seeing a little bit more on the payoffs than last year. So I think that's going to have some impact in the aggregate terms. And I think we also have a little bit more uncertainty as to when some of the pipeline gets pulled through, just given everything that's happening with our clients and in the macro environment. On the residential side, pipelines are probably about 10% lower than last year, still pretty good. We're just getting to the busy season.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So we're really going to have a much better sense of where things are here and towards May and June. So again, that's also been a little bit impacted I think predominantly by availability in our markets as opposed to demand. Demand is there, just availability of housing units is not quite where it needs to be. So that's kind of what we're seeing. And I think we touched on the indirect side in prepared remarks.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

We still feel pretty good about our ability to grow that portfolio. But as we've said before, we don't change our credit box in that world. So for us, some years could be a lot more growth, some years could be a lot less growth, some years with Mighty even shrink. So we'll see kind of we'll take what they give us in our box. As it relates to loan originations in the first quarter, they were right around 7%, a little bit lower.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think we're going to continue to see some of that pressure through the year. So that's unexpected given what's happened with rates and competitive dynamics.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Great. Okay. I appreciate the color. And then as my follow-up, just wondered if you could provide any more color update on de novo expansion, timing for branches to come online? And if you could maybe just further quantify, Moriah, how that would impact or could impact the expense base through the year here?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Yes. I'll take that Frank. So we last year we opened the first one, which was in Syracuse. We just opened the second one, which was Buffalo. The next one is going to be in Syracuse again and then we start in Albany.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

And then we kind of go around the footprint, including PA and all the other places, Rochester. So that's on track. We continue to expect that we're going to be opening virtually all of them maybe say for one or two by the end of the year. As we have discussed, we're also going to be consolidating a very similar number of locations through the year. And the impact of all of those initiatives will come out kind of on a clean run rate basis in Q4.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

We've

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

talked

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

about the cost before. You're probably going to expect to see a little bit more marketing and kind of startup costs, you want to put it that way, in Q3 in particular, to the tune of 3,000,000 to $4,000,000 in that quarter. Outside of that, nothing's really changed in terms of our expectations or in terms of how we're meeting our milestones.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Okay. All

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

right. Appreciate the color. Thanks.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Sure. Welcome.

Operator

Thank you. Your next question comes from Stephen Moss from Raymond James. Please go ahead.

Steve Moss
Steve Moss
Director at Raymond James Financial

Good morning, Devar and Mariah.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Good morning, Steve.

Steve Moss
Steve Moss
Director at Raymond James Financial

Good Maybe just

Steve Moss
Steve Moss
Director at Raymond James Financial

starting or following up on loans here, just curious, Dmitar, like how much tighter is loan pricing these days for auto and just kind of how you're thinking about that market going forward in terms of balances and stuff?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Sure. So on the auto side, where pricing is today is pretty similar to the portfolio rates that we have. So we're kind of churning the portfolio at similar rates. You're not going to see a tremendous amount of pickup there. It probably shrunk by 50 basis points plus in this quarter.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

We've seen a lot of competitors that were a little bit more quiet over the past couple of years kind of get back and even go deeper on credit as well. Again, for us, we don't really do that. So it's really just a matter of our credit box and some changes on pricing. So we've adjusted our pricing there. We're clearly seeing some more momentum.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Some of it is seasonal as well, especially in the western part of our footprint. That's where we've seen most of the challenges in that portfolio. I think more broadly on pricing for the aggregates business, I will tell you that we have a lot of competitors that were constricted over the past couple of years, large and small, and they kind of a little bit woke up, especially post the election and decided that it's time to grow and make up ground. So we have seen some frankly astounding rates, on the commercial side starting with a five. That's not the kind of business that we are going to do today.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So we're probably going to continue to see some pressure on that side as well.

Steve Moss
Steve Moss
Director at Raymond James Financial

Okay, great. Appreciate that color there. And then in terms of the non performing loan here that you guys disclosed last quarter and put the specific reserve on this quarter, Just kind of curious about the timing around resolution kind of where that how that may play out?

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

Yes. Hi, Steve. It's Joe. So we put the credit on non accrual back in the fourth quarter We are basically I think it's today, we're looking at a potential foreclosure sale on the property.

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

So we got an updated appraisal right at the end of the first quarter and hence the additional reserves of about an additional 3,800,000.0 or $3,900,000 over and above what the reserves were prior. I will just note that the that we apply a very conservative valuation in terms of we not only do we take the appraised value, but we apply additional discounts to that just to be conservative. And so ultimately, we hope that the that can resolve the ultimate sale of the properties at a little better than, I'll call it, than the current reserve amounts. But with that said, given that the property is expected to be foreclosed upon in the second quarter, we expect to take the majority of the charge off in the quarter and then hopefully recover that over time through the sale of the properties. All in, there's about 18 properties in the business park, and so we're still trying to collectively with the other participants figure out what the strategy is for ultimately realizing the value of those properties.

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

So, I would expect that that, call it, resolution or sale of those properties will take will certainly take some time.

Steve Moss
Steve Moss
Director at Raymond James Financial

Okay, great. Appreciate that color there. And then in terms of the Employee Benefits Services business here, Dimpar, I hear you on the near term headwinds, but markets have kind of come back a bit. Just kind of curious if you could kind of handicap some of the near term revenue puts and takes?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Yes. It's a little bit hard to be honest with you, Steve. I think where we're running right now, it's probably lower single digits to mid single digits in that business, probably closer to the lower. We do have really good momentum in terms of plant acquisitions and units that are coming on to the platform. Frankly, the plans in conversion this year are higher as they've ever been.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So, we know we're going to get a decent amount of unit growth. Again, it's very hard to predict. And it really depends on which day of the month you price these assets as we've seen a lot of volatility. So for all we know, might be up 10% next week and we might be down 10%. So, it's really hard to pinpoint where things are going to settle.

Steve Moss
Steve Moss
Director at Raymond James Financial

Okay, great. And I guess just one last one for me here. On the municipal deposit side where you had deposit growth there this quarter, you highlighted an expansion there. Just kind of curious how you're looking to grow that business and kind of how rate sensitive we should think about it being in the future?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

It's a business for us that's now pushing about $2,000,000,000 in outstandings on the deposit side. It is a business that we've had a very long history in. These are not funds that really are hot money, if you will. These are municipalities and government entities that have multiple, multiple accounts with us. So it's not just the money market or CD that they're looking to just park money in.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

We've just done a better job over the past couple of years of being even more focused on the business line and making the calls and having the presence in the markets. So to us, if you look at the blended rate on that portfolio, it's in the low 2s today. So it's a very productive funding source. And that's kind of our business. It's not it's just natural seasonal flows and just on the ground, blocking and tackling full relationship as opposed to bidding on some large county CDs that we don't do any other business with.

Steve Moss
Steve Moss
Director at Raymond James Financial

Got it. Appreciate all the color here today. Thank you very much.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

You're welcome.

Operator

Thank you. Your next question comes from Matthew Breese from Stephens Inc. Please go ahead.

Matthew Breese
Managing Director at Stephens Inc

Hey, good morning.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Hey, Matt.

Matthew Breese
Managing Director at Stephens Inc

Just wanted to get some sense for NII over the course of the year. You had mentioned payoffs and competition. Maybe the first one is just what are expected cash flows over the next nine to twelve months from the securities and loan portfolio? And what are the roll off yields there?

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

Matt, this is Joe. I'll take that one. So with respect to the loan portfolio, what I can tell you is that on a trailing twelve month basis, so kind of looking backwards, we had, call it, between 1,500,000,000.0 and $1,800,000,000 of roll off. Obviously, that's dependent on prepayments and prepayment speeds and the like. And I think that's a fair expectation kind of looking forward.

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

And the current book yield is about it's just north of $5.5 and the new volume rate is around 7,000,000 So that's kind of how the back book is pricing. On the securities portfolio, we have pretty minimal runoff in for the remainder of 2025, so less than $100,000,000 which is coming off a little north of 2%, around 2%, call it. And so we're not going to see much opportunity there from a repricing standpoint, at least for the remainder of 2025. However, when we hit late twenty twenty six, '20 '20 '7, '20 '20 '8 and '29, we've got about $2,000,000,000 rolling off in kind of the 2% range. So from my perspective, it kind of builds a bridge to kind of work the loan yields for the balance of this year and into next year.

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

And then we start getting to some securities cash flows in 2026, '20 '20 '7, '20 '20 '9, which you can pick your redeployment rate there, Matt. But if it's coming off at two, I would expect that the redeployment, whether it's in loans or even re upping on some securities, will probably be a net higher book yield. So we'll try to maximize effectively the rollover this year on the loan book in terms of just improving the yield and then get to those securities cash flows in those periods.

Matthew Breese
Managing Director at Stephens Inc

Very helpful. So I mean, all that to say, it sounds like earning asset yields are going up into the rate for a while. Is it also safe to assume that it's going to be difficult to squeeze deposit costs much lower? Are there any opportunities there?

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

Yes. I think that's a fair sort of path, Matt. We might get a little bit better deposit pricing over time, but given where we're starting from, kind of at that 130 ish range, it's going to be hard to or it's going be more difficult for us than it will be for some other of our some peers to bring down the cost of funds too significantly. So I think we're going to get most of our net interest margin and net interest income left really on the asset side as that reprices over the remainder of 25,000,000 and into the next four years or so.

Matthew Breese
Managing Director at Stephens Inc

Got it.

Matthew Breese
Managing Director at Stephens Inc

Okay. And then Dmitry, just in terms of your comments on competitive conditions and uncertainty and things kind of slowing down from a pipeline perspective, does that change your if it continues, does that change your thinking around bank M and A at all? Might you reengage in places you might not otherwise with a forward pipeline?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think as an aggregate comment, Matt, we don't really change our strategies depending on the environment. So in other words, M and A is an important piece of what we do. So we're always looking for quality adds to our company. When I say quality, that is the first and foremost screening factor. Numbers are basically relevant if we're going to dilute the quality of our balance sheet or our business by a meaningful amount.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So, I think that's the first and foremost hurdle. I will say, it's also probably a little bit harder today to price somebody's assets, given that nobody knows what's going happen with their clients on the commercial side in particular. So maybe that's a small of a headwind. So we probably just need to factor in a little bit more cushion on that side. But really, there's a quality franchise, again, to us quality balance sheet, liquidity, low concentrations in markets we care about, always open for business.

Matthew Breese
Managing Director at Stephens Inc

Okay, understood. Just last one, expenses came in at such lower than I was thinking. Maybe some thoughts on the outlook for the remainder of 2025?

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

So I think, Matt do you want to take that, Moriah? Go ahead. I'm sorry. No, okay. Yes, I think with respect to the kind of the core, I'll call it, increase in operating expenses, it's kind of mid single digits for us.

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

We'd like it to be kind of in that 3% or 4% range on a normal run rate basis. We are continuing to invest in the franchise, which includes some of the marketing expenses around de novo, which probably puts us more in the kind of the mid single digit range going forward. But as we've kind of proven, I think, over the last couple of years, our OpEx is a little bit up over where it was traditionally, but it's also beginning to pay off pretty significantly on the revenue side of the business. And so I think we're going to continue to kind of incur operating expenses kind of in that mid single digit range or increases year over year. And the intent there is obviously to continue to grow the company across all lines of business.

Matthew Breese
Managing Director at Stephens Inc

Great. I'll leave it there. Thanks for taking my questions.

Joseph Sutaris
Joseph Sutaris
SVP & Head of Investor Relations at Community Bank System

You're welcome.

Operator

Thank you. Our next question comes from Chris O'Connell from KBW. Please go ahead.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Hey, good morning, Jim, Tara, Joe and Mariah.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Good morning.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

I was just hoping to start off in some of the fee businesses. In particular, I guess, we if the market stays where it is here, on the wealth side, I know there's a little bit of seasonality into Q2 typically, just how you see that progressing throughout the year? And then given the strong start to the insurance business, does that kind of change your outlook here for the revenue growth for 2025 there as well?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think, Chris, our last call, we spoke about mid single digit growth in the fee income businesses. I don't think we're changing that today. That is our expectation. Fully expect that all the businesses are going to grow this year over last year regardless of the market environment. It may just be a little bit different in the aggregate.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So to your point, insurance is off to a good start. That is not 27% growth is not going to be the rate for the year. That's going to moderate down. So but it's going to be probably higher than mid single digits. So that might pull kind of the aggregate up a little bit while some of the markets and some businesses may be a little bit closer to low single to lower middle mid digit rate.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So, we'll see where it shakes out. I think in the aggregate when you look at that $200,000,000 plus in revenues, we think that's growing still in the mid single digits for this year.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Okay. Got it. So despite the market conditions in the first quarter, you still think mid single digit aggregate for those businesses is kind of the right place?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Yes. Assuming where we stay today, I think we're going to get there.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Okay, great. That's helpful. And then on the margin, I thought the deposit cost control here this quarter was really strong and with the asset yields continuing to reprice up, any change in the overall NIM outlook of three to five basis points a quarter, give or take, absent further rate cuts?

Marya Burgio Wlos
Marya Burgio Wlos
EVP & CFO at Community Bank System

No, no. We see that anywhere from two to seven basis points, but you're in the right range. As we look at the portfolio and continue to just operate and take the health of the businesses, which are very strong. We believe that that will continue.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Okay, great.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Just want to circle back on the expense discussion. As far as the cadence throughout the year to get to the mid single digit, Is it more of that from the first quarter, which I think came in pretty solid flat to the fourth quarter that we'll see the balloon up with the de novo costs in 2Q, 3Q and then kind of end 4Q to 4Q closer to the mid single digits?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think that's about right, Chris. That's how I would think about it. You're going to have we're going to be above that rate most likely in the third quarter and kind of moderate back down in the fourth quarter.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Okay, great. And as far as we roll into next year, is the any additional kind of related de novo costs pretty much fully baked into 2025? Or is there a little bit that will trail into 2026 here?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think it will be negligible for 2026. I think we should exit twenty twenty four twenty twenty five, fourth quarter of '20 '20 '5 with a pretty decent run rate with a reconfigured branch network.

Christopher O'Connell
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Okay. Got it. That's all I had. Thank you.

Operator

Thank you. Our next question comes from Manuel Navas from D. A. Davidson. Please go ahead.

Manuel Navas
MD & Senior Research Analyst at D.A. Davidson

Hey, good morning. You're talking about the credit box, think more in the context of auto. Are you actively seeing loans not kind of meet your credit box? Are you just anticipating that that could be the case going forward? Just trying to think through what your customer base is seeing.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think Manuel, what we're seeing is just people being more aggressive on both rate and credit. So some of the things that we saw this quarter that kind of impacted some of our numbers were even assets that for us are criticized being refied away by larger and smaller competitors. So, people were in to take on a little bit more risk to try to make up for multiple years of not being present. That's okay with us. We've got maybe some other criticized assets we want to share as well.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So, that's kind of what I mean. Our credit box really hasn't changed. If we feel great about a particular credit, we're going to lean into it as much as we can. And if there's other things that don't fit our box, they don't fit our box, we don't need to stretch.

Manuel Navas
MD & Senior Research Analyst at D.A. Davidson

Okay. I appreciate that. Bigger picture, how much of the kind of this uncertainty that you're discussing could be tied to regional concerns on the CHIPS Act? Just there's been some pushback from the administration. Just wondering what is your perspective on that?

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

I think very little. We don't really believe that much of the Chip Act activity has really come to our markets yet. So I think very little. It's really more about people literally not knowing what their cost of goods is, right? Most of our clients, a lot of them import something of something.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

And they don't exactly know what it's going to cost. When you don't know what your goods cost, you kind of have trouble pricing your product on the other end. So people are working through inventories and doing the best they can, trying to plan ahead. It's hard to lock in pricing for those that import a lot of their goods. So I think there's some of that.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

On the building side, it's also not clear what some of those projects are truly going to cost. You're to start seeing some cost overruns. We're kind of starting to see some of that. We have clients that also rely on foreign labor. So they're seeing some impact off of that where folks that were temporarily able to work for them are not able to work anymore.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

So there's a whole bunch of undercurrents, which is why when we say uncertainty, the momentum pipeline is pretty good, the dialogue is pretty good. It's just we have to be a little bit extra cautious and our clients are a little bit extra cautious as it relates to major CapEx.

Manuel Navas
MD & Senior Research Analyst at D.A. Davidson

I appreciate the commentary. Thank you.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Thank

Operator

you. This concludes our question and answer session. I would now like to turn the conference back over to Dimitar Karaivanov for closing remarks.

Dimitar Karaivanov
Dimitar Karaivanov
President & CEO at Community Bank System

Thanks, Sagar, and thank you everybody for joining our call. And we look forward to speaking with you in July.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
    • Dimitar Karaivanov
      Dimitar Karaivanov
      President & CEO
    • Marya Burgio Wlos
      Marya Burgio Wlos
      EVP & CFO
    • Joseph Sutaris
      Joseph Sutaris
      SVP & Head of Investor Relations
Analysts
Earnings Conference Call
Community Bank System Q1 2025
00:00 / 00:00

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