Community Bank System Q4 2024 Earnings Report

Community Bank System EPS Results

• Actual EPS: $0.94
• Consensus EPS: $0.90
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $0.76

Community Bank System Revenue Results

• Actual Revenue: $196.30 million
• Expected Revenue: $190.95 million
• Beat/Miss: Beat by +$5.35 million
• YoY Revenue Growth: +10.80%

Community Bank System Announcement Details

• Quarter: Q4 2024
• Date: 1/21/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, January 21, 2025
• Conference Call Time: 11:00AM ET

Community Bank System (NYSE:CBU) operates as the bank holding company for Community Bank, N.A. that provides various banking and other financial services to retail, commercial, institutional, and municipal customers. It operates through three segments: Banking, Employee Benefit Services, and All Other. The company offers various deposits products, such as interest and noninterest -bearing checking, savings, and money market deposit accounts, as well as time deposits. It also provides loans, including consumer mortgages; general purpose commercial and industrial loans, and mortgages on commercial properties; paycheck protection program loans; installment loans that are originated through selected dealerships and are secured by automobiles, marine, and other recreational vehicles; personal installment loans and check credit lines of credit for consumers; and home equity products. In addition, the company offers broker-dealer and investment advisory; cash management, investment, and treasury services; asset management services; and employee benefit services, as well as operates as a full-service insurance agency that provides personal and commercial lines of insurance, and other risk management products and services. Further, it offers contribution plan administration, employee benefit trust, collective investment fund, retirement plan administration and benefit consulting, fund administration, transfer agency, actuarial and benefit consulting, and health and welfare consulting services; and act as an investor in residential and commercial real estate activities. Additionally, the company offers wealth management, retirement planning, higher educational planning, fiduciary, risk management, trust, and personal financial planning services; and investment alternatives, including stocks, bonds, mutual funds, and insurance and advisory products, as well as master recordkeeping services. Community Bank System, Inc. was founded in 1866 and is headquartered in DeWitt, New York.

Community Bank System Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, and welcome to the Community Financial System Inc. 4th Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

[Operator]

I would now like to turn the conference over to Dimitar Karayvanov, President and Chief Executive Officer. Please go ahead.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Thank you, Mike. Good morning, everybody, and thank you for joining our Q4 and full year 2024 earnings call. This was a very solid quarter for us with operating PPNR of $1.40 per share, which grew 8.5% compared to the prior quarter and 23.9% compared to last year's Q4. Those are excellent numbers. There is a lot to be pleased about such as margin expansion and excellent liquidity, strong fee performance, strong credit and well managed expenses.

[Dimitar Karaivanov, President & CEO at Community Bank System]

I will leave all the quarterly details to Joe and would like to really focus on our overall 2024 performance and 2025 outlook. As we look back upon 2024, I'm pleased with the performance of our company. In a year where the overall Carex Index is projected to have lower earnings to the tune of approximately 5%, we actually grew operating PPNR per share by 8.2% and operating earnings per share by 2.2%. The delta between the two is mostly due to our increase of ACL from 69 basis points of loans at the end of 2023 to 76 basis points of loans at 2024, which prepares us better for the future and also a negative reliance on the effective tax rate. The drivers of our outperformance are a great example of the power of our diversified company, and I will go into more details below.

[Dimitar Karaivanov, President & CEO at Community Bank System]

In the Banking and Corporate segment, 2024 operating PPNR grew by 5.6%. Net interest income grew for the 18th consecutive year and fee income grew by 11.8% as a number of initiatives we've been working on for the past couple of years are now delivering results. Loans grew by 7.5% or more than double the expected growth of both the banking industry and our local peers. In other words, we gained a lot of market share. Commercial lending was particularly strong with double digit growth, while mortgage and home equity both grew over 6%.

[Dimitar Karaivanov, President & CEO at Community Bank System]

The investments we've been making in people and processes continue to bear fruit. Overall lending growth was $728,000,000 and overall deposits grew by $514,000,000 or 4%, also an excellent result in a difficult environment. In the latter part of the year, we saw commercial and personal deposits resume their historical performance and that gives us hope for future periods. In 2024, the Federal Reserve ended its hiking cycle and we can now confidently state that we had the lowest cost of funds in the KRX index during the period with a deposit beta of 22%. Speaking of liquidity, we also boosted our borrowing capacity and now have $5,800,000,000 of available liquidity to TAP or 2 46 percent of net uninsured deposits, a level that I believe is truly peer leading.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Credit quality remains very strong with 2024 charge offs of 10 basis points, which is roughly half of that of the KRX index. And as mentioned, our ACL now represents over 7 years of coverage at these levels. In the Employee Benefit Services business, we had an excellent year. Revenues expanded by 11.8% and operating income expanded by 11.9%. We're managing a record amount of assets, have a record number of participants and are seeing real tangible benefits of our growing nationwide reputation.

[Dimitar Karaivanov, President & CEO at Community Bank System]

We also successfully deployed capital and integrated a couple of acquisitions. This segment drove the majority of the improvement for the overall company earnings in 2024 and given its uniqueness for us compared to peers really stands out. In the Insurer Services segment, we grew revenues by 6.7% and continued to expand and strengthen the footprint via acquisitions. We added strong capacity in the North Country, where we also have the leading banking footprint and this past quarter entered the Buffalo market, where we can now benefit from our commercial presence and expanding retail presence on the bank side. Operating earnings were impacted by elevated expenses and we're very focused on that in 2025.

[Dimitar Karaivanov, President & CEO at Community Bank System]

The Wealth Management Services business also had a very strong year. Revenue growth of 14.9% and operating income growth of 22.9% were truly excellent. Of note, we had over $1,000,000,000 of new advisory sales in 2024 and the benefit of many of those will be realized in 2025 and beyond. The business is energized, active and collaborating effectively with the banking business. The 2024 was very good and now on to 2025.

[Dimitar Karaivanov, President & CEO at Community Bank System]

My expectations for 2025 is that we will continue to gain market share across the board, continue to attract excellent talent and continue to grow the reputation of our businesses. As I think about each business, my outlook is as follows. In the banking business, I expect that growth will remain solid, though likely will moderate from latest levels. We have consistently guided towards mid single digits and have consistently outperformed in the past couple of years due to the market and competitive opportunities we saw to attract talent and clients. Those opportunities still exist, but I expect that we will have more competitors who are back after being essentially frozen since 2022 due to liquidity concerns.

[Dimitar Karaivanov, President & CEO at Community Bank System]

The flip side of that is that I also see half a dozen of our competitors who recently announced transactions, which may force them to manage capital and concentrations more actively. So we may see elevated opportunities in particular in CRE lending. Time will tell, but as always it is important to have a balance sheet that serves as a source of strength. For now, mid single digit seems appropriate. Funding will remain as always our top priority and we have a number of initiatives which are still ramping up.

[Dimitar Karaivanov, President & CEO at Community Bank System]

And with a loan to deposit ratio of 78%, we have plenty of capacity as is. We continue to expect that credit costs will trend back up to historical averages and thus have been slowly inching up our ACL and I expect some of that to continue. We will also be opening up 16 more branches and that will cause some increase in expenses in the Syntherem investment phase. Most of those will occur in the second and third quarter, so I expect some increased marketing and operating expenses in those periods. As we have committed previously, we will also be consolidating a similar number of branches and managing other expenses tightly in order to exit 2025 with a cleaner expense run rate.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Just bear in mind it will be a bit more volatile this year than prior years on a quarter to quarter basis. In the Employee Benefit Services business, we're entering 2025 on the heels of outstanding revenue and operating income growth, high asset values and a nationwide reputation. The growth momentum is very good and assuming asset values stay in line, we would be looking for mid to high single digit revenue expansion. We're going to be making some additional investments in products and people, especially in our trust and fund administration vertical, which are important for future periods, but will impact expense growth in 2025. In the Insurance Services segment, our main focus in 2025 is operating efficiency.

[Dimitar Karaivanov, President & CEO at Community Bank System]

We have gained a lot of revenue growth over the past few years and spent most of 2024 laying out the new organizational structure and responsibilities. M and A will continue to be a focus and supplement organic growth with expectation of revenue growth in the mid to high single digits. In the Wealth Management Services business in 2025, we're launching new products on a nationwide basis and actively adding producers while continuing to increase penetration across our client base. Assuming asset values stay where they are, revenue growth is likely to be closer to mid to high single digits as we have also a couple of producer departures to work through, though none of those will meaningfully impact operating earnings performance due to their associated expenses. In the aggregate, I'm very optimistic about our performance in 2025 and beyond.

[Dimitar Karaivanov, President & CEO at Community Bank System]

The foundational work and investment that has been put in place since 2021 has muted our bottom line performance since then, while revenues continue to improve in line with our diversified business model. In 2024, we outperformed the KRX index in earnings performance and my expectation is that we will continue to deliver above average returns while managing to a below average risk profile. These were definitely longer than my usual remarks, and now it's final time to pass it on to Joe.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's 4th quarter performance was strong. GAAP earnings per share of $0.94 were up $0.31 or 49 $4

[Joseph Sutaris, EVP & CFO at Community Bank System]

were up

[Joseph Sutaris, EVP & CFO at Community Bank System]

$0.31 or 49 percent over the Q4 of the prior year and up $0.11 or 13% over linked 3rd quarter results. Operating earnings per share and operating pretax pre provision net revenue per share were also up significantly on both year over year and linked quarter basis. The company recorded operating earnings per share of $1 in the 4th quarter as compared to $0.82 1 year prior and $0.88 in the linked Q3. 4th quarter operating PPNR per share of $1.40 was up $0.27 per share or 23.9 percent from 1 year prior and $0.11 per share or 8.5 percent on a linked quarter basis. Full year GAAP earnings per share, operating earnings per share and operating PP and R per share were up 40.4%, 2.2% and 8.2%, respectively.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Strong revenue growth underpinned these results. In the Q4, the company recorded total operating revenues of $196,000,000 This was up $19,100,000 or 10.8 percent from 1 year prior and up $6,900,000 or 3.7 percent from the linked 3rd quarter. These results marked the 6th consecutive quarter of increases in total operating revenues while establishing new quarterly highs for net interest income, employee benefit services revenues and wealth management services revenues. On a full year basis, total operating revenues increased $41,300,000 or 5.9%. The company recorded net interest income of $120,000,000 in the 4th quarter.

[Joseph Sutaris, EVP & CFO at Community Bank System]

This represents a $7,200,000 or 6.4 percent increase over the linked 3rd quarter result and a $10,800,000 or 9.9 percent improvement over the Q4 of 2023 and also marks the 3rd consecutive quarter of net interest income expansion. An improvement in yield on interest earning assets supported by continued loan growth and lower funding costs helped drive increases in both net interest income and net interest margin in the quarter. During the quarter, the company's cost of deposits was 1.23%, which was consistent with the prior two quarters, while the total cost of funds decreased 6 basis points from 1.44% in the Q3 to 1.38% in the Q4 due to a decrease in borrowed funds costs. The company's fully tax equivalent net interest margin increased 15 basis points from 3.05% in the linked 3rd quarter to 3.2% in the 3rd quarter. As Dimitar mentioned, 2024 also marked the 18th consecutive year of the company increased net interest income and the outlook remains positive for continued net interest income expansion in 2025.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Operating non interest revenues were up in all four businesses compared to the prior year's Q4 and represented 38.6% of total operating revenues. Banking related operating non interest revenues were up $1,900,000 or 10.2 percent over the same quarter of the prior year, driven by increases in mortgage banking revenues and deposit service and other banking fees, including customer interest rate swap fee revenues. Employee benefit services revenues were up $3,900,000 or 13.1 percent over the prior year's Q4, reflective of an increase in total participants under administration and growth in asset based fees. Insurance services revenues were up $600,000 or 5 percent over the prior year's 4th quarter driven by recent acquisitions, while wealth management services were up $2,000,000 or 24.9 percent percent reflective of more favorable market conditions and growth in investment advisory accounts. On a linked quarter basis, operating non interest revenues were down $300,000 or 0.4%.

[Joseph Sutaris, EVP & CFO at Community Bank System]

During the Q4, the company recorded 100 and $25,500,000 in total non interest expenses. This compares to $129,100,000 of total non interest expenses in the prior year's 4th quarter. The 3 point $6,000,000 or 2.8 percent decrease between the periods was mainly driven by several non operating expenses incurred in the prior year's 4th quarter totaling $9,200,000 Excluding the impact of these non operating items, non interest expenses increased $5,600,000 4.7 percent for the prior year's Q4, primarily driven by increases in salaries and employee benefits and data processing and communication expenses. On a full year basis, total operating noninterest expenses increased $24,100,000 or 5.4 percent, consistent with the mid single digit growth rate pension during prior quarterly earnings calls. Reflective of an increase in loans outstanding and qualitative factor adjustments, the company recorded a $6,200,000 provision for credit losses during the Q4 of 2024.

[Joseph Sutaris, EVP & CFO at Community Bank System]

This compares to $4,100,000 in the prior year's 4th quarter and $7,700,000 in the linked Q3. On a full year basis, the company recorded $22,800,000 in the provision for credit losses as compared to $11,200,000 in 2023. The effective tax rate for the Q4 of 2024 was 22.8 percent, down from 23% in the Q4 of 2023. On a full year basis, the company's effective tax rate was 22.9%. Ending loans increased $180,700,000 or 1.8 percent during the Q4.

[Joseph Sutaris, EVP & CFO at Community Bank System]

This marks the 14th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities and expansion into under tapped markets within our Northeast footprint. This included growth in the business lending, consumer mortgage, home equity and consumer direct lending portfolios offset in part by a decrease in the consumer indirect loan portfolio due to seasonal factors. Ending loans were up $727,800,000 or 7.5 percent from 1 year prior, reflective of growth in all 5 lending portfolios. The company's ending total deposits decreased $34,500,000 or 0.3 percent during the 4th quarter driven by a decrease in municipal deposits. 4th quarter deposit funding costs of 123 basis points were flat compared to the prior two quarters.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Non interest bearing and low rate checking and savings accounts continue to represent almost 2 thirds of the total deposits reflective of the core characteristics of the company's deposit base. Ending deposits were up $513,600,000 or 4% from 1 year prior, driven by increases in municipal and business deposits. The company did not hold any broker deposits on its balance sheet during 2024. The company's liquidity position remains strong, readily available source of liquidity, including unpledged cash and cash equivalents and investment securities, funding availability at the Federal Reserve Bank's discount window and unused borrowing capacity at the Federal Home Loan Bank of New York totaled $5,770,000,000 at the end of the 4th quarter. These sources of immediately available liquidity represent over 240% of the company's estimated uninsured deposits net of collateralized and intercompany deposits.

[Joseph Sutaris, EVP & CFO at Community Bank System]

The company's loan to deposit ratio at the end of the year was 77.6%, providing future opportunity to migrate lower yielding investment securities into higher yielding loans. At the end of the year, all the companies and the bank's regulatory capital ratios significantly exceed well capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.19%, which substantially exceeded the regulatory well capitalized standard of 5%. Nonperforming loans totaled 73 point $4,000,000 or 70 basis points of total loans outstanding.

[Joseph Sutaris, EVP & CFO at Community Bank System]

At the

[Joseph Sutaris, EVP & CFO at Community Bank System]

end of the year, this represents a $10,500,000 or 9 basis point increase from the end of the linked Q3. Comparatively, nonperforming loans were 54 point $6,000,000 or 56 basis points of total loans outstanding 1 year prior. Loans 30 to 89 days delinquent were also up on a linked quarter basis from $47,200,000 or 46 basis points of total loans outstanding at the end of the 3rd quarter to $55,900,000 or 54 basis points of total loans outstanding at the end of the 4th quarter. The company recorded net charge offs of $3,200,000 or 12 basis points of average loans annualized during the 4th quarter. This is up from $2,300,000 or 10 basis points in the same quarter of the prior year.

[Joseph Sutaris, EVP & CFO at Community Bank System]

On a full year basis, the company recorded net charge offs of $10,100,000 or 10 basis points of average loans outstanding. Company's allowance for credit losses was $79,100,000 or 76 basis points of total loans outstanding at the end of the 4th quarter, up $2,900,000 from the end of the 3rd quarter and up $12,400,000 from a year prior. Although credit loss reserves increased during the Q4 due to qualitative factors, overall, the company's asset quality remains solid. The allowance for credit losses at the end of the 4th quarter represent over 7 times the company's full year 2024 net charge offs. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base and historically good asset quality provide a solid foundation for continued growth in 2025.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Thank you. Now I'll turn it back to Mike to open the line for questions.

[Operator]

We will now begin the question and answer session. Hello, Steve. Your line may be muted.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Sorry, I was on mute. Good morning, guys. In terms of I appreciate all the color on the growth here, both on the loan growth side and the fee side. Just maybe starting with loans here, just curious where is the loan pipeline today? Does it remain strong heading into the early part of the year?

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

And maybe perhaps moderation as the year goes on? Just kind of curious on dynamics you guys are seeing along with loan pricing.

[Dimitar Karaivanov, President & CEO at Community Bank System]

I think on the pipeline, Steve, it remains reasonably in line. I would probably split up in a couple of buckets. The commercial pipeline is in line with our last few quarters. It's been consistent around a similar level. So I expect that we'll be pulling those through in 2025.

[Dimitar Karaivanov, President & CEO at Community Bank System]

The mortgage pipeline is solid, very consistent with last year, which was a very good year. The one business that's a little bit more hard to predict and a little bit more volatile is our auto lending business. And typically, the Q1 is not the best quarter in that business. So we'll see how that plays out. But again, I think we're going to continue to have really good opportunities.

[Dimitar Karaivanov, President & CEO at Community Bank System]

We think we are gaining market share in literally every one of those businesses. But just mid single digit for us is really what we feel comfortable with for 2025 at

[Dimitar Karaivanov, President & CEO at Community Bank System]

point.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Got it. And just kind of curious, what are you guys seeing for rates on the commercial side in particular?

[Dimitar Karaivanov, President & CEO at Community Bank System]

Right around 7 right now. Certainly, some products, you'll see some rates a little bit lower, but most of those are priced off of the 5 year roughly. So as the rates have gone up here a little bit, we're writing loans today at higher rates than in the beginning of December. So I think 7% ish on average is kind of where we are on a blended basis.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Okay. Got it. And then in terms of the margin here, help me step up with regard to the margin and funding costs coming down and continue to benefit from upward asset repricing and higher loan yields. Kind of curious, I hear you guys in terms of NII growth, but just how do we think about that margin trajectory here?

[Joseph Sutaris, EVP & CFO at Community Bank System]

Well, Steve, I think this is Joe. I think the expectations around margin are continue or we expect it to continue to grow and expand a bit in 2025. And net interest income is obviously the item that we focus a bit more on and that is also expected to increase throughout 2025. And kind of the dynamic here is that our book yield right now on loans is 5.58, I think, for the quarter. And we're booking new loans at 7.

[Joseph Sutaris, EVP & CFO at Community Bank System]

So if we do nothing more than just replace what's coming off, the expectation is that we'd expand the interest income side of the NII equation. And if we do no better than keeping funding costs flat and our hope and expectation is that we can bring those down a bit, but if we do nothing more than hold those flat, we would just have expansion through the loan side of the equation. And obviously, we as Dimitar just noted, we're expecting some incremental increase, kind of mid single digit growth in the loan portfolio. So that gives us additional opportunities for net interest income expansion. So I think we signaled on the last quarter's earnings call that 3 to 4 to 5 basis points quarter over quarter was a reasonable expectation around margin.

[Joseph Sutaris, EVP & CFO at Community Bank System]

We obviously did a little bit better than that this quarter. But so that's our expectation that we're going to continue to expand NII in 2025. Obviously, as we get later into the year, that could change if the market changes. But right now, the market setup is pretty good for expansion.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Okay. Appreciate that. And then in terms of the expense volatility here, I apologize if I missed it, but kind of just curious how are you guys thinking about maybe full year growth? I hear you with the de novos coming on, but just obviously your fee income businesses are showing good growth overall. So I would assume pretty healthy step up in expenses here for the year.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Yes. I think that's a fair expectation, Steve. We're continuing to invest in all of our businesses and that's investing in talent and systems and the like. And we put a lot of investment in, in 2022, 2023 and into 2024, and we're going to continue to invest. So I think kind of mid single digits, maybe a little higher than we had this year in terms of operating expense growth is probably a fair estimate for next year.

[Joseph Sutaris, EVP & CFO at Community Bank System]

And I would also like to remind you that our first in the Q1, we typically have a pretty significant increase in expenses over the Q4 because all of our merit increases go through. We have to we have full load of payroll taxes, and just generally higher expenses in the Q1. And what's actually kind of unique is we actually have snow this year in Upstate New York. And typically, we just have higher maintenance expenses on the buildings for snow removal, etcetera. So I would expect that the Q1, we'd see some significant increase over the Q4 run rate and then but on a full year basis, still kind of thinking mid single digits.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. I think, Steve, I would just add there a little bit more color on the branches kind of on the new expansion. I think in the second and probably mostly in the late second, third quarter, we're going to see about $4,000,000 to $5,000,000 of expenses in terms of marketing, just kind of brand awareness, market presence, events that are going to be associated. We're going to get those are obviously going to be kind of a onetimer type of things, And we're going to get most of them back in the Q4 by the time we consolidate some of the existing locations. So that's our goal is to exit Q4 2025 with a pretty good clean run rate, having revamped our branch network and capabilities, but there will be a little bit of volatility in between.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Okay, great. I appreciate all the color and I'll step back here. Thanks, guys.

[Operator]

The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Good morning.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Good morning, Frank.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Just trying to just back on the margin, trying to think through the linked quarter increase and was there anything more volatile in terms of maybe prepayment income on a linked quarter or just a some seasonality in the back book repricing? Just kind of wanted to see if get a little more color on that 15 basis points versus kind of 3, 4, 5 basis point quarter over quarter growth you guys talked about in the NIM on a sort of a normalized basis here?

[Joseph Sutaris, EVP & CFO at Community Bank System]

Yes. It's a very fair question, Frank. Just a couple of things that's probably worth noting is we did have a Federal Reserve Bank and Federal Home Loan Bank dividend both in the Q4. We don't necessarily have both in a given quarter, and then kind of the 4th and I think in the 2nd quarter. So that will contribute a bit to the increase in the outcome for the Q4.

[Joseph Sutaris, EVP & CFO at Community Bank System]

We did have some loans that kind of came off non accrual status and that gives you a little bit you recoup some of that interest income, which was not a big number for the quarter, but probably added 1 or 2 basis points overall to the NIM. So if you were to kind of strip those items out, it's not a 15 basis point quarter over quarter increase. Hence, the indications of a little lower expectation going forward. So I think that's part of it. The other thing too is that in the this is probably noteworthy as we have some seasonality in our municipal deposit base and that includes a significant tax collection period at the end of really the kind of the end of October.

[Joseph Sutaris, EVP & CFO at Community Bank System]

And what that does is it reduces any sort of overnight borrowings at 4 and change, 4.5, call it, and goes into the deposit base, which is a little less expensive. And then over time, those kind of drift down. You potentially go into overnight borrowings and that could compress the margin going into the Q1.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Great. That's great color. And then just on the employee benefits business. You guys talked about mid to high single digit revenues for this year. And Dimitari also mentioned some investment in the business.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Just wondering if this is a year where you would expect to get positive operating leverage in that business? Or just wondering how extensive those investments might be, specifically in that employee benefits business.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. So Frank, the way I would think about it is, look, our expectation is that we get positive operating leverage in every year in every business. The benefits business is one that's half of its revenue is essentially tied to the market. So that has a meaningful impact depending on what happens with the market. The investments that we're going to make themselves can be easily offset if we get a reasonable market outcome.

[Dimitar Karaivanov, President & CEO at Community Bank System]

But if the market is flat, then those investments will be a little bit heavier. We fully expect we're going to make more money in that business in 2025 than in 2024, even with all of that. So that's how we think about it. So this year, for example, if you look in the business, we had excellent growth on the top line. We basically were flat in terms of operating leverage.

[Dimitar Karaivanov, President & CEO at Community Bank System]

The margin expanded a little bit, but we made a lot more money on the bottom line. So I would expect 2025 to be somewhat similar where the growth rates on the top line and the expense side might be similar. But just the way the math works is we're going to make more money since we have a pretty healthy margin in the business.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Okay. All

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

right, great. And then just if I could sneak in one more, just really a clarification. Dimitar, I think you touched on it in your comments. But in terms of credit, I think you talked about continued sort of credit normalization here. I'm not sure if you mentioned reserve.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Do you anticipate as you get continued normalization here that you do see some continued reserve builds in 2025?

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. We do expect that. And maybe the way at least I put it in my simple math is kind of what is our normalized credit loss content. And 10 basis points is great, but it's probably not that over the cycle. So there will be points in the cycle where the numbers will go up a little bit.

[Dimitar Karaivanov, President & CEO at Community Bank System]

We talked at our Investor Day that 15 basis points through the cycle is our goal. So if you were just to take some number between 10% 15% and say, okay, you need to have 5.5 years of coverage, because that's kind of the life of our portfolio, you can kind of back into some math there of what that means for the reserve. We're sitting at 7 years today at 10 basis points, but that 10 basis points probably drifts up rather than down. I mean, credit remains great. We have 6 basis points of charge offs in our commercial credit book.

[Dimitar Karaivanov, President & CEO at Community Bank System]

That's terrific. We've got 1 basis points of charge off in the mortgage book. But we do expect that over time, that's just not sustainable. Maybe we'll be surprised positively. I hope so.

[Dimitar Karaivanov, President & CEO at Community Bank System]

But we'd rather be safe than sorry on that front.

[Frank Schiraldi, Managing Director at Piper Sandler Companies]

Got it. Okay. I appreciate all the color. Thanks.

[Operator]

The next question comes from Matthew Breese with Stephens Inc. Please go ahead.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Good morning.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Hi, Matt.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Good morning, Matt.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

I wanted to hone in a little bit

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

on loan yields and the cadence of loan yields expansion. So this quarter loan yields were up 7 basis points to 5.58 percent. And Dimitar, you mentioned roll on yields are in the kind of a 7% range. So I was just curious if that's 7 basis points we saw quarter over quarter, is that a decent proxy for how least the early part of 2025 can go? And I was hoping also you could talk a little bit about payoff activity, the extent and the speed of which you're seeing payoff activity.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Yes, maybe I'll pause there and just get a couple of some more color on those two items.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Yes. Matt, this is Joe. That expectation of 7 or 8 basis This is Joe. That expectation of 7 or 8 basis points per quarter

[Joseph Sutaris, EVP & CFO at Community Bank System]

seems a bit high. And the reason

[Joseph Sutaris, EVP & CFO at Community Bank System]

is that we still do have a portfolio of floating rate loans, right, that adjust to the short end of the curve. And so some of those reductions that we saw in the latter part of 2024 haven't fully hit the book yet. And if we get additional reductions from the FOMC in 2025, that works against improving loan yields by 6 or 7 basis points a quarter. So we still have to effectively feel the full effect of the recent rate cuts. We'll get most of that in the Q1.

[Joseph Sutaris, EVP & CFO at Community Bank System]

If there's additional rate cuts that will work against us a little bit. Most of our book though, however, to Dimitar's point is priced off of kind of that 5 year part of the curve. If that continues to stay where it is, and we continue to book new loans around 7, that's going to be, call it, helpful for the overall outcome. But I would not expect to see 7 or 8 basis points on the full book yield improvement quarter over quarter.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. I think on the refi question, Matt, certainly, we've seen a little bit more today than a few quarters ago, but not a lot. I mean, the rate differential there is not quite there for the clients, especially as the back end of the curve has moved up. So I think right now, we're below average kind of trends on prepayments. If rates don't really move much, I don't see that changing.

[Dimitar Karaivanov, President & CEO at Community Bank System]

And I think the benefit that we have is over the past 24 months, when most of the folks were really focused on keeping their balance sheet flat and not having liquidity enough to lend, we went out and we got as many 7.5 type assets as we could, great quality assets. And those should stay with us a little bit longer than usual, I think, if unless rates really move down dramatically.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Got it. Okay. And Dimitar, when you said the 5.5 years duration of the book, if you exclude floating rate loans, which I think is around 10.5% to 11% of total loans, what is the duration of the adjustable and fixed rate book?

[Dimitar Karaivanov, President & CEO at Community Bank System]

That's a good question, Matt, that we may have to come back to you on that one. Also keep in mind, a good chunk of our book is in our indirect auto business, and that's really more of a kind of a 3 year duration. So the 5.5% I was using was more blended, but we'll get back to you on that topic.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Got it. Okay. I appreciate that. And then I wanted to just touch on deposit costs. It's been a few good quarters for you and most of the industry is reducing costs at this point, but granted you are quite a bit lower on deposit costs overall than a lot of your peers.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

So, it's a black and white question. I'm just curious, are you seeing pressure to increase deposit costs despite rates coming down? Or are you seeing opportunity to reduce cost? If so, to what extent? Thank you.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. No, the answer there is simple. No pressure to increase costs. And I think, yes, if you look at our numbers, I mean, our deposit cost was basically the same. However, the mix behind that is very different than quarter to quarter.

[Dimitar Karaivanov, President & CEO at Community Bank System]

So remember, in the Q3, we get a whole chunk of municipal deposits, which typically go into higher cost money market accounts. So that changes kind of the mix during the quarter. During the quarter, we took quite a few steps in terms of moving a whole chunk of our deposit base down in terms of cost. From what we can tell, our competitors have done very similar kind of actions across the board. So there is really very little in the way of pressure to pay for deposits today.

[Dimitar Karaivanov, President & CEO at Community Bank System]

I think everybody has been eagerly waiting for the opportunity to lower some of their deposit funding, and we're seeing it across the board. Clients expect it because the way they expected it on the way up. I think it's no surprise to them that now it's coming on the way down. So I think we're going to continue to grind those costs lower. Again, our mix, 70% roughly of our deposits are essentially 0 or very low cost.

[Dimitar Karaivanov, President & CEO at Community Bank System]

So when you're sitting at 3 basis points in a savings account, you can cut it by 1 basis point, and that's a 33% decrease, but it doesn't move the numbers that much.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Understood.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Okay. And then last one for me.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Dimitar, I was hoping you could talk just a little bit about the regulatory environment. This morning, it looks like Travis Hill has been tapped as acting Chairman of the FDIC. He's been very vocal about speeding up the M and A approval process. And I'm curious if that might make you any more likely to participate in M and A near term?

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. I mean, I think on the regulatory side, the way we think about is that it should not be negative. So clearly, we've seen some accelerated approvals in the past few months. I think that's a good sign. I think the tone is more constructive.

[Dimitar Karaivanov, President & CEO at Community Bank System]

I think as it relates to M and A, the regulatory piece was never really in our way of considering M and A. And in the past few years, we've been very close to that point of announcing a transaction, and we just haven't for various reasons. Those sellers did not go away. They're still around. And I think they're not getting younger either.

[Dimitar Karaivanov, President & CEO at Community Bank System]

So probably we'll have some more opportunities in 2025 and beyond. And certainly, we'll feel maybe a little bit better on the margin about the time line of those approvals. But we'll continue to participate at terms that make sense for us. We generally believe that we are the highest value bid, not necessarily the highest price bid, but the highest value bid. And if we find people that really understand that on the other side, then we'll have something to talk about.

[Dimitar Karaivanov, President & CEO at Community Bank System]

And if we don't, hey, we're growing at a pretty robust pace to ourselves. So we don't really need to do anything.

[Matt Breese, Managing Director & Research Analyst at Stephens Inc]

Great. That's all I had. Thank you for taking my questions.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Welcome.

[Operator]

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

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Thanks. Good morning. Just following up on that last question regarding bank M and A in particular. Does the current de novo expansion effort on the branch side, does that preclude you or does that change your view on doing any type of bank M and A in those expansionary markets over the next year or 2?

[Dimitar Karaivanov, President & CEO at Community Bank System]

It does not, Chris. We look at our ultimate endgame in those markets as a lot more than what we have today and what we will have pro form a for our branch openings. So certainly, adding density, frankly, in any market that we can is always a priority for us. To us, density is the permanence in the business. So we're looking to that.

[Dimitar Karaivanov, President & CEO at Community Bank System]

I think just in terms of as we look at transactions, it's not just really about dots on the map. It is does that franchise bring to us liquidity that we can work with? Or do they use it all of themselves and also usually concentrate themselves out along the way? So if that's the case, then it's just a little bit less attractive, right, because we don't have a lot of room left to create value for our shareholders. So certainly look at all of those markets, but again look at it through the lens of things that really make sense for us to add more value rather than just purely dots on the map.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Got it. And then regarding the timing of that de novo effort, by the end of 2025, do you see the full ads and then net consolidations being completed that time? Or just a few of those drift into 2026?

[Dimitar Karaivanov, President & CEO at Community Bank System]

That's definitely the goal. All of these are have a construction component to them. So it's not perfectly visible, but we're off to the races with many of them under construction, and we do have dates for openings. So we expect that by the end of 2025, we'll be pretty much done. There might be 1 or 2 stragglers if things don't really pan out on the construction side, but I don't think it's going to be more than that.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Okay, great.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

And then just circling back to the margin discussion. One, just first off, do you guys have the December spot margin?

[Joseph Sutaris, EVP & CFO at Community Bank System]

It was very comparable to the full quarter in terms of the exit margin in December.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Okay. Got it. And then can you just walk us through what the security maturity schedule is over the course of 2025 and 2026? And maybe if there's any in particularly large chunks or quarters with big maturities?

[Joseph Sutaris, EVP & CFO at Community Bank System]

Yes. So 2025 is a fairly light period for security maturities, call it $100,000,000 to $150,000,000 of principal and interest cash flows coming off securities portfolio, Chris. And part of that is, if you recall, we did the repositioning back in 2023 and actually pulled forward some of the 2025 cash flows. And then as we walk into 2026 and the latter part of 2026, we have a pretty significant maturity of some treasury securities. I think it's call it $350,000,000 Then as we walk into 2027, there's approximately another $700,000,000 of security maturities.

[Joseph Sutaris, EVP & CFO at Community Bank System]

So we'll really get to the more significant parts of those maturities really in late 'twenty six and 'twenty 27. So call it $1,000,000,000 in 'twenty six and 'twenty seven.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Okay, great. And then lastly, I know you guys have been making some efforts, especially on to expand the fee capabilities with new swap offerings that have gone well in the back half of 'twenty four in terms of the banking fee rate there. Do you see that expanding into 2025 or is the back half of 'twenty four a pretty good starting point?

[Dimitar Karaivanov, President & CEO at Community Bank System]

I think the back half

[Dimitar Karaivanov, President & CEO at Community Bank System]

of twenty twenty four is a good starting point, Chris. We certainly were reasonably successful in twenty twenty four. I think between the swaps and the capital markets activities, it was close to $4,000,000 in terms of fee income. And the way the world works is when you do well, you expect to do better the next year. So we expect to do better.

[Dimitar Karaivanov, President & CEO at Community Bank System]

It really is market dependent because we had opportunities in 2024 on the swap side, in particular with the curve, the way it was inverted where it was clearly a lot more advantageous for our clients to borrow in the swap market than on the fixed side with on balance sheet solutions. The curve is not as inverted today. So in fact, it's not inverted at all. So those opportunities are not quite as appealing today. So it really is dependent on what the interest rate curves do.

[Dimitar Karaivanov, President & CEO at Community Bank System]

But we think that, again, our expectation is we'll do reasonably well. We have other initiatives that probably kind of took full run rates on the on our checking side in the latter part of 2024, and those should stay with us going forward. So 2024 is a good second half was, I think, a decent run rate to use for going forward.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Got it. And then just last one. Any additional color on the single multifamily loan that drove the uptick in the NPLs this quarter?

[Joseph Sutaris, EVP & CFO at Community Bank System]

Yes. Chris, we just had one property in our, call it, our Central New York footprint that was about a $12,000,000 loan balance for us and the absorption on the property was a little bit slower than initially anticipated. We are carrying a specific reserve against it, but we don't know at this point. It's too early to tell, but there's potential opportunities for additional equity to come into the property, which potentially could write itself. So but just kind of I'll call it normal course of business.

[Joseph Sutaris, EVP & CFO at Community Bank System]

Occasionally, you're going to have a project that there's some challenges on. This is one of those. So I don't think there's anything that's indicative of a larger problem or anything. This is just kind of a one off situation with a particular property.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Yes. And just to add to that, Chris, a little bit, kind of on the credit side as we talk, we expect that things are going to kind of move a little bit more in that direction. I mean, right now, we only have less than a handful of specific reserves against credits. And historically, we've had more than a handful of specific reserves against credits. So we're not necessarily surprised that the trend is going to be a little bit more of that and we're certainly spending more time working those things out and we don't necessarily expect a lot of losses, but we'll see how things play.

[Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)]

Got it. I appreciate the time. Thank you.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Welcome.

[Operator]

And your next question comes from Manuel Nieves with D. A. Davidson. Please go ahead.

[Analyst]

Good morning. This is Sharon Gee on for Manuel. Thank you for taking my questions. I want to first question a little bit on the securities book. So looking at where interest rates sit today, is there any update to potentially restructuring of the securities portfolio?

[Dimitar Karaivanov, President & CEO at Community Bank System]

I think with the rate background today, that's probably unlikely. We do have the benefit of knowing exactly what and when we're going to get it because of our book being the vast majority of it being treasuries. So it's easy math for us to do in terms of the payback on those types of opportunities. But right now, as we sit here today, that doesn't make a lot of sense to us given the numbers.

[Analyst]

Thank you. And then do you see any concerns with the Chip Shack given the mixed Trump commentary?

[Dimitar Karaivanov, President & CEO at Community Bank System]

We do not. So in fact, the investment and the subsidy, if you will, that Micron is receiving from the government got approved late last year. So that's finalized. Construction is beginning here in the Q2 of this year. So we don't really see much in the way there.

[Dimitar Karaivanov, President & CEO at Community Bank System]

And I think more importantly, the critical nature of these projects is a bipartisan issue. So we don't think that's going to change much. Again, for us, we don't really plan anything around it. We're planning for what we can do in general. And if that happens, that's a nice gravy on the top.

[Dimitar Karaivanov, President & CEO at Community Bank System]

But all of our plans are as they are with or without Micron.

[Analyst]

That's great to hear. All of my other questions have been answered. I'll have to back. Thank you.

[Dimitar Karaivanov, President & CEO at Community Bank System]

Thank you.

[Operator]

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

[Dimitar Karaivanov, President & CEO at Community Bank System]

Thank you, Mike, and thank you to all of our investors, employees and analysts for joining this call. We had a pretty good 2024, and we look forward to a very productive 2025. Talk to you soon.

Participants

Executives

• Dimitar Karaivanov, President & CEO
• Joseph Sutaris, EVP & CFO

Analysts

• Steve Moss, Director - Banking & Arlington at Raymond James Financial
• Frank Schiraldi, Managing Director at Piper Sandler Companies
• Matt Breese, Managing Director & Research Analyst at Stephens Inc
• Christopher O'Connell, Director at Keefe, Bruyette & Woods (KBW)
• Analyst