Community Bank System, Inc. (CBU) Q4 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the Community Financial System, Inc. Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dimitar Karaivanov, President and Chief Executive Officer. Please go ahead.

Thank you, Mike. Good morning, everybody, and thank you for joining our fourth quarter and full year 2024 earnings call. This was a very solid quarter for us with operating PPNR of $1.40 per share, which grew 8.5% compared to the prior quarter and 23.9% compared to last year's fourth quarter. Those are excellent numbers. There's a lot to be pleased about such as margin expansion and excellent liquidity, strong fee performance, strong credit and well-managed expenses. I will leave all the quarterly details to Joe and would like to really focus on our overall 2024 performance and 2025 outlook. As we look back upon 2024, I'm pleased with the performance of our company. In a year where the overall KRX index is projected to have lower earnings to the tune of approximately 5%. We actually grew operating PPNR per share by 8.2% and operating earnings per share by 2.2%. The delta between the two is mostly due to our increase of ACL from 69 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. 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%. The investments we've been making in people and processes continue to bear fruit. Overall lending growth was $728 million and overall deposits grew by $514 million or 4%, also an excellent result in a difficult environment. In the latter part of the year, we saw commercial and personal deposits resume their historical performance and that gives us hope for future periods. In 2024, the Federal Reserve ended its hiking cycle and we can now confidently state that we had the lowest cost of funds in the KRX index during the period with a deposit beta of 22%. Speaking of liquidity, we also boosted our borrowing capacity and now have $5.8 billion of available liquidity to tap, or 246% of net uninsured deposits, a level that I believe is truly peer-leading. Credit quality remains very strong with 2024 charge-offs of 10 basis points, which is roughly half of that of the KRX index. And as mentioned, our ACL now represents over seven years of coverage at these levels. In the Employee Benefit Services business, we had an excellent year. Revenues expanded by 11.8% and operating income expanded by 11.9%. We are managing a record amount of assets, have a record number of participants, and are seeing real tangible benefits of our growing nationwide reputation. We also successfully deployed capital and integrated a couple of acquisitions. This segment drove the majority of the improvement for the overall company earnings in 2024 and given its uniqueness for us compared to peers really stands out. In the 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 that in 2025. The Wealth Management Services business also had a very strong year. Revenue growth of 14.9% and operating income growth of 22.9% were truly excellent. Of note, we had over $1 billion of new advisory sales in 2024 and the benefit of many of those will be realized in 2025 and beyond. The business is energized, active and collaborating effectively with the banking business. The 2024 was very good and now on to 2025. My expectations for 2025 is that we will continue to gain market share across the board, continue to attract excellent talent and continue to grow the reputation of our businesses. As I think about each business, my outlook is as follows. In the banking business, I expect that growth will remain solid though likely will moderate from latest levels. We have consistently guided towards mid-single digits and have consistently outperformed in the past couple of years due to the market and competitive opportunities we saw to attract talent and clients. Those opportunities still exist, but I expect that we will have more competitors who are back after being essentially frozen since 2022 due to liquidity concerns. The flip side of that is that I also see half a dozen of our competitors who recently announced transactions which may force them to manage capital and concentrations more actively. So we may see elevated opportunities in particular in CRE lending. Time will tell, but as always it is important to have a balance sheet that serves as a source of strength. For now, mid-single digits seems appropriate. Funding will remain as always our top priority and we have a number of initiatives which are still ramping up, and with a loan-to-deposit ratio of 78%, we have plenty of capacity as is. We continue to expect that credit costs will trend back up to historical averages and thus have been slowly inching up our ACL and I expect some of that to continue. We will also be opening up 16 more branches and that will cause some increasing expenses in the interim investment phase. Most of those will occur in the second and third quarter. So I expect some increased marketing and operating expenses in those periods. As we have committed previously, we will also be consolidating a similar number of branches and managing other expenses tightly in order to exit 2025 with a cleaner expense run rate. Just bear in mind, it will be a bit more volatile this year than prior years on a quarter-to-quarter basis. In the Employee Benefit Services business, we're entering 2025 on the heels of outstanding revenue and operating income growth, high asset values and a nationwide reputation. The growth momentum is very good and assuming asset values stay in line, we would be looking for mid-to-high single digits revenue expansion. We're going to be making some additional investments in products and people, especially in our trust and fund administration vertical which are important for future periods but will impact expense growth in 2025. In the Insurance Services segment, our main focus in 2025 is operating efficiency. We have gained a lot of revenue growth over the past few years and spent most of 2024 laying out the new organizational structure and responsibilities. M&A will continue to be a focus and supplement organic growth with overall expectation of revenue growth in the mid-to-high single digits. In the Wealth Management services business in 2025, we're launching new products on a nationwide basis and actively adding producers while continuing to increase penetration across our client base. Assuming asset values stay where they are, revenue growth is likely to be closer to 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 am very optimistic about our performance in 2025 and beyond. The foundational work and investment that has been put in place since 2021 has muted our bottom line performance since then, while revenues continue to improve in line with our diversified business model. In 2024, we outperformed the KRX index in earnings performance and my expectation is that we will continue to deliver above-average returns while managing to a below-average risk profile. These were definitely longer than my usual remarks and now it's finally time to pass it on to Joe.

Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's fourth quarter performance was strong. GAAP earnings per share of $0.94 were up $0.31 or 49% over the fourth quarter of the prior year and up $0.11 or 13% over linked third quarter results. Operating earnings per share and operating pre-tax pre-provision net revenue per share were also up significantly on both a year-over-year and linked-quarter basis. The company recorded operating earnings per share of $1 in the fourth quarter as compared to $0.82 one year prior and $0.88 in the linked third quarter. Fourth quarter operating PPNR per share of $1.40 was up $0.27 per share or 23.9% from one year prior and $0.11 per share or 8.5% on a linked quarter basis. Full year GAAP earnings per share, operating earnings per share and operating PPNR per share were up 40.4%, 2.2% and 8.2% respectively. Strong revenue growth underpinned these results. In the fourth quarter, the company recorded total operating revenues of $196 million. This was up $19.1 million or 10.8% from one year prior and up $6.9 million or 3.7% from the linked third quarter. These results marked the sixth consecutive quarter of increases in total operating revenues while establishing new quarterly highs for net interest income, Employee Benefit Services revenues and Wealth Management services revenues. On a full-year basis, total operating revenues increased $41.3 million or 5.9%. The company recorded a net interest income of $120 million in the fourth quarter. This represents a $7.2 million or 6.4% increase over the linked third quarter result and a $10.8 million or 9.9% improvement over the fourth quarter of 2023 and also marks the third consecutive quarter of net interest income expansion. An improvement in 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 third quarter of -- to 1.38% in the fourth quarter due to a decrease in borrowed funds costs. The company's fully taxed equivalent net interest margin increased 15 basis points from 3.05% in the linked third quarter to 3.2% in the third quarter. As Dimitar mentioned, 2024 also marked the 18th consecutive year the company increased net interest income and the outlook remains positive for continued net interest income expansion in 2025. Operating non-interest revenues were up in all four businesses compared to the prior year's fourth quarter and represented 38.6% of total operating revenues. Banking-related operating non-interest revenues were up $1.9 million or 10.2% over the same quarter of the prior year driven by increases in mortgage banking revenues and deposit service and other banking fees including customer interest rate swap fee revenues. Employee Benefit Services revenues were up $3.9 million or 13.1% over the prior year's fourth quarter, reflective of an increase in total participants under administration and growth in asset-based fees. Insurance Services revenues were up $0.6 million or 5% over the prior year's fourth quarter driven by recent acquisitions, while Wealth Management services were up $2 million or 24.9%, reflective of more favorable market conditions and growth in investment advisory accounts. On a linked quarter basis, our operating non-interest revenues were down $0.3 million or 0.4%. During the fourth quarter, the company recorded $125.5 million in total non-interest expenses. This compares to $129.1 million of total non-interest expenses in the prior year's fourth quarter. The $3.6 million 2.8% decrease between the periods is mainly driven by several non-operating expenses incurred in the prior year's fourth quarter totaling $9.2 million. Excluding the impact of these non-operating items, non-interest expenses increased $5.6 million or 4.7% for the prior year's fourth quarter, primarily driven by increases in salaries and employee benefits and data processing and communication expenses. On a full-year basis, total operating non-interest expenses increased $24.1 million or 5.4%, consistent with the mid-single digit growth rate mentioned during prior quarterly earnings calls. Reflective of an increase in loans outstanding and qualitative factor adjustments, the company recorded a $6.2 million provision for credit losses during the fourth quarter of 2024. This compares to $4.1 million in the prior year's fourth quarter and $7.7 million in the linked third quarter. On a full year basis, the company recorded $22.8 million in the provision for credit losses as compared to $11.2 million in 2023. The effective tax rate for the fourth quarter of 2024 was 22.8%, down from 23% in the fourth quarter of 2023. On a full-year basis, the company's effective tax rate was 22.9%. Ending loans increased $180.7 million or 1.8% during the fourth quarter. This marks the 14th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities and expansion into 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 $727.8 million or 7.5% from one year prior, reflective of growth in all five lending portfolios. The company's ending total deposits decreased $34.5 million or 0.3% during the fourth quarter driven by a decrease in municipal deposits. Fourth quarter deposit funding costs of 123 basis points were flat compared to the prior two quarters. Non-interest-bearing and low-rate checking and savings accounts continue to represent almost two-thirds of the total deposits reflective of the core characteristics of the company's deposit base. Ending deposits were up $513.6 million or 4% from one year prior, driven by increases in municipal and business deposits. The company did not hold any broker deposits on its balance sheet during 2024. The company's liquidity position remains strong, readily available source of liquidity, including 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 $5.77 billion at the end of the fourth quarter. These sources of immediately available liquidity represent over 240% of the company's estimated uninsured deposits net of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the year was 77.6%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. At the end of the year, all the companies and the bank's regulatory capital ratios significantly exceeded well-capitalized standards. Excuse me, more specifically, the company's Tier-1 leverage ratio was 9.19%, which substantially exceeded the regulatory well-capitalized standard of 5%. Non-performing loans totaled $73.4 million or 70 basis points of total loans outstanding. At the end of the year, this represents a $10.5 million or 9 basis point increase from the end of the linked third quarter. Comparatively, non-performing loans were $54.6 million or 56 basis points of total loans outstanding one year prior. Loans 30 days to 89 days delinquent were also up on a linked quarter basis from $47.2 million or 46 basis points of total loans outstanding at the end of the third quarter to $55.9 million or 54 basis points of total loans outstanding at the end of the fourth quarter. The company recorded net charge-offs of $3.2 million or 12 basis points of average loans annualized during the fourth quarter. This is up from $2.3 million or 10 basis points in the same quarter of the prior year. On a full-year basis, the company recorded net charge-offs of $10.1 million or 10 basis points of average loans outstanding. Company's allowance for credit losses was $79.1 million or 76 point basis points of total loans outstanding at the end of the fourth quarter, up $2.9 million from the end of the third quarter and up $12.4 million from one year prior. Although credit loss reserves increased during the fourth quarter due to qualitative factors, overall the company's asset quality remains solid. The allowance for credit losses at the end of the fourth quarter represent over seven times the company's full-year 2024 net charge-offs. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base and historically good asset quality provide a solid foundation for continued growth in 2025. Thank you. Now I'll turn it back to Mike to open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Steve Moss with Raymond James. Please go ahead. Hello, Steve, your line may be muted.

Oh, sorry, I was on mute. Good morning, guys. In terms of the -- 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 and maybe perhaps moderation as the year goes on? Just kind of curious on dynamics you guys are seeing along with loan pricing.

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

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

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

Okay, got it. And then in terms of the margin here, health step up with regard to the margin funding costs coming down and continued 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?

Well, Steve, I think -- this is Joe. I think the expectations around margin are continue -- we expect it to continue to grow and expand a bit in 2025. 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%. 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 have expansion truly 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 basis points to 4 basis points to 5 basis points quarter-over-quarter was a reasonable expectation around margin. And 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.

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 a pretty healthy step up in expenses here for the year.

Yes, I think that's a fair expectation, Steve. We're continuing to invest in all of our business and that's investing in talent and systems and the like. And, we put a lot of investment 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. And I would also like to remind you that our first -- in the first quarter, we typically have a pretty significant increase in expenses over the fourth quarter because all of our merit increases go through. We have to -- we have full of -- full load of payroll taxes and just generally higher expenses in the first quarter. 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, et cetera. So I would expect that the first quarter we'd see some significant increase in -- over the fourth quarter run rate and then -- but on a full year basis, still kind of thinking mid-single digits.

Yes, I think, Steve, I'll 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 million to $5 million 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 one-timer type of things and we're going to get most of them back in the fourth quarter 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.

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

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

Good morning.

Good morning, Frank.

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 you could 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 sort of a normalized basis here.

Yes, it's a very fair question, Frank. Just a couple of things that probably are worth noting is we did have a Federal Reserve bank and Federal Home Loan bank dividend both in the fourth quarter. We don't necessarily have both in a given quarter, kind of in the fourth and I think in the second quarter. So, that will contribute a bit to the increase in the outcome for the fourth quarter. 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, that interest income which was -- not a big number for the quarter, but probably, added 1 basis point 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 -- that that's part of it. The other thing too is that in the -- and this is probably noteworthy is 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. And what that does is it reduces any sort of overnight borrowings, at four 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 first quarter.

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 Dimitar, you also mentioned some investment in the business. 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.

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. 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. 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.

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

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

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

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

Good morning.

Hi, Matt.

Good morning, Matt.

I wanted to hone in a little bit on loan yields and the cadence of loan yields expansion. So this quarter loan yields were up 7 basis points to 5.58%. And Dimitar, you mentioned roll-on yields are in the kind of a 7% range. So I was just curious if that 7 basis points we saw quarter-over-quarter, is that a decent proxy for how at 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. And yes, maybe I'll pause there and just get a couple of some more color on those two items.

Yes. Matt, this is Joe. That expectation of 7 basis points or 8 basis points per quarter seems a bit high. And the reason is that we still do have a perfect 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 basis points 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 first quarter, if there's additional rate cuts, that'll work against us a little bit. Most of our book though, however, to Dimitar's point, is priced off of the kind of that five-year part of the curve. And 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 basis points or 8 basis points on the full book yield improvement quarter-over-quarter.

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. 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.

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?

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

Got it. Okay, I appreciate that. And then I want 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. 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.

Yes. No, the answer there is simple. No pressure to increase costs. And I think 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. So remember, in the third quarter, 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. I think everybody's 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 zero or very low cost. 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.

Understood. Okay. And then last one for me. 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&A approval process. And I'm curious if that might make you any more likely to participate in M&A near term.

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. I think as it relates to M&A, the regulatory piece was never really in our way of considering M&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 any younger either. 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 timeline 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. 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.

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

Welcome.

Our next question comes from Chris O'Connell with KBW. Please go ahead. Christopher O’Connell: Thanks. Good morning. Just following up on that last question regarding bank M&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&A in those expansionary markets over the next year or two?

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 forma for our branch opening. 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. 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 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: Got it. And then regarding the timing of that de novo effort. By the end of 2025, do you see the full adds and then net consolidations being complete at that time or does a few of those drift into 2026?

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 one or two 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: Okay, great. And then just circling back to the margin discussion. One, just first off, do you guys have the December spot margin?

It was very comparable to the full quarter in terms of the exit margin in December. Christopher O’Connell: 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?

Yes. So, 2025 is a fairly light period for security maturities, call it, $100 million to $150 million of principal and interest cash flows coming off the 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, in the latter part of cash 2026, we have a pretty significant maturity of some treasury securities, I think it's, call it, $350 million. And as we walk into 2027, there's approximately another $700 million of security maturities. So, we'll really get to the more significant parts of those maturities really in late 2026 and 2027. So, call it, $1 billion in 2026 and 2027. Christopher O’Connell: 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 2024 in terms of the banking fee rate there. Do you see that expanding into 2025 or is the back half of 2024 a pretty good starting point?

I think the back half of 2024 is a good starting point, Chris. We certainly were reasonably successful in 2024. I think between the swaps and the capital markets activities, it was close to $4 million 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. 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 this -- 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. But we think that, again our expectation is we'll do reasonably well. We have other initiatives that probably kind of took full run rate 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 -- the second half was I think a decent run rate to use for going forward. Christopher O’Connell: Got it. And then just last one. Any additional color on the single multifamily loan that drove the uptick in the NPLs this quarter?

Yes, Chris, we just had one property in our -- call it, our central New York footprint that was about a $12 million 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 right itself. So -- but just kind of, I'll call it normal course of business. 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.

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: Got it. Appreciate the time. Thank you.

Welcome.

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

Good morning. This is Sharanjit on for Manuel. Thank you for taking my questions. For my first question, a little bit on the securities book. So looking at where interest rates fit today, is there any update to potential restructuring of the securities portfolio?

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.

Thank you. And then do you see any concern for the CHIPS Act, given the mixed Trump commentary?

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 second quarter of this year. So we don't really see much in the way there. 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. But all of our plans are as they are with or without Micron.

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

Thank you.

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

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.

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