Community Bank System, Inc. (CBU) Q2 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Community Bank System, Inc.'s Second Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Key followed by zero. Today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. And discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed, refer to our SEC filings including the risk factors section for more details. Discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in our earnings release. I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead.

Thank you, Michael. Good morning, everyone, and thank you for joining our 2025 earnings call. My general summary of the quarter is one of continued solid progress across our diverse business, and record operating results per share. Now our banking business net interest income continues to expand on the heels of both increasing asset yields and growth imbalances. Our funding is growing, and consumer lending had a very strong quarter with momentum continuing into the third quarter. Commercial banking balances were impacted by some constructive repayments of criticized credits, and the resolution of a couple of nonperforming assets. However, the pipeline is very good, and I expect a very strong third quarter will put us back on track to our previously communicated growth targets. Banking fee income also remained strong. Credit results were impacted by the resolution of our two largest nonperforming assets with one being paid off with a very small charge they are being written down and taken into OREO. Outside of those previously reserved for situations, net charge offs were minimal at less than two basis points. Our employee benefit services business was basically flat year over year quarter over quarter. With that said, there are two parts to that story. Our record keeping business is growing at high single digits, while our fiduciary trust business has been experiencing some headwinds as we work to reposition the business and reinvest in the next stage of growth. With that said, I'm very encouraged by the early results of those initiatives. The pipeline that is already built, and expect that we will be well positioned in 2026 and beyond. In insurance services, it is important to note that we had a pull forward of the timing of contingency payments in Q1 of this year versus typically Q2. Year to date, the business is up 13% in revenue, and operating margin is up to 23% driving operating pretax earnings expansion of 70%. Wealth management services came off a very strong Q1, and also, as we talked about back in January, exited certain nonproductive revenue arrangements. As a result, revenue growth was muted year over year, while both operating pretax earnings and margin expanded compared to the same quarter last year. Pretax operating earnings were up 16%. In summary, we're well on our way towards our goals for the year. We also had a very exciting branch acquisition announcement last month, and I expect to close that transaction in the fourth quarter of this year. Transaction provides our banking business with very strong presence in a market that is of high strategic importance to us, high quality liquidity, no asset issues or concentrations, limited execution risk, and comes with no share issuance. In other words, our shareholders get to keep all the upside as we deploy the cash proceeds into earning assets over the next few years. It is unusual for a banking transaction to check multiple of these boxes for us. And very unusual to check all of them. So we're very excited. In addition, other productive discussions are occurring across our fee income businesses, and I'm hopeful that we will continue to productively deploy capital in the second half of this year. I will now pass it on to Mariah Loss for more details on the financials.

Thank you, Dimitar, and good morning. As Dimitar noted, the company's second quarter performance was solid. GAAP earnings per share of $0.97 were up $0.06 or 6.6% over the second quarter of the prior year and were up $0.04 or 4.3% over linked first quarter results. GAAP earnings per share included the impact of $0.02 in restructuring expenses associated with the Workforce Optimization Plan and in addition, $0.01 tied to performance-based incentive accrual. Operating earnings per share and operating pretax pre-provision net revenue per share were record quarterly results for the company. Operating earnings per share were $1.04 in the second quarter as compared to $0.95 one year prior. And $0.98 in the linked first quarter. Second quarter operating PPNR per share $1.41 was up $0.12 from one year prior and was up $0.01 on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $199.3 million in the second quarter. Operating revenues were up $16.1 million or 8.8% from one year prior and were up $3.3 million or 1.7% from the linked first quarter driven by record net interest income results in our banking business. The company's net interest income was $124.7 million in the second quarter. This represents a $4.5 million or 3.8% increase over the linked first quarter result and a $15.3 million or 14% improvement over the 2024 and marks the fifth consecutive quarter of net interest income expansion. The company's fully tax equivalent net interest margin increased six basis points from 3.24% in the linked first quarter to 3.3% in the second quarter. Higher interest earning asset yields and stable funding costs drove increases in both net interest income and net interest margin in the quarter. During the quarter, the company's cost of funds was 1.32% a decrease of one basis point from the prior quarter, while the company's cost of deposits remained low relative to the industry at 1.19%. Operating non revenues were up $700,000 or 1% compared to the prior year's second quarter and represented 37.4% of total operating revenues a metric that continuously underscores the diversification of our businesses. Banking related operating noninterest revenues were up $900,000 or 5% the linked first quarter driven by higher customer interest rate swaps fee revenues and CRE financing and advisory revenues. This was offset by $2.2 million or 3.9% decrease in non banking financial services noninterest revenues over the same period due to seasonal factors the employee benefits, insurance, and wealth businesses. The company recorded a $4.1 million provision for credit losses during the second quarter. This compares to $2.7 million in the prior year second quarter and $6.7 million in the linked first quarter. During the second quarter, the company recorded $129.1 million in total non interest expenses, This compares to $119 million of total non interest expenses in the prior year's second quarter. Expense control remains a focus, The $10.1 million or 8.5% increase between the time periods was primarily driven by an increase of $5.6 million or 7.6% in salaries and employee benefits and $1.4 million or 9.3% in data processing and communication expenses and the impact of a $1.5 million non operating restructuring charge. The increase also included approximately $1.5 million in expenses associated with the bank's De Novo branch expansions. Ending loans increased $98 million or 0.9% during the second quarter primarily driven by net organic growth in the consumer indirect lending portfolio. The company continues to invest in its organic loan growth capabilities and expects continued expansion into under tapped markets within our Northeast footprint. Ending loans were up $495.3 million or 4.9% from one year prior, primarily due to growth in the business lending and consumer mortgage portfolios. The company's ending total deposits increased $563.9 million or 4.3% from one year prior and decreased $190.3 million or 1.4% from the end of the linked first quarter. The decrease in total deposits during the quarter was driven by seasonal outflow of municipal deposits. Non interest bearing and lower rate checking and savings accounts continue to represent almost two thirds of the total deposits reflective of the core characteristics of the company's deposit base. The company did not hold any brokered or wholesale deposits on its balance sheet during the quarter. The company's liquidity position remains strong, as readily available sources of liquidity totaled $5.9 billion or 246% of the company's estimated uninsured deposits of collateralized and intercompany deposits at the end of the second quarter. The company's loan to deposit ratio at the end of the second quarter was 76.8% providing future opportunity to migrate lower yielding investments securities into higher yielding loans. All the companies and the bank's regulatory capital ratios continue to substantially exceed well capitalized standards. The company's Tier one leverage ratio increased 13 basis points during the second quarter to 9.42% which is significantly higher than the regulatory well capitalized standard of 5%. During the quarter, the company charged off one non owner occupied CRE loan relationship and received substantial repayment of one multifamily CRE loan relationship both of which were previously allocated specific reserves. As a result, net charge offs in the quarter were elevated relative to recent results but non performing and delinquent loan metrics were favorably impacted. Nonperforming loans totaled $53.3 million or 51 basis points of total loans outstanding at the end of the second quarter. This represents a $21.7 million or 21 basis point decrease from the end of the linked first quarter Comparatively, non performing loans were $50.5 million or 50 basis points of total loans outstanding one year prior. Loans thirty to eighty nine days delinquent were also down on a linked quarter basis from $59.2 million or 57 basis points of total loans at the end of the first quarter to $53.3 million or 51 basis points of total loans at the end of the second quarter. The company recorded net charge offs of $5.1 million or 20 basis points of average loans annualized during the second quarter. This was up $3.8 million over the prior year's second quarter and up $1.9 million from the linked first quarter driven by the charge offs associated with the previously mentioned CRE loan relationship during the quarter totaling $4.3 million. The company's allowance for credit loss was $81.9 million or 78 basis points of total loans outstanding at the end of the second quarter down $1 million during the quarter due in part to the decrease in specific reserves previously mentioned and up $10.4 million from one year prior. The allowance for credit losses at the end of the second quarter represented over five times company's trailing twelve month net charge offs. We are pleased with the second quarter results. It is an exciting time, especially given our announcement of the acquisition of the seven Santander branches in Pennsylvania, which accelerates our retail growth strategy. To echo Dimitar's comments, this transaction ensures that our shareholders keep all the upside as we deploy the cash proceeds into earning assets. Looking forward, we believe the company's diversified revenue profile strong liquidity, regulatory capital reserves, stable core deposit base, and historically good asset quality provide a solid foundation continued earnings growth. That concludes my prepared earnings comments and Dimitar and I will now take questions Michael, I will turn it back to you. To open the line. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And your first question today comes from Steve Moss with Raymond James. Please go ahead.

Hey. Good morning. This is Thomas on for Steve. Just wanted to start off maybe on loans here. Can you speak to the competitive landscape you're seeing in terms of lending? I know you said that competition was getting tougher in prior quarters. Is that still the case? And, you know, maybe just where is loan pricing these days?

Morning, Thomas. Yes. It is certainly a lot more competitive today than it was, you know, the last couple of years. I think as we discussed in the last quarter, you know, there's a lot of competitors that didn't participate much in the markets because of liquidity and all kinds of other constraints. And now they're trying to make it up. I would say they're trying to make it up on both rates and credits. And as I talked about in my remarks, we were able to offload a number of criticized credits during the quarter. I think there will be some more the rest of the year as well, which we're happy to part ways with. And we're happy for other people to take them. So that is fine. As it relates to, us, we're going to continue to outperform. Because for us, it's mostly about market share gains and things that we've been added for a number of years in terms of reputation and people and activity in the market. So as I said, I expect that we're gonna start seeing some of that kind of accruing here in the third quarter and to the fourth quarter, and I expect that on a full year basis, we will do better than our peers. In terms of, yields, we're seeing, pressure on that as well. I think if you step back and you look at the second quarter you know, the three year and the five year treasury, which is the majority of where we price off of in our lending portfolio. Those just rates were down close to 30 basis points on average basis versus the first quarter. So effectively, there's already been a cut and more into those rates. So that's reflected into the yields at which things are coming in. And then you add the competition, which has accounted for probably another fifteen twenty basis points on top of that. And in this in the second quarter, our our originations were kind of in the six and three quarters range in aggregate. Varies by portfolio. But I expect that that that number is probably trending lower as opposed to higher. Over time. Competition is is high on both rate and credit, as I mentioned.

Okay. All that's very helpful. Thank you. And so how are you feeling about the two to seven basis points of quarterly NIM expansion from here? Is that still a good range?

I can take that. I would say we're in the range closer to three to five at this point. You know, Dimitar just outlined some of, the metrics that are, you know, contributing to to that number for us. But, you know, can't underscore enough the the progress that we're seeing in the markets and and the pipeline's strength. So we're we're very bullish on that overall.

Okay. And and then the last one for me. It sounds like you guys, with the $600 million of acquired deposits, you'll is it is it likely that that'll sort of just boost your liquidity and and that'll be invested over time, or are you you considering securities purchases or can just maybe your updated thoughts around that.

Yeah. I think we look at that as loan growth for us. Over the next number of years. So between our organic growth on deposit side and this transaction, we've got a number of years of of loan growth here ahead of us. So, you know, initially, some of those proceeds are likely to stay in short term you know, instruments. And then we're gonna deploy them over time. So, obviously, as we deploy them over time, the impact of that transaction also improves for for our shareholders.

Okay. Great. All the questions for me. Thanks, and congrats on a good quarter, guys.

Thank you, Thomas.

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

Hello. Good morning. This is Sharanjit Cheema on for Manuel. Thank you for taking my question. I was wondering, could you talk a little bit about OpEx trends from here Does some of the restructuring of the personnel this quarter lower cost in third quarter? And is there any shift to the overall expense trajectory?

So, yes, you had there's a lot in that question. So good. That's a long one. But so the the the restructuring charge that you saw come through that is due to we're consolidating some branches. We're we're looking to evolve our platform, in of service. So we look at it as as a very positive thing. And as we, you know, continue to open the de novos and, you know, expand in Eastern Pennsylvania, this was an important point for us. In terms of OpEx, you're going to see it sort of be flat as we move forward. We're we mentioned in our opening remarks, focused on it. And looking to ensure that you know, every everything that we're investing in has has trajectory to push the business forward. Dimitar also mentioned that in his opening remarks. When it comes to our fee income businesses. So, know, look. When when you're growing a business, there's going to be times as as things move up that you are looking at you know, increasing some expenses, but we don't we don't see that as a go forward. We're just looking at some of these as as onetime.

Great. Thank you. And then shifting over a little bit to the branch acquisition, how is that going so far? Like, is it as expected? And then oh, can you discuss a little bit more about how this transaction built into or ties into your previously planned de novo extensions?

Sure. So we're right on track with our expectations. It is very early days, so we expect that we're gonna work through the regulatory side of this here in in in the summer. And then closing is slated for the fourth quarter. Probably sometime in November is our goal. I will say it's exactly what, we've been looking for. It is it is a perfect complement to our organic strategy in that market. So we have three de novo branches opening up in the Lehigh Valley, Actually, one of them is already open. So by the end of the year, we're between the acquisition and those three branches, we're gonna have 10 branches right into the heart of the valley and then 12 more broadly in the kind of the the greater area. Which brings us to a top five market share in terms of presence. And that is when thing good things start happening. So we're very excited about that. And, you know, if we could replicate that in every one of our markets, we would love to. But those are hard to come by.

Great. Thank you so much. That's all for me.

And your next question comes from Matthew Breese with Stephens. Please go ahead.

Hey, good morning. Good morning, Matthew. I was hoping hoping we could learn a little bit more about the pipeline. You you mentioned a couple of times there that it's robust and you're bullish on it. I also just wanted to kind of you know, hear a little bit more about or a reminder of financial targets. I I think you were referring back to the Investor Day in September when you said kind of through cycle loan growth of 5% to 7%. You think the pipeline supports that?

Sure. So Matt, I'll take that. If you look at our business on the lending side, basically, there's three things with the Right? We do mortgages or home equities. We do auto loans. That's our consumer lending in aggregate, and then we do commercial of which there's virtually two products for the most part, you know, CRE and C and I. And across all of those, we generally target mid single digit growth in all those portfolios. Some years, some of them will be stronger. Some years, they will be a little bit weaker. But, again, the aggregate number is somewhere in the mid single digits. Earlier this year, we talked about probably that being a little bit closer to the lower end of that. So if I don't know, if mid single digits are four to six to seven, you know, in the past few years, we're growing kind of seven plus. You know? We expected this year, we'll be closer to kind of the four to five handle. Given we expected competition, we expected more pressure in in in that sense. So when I say we're we're thinking that we'll be back on track for all those metrics, I I mean that that range. You know? So four plus or minus a little bit is probably a a reasonable number for us this year. We're certainly we started a little bit slower on the consumer lending on the indirect portion of that. We've made a lot of that ground in the second quarter, and we're now positive. And you know, momentum there continues. Mortgage is holding up pretty well in a very tough market. With where rates are. You know, all the yields I talked about, the pressure, that's actually not occurred on the mortgage side because that's old of the long end of the curve. So that's really putting an impact on demand. But we're we're quoting our own and up outperforming the industry. Then in the in the commercial business, it's been a little bit of a story of two tales because you have the C and I business has grown very, very well this year. In fact, you know, probably on track for high single digits to double digit growth even. And at the same time, you know, we've, again, cleaned up some of the exposures on the CRE side. I would say some of those were higher risk, and some of them were unproductive because of non performing assets. So you might see the balance come off, but it's not accruing interest anyways. So now we've got capacity to to get back and refill some of those buckets a little bit more. Again, the activity is very good. We have had just kind of in the context of payoffs, We've had over a $100 million of payoffs year to date in the commercial business. Probably 40% of those were in assets that we were happy to see go. And we probably have another $100 million to go in terms of prepayments in the second half of the year. But given the pipeline, we think we're gonna absorb that and actually grow meaningfully.

Great. I appreciate all that. Two or three others for me. The first one is just going back to the the the branch acquisition. Could you give us some sense for composition of the deposits being acquired, the all in cost And then, you know, particularly in this day and age with mobile banking, I'd love to hear your thoughts on retention.

Sure. If you kind of look at the aggregate population there, these are deposits that look very much ours in terms of their granularity The average account size is less than 20,000. If you look at, kind of the split between transaction and DDAs versus CDs, it's somewhere in the $65.35 split range. With that said, basically, the CDs are the same customers. With they're not single product customers. Very, very few very small percent are single product customers. It's the same customer that just parked money out of transaction account into CD for the rate environment. As we look at kind of the the opportunity to deploy that you know, capital and that that liquidity, we feel that next couple of years, we'll be able to make a decent dent into it. But over five and six, you know, we'll probably bring that to our normal kind of target of loan to deposit ratio. So as you think about the long term, you know, probably 75 to 85% loan to deposit ratio by year five or six. So, yeah, I mean, the blended cost of of funds there is just below 2%. And that's a little bit dated. So it's probably a little bit lower today. So very high quality deposits in a really great market for us.

Great. I appreciate that. The next one is just on the you know, could you remind us where you are in terms of the the De Novo branch build out? I think the total was maybe, like, fifteen or branches that you wanted to open. How many of those are in fact open today? How many expect will be open by the end of this year? And then on the other side of that, I I think I saw on the in the applications, there's something like maybe seventeen branch closings submitted. Could you help me out on on potential branch closures? Near term? Thank you.

Sure. So so on the de novo, it was it's 19. What has opened so far, Seven. So we've opened seven total across across the footprint. We just opened three in Q2, and there will be two in July. So that's that's going extremely well. We're really happy with the progress there. They're they're beautiful branches. They're they're very well staffed. The the the sentiment, you know, around as as we definitely talk to the field and get out, to talk to customers. And and our employees that are that are opening these branches is is extremely positive. So we're really happy with that strategy and we'll continue to to do our best, to get those stood up, all 19, you know, by the end of the year. Possibly a couple will fall into Q1 of twenty six, but, that's all on track. So, really, really happy with that progress. In terms of closures, 17 is is correct.

Matt, you may recall we we've committed consistently that our branch expansion will be net neutral. To our shareholders. So you know, we're closing as many as we're opening and basically reallocating resources and some of that you saw this quarter with a restructuring charge.

Great. I appreciate that. And then the other one I wanted to ask is just on loan yields. They were up five basis points this quarter. Just a bit more than what I was expecting. Was there anything atypical or unusual there? You'd mentioned some payoffs. I'm curious if there was repayment of, you know, interest income that was on accrual, or is this a a decent pace of loan yield expansion in the absence of rate cuts?

It's the latter. So, yep, you're you're exactly correct. There's there's nothing atypical that we're seeing. We, you know, obviously, are are looking at this on a daily, weekly basis, and, all all is in line there.

Thank you. And then just the last one is just any updates You know, the CHIPS Act was kinda in in focus of the new administration earlier this year. And is there anything upsetting the apple cart there? I know was curious if if Micron is still on track to break ground later this year. And that's all I had. Thank you for taking all this.

Yeah. So it is still on track. I believe the fourth quarter is when they're gonna break ground. There's a as it relates to some of the environmental concerns that's ongoing right now. So and I think, actually, the number the investment number actually went up. The expected investment. So all good. As we've said before, that's really not what we're growing because of today and not what we're gonna grow because of the next know, probably couple of years. But as the impact of of that sixteen year investment, come into play, certainly, over time, there will be a positive lift for everybody involved.

Thank you.

Again, if you have a question, please press then 1. And your next question comes from David Conrad with KBW. Please go ahead.

Yeah. Good morning. Just just one for me. Just on fee income. You mentioned some seasonality, some pull forward insurance this quarter. I think you're up like, 1% year over year this quarter. So just kinda thinking about the run rate over the next two quarters as stuff picks up a little bit and kind of your year over year expectations for '25?

Good morning, David. Good morning. So on the insurance you know, we usually get the contingent payments in the second quarter. This year, we got them in the first quarter. So the first quarter was quite robust for us in insurance. We did communicate that that's probably not sustainable. You know, 27% revenue growth was not the run rate of the business. We traditionally target high single digit to low double digit growth rate in that business between organic and inorganic. And year to date, we're at 13%. We certainly expect that this year will not be an exception from our targets. So whether we end up at you know, a little bit in the high single digits or maybe just a hair, you know, in the in the double digits. Who knows? But that's kind of the ultimate target. Business is doing well. Pipeline is pretty good. The seasonality there again is typically the second quarter. This year was more in the first quarter. We're gonna have a nice third quarter. That's usually another big renewal quarter for us. And then the fourth quarter is usually a little bit slower. But in the aggregate basis, I think we're very much on track to get to our historical growth rate, which over the past ten plus years has been the 11% actually in that business.

Great. 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 to you, Michael, for for hosting the call, and thank you for everybody who joined. And we look forward to speaking with you in a couple of couple of months.

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