Q4 2024 Community Financial System Inc Earnings Call
Good day and welcome to the community Financial System, Inc. Fourth quarter 'twenty 'twenty four earnings conference call.
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Dimitar Crab: I'd now like to turn the conference over to Dimitar crab enough President and Chief Executive Officer. Please go ahead.
Speaker Change: Thank you Mike.
Speaker Change: Morning, everybody and thank you for joining our fourth quarter and full year 2024 earnings call.
Speaker Change: This was a very solid quarter for us with operating <unk> of $1 40 per share, which grew 18, 5% compared to the prior quarter and 23, 9% compared to last year's fourth quarter.
Speaker Change: Those are excellent numbers.
Speaker Change: There's a lot to be pleased about that just margin expansion and excellent liquidity strong fee performance strong credit and well managed expenses.
Speaker Change: Leave all the quarterly details to Joe and we'd like to really focus on our overall 2020 for performance in 2025.
Speaker Change: As we look back upon 2024, I'm pleased with the performance of our company.
Speaker Change: In a year, where the overall correction is projected to have lower earnings to the tune of approximately 5%. We actually grew operating PNR per share by eight 2% and operating earnings per share by 2.2%.
Speaker Change: Delta between the two is mostly due to our increase of ACO from six to nine basis points of loans at the end of 2023% to 7% to six basis points of loans at 2024, which prepare us better for the future and also a negative variance on the effective tax rate.
Speaker Change: The drivers of our outperformance are a great example of the power of our diversified company and I will go into more details below.
Speaker Change: In the banking and corporate segment.
Speaker Change: 2024 operating keep in our grew by five 6%.
Speaker Change: Net interest income grew for the eighth 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.
Speaker Change: <unk> grew by seven 5% or more than double the expected growth of both the banking industry and our local peers.
Speaker Change: Her words, we gained a lot of market share.
Speaker Change: Commercial lending was particularly strong with double digit growth, while mortgage and home equity both grew over 6%.
Speaker Change: The investments we've been making in people and process continues to bear fruit.
Speaker Change: Lending growth was $728 million in overall deposits grew by $514 million or 4% also an excellent result in a difficult environment.
Latter part of the year, we saw commercial and personal deposits resumed their historical performance and that gives us hope for future periods.
Speaker Change: In 2020 for the Federal Reserve ended its hiking cycle and we can now confidently state that we have the lowest cost of funds in the <unk> index during the periods with a deposit beta of 22%.
Speaker Change: Speaking of liquidity, we also boosted our borrowing capacity and I don't have five 8 billion of available liquidity to that or.
Speaker Change: 246% of net uninsured deposits.
Speaker Change: That I believe is truly pure leading.
Speaker Change: Credit quality remains very strong with 2020 for charge offs of 10 basis points, which is roughly half of that of the <unk> index and as mentioned our ACL now represents over seven years of coverage at these levels.
Speaker Change: And the employee benefit services business, we had an excellent year.
Speaker Change: 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.
Speaker Change: We also successfully deployed capital and integrated a couple of acquisitions.
Speaker Change: 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.
Speaker Change: In the insurance services segment, we grew revenues by six 7%.
Speaker Change: To expand and strengthen the footprint via acquisitions we.
We had a 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.
Speaker Change: Operating earnings were impacted by elevated expenses and we're very focused on that in 2025.
Speaker Change: The wealth management services business also had a very strong year revenue growth of 14, 9% and operating income growth of 22, 9% we're truly excellent.
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.
Speaker Change: The business has energized active and collaborating effectively with the banking business.
Speaker Change: So 2024 was very good and I want to 2025.
Speaker Change: 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.
Speaker Change: 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 basketball of years get to the market and competitive opportunities, we sought to attract talent and clients.
Speaker Change: Those opportunities do exist, but I expect it to have more competitors square back after being essentially frozen since 2022 due to liquidity concerns the.
Speaker Change: Flip side of that is that I also see half a dozen of our competitors 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.
Speaker Change: For now mid single digit seems appropriate.
Speaker Change: Funding will remain as always our top priority and we have a number of initiatives, which are still ramping up.
Speaker Change: And with a loan to deposit ratio of 78%, we have plenty of capacity as we.
Speaker Change: We continue to expect this credit costs will trend back up to historical averages and thus have been slowly inching up our ACO and I expect that to continue.
Speaker Change: We will also be opening up 16, more branches and that will cause some increase in expenses industry through an 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.
Speaker Change: 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.
And 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 wouldnt be looking for mid to high single digit revenue expansion.
Speaker Change: 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.
Speaker Change: We have gained a lot of revenue growth over the past few years and spent most of 2020 for laying out the new organizational structure and responsibilities M&A.
Speaker Change: M&A will continue to be a focus and supplement organic growth with all of our expectation of revenue growth in the mid to high single digits.
Speaker Change: And the wealth management services business in 2025.
Speaker Change: 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 those none of those will meaningfully impact operating earnings perform.
Speaker Change: Due to the associated expenses.
Speaker Change: 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 continues to improve in line with our diversified business model in.
Speaker Change: In 2024, we outperformed the <unk> index and our earnings performance and my expectation is that we will continue to deliver above average returns while managing to a below average risk profile.
Speaker Change: We're definitely longer than my usual remarks, and now it's finally time to pass it on to Joe.
Joe: Thank you Dimitar good morning, everyone.
Joe: <unk> known as the Companys fourth quarter performance was strong GAAP earnings per share of <unk> 94 cents were up 31 sensor, 49% over the fourth quarter of the prior year and up 11 or 13% over linked third quarter results operating earnings per share in operating pretax pre provision net revenue per share were also up significantly.
Joe: The year over year and linked quarter basis. The company reported operating earnings per share of a dollar in the fourth quarter as compared to 82 cents one year prior and 88 cents in the linked third quarter fourth quarter operating P. PNR per share of $1 40 was up 27 per share or 23, 9% from one year.
Joe: <unk> and <unk> 11 per share or eight 5% on a linked quarter basis.
Joe: Full year GAAP earnings per share operating earnings per share and operating P. PNR per share were up 44% to 2% and eight 2% respectively strong revenue growth underpin these results.
Joe: In the fourth quarter. The company reported 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 three 7% from the linked third quarter. These results marked the sixth consecutive quarter of increases in total operating revenues, while establishing new.
Joe: Quarterly highs for net interest income employee benefit services revenues in wealth management services revenues on a full year basis total operating revenues increased $41 $3 million or five 9%.
Joe: The company recorded net interest income of $120 million in the fourth quarter. This represents a $7 $2 million or six 4% increase over the linked third quarter result, in a $10 $8 million or nine 9% improvement over the fourth quarter of 2023 and also marks the third consecutive quarter of net interest income.
Joe: Fashion.
Joe: An improvement in the 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 one 3%.
Which was consistent with the prior two quarters, while the total cost of funds decreased six basis points from 144% in the third quarter of 213, 8% in the fourth quarter due to a decrease in borrowed funds costs. The company's fully tax equivalent net interest margin increased 15 basis points from three 5% and the linked third.
Joe: Quarter to three 2% in the third quarter as Dematteis mentioned 2024 also marked the 18th consecutive year. The company increased net interest income and the outlook remains positive for continued net interest net interest income expansion in 2025.
Joe: Operating noninterest 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 noninterest revenues were up $1 9 million or 10, 2% over the same quarter. The prior year driven by increases in mortgage banking revenues and deposit service.
Joe: 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 and insurance services revenues were up zero point $6 million or five person.
Joe: 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.
Joe: Linked quarter basis, operating noninterest revenues were down zero point $3 million or 0.4%.
Joe: During the fourth quarter the company recorded a $125 $5 million in total noninterest expenses. This compares to a $129 1 million of total noninterest expenses in the prior year's fourth quarter, the $3 $6 million two 8% decrease between periods was mainly driven by several non operating expenses incurred in the prior year.
Joe: Fourth quarter totaling $9 $2 million, excluding the impact of these nonoperating items noninterest expenses increased $5 6 million or four 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 op.
Joe: Operating noninterest.
Joe: <unk> expenses increased $24 $1 million or five 4% consistent with the mid single digit growth rate pension during prior quarterly earnings calls.
Joe: Reflective of an increase in loans outstanding and qualitative factor adjustments. The company reported a $6 2 million $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 record.
Joe: $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 effective tax rate was 22, 9%.
Joe: Ending loans increased to $187 million or one 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 tap markets within our northeast footprint.
Joe: 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.
Joe: Ending loans were up $727 $8 million or seven 5% from one year prior reflective of growth in all five lending portfolios.
Joe: The company's ending total deposits decreased $34 $5 million or 0.3% during the fourth quarter driven by a decrease in municipal deposits.
Joe: Fourth quarter deposit funding costs of 123 basis points were flat compared to the prior two quarters noninterest bearing and low rate checking and savings accounts continue to represent almost two thirds of the total deposits reflected about the core characteristics of the Companys deposit base ending deposits were up $513 6 million or 4% from one year.
Joe: Fire.
Joe: Driven by increases in municipal and business deposits. The company did not hold any broker deposits on its balance sheet during 2024.
Joe: 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 discount window and unused borrowing capacity at the federal home loan Bank of New York total of $5 $77 billion at the end of the fourth quarter. These sources of immediate.
Joe: Available liquidity represented 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.
Joe: At the end of the year all the companies in the bank's regulatory capital ratios significantly exceeded well capitalized standards.
Excuse me more specifically the company's tier one leverage ratio was 9.19%.
Joe: Which substantially exceeded the regulatory well capitalized standard of 5%.
Joe: Nonperforming loans totaled $73.4 million of 70 basis points of total loans outstanding.
Joe: At the end of the year. This represents a $10 5 million or nine basis point increase from the end of the linked third quarter comparatively nonperforming loans were $54 6 million or 56 basis points of total loans outstanding one year. Prior loans 30 to 89 days delinquent were also up on a linked quarter basis from $47 2 million or <unk> 46.
Joe: Six 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.
Joe: The company recorded net charge offs of $3 $2 million of 12 base basis points of average loans annualized during the fourth quarter. This 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 avid.
Joe: Loans outstanding companies allowance for credit losses was $79 1 million or 76 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 for near prior although credit loss reserves increased during the fourth quarter due to qualitative factors overall, the company's asset quality.
Joe: [noise] remains solid the allowance for credit losses at the end of the fourth quarter represented over seven times, the company's full year 2024 net charge offs.
Joe: We believe the company's diversified revenue profile strong liquidity regulatory capital reserve stable core deposit base and historically good asset quality provide a solid foundation for continued growth in 2025.
Mike: Now I'll turn it back to Mike to open the line for questions.
Mike: We will now begin the question and answer session.
Mike: To ask a question you May press Star then one on your telephone keypad.
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 two.
Mike: At this time, we will pause momentarily to assemble our roster.
Mike: Yeah.
Mike: Okay.
Speaker Change: First question comes from Steve Moss with Raymond James. Please go ahead.
Speaker Change: Hello, Steve Your line may be muted.
Oh, sorry, I was on mute.
Speaker Change:
Speaker Change: Good morning, guys.
Speaker Change: In terms of the.
Speaker Change: In terms of I appreciate all the color on the growth here.
Speaker Change: Both on the loan growth side and the fee side, just maybe starting with loans here I was just curious.
Speaker Change: Where's the loan pipeline today, what does it remains strong heading into the early part of the year and maybe perhaps moderation as the year goes on just come through some dynamics you guys are seeing along with loan pricing.
Speaker Change: I think on the pipeline Steve It remains reasonably in line.
Speaker Change: I would probably split it up in a couple of buckets. The commercial pipeline is in line with our.
Speaker Change: Last few quarters.
Speaker Change: <unk> been consistent around a similar level. So I expect that we'll we'll be pulling those through in 2025.
Speaker Change: The mortgage pipeline is solid and very consistent with last year, which was a very good year.
Speaker Change: The one business, that's a little bit more hard to predict on a little bit more volatile as our.
Speaker Change: Auto lending business.
Speaker Change: And typically the first quarter is not.
Speaker Change: The best quarter in that business. So, we'll see how that plays out.
Speaker Change: But again I think we're going to.
Speaker Change: We're going to continue to have really good opportunities. We think we are gaining market share in literally every one of those businesses.
Speaker Change: But just mid single digits for us is really what they feel comfortable with for 2025 at this point.
Speaker Change: Just kind of curious what are you guys seeing for rates.
Speaker Change: Parcel side in particular.
Speaker Change: Right around seven.
Speaker Change: Right now.
Speaker Change: Certainly some products youll be youll see some rates a little bit lower but.
Speaker Change: Most of those are priced off of their five year roughly so as the rates have gone up here a little bit you know, we're writing loans today at higher rates than at the beginning of December so.
Speaker Change: I think seven years on average is kind of where we are a blended basis.
Speaker Change: Okay.
Speaker Change: And then in terms of the margin here.
Speaker Change: Step up with regard to the modern funding costs come down.
Speaker Change: Can you benefit from upward asset repricing and higher loan yields.
Speaker Change: Hi, Chris.
Speaker Change: I hear you guys in terms of NII growth, how do we think about that margin trajectory here.
Joe: Well, Steve I think this is Joe I think the.
Joe: Expectations around margin are continue or we expect it to continue to grow and expand a bit in 2025.
Joe: Net interest income is obviously the.
Joe: 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.
Joe: Our book yield right now on loans is $5 58, I think for the quarter and were booking new loans at seven so if we do nothing more than just replace whats coming off the expectation is that we'd expand the interest income side of the NII equation.
Joe: 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.
Joe: Truly.
Joe: Through the loan side of the of the equation and obviously, we as dermatologist noted were expecting some incremental.
Joe: Increase.
Joe: Mid single digit growth in the loan portfolio.
Joe: So that gives us additional opportunities for net interest income expansion. So I think we signaled on our last quarter's earnings earnings call that you know.
Joe: Three to four to five basis points quarter over quarter was a reasonable expectation around margin, we obviously didn't get a little bit better than that this quarter.
Joe: But.
Joe: So thats our expectations that we're going to continue to expand NII in 2025, obviously you know as we get later into the year that could change if the market changes, but right now the market is set up as is pretty good for expansion.
Joe: Okay appreciate that and then in terms of.
Speaker Change: The expense volatility here I apologize if I missed it but just curious are you guys thinking about maybe full year growth here.
Joe: Here with a genomics coming on but just.
Joe: Your fee income businesses are shown good growth overall.
Joe: So I would assume a pretty healthy step up in expenses here for the year.
Yeah, I think that's a fair expectation.
Joe: <unk>.
Joe: You know, we're continuing to invest in all of our businesses and that's investing in.
Joe: Talent and systems.
Joe: And the like and we put a lot of investment in in 'twenty, two 'twenty three and into 'twenty, four and we're going to continue to invest so.
Joe: I think kind of mid mid single digits, maybe a little a little higher than we had this year in terms of operating expense growth is probably a fair 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.
Joe: Does all of our Merit increases go through we have to we have full a full load of payroll taxes, and just generally higher expenses.
In the first quarter.
Joe: What's actually kind of unique because we actually have snow this year and 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.
Joe: First quarter, we'd see some significant increase over the fourth quarter run rate and then but on a full year basis still kind of thinking mid single digits.
Speaker Change: Steve I would just add there a little bit more color.
Speaker Change: On the branches kind of on the new expansion I think in the second and probably mostly in the late second.
Speaker Change: Third quarter.
Speaker Change: We're going to see about $4 million to $5 million of expenses in terms of marketing.
Speaker Change: Just kind of brand awareness and market presence events.
Speaker Change: They're going to be associated were going to get those are obviously going to be kind of a one timer type of things.
Speaker Change: And we're going to get.
Speaker Change: Most of them back into fourth quarter by the time, we consolidate some of the existing location. So that's our goal is to exit.
Speaker Change: 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.
Speaker Change: Okay, Great I appreciate I'll call. It all I'll step back here thanks, guys.
Speaker Change: The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.
Frank Schiraldi: Good morning.
Speaker Change: Morning, Frank.
Just trying to just back on the margin I'm trying.
Speaker Change: Trying to think through you know the linked quarter increase and was there anything more volatile in terms of maybe prepayment income on a linked quarter war or just a some seasonality in the back book repricing, just kind of wanted to get a little more color on.
Speaker Change: About 15 basis points versus.
Speaker Change: I'm kind of three or four or five.
Speaker Change: This point quarter over quarter growth you guys talked about you know in the NIM on a sort of a normalized basis here.
Speaker Change: Yes.
Frank Schiraldi: A fair question Frank.
Just a couple of things that probably are worth noting is we did have.
Frank Schiraldi: A federal reserve Bank and federal home loan bank dividend both in the fourth quarter. You know, we don't necessarily have both in a given quarter.
You know kind of the fourth I think in the second quarter, so that will contribute a bit to the increase in <unk> in the <unk>.
Frank Schiraldi: Outcome for the fourth quarter.
Frank Schiraldi: We did have some some loans that kind of came off nonaccrual status and that gives you a little bit you recoup some of that.
Frank Schiraldi: That interest income, which was not a big number for the quarter, but probably added one or two basis points overall to the NIM. So if you were to kind of strip those items out it's not it's not a 15 basis point.
Frank Schiraldi: Quarter over quarter increase hence the.
Frank Schiraldi: The indications are a little lower expectation going forward.
Frank Schiraldi: So I think that's.
Frank Schiraldi: It's part of it the other thing too is that in the and this is probably noteworthy as we have some seasonality in.
Frank Schiraldi: Our municipal deposit base and that includes a significant tax collection peer.
Frank Schiraldi: Period at the end of really the kind of the end of October and what that does is it reduces.
Frank Schiraldi: Any sort of overnight borrowings.
Frank Schiraldi: Yes.
Frank Schiraldi: Four and change four five call it.
Frank Schiraldi: And it goes into the into the deposit base, which is a little less expensive and then over time those those pennant drift down you potentially go into overnight borrowings and that that could compressed the margin going into the into the first quarter.
Frank Schiraldi: Okay, 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.
Dimitar Crab: And Dimitar you also mentioned some some investment in the business just wondering.
Dimitar Crab: If this is a year, where you would expect them.
Dimitar Crab: To get positive operating leverage in that business or just wondering how extensive those investments might be specifically and that employee benefits business.
Speaker Change: Yes, so Frank the way I would think about it is look our expectation is that we get positive operating leverage.
Dimitar Crab: Youre in every business.
Dimitar Crab: The benefits business is one thats half of its revenue is essentially tied to the market. So.
Dimitar Crab: That has a meaningful impact depending on what happens with the market.
Dimitar Crab: The investment that we're going to make.
Dimitar Crab: Them selves can be easily offset if we get a reasonable market outcome.
Dimitar Crab: But if the market is flat then those investments will be a little bit heavier.
Dimitar Crab: We fully expect we're going to make more money in that business in 2000 25 billion 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.
Dimitar Crab: We basically were flat in terms of our positive operating leverage the margin expanded a little bit.
Dimitar Crab: But we made a lot more money.
Dimitar Crab: 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.
Dimitar Crab: Just the way the math works is we're going to make more money since we have a pretty healthy margin in the business.
Speaker Change: Okay, Alright, great and then just if I could sneak in one more just really a clarification dimitar I think I think you touched on it in your comments, but in terms of credit.
Dimitar Crab: I think you talked about.
Speaker Change: <unk> sort of credit normalization here I'm not sure. If you you mentioned reserve.
Dimitar Crab: You anticipate.
Dimitar Crab: As you know you get continued normalization here that you do see some continued.
Dimitar Crab: Reserve builds in 2025.
Dimitar Crab: Yes, we do expect that in maybe the way.
Dimitar Crab: The way at least I would 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 It at 15 base.
Dimitar Crab: This 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.
Dimitar Crab: Five and a half years of coverage because thats 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.
Dimitar Crab: 10 basis points, but that 10 basis points, probably drifts up rather than down.
Dimitar Crab: Credit remains great.
Dimitar Crab: Six basis points of charge offs in our commercial credit book, that's terrific got one basis points of charge offs and the mortgage book.
Dimitar Crab: But we do expect that over time, that's just not not sustainable maybe we'll be surprised positively I hope so.
Dimitar Crab:
Dimitar Crab: But we rather be safe than sorry on that front.
Got it okay I appreciate all the color. Thanks.
Dimitar Crab: Yeah.
Dimitar Crab: The next question comes from Matthew Breese with Stephens, Inc. Please go ahead.
Matthew Breese: Good morning.
Speaker Change: Hey, Matt.
Speaker Change: I wanted to hone in a little bit on on loan yields and the cadence of loan yield expansion for this quarter loan yields were up seven basis points to 558.
Speaker Change: And the inventory you mentioned roll on yields are in the 7% range. So I was just curious if that seven basis points, we saw quarter over quarter.
Speaker Change: Is that a decent proxy for how at least the early part of 2025 kimco.
Speaker Change: And I was hoping also you could you could talk a little bit about <unk>.
Speaker Change: Payoff activity mix.
Speaker Change: And the speed of which youre seeing pay off activity.
Speaker Change: Yes, maybe I'll pause there and just get.
Speaker Change: Again, a couple of us some more color on those two items.
Speaker Change: Yeah, Matt. This is this is Joe.
Speaker Change: That expectation of seven or eight basis points per quarter seems a bit high and the reason is is that we still do have a portfolio of.
Speaker Change: Floating rate loans that adjust to the short end of the curve.
Speaker Change: And so some of those reductions that.
Speaker Change: We saw in the latter part of 2024 haven't fully hit the book, yet and if we get additional.
Speaker Change: Reductions from the from the F O M C in 2025 networks against.
Speaker Change: Improving loan yields by six or seven basis points a quarter. So.
Speaker Change: So we still have to effectively feel the full effect of the of the recent rate cuts, we will get most of that in the first quarter. If theres additional rate cuts that will work against us a little bit.
Speaker Change: Most of our book, though however to dermatitis point is priced off of it you know kind of that five year part of the curve.
Speaker Change: That continues to stay where it is.
Speaker Change: And we continue to book new loans around seven thats going to be call. It helpful for the overall outcome.
Speaker Change: Would not expect to see seven or eight basis points on the full book yield improvement quarter over quarter.
Speaker Change: I think on the refi.
Speaker Change: Matt.
Speaker Change: Certainly.
Speaker Change: We've seen a little bit more today than a few quarters ago, but.
Speaker Change: Not a lot I mean, the rate differential there is not quite there for declines, especially as.
Speaker Change: The backend of the curve has moved up.
Speaker Change: So I think.
Speaker Change: Right now we're below average.
Speaker Change: Trends on on prepayments.
Speaker Change: 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.
Speaker Change: 24 months when most of the folks we're really focused on keeping the balance sheet flat and not having liquidity enough to land. We went out and we got as many seven five type assets as we could great.
Speaker Change: Great quality assets and those should stay with us a little bit longer than usual I think if unless rates really move down dramatically.
Speaker Change: Got it okay and inventory when you said.
Speaker Change: Five five years duration of the book.
Speaker Change: 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.
Speaker Change: That's a good question, Matt that we may have to come back to you on that one I'll also keep in mind that a good chunk of our book is in our indirect auto business and Thats really more of a kind of a three year duration. So the five and a half I was using was more blended but we will get back to you on that.
Speaker Change: Topic.
Speaker Change: Got it okay I appreciate that.
Speaker Change: And then I wanted to just touch on deposit costs.
Speaker Change: A few good quarters for you and.
Speaker Change: Most of the industries, reducing cost at this point, but granted you are yes.
Speaker Change: Quite a bit lower on deposit costs overall have been a lot of your peers. So.
Speaker Change: It's a black and white question.
Speaker Change: Just curious are you seeing pressure to increase deposit cost despite rate coming rates coming down.
Speaker Change: Or are you are you seeing opportunities to reduce costs, if so to what extent. Thank you.
Speaker Change: Yes no.
Speaker Change: 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.
Speaker Change: Municipal deposits, which typically go into higher cost money market accounts. So.
Speaker Change: So that changes 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.
Speaker Change: From what we can tell our competitors have done very similar.
Speaker Change: Kind of actions across the board. So there is there is really very little in the way of of.
Speaker Change: Pressure to pay for deposits today.
Speaker Change: 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.
Speaker Change: They expected it on the way up I think it's no surprise to them that now it's coming on the way down.
Speaker Change: So I think we're going to continue to grind those costs lower.
Speaker Change: Again, our mix.
70% roughly of our deposits are essentially zero or very low cost. So when you're sitting at three basis points in the savings account you can cut it by one basis point.
Speaker Change: And Thats, a 33% decrease but it doesn't move the numbers that much.
Speaker Change: Understood. Okay, and then last one for me.
Speaker Change: Jim I was hoping you could talk just a little bit about the regulatory environment.
Speaker Change: Good morning, it looks like travelers Hill, it's been tapped as acting chairman of the FDIC has been very vocal about speeding up the M&A approval process.
Speaker Change: I'm curious if that might make you any more likely to participate in M&A near term.
Speaker Change: Yes.
Speaker Change: Yes, I mean, I think on the regulatory side the way.
Speaker Change: We think about it is that it should not be negative so.
Speaker Change: Clearly we've seen some.
Speaker Change: Accelerated approvals in the past few months I think that's a good sign I think the tone is more constructive.
Speaker Change: I think as it as it relates to M&A. The regulatory piece was never really know our way of considering M&A and in the past few years, we've been very close to that.
Speaker Change: The point of announcing a transaction and.
Speaker Change: And we just haven't a floor for various reasons <unk> does not go away.
Speaker Change: Still around.
Speaker Change: And I think there.
Speaker Change: There is not getting any younger either so.
Speaker Change: Probably we will have some more opportunities in 2025 and beyond and.
Speaker Change: Certainly we will feel.
Speaker Change: Maybe a little bit better on the margin about the timeline of those approvals.
Speaker Change: But we will continue to.
Speaker Change: To participate at terms that make sense for us. We generally believe that we are the highest value bid not necessary the highest price, but the highest value bids and if we find people that.
Speaker Change: Really understand that on the other side then we will have some can talk about that if we don't.
Speaker Change: Hey, we're growing at a pretty robust based ourselves. So we don't really need to do anything.
Speaker Change: Great. That's all I had thank you for taking my questions.
Speaker Change: Welcome.
Speaker Change: Our next question comes from Chris O'connell with <unk>. Please go ahead.
Speaker Change: Thanks, Good morning.
Speaker Change: Just following up on that last question.
Speaker Change: Regarding bank M&A in particular.
Speaker Change: 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.
Speaker Change: And those expansionary markets over the next year or two.
Speaker Change: Okay.
Speaker Change: It does not Chris we look at our ultimate end game in those markets is a lot more than what we have today and what we will have pro forma for <unk>.
Speaker Change: Our branch openings so.
Speaker Change: Certainly adding density frankly in any market that we can is always a priority for us too as the density of the permanence in the business. So.
Speaker Change: We're looking to that.
Speaker Change: I think just in terms of as we look at transactions just not just really about dots on the map. It is does that franchise brings to us.
Speaker Change: Liquidity that we can work with or do they use it all themselves and also usually concentrate themselves out along the way. So if thats. The case then it is just a little bit less attractive red because we don't have a lot a lot of room left to create value for our shareholders. So.
Speaker Change: Certainly look at all of those markets.
Speaker Change: But again look at it through the lens of things that really makes sense for us to add more value rather than just purely dots on the map.
Speaker Change: Got it and then.
Speaker Change: Regarding the timing of that de Novo effort.
Speaker Change: By the end of 2025 do you see the full.
Speaker Change: And then you know net consolidations.
Speaker Change: Being complete at that time are just a few of those drift into 2026.
Speaker Change: That's definitely the goal.
Speaker Change: All of these are have a construction component to them. So it is not.
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 will be.
Speaker Change: <unk> pretty much done there might be one or two stragglers, if things don't really pan out on the construction side that I don't think its going to be more than that.
Speaker Change: Okay great.
Speaker Change: And then just circling back to the to the margin discussion.
Speaker Change: One just first off do you guys have the December spot margin.
Speaker Change:
Speaker Change: It was it was very comparable.
Speaker Change: To the to the full quarter.
Speaker Change: In terms of the the exit margin in December.
Speaker Change: Okay got it and then.
Speaker Change: Can you just walk us through.
Speaker Change: You know what the security maturity schedule is over the course of 'twenty, five and 26 and maybe if there's any.
Speaker Change: And particularly large chunks.
Speaker Change: Our quarters with the big maturities.
Speaker Change: Yes, So 2025 is a fairly light period for security maturities.
Speaker Change: Call it $100 million to $150 million of.
Speaker Change: 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.
Speaker Change: 2023, and actually pulled forward some of the 2025 cash flows and then as we walk into 2026 in the latter part of 2026, we have a pretty significant.
Speaker Change: Maturity of some Treasury Securities I think it's call it $350 million and as we walk into 2027, there is approximately another $700 million of security maturities.
Speaker Change: So we're really get to the more significant.
Speaker Change: Parts of those those maturities really in late 2006 and 2027.
Speaker Change: So call it $1 billion 26 and 27.
Speaker Change: Okay great.
Speaker Change: And then lastly, I know you guys have been making some efforts, especially on to expand the Ah.
Speaker Change: <unk> capabilities.
Speaker Change: With new swap offerings.
Speaker Change: You know that have gone well.
Speaker Change: Back half of 'twenty four in terms of.
Speaker Change: The banking fee rate there.
Speaker Change: Do you see that expanding into 2025 or is the back half of 'twenty for a pretty good starting point.
Speaker Change: I think the back half of 'twenty four is a good starting point, Chris we certainly.
Speaker Change: We're reasonably successful in 'twenty four I mean between the swaps and the capital markets.
Speaker Change: Activities It was close to $4 million in terms of fee income.
Speaker Change: And the way the World works is when you do well you expect to do better the next year. So we we.
Speaker Change: We expect to do to do better at 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 to 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.
Speaker Change: The curve is not as inverted today. So in fact, it's not inverted at all so.
Speaker Change: Those opportunities, they're not quite as appealing today. So it really is dependent on what the interest rate curve do but.
Speaker Change: We think that again, our expectation is we'll do reasonably well we have other initiatives that.
Speaker Change: 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 segue.
Speaker Change: Half was I think a decent run rate to use going forward.
Speaker Change: Got it and then just last one any any additional color on the single multifamily loan that drove the uptick in the Npls this quarter.
Speaker Change: Yeah, Chris we just had a one property in our in our call it our central New York footprint that.
It was about was about a $12 million loan balance for us and the absorption on the property was a little bit slower than initially anticipated.
Speaker Change: 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 in the product into the property, which.
Speaker Change: Potentially.
Speaker Change: Could write itself so.
But just kind of I'll call. It normal course of business occasionally you're going to have.
Speaker Change: Projected.
There are some challenges on this is one of those so I don't think theres anything thats indicative of.
Speaker Change: Larger problem or anything this is just kind of a one off.
Speaker Change: Situation with a particular property.
Speaker Change: Just to add to that Chris a little bit kind of on the credit side as we talked we expect that things are going to kind of move a little bit.
Speaker Change: More in that direction I mean, right now we only have we have less than a handful of specific reserves against credits and historically, we've had more than a handful of specific reserves against credit so.
We're not 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.
Speaker Change: Those things out and we.
Speaker Change: Don't necessarily expect a lot of losses, but we'll see how things play.
Speaker Change: Got it I appreciate the time thank you.
Okay.
Speaker Change: And your next question comes from Manuel Novice with D. A Davidson. Please go ahead.
Manuel Novice: Good morning.
Speaker Change: Sure.
Speaker Change: That's a great question.
Speaker Change: Hello, My first question a little bit on the Securities book.
Speaker Change: Hello.
Speaker Change: Essentially restructuring the securities portfolio.
Speaker Change: Yeah.
Speaker Change: I think with the right background today, that's probably unlikely.
Speaker Change: 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 to data doesn't make a lot of sense to us.
Speaker Change: Given the numbers.
Speaker Change: Mhm. Thank you.
Speaker Change: Overall.
Speaker Change: Charles.
Speaker Change: Yes.
Speaker Change: Some of the commentary.
Speaker Change: We do not.
Speaker Change: So in fact the.
Speaker Change: The investment in the.
Speaker Change: Subsidy if you will.
Speaker Change: That micron is receiving from the government got approved late last year, So thats finalized.
Speaker Change: Construction is beginning here in the second quarter of this year.
Speaker Change: So we don't really see much in the way there and I think more importantly.
Speaker Change: The critical nature of these projects is a bipartisan issue. So we don't.
We don't think thats going to change much.
Speaker Change: 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.
Speaker Change: But all of our plans.
Speaker Change: As they are with or without microphone.
Speaker Change: Oh, that's great to hear.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to <unk> for any closing remarks.
Speaker Change: Thank you, Mike and thank you to all of our investors.
Speaker Change: <unk> and analysts for joining this call.
Speaker Change: We had a pretty good 2024, and we look forward to a very productive 2025.
Speaker Change: Talk to you soon.
Yeah.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.