Community Bank System, Inc. (NYSE:CBU) Q1 2025 Earnings Call Transcript

Community Bank System, Inc. (NYSE:CBU) Q1 2025 Earnings Call Transcript April 29, 2025

Community Bank System, Inc. beats earnings expectations. Reported EPS is $0.93, expectations were $0.91.

Operator: Good day, and welcome to the Community Bank System, Inc. First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead.

Dimitar Karaivanov: Good morning, everyone, and thank you for joining our first quarter earnings call. I would like to start this call by acknowledging Joseph Sutaris’ upcoming retirement in July. Joseph joined us through the acquisition of Wilbur, and cumulatively has been with our company for thirty years. That is quite the accomplishment, and we are very grateful for his contributions. Joseph’s integrity and humility have been a pillar for us over that period. I also want to thank him personally for being a great partner for me in the past four years. I am also very happy that our company’s performance allows people to have rewarding and productive careers and retire earlier than most.

Operator: Joseph, congratulations.

Dimitar Karaivanov: I would also like to welcome Mariah Loss as our new Chief Financial Officer. Mariah joins us with a very dynamic background in finance and a very strong mind for driving business performance. Equally as importantly, she fully embodies our values of humility, integrity, teamwork, and excellence. Mariah, welcome. Now onto business. We had a predictive quarter. Results were consistent with last quarter, even with a shorter calendar, seasonal slowdowns, lower asset values, and creeping uncertainty. Operating return on assets was 1.28% and operating PPNR per share was up 18.6% on a year-over-year basis. Looking at each one of the business units in more depth, our banking business is benefiting from continued repricing of assets.

While funding costs are also moving lower, leading to margin expansion. Deposits benefited from seasonal municipal flows while loans were essentially flat as growth in commercial and mortgage was more than offset by weakness in auto lending, which was mostly seasonal and pricing driven. We continue to focus on appropriate risk-reward in terms of both credit quality and rate and saw some increased aggressiveness by competitors on both fronts. With that said, pipelines in commercial and mortgage, while a bit lower than last year, are still solid and we believe that mid-single-digit growth for those portfolios is still on track for this year. It may just be at the lower end of the range depending on overall economic activity. Indirect auto lending remains more of a wild card given aggressive competition and the impact of tariffs.

Our employee benefit services business also had a solid quarter and business momentum is strong. Current asset values will likely have an impact in 2025, but we are also working hard on the underlying unit growth. Our insurance services business had an excellent quarter, with expenses flat and revenues up meaningfully, leading to sizable margin expansion. Some of the revenue growth was due to the timing of contingency payments, but we still remain on track to deliver meaningful operating leverage for the rest of the year as well. In fact, insurance was the main driver of strong performance this quarter for the overall company. Our wealth management services business results were in line with last quarter and up meaningfully year-over-year. Similarly to our employee benefits business, we may experience revenue headwinds the rest of the year tied to asset values.

In summary, I feel good about the ability of our diversified company to grow revenues regardless of the economic and market gyrations. If you look at last year, for example, our market-sensitive businesses, employee benefit services, and wealth management services drove the majority of the overall improvement for the company. This year so far, it is looking like the bank and insurance will take the baton. That is how our company is designed, and it is times like these when we shine. I also feel great about our continued ability to attract talent and we had one of our best quarters in talent acquisition across all units: banking, benefits, insurance, and wealth. I will also note that the current economic uncertainty is as high as it has been in many years, and it is the time to be extra prudent and make sure we are truly getting paid for taking on risk while strengthening reserves.

Our business is diversified and highly profitable. Our balance sheet is excellent and we are ready to capitalize on the right opportunities. I will now pass it on to Mariah to deliver the detailed financial highlights. Mariah?

Mariah Loss: Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company’s first quarter performance was solid. GAAP earnings per share of $0.93 were up $0.17 or 22% over the first quarter of the prior year and down $0.01 or 1% over linked fourth quarter results. Operating earnings per share and operating pretax pre-provision net revenue per share were also up significantly year-over-year while remaining relatively consistent with last quarter. The company recorded operating earnings per share of $0.98 in the first quarter as compared to $0.82 one year prior and $1.00 in the linked fourth quarter. First quarter operating PPNR per share of $1.40 was up $0.22 or 18.6% from one year prior and was consistent on a linked quarter basis.

Strong revenue growth and improvements in core operating performance of all four businesses underpin these year-over-year improvements. The company recorded total operating revenues of $196 million in the first quarter. This was up $18.7 million or 10.6% from one year prior and was consistent with the record results established in the linked fourth quarter. This quarter established quarterly highs for net interest income and insurance services revenues as Dimitar also highlighted. The company’s net interest income was $120.2 million in the first quarter, a $13.2 million or 12% improvement over the first quarter of 2024 and marks the fourth consecutive quarter of net interest income expansion. Lower funding costs helped drive increases in both net interest income and net interest margin in the quarter.

During the quarter, the company’s positive deposits was 1.17%, a decrease of six basis points from the prior two quarters, drove a decrease of five basis points in the total cost of funds from 1.38% in the linked fourth quarter to 1.33% in the first quarter. The company’s fully taxable net interest margin increased four basis points from 3.20% in the late fourth quarter to 3.24% in the first quarter. The company has increased its net interest income for eighteen consecutive years and the outlook remains positive for continued net interest income expansion in 2025. Operating noninterest revenues were up in all four businesses compared to prior year’s first quarter and represented 38.7% of total operating revenues. Banking-related operating noninterest revenues were up $0.9 million or 4.7% over the same quarter of the prior year, driven by increases in mortgage banking revenues.

Employee benefit services revenues were up $0.9 million or 2.9% over the prior year’s fourth quarter reflective of an increase in the total participants under administration, and growth in asset-based fees. Insurance services revenues were up $3.1 million or 27.8% over the prior year’s first quarter driven by contingent commissions and recent acquisitions, while wealth management services were up $0.7 million or 7.1% reflective of more favorable market conditions and growth in investment advisory accounts. On a linked quarter basis, operating noninterest revenues were down $0.3 million or 0.4% due in part to two fewer days in the current quarter. The company recorded a $6.7 million provision credit losses during the first quarter, reflective of an increase for a specific reserve on one nonowner occupied CRE loan.

Placed on non-accrual during the fourth quarter of 2023. This compares to $6.1 million in the prior year’s first quarter and $6.2 million in the linked fourth quarter. During the first quarter, the company recorded $125.3 million in total noninterest expenses. This compares to $118.1 million of total noninterest expenses in the prior year’s first quarter. The $7.2 million or 6.1% increase between the periods primarily driven by increases in salaries and employee benefits, including the impact of annual merit-based salary increases, data processing, and communication and occupancy and equipment expenses. The increase also included approximately $0.9 million associated with the additional de novo related expenses are expected to be incurred in the remaining three quarters of 2025.

The effective tax rate for the first quarter of 2025 was 22.8%, down slightly from 22.9% in the first quarter of 2024. Ending loans decreased $11.2 million or 0.1% during the first quarter, driven by a net decrease in the consumer indirect lending portfolio, which was partially offset by growth in the business lending and consumer mortgage portfolios. Although this result ends the company’s streak of fourteen consecutive quarters of loan growth, the company continues to invest in its organic loan growth capabilities and expects continued expansion into the under-tapped markets within our Northeast footprint. Ending loans were up $537.6 million or 5.4% from one year prior, primarily due to growth in the business lending and consumer mortgage portfolios.

The company’s pending total deposits increased $153.3 million or 3.4% during the first quarter and $540 million or 4% from one year prior, driven by an increase in municipal deposits. Public funds deposits increased to $2.341 billion at the end of the first quarter, up $408.5 million from one year prior and up $354.8 million from the end of the linked fourth quarter. Noninterest 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. Readily available sources of liquidity, including unrestricted cash and cash equivalents, unpledged investment securities, funding availability at the Federal Reserve Bank’s discount window, and unused borrowing capacity at the Federal Home Loan Bank of New York totaled $5.9 billion at the end of the first quarter.

These sources of immediately available liquidity represent over 250% of the company’s estimated uninsured deposits net of collateralized and intercompany deposits. The company’s loan to deposit ratio at the end of the first quarter was 75%, providing future opportunities to migrate lower-yielding investment securities into higher-yielding loans. All the companies and the banks’ regulatory capital ratios continue to significantly exceed well-capitalized standards. More specifically, at the end of the first quarter of the company’s tier one leverage ratio was 9.29%, which substantially exceeded the regulatory well-capitalized standard of 5%. Nonperforming loans totaled $75 million, or 72 basis points of total loans outstanding. This represents a $1.6 million or two basis point increase from the end of the late fourth quarter.

Comparatively, nonperforming loans were $49.5 million or 50 basis points of total loans outstanding one year prior. Loans thirty to eighty-nine days delinquent were also up on a linked quarter basis from $55.9 million or 54 basis points of total loans at the end of the fourth quarter to $59.2 million or 57 basis points of total loans at the end of the first quarter. The company recorded net charge-offs of $3.2 million or 13 basis points of average loans annualized during the first quarter. This is up slightly from $2.8 million or 12 basis points in the same quarter of the prior year. The company’s allowance for credit losses was $82.8 million or 79 basis points of total loans outstanding at the end of the first quarter, up $3.7 million during the quarter and up $12.7 million from one year prior.

The allowance for credit losses at the end of the first quarter represented over seven times the company’s trailing twelve-month net charge-offs. Looking forward, we believe the company’s diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically good asset quality provide a solid foundation for continued earnings growth in the remaining three quarters of 2025. That concludes my prepared earnings comments. I would like to take the opportunity now to introduce myself and thank Joseph for his guidance through the transition period. Joseph, you are exceptional at what you do, and you will be missed. I would also like to thank Dimitar and the entire management team for their support over the last few weeks.

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

Q&A Session

Operator: Thank you. We will now begin the question and answer session. To ask a question, please press star then one 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 two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Frank Schiraldi from Piper Sandler. Please go ahead.

Frank Schiraldi: Morning. And congrats on the new position, Mariah. I wanted to start, Dimitar, you mentioned I think you mentioned pipelines a little bit lighter maybe from the year-ago period. Wondering if you could drill down into that a little bit in terms of how significant the drop-off is on the commercial side in terms of pipelines? And then also, if you would not mind, if you could provide any detail around blended new origination yields coming on currently?

Dimitar Karaivanov: Yes. Thank you, Frank. I would kind of probably put it in a couple of buckets. On the commercial side, pipelines are not that dramatically different from last year. It might be a couple of percentage points lower. The difference is we are probably seeing a little bit more on the payoffs than last year. So I think that is going to have some impact in the aggregate terms. And I think we also have a little bit more uncertainty as to when some of the pipeline gets pulled through, just given everything that is happening with our clients and in the macro environment. On the residential side, pipelines are probably about ten percent lower than last year. Still pretty good. We are just getting into the business season, so we are really going to have a much better sense of where things are here and towards May and June.

So again, that is also been a little bit impacted, I think, predominantly by availability in our markets as opposed to demand. Demand is there, just availability of housing units is not quite where it needs to be. So that is kind of what we are seeing, and I think we touched on the indirect side in the prepared remarks. We still feel pretty good about our ability to grow that portfolio. But as we have said before, we do not change our credit box in that world. So for us, you know, some years could be a lot more growth, some years could be a lot less growth, some years we might even shrink. So we will see what kind of we will take what they give us in our box. As it relates to loan originations in the first quarter, they were right around seven percent.

A little bit lower. I think we are going to continue to see some of that pressure through the year, so that is not unexpected given what has happened with rates and competitive dynamics.

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

Dimitar Karaivanov: I will take that, Frank. So last year, we opened the first one, which was in Syracuse. We just opened the second one, which was Buffalo. The next one is going to be in Syracuse again, and then we start in Albany. And then we kind of go around the footprint, you know, including PA and all the other places, Rochester. So that is on track. We continue to expect that we are going to be opening virtually all of them, maybe, say, for one or two, by the end of the year. As we have discussed, we are also going to be consolidating a very similar number of locations through the year. And the impact of all those initiatives will come out kind of on a clean run rate basis in Q4. We have talked about the cost before. You are probably going to expect to see a little bit more marketing and kind of start-up cost, if you want to put it that way, in Q3 in particular.

To the tune of three to four million bucks in that quarter. Outside of that, nothing is really changed in terms of our expectations or in terms of how we are meeting our milestones.

Frank Schiraldi: Okay. Alright. Appreciate the call. Thanks.

Operator: Thank you. Your next question comes from Steven Moss from Raymond James. Please go ahead.

Steven Moss: Hi. Good morning, Dimitar.

Dimitar Karaivanov: Good morning, Steve.

Steven Moss: Maybe just starting or following up on loans here. Just curious, Dimitar, like, how much tighter is loan pricing these days for auto, you know, and you know, just kind of how you are thinking about that market going forward in terms of balances and stuff.

Dimitar Karaivanov: Sure. So on the auto side, where pricing is today is pretty similar to the portfolio rates that we have. So we are kind of churning the portfolio at similar rates. You are not going to see a tremendous amount of pickup there. It probably shrunk by fifty basis points plus in this quarter. We have seen a lot of competitors that were a little bit more quiet over the past couple of years, kind of get back and even go deeper on credit as well. Again, for us, we do not really do that. So it is really just a matter of our credit box and some changes on pricing. So we have adjusted our pricing there. We are clearly seeing some more momentum. Some of it is seasonal as well, especially in the western part of our footprint.

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

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

Joseph Sutaris: Yeah. Hi, Steve. It is Joseph. So we put the credit on a call back in the fourth quarter of 2023. We are basically like, I think it is today. We are looking at a potential foreclosure sale on the property. So we got an updated appraisal right at the end of the first quarter. And hence the additional reserves about an additional $3.8 million or $3.9 million over and above what the reserves were prior. I will just note that you know, we apply a very conservative valuation, you know, in terms of we not only do we take the appraised value, but we apply additional discounts to that, you know, just to be conservative. And so, ultimately, we hope that the, you know, that we could resolve the ultimate sale of the properties at a little better than, you know, we will call it, than the current reserve amounts.

But with that said, you know, given that the property is expected to be, you know, foreclosed upon in the second quarter, expect to take the majority of the charge-off in the quarter and then hopefully recover that over time through the sale of the properties. All in, there are about eighteen properties in the business park, and so we are still trying to, collectively with the other participants, figure out what the strategy is for, ultimately, realizing the value of those properties. So I would expect that that call it, resolution or sale of those properties will take will certainly take some time.

Steven Moss: Okay. Great. Appreciate that color there. And then in terms of the employee benefits services business here, I am sorry. I hear you on the near-term headwinds, but markets have kind of come back a bit. Just kind of curious if you could kind of handicap some of the near-term revenue puts and takes.

Dimitar Karaivanov: Yeah. It is a little bit hard to be honest with you, Steve. I think where we are running right now, it is probably lower single digits to mid-single digits in that business. Probably closer to the lower. We do have really good momentum in terms of plant acquisitions and units that are coming onto the platform. Frankly, the plans and conversion this year are highs that they have ever been. So we know we are going to get a decent amount of unit growth. Again, it is very hard to predict. And it really depends on which day of the month you price these assets. As we have seen a lot of volatility. So, you know, for all we know, we might be up ten percent next week and we might be down ten percent. So it is really hard to pinpoint where things are going to settle.

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

Dimitar Karaivanov: It is a business for us that is now pushing about two billion in outstanding. So on the deposit side. It is a business that we have had a very long history in. These are not funds that really are hot money, if you will. These are municipalities and government that have multiple, multiple accounts with us. So it is not just the money market or the CD. That they are looking to just park money in. We have just done a better job over the past couple of years of being even more focused on the business line and making the calls and having the presence in the markets. So to us, if you look at the blended rate on that portfolio, it is in the low twos. Today. So it is a very productive funding source. And that is kind of our business. You know, it is not it is just natural seasonal flows and just on the ground walking and tackling full relationship as opposed to, you know, bidding on some large county CDs that we do not do any other business with.

Steven Moss: Got it. Appreciate all the call here today. Thank you very much.

Mariah Loss: Welcome.

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

Matthew Breese: Hey. Good morning.

Dimitar Karaivanov: Hey, Matt.

Matthew Breese: Just wanted to get some sense for NII over the course of the year. You know, you mentioned payoffs and competition. To me, the first one is just what are expected cash flows over the next, you know, nine to twelve months from the securities and loan portfolio and what are the roll-off yields there?

Joseph Sutaris: Matt, this is Joseph. I will take that one. So with respect to the loan portfolio, what I can tell you is that on a trailing twelve-month basis, so kind of looking backwards, we had, call it, between $1.5 and $1.8 billion of roll-off. Obviously, that is dependent on, you know, prepayments and prepayment speeds and the like. And I think that is a fair expectation kind of looking forward. And, you know, the current book yield is about it is just north of 5.50 and the new volumes rate is around seven. So, yeah, that is kind of how the back book is pricing. On the securities portfolio, we have pretty minimal runoff in the remainder of 2025, so less than $100 million. You know, which is coming off a little north of two, around two, call it.

And, you know, so we are not going to see much opportunity there from a repricing standpoint, at least for the remainder of 2025. However, when we hit late 2026, 2027, 2028, and 2029, we have got about $2 billion rolling off in kind of the two percent range. So, you know, from my perspective, it kind of builds a bridge. To kind of, you know, work the loan yields for the balance of this year and into next year, and then we start to get into some securities cash flows in 2026, 2027, 2028, 2029, which, you know, can pick your redeployment rate there. Matt. You know, but if it is coming off at two, you know, I would expect that the redeployment, whether it is in loans or even, you know, re-upping on some securities, probably be a net higher book yield.

So, you know, we will try to maximize effectively the rollover this year in the on the loan book in terms of improving the yield and then get to those securities cash flows in those periods.

Matthew Breese: Very helpful. So, I mean, all that say, it sounds like earning passive deals are going up into the rate for a while. Is it also safe to assume that it is going to be difficult to squeeze deposit cost much lower? Any opportunities there?

Joseph Sutaris: Yeah. I think that is a fair sort of path, Matt. You know, we might get a little bit better deposit pricing over time. But, you know, given where we are starting from, kind of at that, you know, at one thirty-ish range, it is going to be hard to or it is going to be more difficult for us than it will be some other of our, you know, some peers to bring down the cost of funds too significantly. So I think we are going to get most of our net interest margin and then income left really on the asset side as that reprises over the remainder of 2025 and to the, you know, the next four years or so.

Matthew Breese: Okay. And then, Dimitar, just in terms of your comments on competitive conditions and uncertainty and things kind of slowed down from a pipeline perspective, you know, does that change your, you know, if it continues, does that change your thinking around bank M&A at all? Like, you reengage, you know, in places you might not otherwise with a fuller pipeline.

Dimitar Karaivanov: I think as an aggregate comment, Matt, we do not really change our strategies depending on the environment. So in other words, M&A is an important piece of what we do. So we are always looking for quality adds to our company. When I say quality, that is the first and foremost screening factor. You know, numbers are basically irrelevant if we are going to dilute the quality of our balance sheet or our business by a meaningful amount. So I think that is the first and foremost hurdle. I will say it is also probably a little bit harder today to price somebody’s assets given that nobody knows what is going to happen with their clients on the commercial side in particular. So maybe that is small of a headwind. So we would probably just need to factor in a little bit more cushion on that side. But really, if there is a quality franchise, again, towards quality balance sheet, liquidity, low concentrations, in markets we care about, always open for business.

Matthew Breese: Okay. Understood. Just last one. Expenses came in a touch lower than I was thinking. Maybe some thoughts on the outlook for the remainder of 2025.

Dimitar Karaivanov: So I think, Matt, do you want to take that, Mariah? Go ahead.

Mariah Loss: Sorry. Oh, no. Okay. Okay. Yeah. I think with respect to the, you know, kind of the core, I will call it, increase in operating expenses. It is kind of mid-single digits for us. We would like it to be kind of in that three or four percent range, you know, on a normal run rate basis. We are continuing to invest in the franchise, which includes some of the marketing expenses around de novo, which probably puts us more in the, you know, kind of the mid-single-digit range going forward. But, you know, as we have kind of proven, I think, over the last couple of years, you know, we our OpEx is a little bit up over where it was traditionally, but it is also beginning to pay off pretty significantly on the revenue side of the business.

And so I think we are going to continue to kind of incur operating expenses kind of in that single-digit range increases year over year. And, you know, the intent there is obviously to continue to grow the company across all lines of business.

Matthew Breese: Great. I will leave it there. Thanks for taking my questions.

Operator: Thank you. Again, if you wish to register for a question, please press star then one. From KBW. Please go ahead.

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

Dimitar Karaivanov: I think, Chris, on our last call, we spoke about mid-single-digit growth in the fee income businesses. I do not think we are changing that today. That is our expectation. Fully expect that all the businesses are going to grow this year over last year regardless of the market environment. It may just be a little bit different in the aggregate. So to your point, insurance is off to a good start. That is not 27% growth is not going to be the rate for the year. That is going to moderate down. So but it is going to be probably higher than mid-single-digit. So that might pull kind of the aggregate up a little bit while some of the markets end to businesses maybe a little bit closer to, you know, low single to lower middle mid-digit rate. So we will see where it shakes out. I think in the aggregate when you look at that $200 million plus in revenues, we think that is growing still in the mid-single digits for this year.

Christopher O’Connell: Okay. Got it. So despite, you know, the, you know, market conditions, you know, in the first quarter, you still think, you know, mid-single-digit aggregate for those businesses is kind of the right place.

Dimitar Karaivanov: Yeah. Assuming where we stay today, I think we are going to get there.

Christopher O’Connell: Okay. Great. That is helpful. You know, and then, you know, on the margin, you know, I thought the deposit cost control here this quarter, you know, was really strong and, you know, with the asset yields, you know, continuing to reprice up. Yep. Any change in the overall, you know, NIM outlook of, you know, three to five basis points a quarter give or take, you know, absent, you know, further rate cuts.

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

Christopher O’Connell: Okay. Great. Just want to circle back on the expense, you know, discussion. You know, if, you know, as far as the cadence throughout the year, you know, to get to the mid-single-digit, you know, is it more that, you know, from the first quarter, which, you know, I think came in, you know, pretty solid, you know, flat to the fourth quarter that we will see, you know, the balloon up with the de novo cost in Q2, Q3, and then kind of end Q4 to Q4? Closer to the mid-single digits?

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

Christopher O’Connell: Okay. Great. And as far as we roll into next year, is, you know, any additional kind of related de novo costs pretty much fully baked into 2025? Or is there a little bit that will trail into 2026 here?

Dimitar Karaivanov: I think it will be negligible for 2026. I think we should exit 2025 fourth quarter with a pretty decent run rate, with a reconfigured branch network.

Christopher O’Connell: Okay. Got it. That is all I had. Thank you.

Operator: Thank you. Our next question comes from Manuel Navas from DA Davidson. Please go ahead.

Manuel Navas: Hey. Good morning. You are talking about the credit box, I think, more in the context of auto. Are you actively seeing loans not kind of meet your credit box, or you are just anticipating that that could be the case going forward? Just kind of think through what your customer base is seeing.

Dimitar Karaivanov: I think, Manuel, what we are seeing is just people being more aggressive on both rate and credit. So some of the things that we sold this quarter that kind of impacted some of our numbers were even assets that were criticized being refied away by larger and smaller competitors. So people are insisting a little bit more risk to try to make up for multiple years of not being present. That is okay with us. We have got maybe some other criticized assets we want to share as well. So that is kind of what I mean. Our credit box really has not changed. If we feel great about a particular credit, we are going to lean into it as much as we can. And if there are other things that do not fit our box, they do not fit our box, we do not need to stretch.

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

Joseph Sutaris: I think very little.

Dimitar Karaivanov: We do not really believe that much of the CHIPS Act activity has really come to our markets yet. So I think very little. It is really more about people literally not knowing what their cost of goods is. Right? Most of our clients, a lot of them, import something of something. And they do not exactly know what it is going to cost. When you do not know what your goods cost, you kind of have trouble pricing your product on the other end. So people are working through inventories and, you know, doing the best they can, trying to plan ahead. It is hard to look in pricing for those that import a lot of their goods. So I think there is some of that on the building side. It is also not clear what some of those projects it is really going to cost.

You are going to start seeing some cost overruns. We are kind of starting to see some of that. We have clients that also rely on foreign labor. So they are seeing some impact off of that where folks that were temporarily able to work for them are not able to work anymore. So it is a whole bunch of undercurrents, which is why when we say uncertainty, you know, the moment that pipeline is pretty good. The dialogue is pretty good. It is just we have to be a little bit extra cautious and our clients are a little bit extra cautious as it relates to major CapEx.

Manuel Navas: I appreciate the commentary. Thank you.

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

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

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