Community Bank System, Inc. Q3 FY2025 earnings call

• The company had an excellent quarter with strong and diversified revenue growth and market share gains across all businesses. • A $100 million investment in facilities, talent, and technology is ongoing. • Risk metrics remained excellent with strong capital, liquidity, and credit. • Recognitions included Employee Benefit Services being top 5 record keepers, ONE Group as the 68th largest property and casualty broker, Nottingham Advisors as a five-star Wealth Management team, Community Bank being top 20 banks in deposit rankings, and the Community Champion Award from the United Way of Central New York. • Pretax tangible returns for the quarter: 63% for insurance services, 62% for employee benefit services, 48% for Wealth Management Services, 25% for banking and corporate. • The company is on track to deploy approximately $100 million in cash capital in transactions aligning with strategic priorities. • Anticipated closing of the acquisition of seven Santander branches in the Lehigh Valley Market on November 7 and a minority investment in Leap Holdings, Inc. which complements the insurance services business.

In the third quarter, Community Bank System, Inc. saw robust financial performance across all segments. Total operating revenues reached $206.8 million, a new quarterly high. Net interest income was $128.2 million, representing a 13.7% increase from the prior year. Operating noninterest revenues increased $4.1 million or 5.6% from the linked second quarter. Pretax tangible returns for the quarter were 63% for insurance services, 62% for employee benefit services, 48% for Wealth Management Services, and 25% for banking and corporate. Ending loans increased $231.1 million or 2.2% during the quarter, and ending total deposits increased $580.7 million or 4.3% from one year prior. Revenue contribution across segments was diversified, with net interest income driving a significant portion of growth in the banking business.

• The company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and good asset quality provide a solid foundation for continued earnings growth. • Expect to close the acquisition of seven Santander branches on November 7, accelerating the retail strategy in the banking services business. • The minority investment in Leap Holdings, Inc. is expected to complement the insurance services business. • Anticipate continued loan growth, with ending loans up $231.1 million or 2.2% during the quarter and expected expansion into under-tapped markets. • In the fourth quarter, approximately $1 million of incremental expense is anticipated due to prepayment of charitable contribution commitments and incentive compensation adjustments.

Q: Tyler Cacciatore inquired about the minority investment in Leap, deposit costs difference between legacy and de novo markets, and spread compression on CRE loans.

A: Dimitar Karaivanov responded that the investment in Leap is in an attractive growing business, deposit costs are similar across legacy and de novo strategies, and loan yields for CRE loans are trending down due to market evolution.

Q: Steve Moss asked about the loan growth pipeline, margin with Santander deposits, expense increase, and fee income seasonality.

A: Dimitar Karaivanov and Mariah Loss stated that the commercial pipeline is at a high level, margin is expected to remain in the 3%-5% range, Q4 expense increase is due to prepayment of commitments and incentive adjustments, and employee benefit services have Q4 seasonality with potential growth.

Q: David Conrad asked about NIM and the investment portfolio yield.

A: Dimitar Karaivanov responded that investment portfolio yield fluctuations are due to dividend timing, with treasury maturities having known cash flows and plans to redeploy into loans or pay down borrowings.