Community Financial System, Inc.

Good day and welcome to the Community Financial System Inc. First Quarter 2025 Earnings Conference Call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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 Geraevanov, President and CEO. Please go ahead.

Thank you, Sagar. Good morning, everyone, and thank you for joining our first quarter earnings call. I would like to start this call by acknowledging Joseph Terrace's upcoming retirement in July. Joe joined us through the acquisition of Uber and cumulatively has been with our company for 30 years. That is quite the accomplishment, and we're very grateful for his contributions. Joe's integrity and humility have been a pillar for us over that period, and I also want to thank him personally for being a great partner for me in the past four years. I'm also very happy that our company's performance allows people to have rewarding and productive careers and retire earlier than most. Joe, congratulations. 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 on to business. We had a productive 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 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're 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 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 in line with last quarter and up meaningful 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 generations. 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's 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's been in many years and is the time to be extra prudent and make sure we're truly getting paid for taking on risk while strengthening reserves. Our business is diversified and highly profitable. Our balance sheet is excellent. and we're ready to capitalize on the right opportunities. I will now pass it on to Mariah to deliver the detailed financial highlights. Mariah?

Mariah Meachum- Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's first quarter performance was solid. GAAP earnings per share of 93 cents were up 17 cents, or 22 percent, over the first quarter of the prior year and down 1 cent, or 1 percent, over linked fourth quarter results. Operating earnings per share and operating pre-tax, 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 98 cents in the first quarter as compared to 82 cents one year prior and $1 in the linked fourth quarter. First quarter operating PPNR per share of $1.40 was up 22 cents 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 result established in the linked fourth quarter. This quarter established new 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. This represents a 0.2 million increase over the linked fourth quarter result and 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 cost of deposits was 1.17 percent, a decrease of six basis points from the prior two quarters, and drove a decrease of five basis points in the total cost of funds from 1.38 percent in the linked fourth quarter to 1.33 percent in the first quarter. The company's fully tax equivalent net interest margin increased four basis points from 3.20 percent in the linked fourth quarter to 3.24 percent in the first quarter. The company has increased its net interest income for 18 consecutive years, and the outlook remains positive for continued net interest income expansion in 2025. Operating non-interest revenues were up in all four businesses compared to the prior year's first quarter and represented 38.7% of total operating revenues. Banking-related operating non-interest 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 and investment advisory accounts. On a linked quarter basis, operating non-interest 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 for credit losses during the first quarter reflective of an increase for a specific reserve on one non-owner 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 non-interest expenses. This compares to $118.1 million of total non-interest expenses in the prior year's first quarter. The $7.2 million, or 6.1% increase between the periods, was 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 bank's de novo branch expansions. 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 14 consecutive quarters of loan growth, the company continues to invest in its organic loan growth capabilities and expects continued expansion into the undertapped 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 ending total deposits increased 453.3 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. 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. 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 opportunity 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 1 leverage ratio was 9.29%, which substantially exceeded the regulatory well-capitalized standard of 5%. Non-performing 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 linked fourth quarter. Comparatively, non-performing loans were 49.5 million or 50 basis points of total loans outstanding one year prior. Loans 30 to 89 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 12-month net charge-off. 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 Joe for his guidance through the transition period. Joe, 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 30 days, and while I still have a lot to learn, I can tell you the future of this company is very bright. And with that, Dimitar, Joe, and I will now take questions. Sagar, I will now hand it back to you to open the line.

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 Chiraldi from Piper Sandler. Please go ahead.

Good 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. I wonder 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 wouldn't mind, if you could provide any detail around blended new origination yields coming on currently.

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 percentage points lower. The difference is we're probably seeing a little bit more on the payoffs than last year. So I think that's 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's happening with our clients and the macro environment. On the residential side, pipelines are probably about 10% lower than last year. Still pretty good. We're just getting into the busy season, so we're really going to have a much better sense of where things are here towards May and June. So, again, that's 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's kind of what we're 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've said before, we don't change our credit box in that world. So for us, some years could be a lot more growth. Some years could be a lot less growth. Some years we might even shrink. So we'll see. We'll take what they give us in our box. As it relates to loan originations in the first quarter, they were right around 7%. A little bit lower. I think we're going to continue to see some of that pressure through the year, so that's not unexpected given what's happened with trades and competitive dynamics.

Great. Okay. I appreciate the color. And then as my follow-up, just wondered if you could provide any more color update on de novo expansion plans 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.

I'll 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, including PA and all the other places, Rochester. So that's on track. We continue to expect that we're going to be opening virtually all of them, maybe save for one or two by the end of the year. As we have discussed, we're also going to be consolidating a very similar number of locations through the year. And the impact of all of those initiatives will come out kind of on a clean run rate basis in Q4. We've talked about the cost before. You're probably going to expect to see a little bit more marketing and kind of startup costs, if you want to put it that way, and Q3 in particular. to the tune of $3 million to $4 million in that quarter. Outside of that, nothing's really changed in terms of our expectations or in terms of how we're meeting our milestones.

Okay. All right. Appreciate the call. Thanks. Sure.

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

Good morning, David Moran. Morning, Steve.

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

Sure. So on the auto side, where pricing is today is pretty similar to the portfolio rates that we have. We're kind of churning the portfolio at similar rates. You're not going to see a tremendous amount of pickup there. It probably sprung by 50 basis points plus in this quarter. We've seen a lot of competitors that were a little bit more quiet over the past couple of years going to get back and even go deeper on credit as well. Again, for us, we don't really do that, so it's really just a matter of our credit box and some changes on pricing. So we've adjusted our pricing there. We're clearly seeing some more momentum. Some of it is seasonal as well, especially in the western part of our footprint. That's where we've seen most of the challenges in that portfolio. I think more broadly on pricing for the aggregate 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's time to grow and make up ground. So we have seen some, frankly, astounding rates on the commercial side, starting with a five. That's not the kind of business that we are going to do today. So we're probably going to continue to see some pressure on that side as well.

Okay. Great. Appreciate that color there. And then in terms of the non-performing 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 how that may play out.

Yeah, hi, Steve.

It's Joe. So we put the credit on non-accrual back in the fourth quarter of 23. We are basically... In fact, I think it's today we're 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 of about an additional $3.8 or $3.9 million over and above what the reserves were prior. I will just note that we apply a very conservative valuation. in terms of not only do we take the praise value, but we apply additional discounts to that just to be conservative. And so ultimately we hope that we can resolve the ultimate sale of the properties a little better than the current reserve amounts. But with that said, given that the property is expected to be foreclosed upon in the second quarter, we 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's about 18 properties in the business park and so we're 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.

Okay, great. Appreciate that, Claire, there. And then in terms of the employee benefits services business here, Dimitar, 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.

It's a little bit hard, to be honest with you, Steve. I think where we're running right now 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 plan acquisitions and units that are coming onto the platform. Frankly, the plans and conversion this year are higher than they've ever been. So we know we're going to get a decent amount of unit growth. Again, it's very hard to predict. And it really depends on which day of the month you price these assets, as we've seen a lot of volatility. So, you know, for all we know, we might be up 10% next week and we might be down 10%. So it's really hard to pinpoint where things are going to settle. Okay, great.

And I 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're looking to grow that business and kind of, you know, how rate sensitive we should think about it being in the future.

That's a business for us that's now pushing about $2 billion in outstandings on the deposit side. is a business that we've had a very long history in. These are not funds that really are hot money, if you will. These are municipalities and government entities that have multiple, multiple accounts with us. So it's not just the money market or the CD that they're looking to just park money in. We've 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's in the low twos today. So it's a very productive funding source. And that's kind of our business. It's just natural seasonal flows and just on the ground blocking and tackling full relationship as opposed to bidding on some large county CDs that we don't do any other business with.

Yeah, I appreciate all the power here today. Thank you very much.

You're welcome. Thank you. The next question comes from Matthew Brees from Stevens Inc. Please go ahead.

Hey, good morning. Hey, Matt. I just wanted to get some sense for NII over the course of the year. You know, you had mentioned payoffs and competition. To me, the first one is just what are expected cash flows over the next nine to 12 months from the securities and loan portfolio? And what are the roll-off yields there?

This is Joe. I'll take that one.

So with respect to the loan portfolio, what I can tell you is that on a trailing 12-month basis, so kind of looking backwards, we had, call it, between $1.5 and $1.8 billion of roll-off. Obviously, that's depending on, you know, prepayments and prepayment speeds and the like. And I think that's a fair expectation kind of looking forward. And, you know, the current book yield is about, it's just north of 550, and the new volume, you know, rate is around seven. So that's kind of how the back book is pricing. On the securities portfolio, we have pretty minimal runoff for 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're not going to see much opportunity there from a repricing standpoint, at least for the remainder of 2025. However, when we hit late 26, 27, 28, and 29, we've got about $2 billion rolling off in kind of the 2% 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 getting to some securities cash flows in 26, 27, 20, 29, which, you know, you can pick your redeployment rate there, Matt, you know, but if it's coming off at two, you know, I would expect that the redeployment, whether it's in loans or even, you know, re-upping on some securities, would probably be a net higher book yield. So, you know, we'll, you know, try to maximize effectively the rollover this year on the loan book in terms of just improving the yield and then get to those securities cash flows in those periods.

Very helpful. So, I mean, all that to say it sounds like earning asset yields are going up into the rate for a while. Is it also safe to assume that it's going to be difficult to squeeze deposit costs much lower? Are there any opportunities there?

Yeah, I think that's 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're starting from, kind of at that, you know, that $130-ish range, it's going to be hard to, or it's going to be more difficult for us than it will be for some other of our, you know, some peers to bring down the cost of funds too significantly. So I think we're going to get most of our net interest margin and net interest income left really on the asset side as that reprices over the Right, remainder of 25 into the, you know, the next four years or so.

Okay. And then, Dimitar, just in terms of your comments on competitive conditions and uncertainty and things kind of slowing 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? You know, might you reengage, you know, in places you might not otherwise with a forward pipeline?

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

Okay, understood. Just last one, you know, expenses came in a touch lower than I was thinking. Maybe some thoughts on the outlook for the remainder of 2025.

So I think, Matt, do you want to take that, Mariah?

Go ahead. I'm sorry. Oh, no, okay, okay. Yeah, I think with respect to the, you know, kind of the core, I'll call it increase in operating expenses, it's kind of mid-single digits for us. You know, we'd like it to be kind of in that 3% or 4% range, you know, on a normal run rate basis. We are continuing to invest in the franchise, which includes, you know, some of the marketing expenses around DeNovo. which probably puts us more in the, you know, kind of the mid-single-digit range going forward. But, you know, as we've kind of proven, I think, over the last couple of years, you know, our OptX is a little bit up over where it was traditionally, but it's also beginning to pay off pretty significantly on the revenue side of the business. And so I think we're going to continue to kind of incur operating expenses kind of in that mid-single-digit range or increases year over year. And the intent there is obviously to continue to grow the company across all lines of business.

Great. I'll leave it there. Thank you for taking my questions. You're welcome.

Thank you. Again, if you wish to register for a question, please press star, then 1. Our next question comes from Chris O'Connell from KBW. Please go ahead.

Hey, morning, Jim Tarr, Joe, Mariah. I was hoping to start off and some of the fee businesses, you know, in particular, I guess if we, you know, you know, if the market stays, you know, where it is here, you know, on the wealth side, I know there's 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?

I think, Chris, on our last call, we spoke about mid-single-digit growth in the fee-income businesses. I don't think we're 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's going to moderate down. But it's going to be probably higher than mid-single digits. So that might pull kind of the aggregate up a little bit, while some of the market-sensitive businesses may be a little bit closer to you know, low single to lower middle mid-digit rate. So we'll see where it shakes out. I think in the aggregate, when you look at that 200 million plus in revenues, we think that's growing still in the mid-single digits for this year.

Okay, got it. So despite, you know, the 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? Yeah, assuming where we stay today, I think we're going to get there. Okay, great. That's 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. 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.

No, no, we see that, you know, anywhere from two to seven basis points, but you're 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.

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, is it more that, you know, from the first quarter, which, you know, I think came in, you know, you know, pretty solid, you know, five to the fourth quarter that we'll see, you know, the balloon up with the DeNovo costs and two Q, three Q, and then kind of end four Q to four Q closer to the mid single digits.

I think that's about right, Chris. That's how I would think about it. We're going to be above that rate most likely in the third quarter and kind of moderate back down in the fourth quarter.

Okay, great. And as far as we roll into next year, is 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?

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

Okay, got it. That's all I had. Thank you. Thank you.

Our next question comes from Manuel Navas from DA Davidson. Please go ahead.

Hey, good morning. You're 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? Are you just anticipating that that could be the case going forward?

Just trying to think through what your customer base is seeing.

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

Okay. I appreciate that. Bigger picture, how much of the kind of this uncertainty that you're discussing, could be tied to regional concerns on the CHIPS Act? There's been some pushback from the administration. Just wondering what is your perspective on that?

I think very little. We don't really believe that much of the CHIPS Act activity has really come to our markets yet. So I think very little. It's 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 don't exactly know what it's going to cost. When you don't 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's hard to lock in pricing for those that import a lot of their goods, right? So I think there's some of that. On the building side, it's also not clear what some of those projects are truly going to cost. You're going to start seeing some cost overruns. We're starting to see some of that. We have clients that also rely on foreign labor. So they're seeing some impact off of that where folks that were temporarily able to work for them are not able to work anymore. There's a whole bunch of undercurrents, which is why when we say uncertainty, you know, the pipeline is pretty good. The dialogue is pretty good. It's 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.

I appreciate the commentary. Thank you.

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

Dimitar Karayevanov Thanks, Sagar, and thank you, everybody, for joining our call, and we look forward to speaking with you in July.

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