Community Financial System, Inc.

Good day and welcome to the Community Financial System's fourth quarter 2025 earnings conference call. Call participants will be in 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 a touchtone phone. To withdraw your question, please press star and then two. Please note that this event is being recorded and discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed. Refer to the company's SEC filing, including the risk factor section, for more details. Discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings release. I would now like to turn the conference over to Dmitry Tarabanov, President and CEO. Please go ahead.

Thank you, Dave. Good morning, everyone. Thank you for joining our Q4 and full year 2025 earnings call. My summary of the quarter is that I'm pleased with the revenue strength across all of our businesses, very pleased with the liquidity and credit equality of our balance sheet, and that we also had more than the usual noise in our expense space. Mariah will provide you the details with some high-level reconciliations of the prior quarter expenses, but overall, I would say that most of the delta is driven by items that are tied to actual earnings performance plus recent transactions and consolidations. Overall, 16% operating earnings growth in 2025, while making the largest organic growth investments that our company has ever made, and actively deploying capital in high-return businesses is something I'm very happy with. I'm most happy about the progress we continue to make in our brand, reputation, talent, capabilities, presence, and the market share gains that are accruing as a result of it. One recent data point in our banking business, during the fourth quarter, we were selected as the 2025 Company of Year in Banking by the Buffalo Business First. Looking at a bit more details in the businesses, the largest percentage improvement in pre-tax income compared to the third quarter was visible in our employee benefit services business, which grew pre-tax income by 10% quarter over quarter. As discussed previously, we spent most of 2025 revamping our growth strategy in the trust fund administration side of the business and expect to start seeing the fruits of that in the second quarter of 2026. While full-year performance was in the low single digits, Q4 marked a year-over-year improvement of 8% in revenue and 13% in pre-tax income as this momentum is beginning to take shape. We expect that 2026 growth will revert back to mid to high single digits. In our banking business, in 2025, we benefited from both mid-single-digit asset growth and expanding margin, which rolled very meaningful operating income growth of 22%, on a full year basis. I would note that our 5% loan growth compares favorably to the industry and local peers and came in spite of very elevated pay downs of over 300 million in the commercial business. We have continued to add talent and customers from recent disruptions around our footprint and in our expanded footprint. Insurance services had a strong year as well with top line growth of 8% and operating income growth of 42%. We expect mid-single-digit growth going into 2026. In wealth management services, revenues as expected were impacted by some realignment of producers, which also as expected resulted in positive margin and operating pre-tax income with growth of 15%. We expect mid-single-digit growth in 2026 as we account for the full run rate of these changes. In aggregate, we had a very strong year in banking, insurance, and wealth. All of those businesses were ahead of industry metrics and peers in their bottom line improvement. Given that banking accounted for the majority of the very significant investments we're making, I'm very pleased with the bottom line result there of 22% growth. We were less successful in our employee benefit services in 2025 due to both some revenue challenges and planned investment in the fund administration side. With that in mind, the trends there as mentioned are positive and I expect meaningful improvement in 2026. I would also call out the impact of New York state income taxes as our tax rate is now almost 2% higher than 18 months ago. That is real money, but we will keep working through those headwinds as well. For 2026, one of our main areas of focus is expense management and beginning to harness more fully the investments and focus we have in AI and automation. As a quick statistic on that, due to our focus on automation, we have saved over 200,000 hours over the past three years, and that has allowed us to keep our headcounts roughly flat while growing the overall business meaningfully. You now need to see it fully in the bottom line. Now let's talk about returns. The pre-tax tangible returns for the quarter were 61% for employee benefit services, 39% for wealth management services, 26% for banking and corporate, and 8% for insurance services. The return on insurance services is impacted by the increase in allocated capital due to our investment in LEAP and seasonally lower revenues in Q4. Similar to last quarter, we continue to aggressively pursue opportunities to deploy capital at high tangible returns. Durable, growing, subscription-like revenues remain our main focus and point of excitement. Our recently announced transaction with ClearPoint is a great example of that. We're excited about both the quality and durability of the trust revenue that it will provide, and also the multitude of opportunities for us to deploy both expanded wealth management and banking products to the customer base. Lastly, I would note that in spite of the meaningful inorganic growth, our share count is flat for the year. To reinforce our feelings, as shareholders, we love our company and its prospects and want to own more, not less of it. We're also not too excited about trading shares in our high-quality diversified income streams for lower-quality ones unless there are significant offsetting benefits. With that, I will pass it on to Mariah for more details.

Thank you, Dimitar, and good morning, all. As Dimitar noted, the company's fourth quarter and folio performance was robust in all four of our businesses. Including acquisition expenses, gap earnings per share of $1.03 increased 9 cents The 9.6% from the fourth quarter of the prior year decreased 1% from linked third quarter results due to 4 cents per share of expenses associated with the Santander branch acquisition. Operating earnings per share and operating pre-tax, pre-provision net revenue per share were record quarterly and annual results for the company. Operating earnings per share was $1.12 in the fourth quarter. as compared to $1 one year prior and $1.09 in the linked third quarter. Fourth quarter operating PPNR per share of $1.58 increased 18 cents from one year prior and increased 2 cents on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $215.6 million in the fourth quarter. Operating revenues increased 8.7 million or 4.2% from the linked third quarter and increased 19.5 million or 10% from one year prior driven by record net interest income in our banking business. The company's net interest income was 133.4 million in the fourth quarter. This represents a 5.3 million or 4.1% increase over the linked third quarter and a 13.5 million or 11.2% improvement over the fourth quarter of 2024 and marks the seventh consecutive quarter of net interest income expansion. The company's fully tax-equivalent net interest margin increased fixed basis points from 3.33% in the late third quarter to 3.39% in the fourth quarter, driven by lower funding costs. During the quarter, the company's cost of funds was 1.27%, a decrease of fixed basis points from the prior quarter driven by lower deposit costs and a lower average overnight borrowing balance due in part to the funding inflows from the Santander branch acquisition. Operating non-interest revenues increased 6.1 million, or 8%, compared to the prior year's fourth quarter, an increase of 3.5 million, or 4.4%, in the linked third quarter, reflective of increases in overall banking and non-banking financial service revenues and included the one-time impact of a $1.6 million income distribution from a limited partnership investment. Operating non-interest revenues represented 38% of total operating revenues during the fourth quarter, a metric that continuously emphasizes the diversification of our businesses. The company recorded a $5 million provision for credit losses during the fourth quarter. This compares to $6.2 million in the prior year's fourth quarter and $5.6 million in the linked third quarter. During the fourth quarter, the company recorded $138.5 million in total non-interest expenses. This represents an increase of $10.2 million or 8% from last quarter. Excluding the impact of a $2.1 million quarter-over-quarter increase in acquisition expenses due to the Santander branch acquisition, non-interest expenses increased $8.1 million, or 6.4% from last quarter. $5.4 million of the increase from the linked quarter was from salaries and employee benefits, which was impacted by an increase in performance-pied incentive compensation, including a $1 million true-up of long-term incentive program-related expense a $0.8 million true-up of annual management incentive plan expense, along with a $0.6 million incentive accrual tied to revenue and bottom-line performance in the CRE finance and advisory business line. Operating expenses associated with the seven branches acquired from Santander totaled $1 million during the fourth quarter, while expenses associated with the Bank de Novo branch expansions increased $0.6 million between late quarters as additional branches were opened for business. The increase in other expenses was impacted by previously announced branch consolidation activities, specifically 0.8 million of net property-related write-downs recognized during the quarter, along with 0.6 million of charitable contribution expenses that were accelerated prior to 2026 tax law changes. Excluding the above-mentioned acquisition expenses, write-downs, charitable contributions, and performance-related incentive accruals, Q4 non-interest expenses were $131.9 million an increase of 4.3 million or 3.4% quarter over quarter. Pending loans increased 199.5 million or 1.9% during the fourth quarter and increased 517.4 million or 5% from one year prior, primarily due to organic growth in the overall business and consumer lending portfolios. The loan growth also included approximately 32 million of acquired loans associated with the Santander branch acquisition. The company continues to invest in its organic loan growth opportunities and expects continued expansion into the undertapped markets within our Northeast footprint. The company's total ending deposits increased 945.4 million or 7% from one year prior and increased 330.2 million or 2.3% from the end of the linked third quarter. The growth in total deposits during 2025 was comprised of growth in all of the company's regions. The increase in total deposits between both periods was primarily driven by the $543.7 million of deposits assumed from the Santander branch acquisition. Moving on to asset quality, the non-performing loans and net charge-off ratios were consistent with the linked third quarter, while the loans 30 to 89 days delinquent increased 10 basis points from last quarter, aligned with typical seasonal trends. The company's allowance for credit losses was $87.9 million, or 80 basis points of total loans outstanding at the end of the fourth quarter, an increase of $3 million during the quarter. The increases were primarily attributed to reserve building in the business lending portfolio, reflecting the growth in size and volume trends of recently originated commercial loans. The allowance for credit losses at the end of 2025 represented over six times the company's net charge-offs during the year. We are pleased with the fourth quarter and four-year results, all of which reinforce our commitment to scale as a diversified financial services company. During 2025, the company made significant progress on our de novo expansion plans, opening 15 new branches across our footprint. Additionally, during the fourth quarter, we successfully integrated seven former Santander branches in the Lehigh Valley market, which accelerates our retail strategy in a market we anticipate significant growth. Furthermore, We were excited to recently announce an agreement to acquire ClearPoint Federal Bank and Trust, a national leader in a niche trust administration market. This acquisition significantly expands the revenue and offering of our wealth management business and is expected to close in the second quarter of 2026. Looking forward, we believe the company's diversified revenue profile, strong liquidity, and historically good asset quality provides a solid foundation for continued earnings growth. More specifically, For 2026, we expect 3.5 to 6% growth in loan balances, 2 to 3% growth in deposit balances, 8 to 12% growth in net interest income, 4 to 8% growth in non-interest revenues, and a provision for credit losses in the range of $20 to $25 million. Four non-interest expenses are expected to be in the range of $535 to $550 million, or an increase of approximately 4 to 7% from 2025. including approximately $8 to $9 million of incremental expenses associated with the branch of Sequoia from Santander, which includes the non-operating amortization potential. These figures do not include the impact of pending or future acquisitions. Additionally, we anticipate an effective tax rate between 23% and 24%. Finally, as a reminder for the first quarter, non-interest expenses typically trend higher compared to fourth quarter levels due to merit increase, higher FICA and payroll taxes, and seasonal snow removal costs. That concludes my prepared earnings comments, but I do want to say one more thing. It was a catch. Go Bills. And with that, Dimitar and I will now take questions. Dave, I will now turn it back to you to open the line. Thank you.