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.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, if you'd like to withdraw your question, please press star and then two. Our first question comes from Steve Moth with Raymond James. Please go ahead.

Good morning. Good morning, Steve. Good morning. Maybe just start on. with loan pricing here, you know, here you guys in terms of loan growth opportunities, just curious, you know, I know pricing got a little more competitive here over the last three to four months. Just kind of curious what you guys have seen and kind of what you guys think will be the drivers of growth in 2026.

Yeah, so for the fourth quarter, Steve, originations were in the low sixes. And I think the curve hasn't really moved much so far in this quarter. So we're probably kind of in that range. All week long, clearly the trend is lower. So I think at some point this year we will be below six. Could be the end of this quarter, could be the next quarter, who knows. But yeah, the trend is clearly lower on that. Fortunately for us, we have a lot of fixed asset repricing to continue. So if you look at kind of that low sixes compared to the current yields that we have on the loan portfolio, there's still a decent amount of gap for us to benefit from.

Okay. Appreciate that. And then in terms of the non-interest income guide, I think is what it was. Mariah, I missed your comment there. Was that 4% to 8% growth for 2026?

8% to 12% growth for NII. Is that what you asked, Steve?

Non-II. I'm sorry.

Oh, all right. Sorry, sorry. 4% to 8%. Yes, 4% to 8%. Yes. Sorry. Yep.

Okay.

Great.

Oh, no worries. And then in terms of the employee services, employee benefits services business, you know, obviously a healthy step up. And Dimitar, I hear you in your comments in terms of the investment and some accelerating here. Just kind of curious, I think you said mid to high single digit growth. Maybe is there just a little bit of like, one-time stuff in nature in the fourth quarter or seasonality that we should think of. I realize some of those asset values, acquisitions and stuff, just kind of thinking about the cadence of that trajectory a little bit.

Yeah, so in the employee benefit services, if you kind of split it up and kind of look at what happened in 2025, in the retirement side of the business, we actually grew high single digits. So that was a very productive outcome on the retirement side. In the institutional trust side, we were basically flat year over year and a little bit down on pre-tax because of the investments on the expense side. So as you think about 2026, if you split up the two businesses, retirement is at higher asset values this year so far than last year. So we will continue to see some pickup there. It's probably going to taper down if asset values don't continue to increase. just on an average basis, it's going to taper down over the year. So that's going to impact that growth trajectory. And on the institutional trust side, we feel like we have really kind of turned the corner there on the revenue side, and we're sitting at the highest assets we have had in that business as well. So between that and the, I think we have more than 20 fund launches coming here in the first and second quarter, we're going to have an acceleration on that side of the house to get us back to that mid to high single digits. So I think in the aggregate basis, we're sitting here, of course, depending on market conditions, would be mid to high single digits for the overall line of business. And you're right on the seasonality. There's more in the fourth quarter in that business. So you're going to see, I expect in 2026, the fourth quarter, OLS equal to be the higher mark.

Okay, great. I appreciate all that color, and I'll step back in the queue here.

And the next question comes from David Conrad with KBW. Please go ahead.

Yeah, hey, good morning. Just taking a big picture here, I mean, you put up, I think, roughly about 38% of your revenues as fee income. You know, you have a peer-leading 22.7 ROTCE. It looks like, based on your guide, that ratio might pull back a little bit. But just kind of thinking about, you know, over the next three to five years, where do you think the fee ratio to revenues could go to and, you know, the implications of that to your ROTCE?

Yeah, great question, David, and one that we certainly hear a lot and we ask ourselves a lot as well. And I'll start it this way. We love all of our four businesses. And we are experiencing right now in the banking business, which is the largest, we're experiencing tailwinds on the margin side, which we haven't had historically. So even if the other businesses are doing really well themselves, it is hard to overrun the bank given that you have margin expansion and asset growth at the same time. Now, that's not going to be forever. You know, the margin expansion party, I think, is going to slow down here this year and beyond. So that's going to temper down some of that growth rate on the bank side. At the same time, we continue to also invest heavily in inorganic and organic opportunities on the income side. So the short of it is I don't know where it's going to settle. We want to have more of all of them, more of all of our core businesses. I think all else equal, we understand where tangible returns are the highest. So if we have a dollar of capital to invest, it's going to go to the highest tangible return we can find. And that's why you've seen us, you know, not only invest in the banking business, but in the insurance business, in the benefits business, in the wealth business now with ClearPoint. Just as a reference point, we complete probably somewhere between 8 and 12 acquisitions every year, and most of them you don't see because they're in the income businesses. So they're kind of small singles and doubles that over time add up, and I think we'll have more opportunities to continue to do that and maybe take some larger swings along the way as well.

Okay. Thank you. Appreciate it.

The next question comes from Matthew Bryce with Stevens, Inc. Please go ahead.

Hey, good morning. Good morning, Tony. Dimitar, the ClearPoint transaction, you know, and its market share, and I think you described it as the death care industry, I don't know much about that. I don't know if I know any of the banks that are in that arena. Could you maybe just introduce us to what that industry is and what you expect to do with their book there? It looks to be about $8 million in fee income. Maybe set the table for us on that.

Sure, Matt. Thank you for the question. So what ClearPoint does and kind of the background of the industry more kind of at large, is that as the cost of death care, you know, basically people planning for the funerals and, you know, their time in the cemeteries and taking care of the expenses that come with that, the cost for those services has increased over time pretty meaningfully. And as a result, there's multiple ways that people save for those events and those life events. Depending on the state, it could be For us, it could be insurance or it could be deposits, like in New York State. So there's pre-need, you know, deposit accounts, which we already have, and I'm sure a lot of players in New York State have as well. So that business, as you can imagine, you know, if there is one thing that's certain is that none of us are going to be around forever. So there is a – and the population is aging. So that's a, you know, tailwind, if you will, in the space. There is a few larger players. ClearPoint is one of the leading ones. There are some other banks, large regional banks that are in the space as well. And then there's a lot of kind of smaller entities around it. So, one, we like the space. We like the niche. We love business where we can compete nationwide with a differentiated offering in a space that's not easy to penetrate. It's fairly complicated. It's state-by-state rules. It is nationwide. So we have a clear right to win here with ClearPoint. So we love that. And then secondly, the customer base here is basically the funeral homes and cemeteries and larger aggregators in the space. And right now, ClearPoint does predominantly the record-keeping side of those trust relationships. They're increasingly growing into the asset management side of those relationships as well. for the monies in the trust. We think that we bring on day one a tremendous platform through our Nottingham Advisors business with eight CFAs and three CFPs and close to $10 billion of assets and nationwide reputation. So we think there's exciting opportunities there. We also know that purely on the banking side, we have some products that fit very neatly with the space as well. So we have a... dedicated escrow product, which one of its actually services and, you know, demos to clients is in the funeral space. So that's a pretty nice ability kind of when they want to provide additional offering. We also, through the SBA, can certainly provide a lot of SBA-type financing for some of those funeral homes as well. So there's a lot of multiple ways for us to make a lot more money than what they did today on their own.

Very helpful. Excited to see what you can do with that business despite the obvious morbidity. On expenses, there's a lot of moving parts there, but I just wanted to get a sense for where the starting point is in 1Q26. Is it fair to use kind of the upper end of the $550,000? range in the first part of the year and maybe moving towards the middle as the year progresses?

Hi, yes, yes, that is fair. As we mentioned in the prepared remarks, Q1 tends to lean a little bit heavier. And as you heard us talk through Q4, you know, primarily comprised of de novo, fin hinder, bonus accruals. We also had a – a rebate in Q3 for our medical expenses that didn't carry over to Q4, so you saw a little bit of noise there, too. You know, outside of these items, what we're looking forward to most, I think, in 2026 is seeing that the fruits of our investments, you know, come to light with, you know, people systems and other infrastructure that we've talked about, you know, throughout 25, and we're confident that we'll see, you know, the returns, as you can see, from 25, but also, you know, pulling through even more in 26. So, And yeah, I'll seem ahead. We're excited.

And then the last one is just on the NIM. It feels like there's still some structural upside to the NIM. I was hoping you could comment on that. And then I believe if I have my notes right, you start to see a bit more of the securities book repriced towards the end of the year. So might we see some acceleration in NIM expansion as that occurs? Yes.

Yep. So, first, you know, for Q4, we are happy with that expansion of six basis points. That was, you know, primarily attributed to, you know, loan growth, deposit growth, ongoing repricing efforts that we're really diligent with at this company. Also, lower overnight borrowing balance, which helped there. You know, for Q1, you know, we're guiding two to four sets for NIMS. Just expecting a little bit of pressure on the loan side, as Dimitar noted earlier, and, you know, looking to see some of the realization of the late cuts in 25 coming through in Q1 as well. To your point about the securities rebalancing at the end of the year, that we have talked through that, and that is happening. So we do expect expansion. don't necessarily want to guide out too far, but certainly that is, you know, a tailwind for us, and it does begin at the end of this year, yeah.

MRI, did you describe two to four basis points of NIM expansion in one queue or compression?

Expansion, yes, for Q1, yes.

All right, I appreciate it. I'll leave it there. Thank you.

And the next question comes from Manuel Navas. with Piper Sandler.

Please go ahead. Hey, thanks. Following up on that securities broker pricing, what is assumed in the NII guide? Is that the securities are reinvested, put into loan growth, pay off something? What is kind of assumed currently with those maturities?

Yeah, so morning, Manuel. Because the timing of the securities really is in the fourth quarter and late in the fourth quarter, it doesn't really impact the guy for the year. And I think by then we'll see what the balance sheet looks like. We certainly, our plan number one and foremost is to deploy those into loans. And we believe we've got tremendous momentum in terms of talent and presence and opportunities in the market to do that. And kind of looking forward beyond 26, We have 27 where we have another $600 million of securities maturing. Those are kind of spread out a little bit more evenly for 2027. We're going to evaluate those as the time comes. Generally, we want to be lending, not buying securities. So if we're not able to deploy them immediately into phone growth, what's likely to happen is they're going to offset some of our longer-term borrowings, which also matured roughly on the similar timeline in 27. So, but again, it's pretty early to be talking about 27. For 26, there's not a lot of impact in the guide from securities.

Does the deposit growth guide include some remixing? How much of it is from new branches? Just thinking that it could have been higher if the novos are

working sooner but maybe if they're not all online yet you just got to talk about de novo progress and that deposit guide sure absolutely so on the de novo side um as we we mentioned we opened 15 this year the vast majority of the openings occurred in the late third quarter fourth quarter so those are very young branches if you want to call it that way we ended the year with roughly $100 million of footings across the various branches that we've opened. I think the goal for us for this year is to double that, which I think is possible. So, again, these are going to become more productive as they mature. It usually takes kind of 18 to 24 months before you can kind of really see some of the momentum. With that said, we're very pleased with where we are. The customer base, not just retail, but commercial, has really stepped up and contributed. And the deposits that we currently have in the de novos, roughly 60% are commercial deposits. So we're very pleased with the efforts from our commercial bankers and clients and all the events and the rest of the activity. To your point, we hope that it accelerates. For us, again, this is a growth strategy on the deposit side, which we expect. ultimately brings over a billion dollars over a seven to 10-year period. And I think we're tracking pretty well towards that.

I appreciate the commentary.

This concludes our question and answer session. I would like to turn the conference back over to Dimitar Hravenov for any closing remarks.

Thank you, Dave, and thank you all for your interest. And as always, Mariah and I are available for any follow-up. Stay warm.

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