Community Bank System, Inc. (CBU) Q4 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Community Bank System, Inc. Fourth Quarter 2025 Earnings Conference Call. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. There will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star and then 2. 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. These statements 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 Dimitar Karaivanov, 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 am very pleased with the revenue strength across all of our businesses, the liquidity and credit quality of our balance sheet, and that we also have more than the usual noise in our expense base. Mariah will provide you the details with some high-level reconciliations to 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 am very happy with. I am most happy about the progress we continue to make in our brand, reputation, talent, capabilities, presence, and the market share gains they are accruing as a result of it. One recent data point in our banking business: During the fourth quarter, we were selected as a 2025 company of the year in banking by the Buffalo Business First. Looking at a bit more details in the businesses, the largest percentage improvement in pretax income compared to the third quarter was visible in our employee benefit services business, which grew pretax 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 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 pretax income as this momentum is beginning to take shape. We expect that 2026 growth will revert back to mid to high single digits. Now our banking business, in 2025, we benefited from both mid-single-digit asset growth and expanding margin which drove 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 paydowns 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 pretax 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 are making, I am 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 eighteen 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 two hundred thousand hours over the past three years. And that has allowed us to keep our headcount roughly flat while growing the overall business meaningfully. We now need to see it fully in the bottom line. Now let's talk about returns. The pretax 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 in 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 are 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 are 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 full-year performance was robust in all four of our businesses. Including acquisition expenses, GAAP earnings per share of $1.03 increased $0.09 or 9.6% from the fourth quarter of the prior year and decreased 1¢ or 1% from linked third quarter results due to $0.04 per share of expenses associated with the Santander branch acquisition. Operating earnings per share and operating pretax pre-provision net revenue per share for record quarterly and annual results for the company. Operating earnings per share were $1.12 in the fourth quarter, as compared to one point one year prior and $1.09 in the linked third quarter. Fourth quarter operating PPNR per share of $1.58 increased $0.18 from one year prior and increased 2¢ 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 2024 and marks the seventh consecutive quarter of net interest income expansion. The company's fully tax-equivalent net interest margin increased six basis points from 3.33% in the linked third quarter to 3.39% in the fourth quarter, driven by lower funding costs. During the quarter, the company's cost funds were 1.27%, a decrease of six 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 noninterest revenues increased $6.1 million or 8% compared to the prior year's fourth quarter increased $3.5 million or 4.4% from 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 million income distribution from a limited partnership investment. Operating noninterest revenues represented 38% of total operating revenues during the fourth quarter, a metric that continuously emphasizes 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 noninterest expenses, This represents an increase of $10.2 million or 8% from the quarter. Excluding the impact of a $2.1 million quarter-over-quarter increase in acquisition expenses due to the Santander branch acquisition, noninterest 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-tied incentive compensation including a $1 million true-up of long-term incentive program-related expense, an $800,000 true-up of annual management incentive plan expense, along with a $600,000 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 Banque de Novo branch expansions increased $600,000 between linked quarters as additional branches were opened for business. The increase in other expenses was impacted by previously announced branch consolidation activities. Specifically, $800,000 of net property-related write-downs recognized during the quarter along with $600,000 of charitable contribution expenses that were accelerated prior to 2026 tax law changes. Excluding the above-mentioned expenses, write-downs, charitable contributions, and performance-related incentive accruals, Q4 noninterest expenses were $131.9 million, an increase of $4.3 million or 3.4%.

Quarter over quarter.

Ending 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 increased approximately $32 million of acquired loans associated with the Santander branch acquisition. The company continues to invest in its in our loan growth opportunities and expects continued expansion into the under-tapped markets within our Northeast footprint. The company's total ending deposits increased $945.4 million or 7% from one year prior, an increase of $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 nonperforming loans and net charge-off ratios were consistent with the linked third quarter, while the loans thirty to eighty-nine 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 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 full-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 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 is expected to close in 2026. Looking forward, we believe the company's diversified revenue profile, strong liquidity, and historically good asset quality provide 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, four to 8% growth in noninterest revenues, a provision for credit losses in the range of $20 million to $25 million. Core noninterest expenses are expected to be in the range of $535 million to $550 million or an increase of approximately four to 7% from 2025 including approximately $8 to $9 million of incremental associated with the branch of Sequoia from Santander which includes the nonoperating amortization of intangible. These figures do not include the impact of pending or future acquisitions. Additionally, we anticipate an effective tax rate between 23% to 24%. Finally, as a reminder for the first quarter, noninterest 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 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, would like to withdraw your question, please press star and then 2. Our first question comes from Steve Moss with Raymond James. Please go ahead.

Morning, Dimitar. Morning, Mariah.

Maybe just starting on with loan pricing here. I hear you guys in terms of loan growth opportunities. Just curious I know pricing got a little more competitive here over the last three to four months. Just kind of curious what you guys are seeing 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

think the curve has not really moved much. So far in this quarter. So we are probably kind of in that range.

All all

all all we call, 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 next quarter. Who knows? But, yeah, the trend is clearly the lower on that. Fortunately for us, we have a lot of fixed asset repricing continue. So if you look at kind of that low sixes compared to the current yields that we have on the loan portfolio. There is still a decent amount of gap for us to benefit from.

Okay. Appreciate that. And then in terms of

the noninterest income guide, I think, is what it was. Mariah, I missed I missed your comment there. Was that four to 8% growth for 2026?

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

Non NII. I am sorry.

Oh, sorry. Sorry. Sorry.

48. Yes. 48%. Yeah.

Sorry. Yep. Okay. Great. I just want to do it. It is perfect. Yep. Oh, no worries. And and then in terms of the employee services

employee benefit 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.

Babies, 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 I realize some of there is

asset values, acquisitions and stuff.

Just kind of thinking about the the cadence of that trajectory a little bit.

Yeah. So

in in in the employee benefits 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 pretax because of the investment 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 some pick up there. It is probably going to taper down if asset values do not continue to increase. Just on an average basis, it is going to taper down over the year. So that is 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 are sitting at the highest assets we we have had in that business as well. So between that and the I think we got more than 20 fund launches coming here in the first and second quarter. We are 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 were sitting here of course, depending on market conditions,

would be mid to high single digits for the overall

line of business. And you are right on the seasonality. There is more in the fourth quarter in that business. So you are going to see like, you expect in 2026, the fourth quarter, OLSQL to be the higher mark. For 2026.

Okay. Great. I appreciate all that color, and I will 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 stuff a 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, you know, peer leading 22.7 ROTCE. It looks like based on your guide, that ratio might hold 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 ROTC

Yeah. Great question.

David, and one that we certainly hear a lot and we ask ourselves a lot as well. And I will start it this way. We love all of our four businesses. And we we are experiencing right now in the banking business, which is the largest, we are experiencing tailwinds on the margin side, which we have not had historically. So even as the other businesses are doing really well themselves, it is it is hard to overrun the bank given that you have margin expansion and asset growth at the same time. Now that is not going to be forever. You know, the the margin expansion party, I think, is going to slow down here this year and and and and beyond. So that is going to temper down some of that growth rates on the bank side. The same time, we continue to also invest heavily in inorganic and organic opportunities on the fee income side. So the the short of it is I I do not know where it is going to settle. We want to we want to have more of all of them, more of all of our core businesses. I think OL SQL, we understand where tangible returns are the highest. So if we have a dollar of capital to invest, it is going to go to the highest tangible return we can find. And that is why you have seen us, you know, not only invest in the banking business, but in the insurance business, in the benefits business, in the in the wealth business now with ClearPoint, Just as a reference point, we we complete probably somewhere between eight and twelve acquisitions every year. Most of them you do not see because they are in the fee income businesses. So they are kind of small singles and doubles that over time add up. And I think we will have more opportunities to 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 Breese with Stephens Inc. Please go ahead.

Hey, good morning. Morning, Dimitar. Morning, Mariah.

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

Sure, Matt. Thank thank you for the question. So what

ClearPoint does and kind of the the background of the industry more kind of at large, is that there is the cost of, death care know, basically people planning for the funerals and, you know, the their time in the cemeteries and taking care of of of the expenses that come with that. The cost for those services has increased over time pretty meaningfully. And as a result, there are multiple ways that people save for those events, in in those life events. Depending on the state, it could be trust, it could be insurance, or it could be deposits. Like in New York State. So there are pre-needs, you know, deposit accounts, which we already have, and I am sure about our players in New York state have as well. So that business, as you can imagine, you know, if there is one thing that is certain is that none of us are going to be around forever. So there is there is a and and the population is aging. So that is a you know, tailwind, if you will, in in in the space. There is a 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 is a lot of kind of smaller entities around it. So, one, we like the

the the

like the space. We like the niche. We love business where we can compete nationwide with a differentiated

offering.

In a space that is not easy to penetrate. It is fairly complicated. It is state by state rules. It is nationwide. So we we have a clear right to win here. With with ClearPoint. So we love that. And then secondly, the the customer base here is is basically the funeral homes and cemeteries and and larger aggregators in in the space. And, right now, ClearPoint does predominantly the recordkeeping side of of those trust relationships. They are increasingly growing into the asset management side of 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 think there is exciting opportunities there. We also know that on the purely on the banking side, we have some products that fit very neatly with with the space as well. So we have a dedicated escrow product, which one of it is actually services and, you know, demos to clients is in the funeral space. So that is that is a pretty nice ability of on day one to provide additional offering We also through the SBA can certainly provide a lot of SBA type financing some of those funeral homes as well. So there is there is a there is a lot of multiple ways for us to to make a lot more money to than what they do today on their own.

Very helpful. Excited to see what you can do that with that business despite, you know,

the obvious morbidity. On expenses, you know, there is a lot of moving parts there, but I just wanted to get a sense for where the starting point is. In in 1Q 2026. Is it fair to use kind of the upper end of the $550 range in the first part of the year and maybe moving towards the middle? As the year progresses?

Hi. Yes. Yes. That is that is fair. As as we mentioned in the prepared remarks, Q1 tends to lean a little bit heavier. And and as you heard us talk through Q4, you know, primarily comprised of de novo, Santander, bonus accrual, We also had a a rebate in Q3 for our medical expenses that did not carry over Q4, so you saw a little bit noise there too. You know, outside of these, items, what we are 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 and other infrastructure that that we have talked about, you know, throughout '25, and, we are confident that we will see, you know, the returns as you can see from '25, but also, you know, pulling through even more in '26. So, yeah, I will look I will I will beam beam ahead. We are we are excited.

And then the last one is just on the NIM.

Sure. You know, it feels like there is there is still some structural upside to the NIM. I was hoping you could comment on that. And then I I believe if I have my notes right, you start to see a bit more of the securities book reprice towards the end of the year. So might we see Yeah. You know, some acceleration in NIM expansion if that occurs?

Yep. So so first, you know, for 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 were really diligent with at this company, also lower overnight borrowing balance, which helps which helped there. Know, for Q1, you know, we are guiding two to four fifths for NIM. Just expecting a little bit of pressure on the loan side, as Dimitar noted earlier, And you know, looking to see that some of the realization of 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 that we have talked through that, and and that is happening. So we do expect expansion Do not necessarily want to guide out too far, but, certainly, that is you know, a tailwind for us. And it does begin at the end end of this year. Yeah.

Amirai, did you just did you

describe two to four basis points of NIM expansion in one q? Or or Expansion.

Yes.

For Q1. Got it. Yes.

Alright. Appreciate it. I will 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 book repricing repricing, what is assumed in the NII guide? Is that the securities are reinvested put into loan growth, pay off something? What what is kind of assumed currently with those maturities? Yeah. So good morning, Manuel. The because the timing of the security is really is in the fourth quarter, and late in the fourth quarter, It does not really impact the guide for the year. And I think by then, we will 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 have 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 are going to evaluate those as the time comes.

Generally, we want to be lending, not buying securities. So if we are not able to deploy them immediately into phone growth, what is likely to happen is they are going to offset some of our longer-term borrowings, which also mature roughly on on the similar timeline '27. So but again, with it is pretty early to be talking about '27 for '26. There is 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 de novos are working sooner. But maybe if they are not all online yet. He just kind of talked about de novo progress and that deposit guide? Sure. Absolutely. So on the de novo side, as we we mentioned, we opened 15 this year. The vast majority of 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 of footings across the various branches that we have opened. Think the goal for us for this year is to double that. Which I think is is possible. So, again, these these are going to become more productive as they mature Usually takes kind of eighteen to twenty-four months before you can kind of really see some of the momentum. With that said, we are very pleased with where we are. The 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 are very pleased with the efforts from our commercial bankers and clients, and all the events and the receptivity. And so 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 ten-year period. And I think we are 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 Karaivanov 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 has now concluded.

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