Community Bank System, Inc. (NYSE:CBU) Q3 2025 Earnings Call Transcript

Community Bank System, Inc. (NYSE:CBU) Q3 2025 Earnings Call Transcript October 21, 2025

Community Bank System, Inc. beats earnings expectations. Reported EPS is $1.04, expectations were $1.03.

Operator: Good day, and welcome to the Community Bank System, Inc. Third Quarter 2025 Earnings Conference Call. All 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 touch-tone phone. To withdraw your question, please press star 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 production 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. Refer to the company’s SEC filings, including the Risk Factors section, for more details. Discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the 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.

Dimitar Karaivanov: Thank you, Bailey. Good morning, you all, for joining our Q3 2025 earnings call. We had an excellent quarter. Strong and diversified revenue growth remains a core differentiator for our company. Market share gains across all of our businesses continue. We remain focused on expenses even as we are making a $100 million investment in facilities, talent, and technology across all of our businesses. Risk metrics remain excellent. The strength of our capital, liquidity, and credit continues to provide the base for our growth. All in all, record operating earnings per share of 23.9% year over year. I’d like to highlight a few recognitions to give you a better sense of where our businesses stand in terms of capabilities and reputation.

Our Employee Benefit Services business, BPIS, was recognized again as one of the top five record keepers nationwide by the National Association of Plan Advisors. Our insurance services business, ONE Group, ranked as the 68th largest property and casualty broker in the country by the Insurance Journal. ONE Group is now the third largest bank-owned broker. In our wealth management services business, Nottingham Advisors was recognized as a five-star Wealth Management team by Investment News. Our banking business, Community Bank, was recognized by S&P Global as one of the top 20 banks in the country in their inaugural deposit rankings. Also importantly, the culture and values of our company and people led to our recognition by the United Way of Central New York with their Community Champion Award.

All of these things matter. They make a difference. They make us who we are and lead to the results you see. We have deep national-level talent and capabilities, are now becoming nationally recognized. We have also been fortunate to have excellent capital deployment opportunities year to date. We are on track to deploy approximately $100 million in cash capital in transactions that push forward our strategic priorities. Diversified higher growth subscription-like revenue streams in insurance benefits or wealth, and for the banking business, strong funding and liquidity in attractive high-priority markets. You will note that this quarter, we also provided in the press release the tangible returns for each one of our businesses. I believe those speak for themselves and are largely self-explanatory for our capital allocation strategy.

The pretax tangible returns for the quarter were 63% for insurance services, 62% for employee benefit services, 48% for Wealth Management Services, 25% for banking and corporate. We will continue to aggressively pursue similar opportunities to deploy capital at high tangible returns. I am optimistic that we will continue to do so, in particular in our insurance and wealth businesses. In addition, we also have the opportunity after our prior earnings release to buy back approximately 206,000 shares at what we believe was meaningfully below intrinsic value for our company. This largely eliminated any share dilution to our shareholders for the year. I will now pass it on to Mariah Loss for details on the financials.

Mariah Loss: Thank you, Dimitar. Good morning. As Dimitar noted, the company’s third-quarter performance was robust in all four of our businesses. GAAP earnings per share of $1.04 increased $0.21 or 25.3% from the third quarter of the prior year and increased $0.07 or 7.2% from linked second-quarter results. Operating earnings per share and operating pretax pre-provision net revenue per share were record quarterly results for the company. Operating earnings per share were $1.09 in the third quarter as compared to $0.88 one year prior and $1.04 in the linked second quarter. Third-quarter operating PPNR per share of $1.56 increased $0.27 from one year prior and increased $0.15 on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $206.8 million in the third quarter.

Operating revenues increased $7.6 million or 3.8% from the linked second quarter and increased $17.7 million or 9.4% from one year prior, driven by record net interest income in our banking business. The company’s net interest income was $128.2 million in the third quarter. This represents a $3.4 million or 2.7% increase over the linked second quarter and a $15.4 million or 13.7% improvement over 2024 and marks the sixth consecutive quarter of net interest income expansion. The company’s fully tax-equivalent net interest margin increased three basis points from 3.3% in the linked second quarter to 3.33% in the third quarter. Higher loan yields and stable funding costs drove increases in both net interest income and net interest margin in the quarter.

During the quarter, the company’s cost of funds was 1.33%, an increase of one basis point from the prior quarter driven by a higher average of overnight borrowing balance, while the company’s cost of deposits decreased two basis points and remained low relative to the industry at 0.17%. Operating noninterest revenues increased $2.3 million or 3% compared to the prior year’s third quarter and increased $4.1 million or 5.6% from the linked second quarter, reflective of revenue growth in all four of our businesses. Operating non-interest revenue represented 38% of total operating revenues during the third quarter, a metric that continuously emphasizes the diversification of our businesses. The company recorded a $5.6 million provision for credit losses during the third quarter.

This compares to $7.7 million in the prior year’s third quarter and $4.1 million in the linked second quarter. During the third quarter, the company recorded $128.3 million in total non-interest expenses. This represents an increase of $4.1 million or 3.3% from the prior year’s third quarter. The increase included approximately $2.3 million of expenses associated with the bank’s de novo branch expansion and an increase in data processing and communication expenses included a $1.4 million consulting expense in connection with a contract renegotiation with our core system provider. The impact of a consulting item on total managers’ expenses was offset by medical rebates and an incentive true-up, which drove a $1.5 million or 1.9% decrease in salaries and employee benefits.

In the fourth quarter, we anticipate approximately $1 million of incremental expense driven by the prepayment of charitable contribution commitments in response to tax changes and incentive compensation adjustments contingent on final scorecard items. The effective tax rate during the quarter of 24.7% increased from 23% in the prior year’s third quarter driven by increases in certain state income tax. The effective tax rate for the first nine months of 2025 was 23.3%, only slightly higher than the 22.9% for the first nine months of 2024. Ending loans increased $231.1 million or 2.2% during the third quarter and increased $498.6 million or 4.9% from one year prior, reflective of organic growth in the overall business and consumer lending portfolio.

The company continues to invest in its organic loan growth opportunities and expects continued expansion into under-tapped markets within our Northeast footprint. The company’s ending total deposits increased $580.7 million or 4.3% from one year prior and increased $355.1 million or 2.6% from the end of the linked second quarter. The increase in total deposits between both periods was driven by growth in non-time deposits across governmental and non-governmental customers. Non-interest-bearing and relatively low-rate checking and savings accounts continue to represent almost two-thirds of the total deposits, reflective of the core 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 as readily available sources of liquidity total $6.6 billion or 240% of the company’s estimated uninsured deposits net of collateralized and intercompany deposits at the end of the third quarter. The company’s loan-to-deposit ratio at the end of the third quarter was 76.5%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. All the companies and the bank’s regulatory capital ratio continues to substantially exceed well-capitalized standards. The company’s Tier one leverage ratio increased four basis points during the third quarter to 9.46%, which is significantly higher than the regulatory well-capitalized standard of 5%. The company’s asset quality metrics were generally stable during the third quarter.

Non-performing loans totaled $56.1 million or 52 basis points of total loans outstanding at the end of the third quarter. This represents a $2.7 million or one-point increase from the end of the linked second quarter. Comparatively, non-performing loans were $62.8 million or 61 basis points of total loans outstanding one year prior. Those thirty to eighty-nine days delinquent decreased on a linked quarter basis from $53.3 million or 51 basis points of total loans at the end of the second quarter to $51.6 million or 48 basis points of total loans at the end of the third quarter. The company reported net charge-offs of $2.5 million or nine basis points of average loans annualized during the third quarter. This represents decreases of $300,000 from the prior year’s third quarter and $2.6 million from the linked second quarter.

The company’s allowance for credit losses was $84.9 million or 79 basis points of total loans outstanding at the end of the third quarter, an increase of $3.1 million during the quarter and an increase of $8.8 million from one year prior. The increases were primarily attributed to reserve building in the business lending portfolio, reflecting the growth in size and volume of recently originated commercial loans. The allowance for credit losses at the end of the third quarter represented over 6x the company’s trailing twelve months net charge-off. We are pleased with the third-quarter results and momentum behind recent initiatives that reinforce our commitment to scale as a diversified financial services company. We anticipate closing on the acquisition of seven Santander branches in the Lehigh Valley Market on November 7, which accelerates our retail strategy in the banking services business.

A market we anticipate significant growth. Additionally, we are excited to announce a minority investment in Leap Holdings, Inc, which intentionally complements our insurance services business. Looking forward, we believe the company’s diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit bank, and historically good asset quality provide a solid foundation for continued earnings growth. That concludes my prepared earnings comments. Dimitar and I will now take questions. Bailey, I will turn it back to you to open the line.

Q&A Session

Operator: 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. At any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Tyler Cacciatore with Stephens. Please go ahead.

Tyler Cacciatore: Good morning. This is Tyler on for Matthew Breese. Morning, Tyler.

Dimitar Karaivanov: Morning.

Tyler Cacciatore: If I could just start on the minority investment in Leap, and I think you touched on it a bit in the prepared remarks. Should we look at this as a first step to something bigger, maybe a precursor to a larger investment if things work out? And are you able to provide what the impacts to revenues and expenses are, as we move forward?

Dimitar Karaivanov: Thanks, Tyler. The way I would think about it is we invested in a business that we believe is highly attractive, growing at very high growth rates. But a tremendous team that fits squarely in our thesis to grow insurance services. So we took a stake in something that we really like and love. And, obviously, we would love to have more of it if we are so lucky sometime down the line. But I think at this point, we are where we are in terms of our investment in Leap. So we will see how well the future evolves for us. As it relates to financial impact, I think the best way to think about it is roughly neutral. You know, kind of some of these ins and outs of the way the accounting works kind of leads to that outcome. And kind of given its relative size, it does not really dramatically change things for us. So I would not really expect much in the way of contribution for 2026.

Tyler Cacciatore: Great. Thank you. And then moving to deposit costs. If you could just talk about how deposit costs and how the legacy footprint is doing versus more concerted efforts in areas like Albany, Buffalo, and Rochester. Is there a notable difference in the cost of deposits there? And how should we think about the cost of deposits overall moving forward?

Dimitar Karaivanov: Yeah. I do not think that we have seen any dramatic difference in the cost of deposits if you are referring to kind of our legacy footprint versus the de novo expansion. We are pursuing very much the same strategies. I will say we are a little bit more intentional around commercial growth in those de novo markets. So that kind of leads maybe a little bit on the margin of higher cost while the retail side kind of builds up, you know, small checking account at a time. And that will take just a little bit more time. That is kind of the strategy. With all of that said, as we have discussed before, our de novo initiative is not really moving the needle in the way of cost of deposits for the aggregate company because of its relative size.

Right? So over ten years, we are hopeful that it is going to be a very meaningful contributor to us. But right now, it is not, and it is not going to be for a little bit. And by the time those ten years have come, we are going to have built the retail checking accounts, as I talked about, kind of one thousand dollars account at a time. So right now, our expectation is that the deposit costs are going to continue to trend down with the rate cuts as expected by the market. And the de novo issue does not really impact that trend for us.

Tyler Cacciatore: That is helpful. Thank you. And then if I could just squeeze one more in. I was wondering if you are seeing any spread compression on incremental CRE loans and if so, to what extent? And then if you could provide us what your current CRE loan yields are.

Dimitar Karaivanov: Yes. So the way I would think about loan yields is everything is priced roughly spread over three or five years, right? So if you look at the three things that we do, now I will touch on not just commercial, but kind of the overall portfolios. I am sure everybody has got a similar question here. If you look at, let us start with the commercial side. Basically have a fixed and kind of a variable component to those, particularly pricing somewhere to 25, you know, to 30, $2.40 all the, you know, pure five-year part of the curve. So as you can easily see, those parts of the curve have moved down dramatically since the beginning of the year. So if you are looking at $3.50 ish million on those rates in the market and you are putting real spread, now you are looking at that high fives.

Now low sixes in terms of commercial originations. This quarter was a little bit higher. But I expect that we will continue to kind of see a downtrend in those rates as just the market is evolving. We do have some aggressive competitors on the CRE side in particular. In our markets, particularly in Upstate New York and to some extent, Vermont. And you are seeing, you know, rates there, promotional rates they are now in the mid-fives. That is not where we are, but that is what some folks are in our markets. If you look at our mortgage portfolio, you are typically pricing that kind of two sixty ish to 70 the ten year. So you can do the math. You are kind of in the mid-sixes right now. That clearly also has a trend towards lower. And I expect that we are going to continue to see that.

Again, the back book in that product for us is five thirty ish. So there is still plenty of room for us to reprice mortgage cash flows up. And then in our consumer installment lending business, which is our auto business, we basically have new volume rates that are roughly in line with portfolio rates. So growth there is going to be driven by volume, not by rate.

Tyler Cacciatore: Great. Thank you. That will be all for me. I appreciate you taking my questions.

Operator: Our next question comes from Steve Moss with Raymond James.

Steve Moss: Good morning. Morning, Dimitar. Morning, Mariah. Maybe just, you know, off on the loan growth side here, you know, good to see broad-based growth. Kind of as you were expecting here, Dimitar. Just kind of curious, you know, where does the pipeline stand and, you know, are you still as optimistic on growth just given maybe incrementally more competition?

Dimitar Karaivanov: Yeah, Steve, we remain very constructive on the growth side. So if you look at our pipelines today, our commercial pipeline is at its highest level it has ever been. So I expect that that will do well, depending on the pull-through, of course. You know, timing matters. But a lot of that pipeline will come to fruition, you know, over the next couple of quarters. When you look at our mortgage pipeline today, the pipeline is actually higher than it was this time last year, which I think says a lot for the execution of our team on the mortgage side well, given the market we are in. And then on the consumer on the auto side, things are a little bit more unpredictable, but typically, the fourth quarter is a little bit slower, so we will see how that goes.

If I was to ballpark it today, I would guess that the fourth quarter is plus or minus $20 million or $30 million in line with the third quarter. That will be kind of my high-level guess, but we will see where things shake out. So I think our kind of guidance for the year of 4% to 5% is very much intact. With an expectation for a strong fourth quarter as well. Most of the growth for us has been is and will continue to be market share gains. And we have talked about this before, but for us, I think if you look at how we are performing versus the majority of folks in our markets, we are outperforming. And that is because we are gaining a lot of market share from some of the larger super regionals that we compete with. And I expect that to continue.

Steve Moss: Okay. And I guess on the margin front, still have relatively favorable yields with loans. You have got the Santander deposits coming in. Just kind of curious how you guys are thinking about the blended margin here for the quarter. I am assuming the deal might be a little bit more accretive just given loans are kind of trending the right way here, and you can deploy some of that liquidity potentially.

Mariah Loss: Hey, Steve. I will take that one. So you are correct. We are thinking about things the same way. I think for us, we are still in the 3% to 5% range that we guided in Q2. As we continue to look at the balance sheet and bring all the moving parts together, including Santander. We continue to hold funding costs, we mentioned, at an industry level of 1.17%. That is really helpful for us as we go forward. We expect costs to stay at those levels and likely even to go lower. As we address exception pricing in line with Fed funds cuts and as Dimitar just noted, price our loan portfolios effectively. So we have been really successful from that perspective. And we do expect the results to come through in the margin with Santander coming on about halfway through Q4.

We will have less overnight borrowings, which will be offset by some fixed assets pricing lower. But again, overall, we are pleased with the expansion year to date, and we do expect to see that in Q4 as well.

Steve Moss: Okay. And then on the expense side here, Mariah, I think I heard you a $1 million increase in total expenses quarter over quarter, and I am assuming that is excluding Santander.

Mariah Loss: Yes, that is correct. So just wanted to give a little guidance on what we are going to see in Q4, given that we are going to prepay some contribution commitments due to some tax changes, as I am sure you are aware. And then just looking at the compensation adjustments we accrued heavily in the first half of the year. And then as we trued up in Q3, we expect that that might increase again in Q4 as we get our final scorecard in line and everything looking like we are going to close-up.

Steve Moss: Okay. And then, you know, on the fee income side here, you know, definitely continue to see good growth with employee benefit services. Just kind of curious, you know, Dimitar, I am assuming it is steady as she goes, but just you know, anything unique with that business that maybe adds a little more upside or I mean, the market has obviously been favorable to help in asset growth. So I am assuming, you know, pretty much regular investments and regular trends.

Dimitar Karaivanov: Yes. I think on the Employee Benefit Services, Steve, we have a little bit more seasonality out in Q4. Because a couple of the acquisitions that we did over the past eighteen months that have a lump in revenue in October as they complete the work. That may even out a little bit more next year, but right now, I think Q4 assuming the market values stay where they are, I expect it to be better than Q3.

Steve Moss: Okay. Great. So all my questions for now. I will step back in the queue.

Operator: Our next question comes from David Conrad with KBW. Please go ahead.

David Conrad: Yeah. Hey. Good morning. Just kind of a little bit of follow-up question on NIM. Just want a little bit of color on the investment portfolio. It looks like it went down quarter over quarter in yield and we are kind of down at the low 2% level. So maybe just an outlook there and maybe cash flows or what the duration is and where we can go from yields from here.

Dimitar Karaivanov: I think David’s on the investment portfolio, some of that noise is due to dividends that we receive from the FHLB or the FRP. So the timing of that kind of impacts some of those yields quarter over quarter. So we have not really made any meaningful purchases in that portfolio nor do we expect to do any meaningful purchases. The vast majority of it is treasuries. So they kind of yield what they yield. So generally, fairly steady. We are going to provide a little bit of refreshed disclosure in our investor deck that we are going to file in terms of the cash flows. But you can think of it as 2026. It is roughly $350 million cash flows. Heavily, heavily weighted towards the fourth quarter. 2027, we have over $600 million.

’28, it is another $600 million. Net’s another $300 to $400 million in 2029. These are all treasury maturities. So we know we are going to get, when we are going to get, and we know what it yields. So those will be the cash flows that for us ultimately, they are going to have two uses. Highest and best use is for us to redeploy those into loans. Which is Plan A. Plan B is if loan growth or opportunities are not attractive at that time, we are going to be paying down some of our HVLP borrowings. Also, we have turned out to match those cash flows in a meaningful way. So 2027, we have some FHLBs that are kind of in the mid-4s. We have similar in 2028. So if we are not deploying those funds from the treasury securities portfolio, which is kind of roughly one fifty, one sixty ish, you know, in terms of yields.

If they are not going into loans, at the very least, we are going to be very additive just by paying down some of the eventual borrowings. And that is going to, if that happens, which is plan B, then you are looking at the balance sheet shrinking and margin going up by default as well.

David Conrad: Got it. Okay. Thank you.

Operator: Again, if you have a question, please press star then 1. This concludes our question and answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks.

Dimitar Karaivanov: Thank you, Bailey. And thank you all for joining us today. At a conclusion, I would like to note that while both Mariah and I attend a number of investor conferences and events during the year, we consistently find that dedicated one-on-one time with investors and prospective investors is the best way for us to have a well-prepared for and productive meeting. We are very open and available, so please reach out to us if our story is of interest and we will be happy to spend an hour with you. Thank you all, and we will talk to you again in January.

Operator: This concludes our conference. Thank you for attending today’s presentation. You may now disconnect.