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Date

Jan. 30, 2026, 8:30 a.m. ET

Call participants

  • President and Chief Executive Officer — Marty Birmingham
  • Chief Financial Officer — Jack Lance
  • Senior Vice President, Investor Relations — Kate Croft

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Takeaways

  • Net Income -- $19.6 million for the quarter, translating to $0.96 per diluted share, and $73.4 million, or $3.61 per diluted share, for the year.
  • Return Metrics -- Return on average assets was 1.20% for the year and return on average equity was 12.38%, both exceeding annual targets.
  • Net Interest Income -- $200 million for the year, supporting above-guide profitability.
  • Noninterest Income -- $11.9 million for the quarter and $45 million for the year, including $2.8 million in quarterly company-owned life insurance (COLI) revenue and $11.4 million for the year.
  • Efficiency Ratio -- 58% for the year, as explicitly disclosed.
  • Share Repurchase -- 1.7% of outstanding shares repurchased in the quarter, totaling nearly $11 million in capital returned.
  • Debt Actions -- Successful $80 million subordinated debt issuance at a fixed 6.5% rate; prior 2015 and 2020 sub-debt facilities redeemed in January.
  • Kroll Credit Rating -- 2025 notes received BBB minus with a stable outlook, tied to improved profitability and capital.
  • Loan Growth -- Total loans increased 1.5% sequentially and 4% year over year to $4.66 billion; commercial mortgage loans up 4% sequentially and 6.5% year over year; consumer indirect loans declined 3.7% for the quarter and 4.5% for the year, now at $807 million.
  • Deposit Trends -- Period-end deposits were $5.21 billion, down 2.8% sequentially but up 2% year over year, including ongoing wind-down of banking-as-a-service (BaaS) deposits.
  • Margin/NIM -- Net interest margin was 3.62% for the quarter, 3.53% for the year, with margin targeted to expand through 2026; NIM guidance based on spot rates as of year-end, not assuming rate cuts.
  • Guidance for 2026 -- Targeting return on average assets of at least 1.22%, return on average equity above 11.9%, annual loan growth of about 5% driven by commercial lending, low-single-digit deposit growth, and an efficiency ratio below 58%.
  • Noninterest Expense -- Quarterly noninterest expense was $36.7 million, up from $35.9 million in the prior quarter due to incentive compensation; full-year expense was $142 million as fraud and auto lending settlements impacted 2024 comparison.
  • Allowance for Credit Losses (ACL) -- Year-end ACL-to-total loans ratio was 1.02% with a targeted full-year 2026 net charge-off budget of 0.25% to 0.35% of average loans.
  • Asset Under Management Growth -- Investment advisory income reached $11.7 million, up more than 9%, and assets under management rose $500.4 million (16%) to $3.6 billion, attributed to net flows and market-driven gains.
  • Swap Fee Income -- Quarterly swap-related fee income was $1.1 million (up 31% sequentially); full-year swap fees totaled $2.5 million with 2026 guidance of $1 million to $2 million, expected to normalize.
  • Tax Rate -- Effective tax rate reported at 18% for 2025, with 2026 guidance given as 16.5% to 17.5% due to the taxable COLI surrender transaction.

Summary

Financial Institutions (FISI 1.31%) concluded the year with annual metrics surpassing prior guidance, highlighting significant progress in both earnings quality and capital management. The company’s 2026 outlook centers on disciplined commercial loan growth, expense control, improved asset mix, and a focus on core deposit generation to drive net interest margin expansion. Strategic capital deployment included both meaningful share-repurchase activity and targeted debt issuance, reflecting active management of the capital stack amid regulatory constraints. Management emphasized that incremental margin improvement is expected following the retirement of legacy sub-debt in January while also signaling a deliberate moderation in consumer indirect loan balances. Operational focus for 2026 will remain on deposit gathering, positive operating leverage, and sustaining credit quality within anticipated net charge-off ranges.

  • Leadership confirmed that all margin guidance is modeled on stable interest rates as of year-end, with no rate cuts assumed in projections.
  • CET1 ratio ended the year at 11.1%, with management identifying 11% as the minimum operating threshold for future capital deployment.
  • "We are guiding to a low single-digit deposit growth year over year, and remain focused on growing lower-cost core deposits, including demand, now, and savings across both our consumer and commercial lines of business," according to management.
  • Management expected "commercial growth to be lighter in Q1 and build through the year," attributed to volume of fourth-quarter closings and larger anticipated paydowns.
  • Average loan yields decreased 9 basis points sequentially, mainly due to the effects of the October rate cut and sub-debt issuance in December; cost of funds decreased 4 basis points over the same period.
  • Executive commentary noted ongoing capacity for further share repurchases through prudent capital management, constrained by CET1 ratio limits.

Industry glossary

  • Subordinated Debt (Sub-debt): Unsecured, fixed-term debt that ranks below other bank debt and deposits, used for regulatory capital and strategic funding.
  • CET1 (Common Equity Tier 1) Ratio: Regulatory measure of a bank's core equity capital compared to total risk-weighted assets, used to assess financial strength.
  • BaaS (Banking as a Service): Business line in which a bank partners with fintechs or other nonbanks to offer banking products under the partner label.
  • COLI (Company-Owned Life Insurance): Life insurance policies a bank holds on key employees, used for balance sheet and income management purposes.
  • Swap Fee Income: Revenue generated from commercial back-to-back interest rate swaps facilitating client risk management, providing fee-based earnings for the bank.
  • ACL (Allowance for Credit Losses): Reserve set aside by banks to cover estimated loan and lease losses, reflecting credit risk management.
  • NIM (Net Interest Margin): The ratio of net interest income to average earning assets, indicating a bank’s core lending profitability.

Full Conference Call Transcript

Marty Birmingham: Thank you, Kate. Good morning, everyone, and thank you for joining us today. The fourth quarter rounded out what was a very strong year for our company, marked by consistent execution and profitable organic growth across our enterprise. We delivered net income available to common shareholders of $19.6 million or $0.96 per diluted share for the fourth quarter and $73.4 million or $3.61 per diluted share for the full year. Return on average assets was 120 basis points for the year, while return on average equity was 12.38%. Both measures exceeded our annual guides, supported by growing net interest income of $200 million and durable noninterest income of $45 million. Our efficiency ratio for the year was 58%.

We are incredibly proud of these results and excited about the coming year and opportunities ahead. Veggie. Our disciplined approach to long-term value creation. In the fourth quarter, capital actions included the repurchase of 1.7% of outstanding shares, totaling nearly $11 million, and the successful completion of an $80 million sub-debt offering. Sub-debt notes have a five-year fixed rate of 6.5%, which is favorable to the 2015 and 2020 issuances that were subsequently redeemed earlier this month. 2025 notes received a BBB minus rating from Kroll, with a stable outlook reflective of our improved profitability and capital position.

The strength of the company's credit rating and favorable coupon on our recent debt issuance are clear testaments to our commitment to achieving higher financial performance. We delivered solid loan growth, with total loans increasing 1.5% in the fourth quarter and 4% year over year to $4.66 billion. This growth was reflective of strong competitive positioning and demand in commercial lending across our Upstate New York markets. Commercial business loans were down modestly on a linked quarter basis and up 11% year over year. Commercial mortgage loans were up about 4% from the end of the linked quarter and 6.5% year over year, led by healthy activity in our Rochester region.

We remain highly confident in the durability and growth potential of our Upstate New York markets. This includes Syracuse, where Micron Technology's long-anticipated $100 billion investment officially broke ground earlier this month. We build out an operation of an entire semiconductor supply chain is expected to bring thousands of jobs and drive significant economic expansion. While the results will take years to fully materialize, we were excited to see the shovel in the ground and anticipate more meaningful lending activity beginning this year as infrastructure, housing, and health care expand to support a larger anticipated population. Residential lending grew modestly, up 1% during both the three and twelve months ended 12/31/2025.

Originations were led by Buffalo and Rochester, where the housing market remains tight and prices have continued to increase. That said, inventories are starting to loosen in our overall geography. Application volumes were up year over year. We are beginning to see increased refinance activity. New 2025 continue to build their clientele and pipelines, supporting our expectations for stronger residential production in 2026. Consumer indirect loans were down 3.7% during the fourth quarter and 4.5% for the year, to $807 million. We manage this portfolio based on business unit profitability targets, and have been comfortable allowing runoff to outpace originations, given current market conditions.

As we maintain a strong focus on profitable spreads and favorable credit mix, we expect consumer indirect loans to drift down modestly in 2026. As a reminder, we are applying indirect lender for individual vehicle purchases through a network of more than 350 new auto dealers across New York State. The portfolio has an average loan size of approximately $20,000 and a weighted average FICO score exceeding 700. Period-end total deposits were $5.21 billion, down 2.8% from September 30, driven by seasonal public deposit outflows and lower broker deposits. Deposits were up 2% year over year despite the ongoing wind down of our banking as a service line of business.

As a reminder, we announced plans to exit BaaS in September 2024 and since then, have worked closely with our fintech partners to onboard their customers in $100 million of associated deposit balances. We had approximately $7 million of these deposits on the balance sheet at year-end, and continue to expect they will roll off in the first quarter to a new banking provider. While we did leverage broker deposits throughout the year as planned, to help offset the outflow of the BAS deposits, strong growth in our reciprocal deposit business allowed us to reduce broker in the fourth quarter. Our reciprocal deposit base is a differentiator, one anchored in deep and often long-tenured commercial and municipal relationships.

More than 20% of these customers and 30% of the balances have had a relationship with Five Star Bank for more than a decade. The average relationship tenure across the portfolio is five years. Through the reciprocal product offering, we were able to meet the deposit needs of individual, municipal, and commercial customers requiring collateralization above the $250,000 FDIC insurance limit for full insurance coverage. This allows us to keep important customer relationships in-house. Additional details on our performance, and a look at our 2026 guidance. Thank you, and good morning, everyone.

As Marty shared, we are very proud of our 2025 results, and we are committed to pushing higher in 2026 as we continue to unlock more potential from our commercial banking, consumer banking, and wealth management offerings. Our full-year 2025 return on assets exceeded initial expectations, reflecting the sustained momentum and our ability to raise the bar on operating results. We anticipate higher performance for the full year 2026 with a targeted return on average assets of at least 122 basis points, return on average equity exceeding 11.9%, and an efficiency ratio of below 58%. We also expect margin expansion in '26 as we continue to shift our earning asset mix and actively manage funding costs.

NIM is expected to incrementally build through the year, supporting a full-year target in the mid-three sixties. As a reminder, this is based on a spot rate forecast as of year-end, which does not factor in potential future rate cuts. Looking at our 2025 results, margin was 3.62% for the fourth quarter, and 3.53% for the full year. As expected, quarterly NIM was down three basis points from the linked period, in part to FOMC activity, given the timing of deposit and variable rate loan repricing. However, the primary driver of the compression was the impact of December sub-debt offering coupled with the mid-January call of our preexisting sub-debt issuances contributed about two basis points of declines.

Average loan yields decreased nine basis points as compared to the third quarter, primarily reflecting the timing of the October rate cut. As a reminder, approximately 40% of our loan portfolio is tied to variable rates, with a repricing frequency of one month or less. Cost of funds decreased four basis points from the linked quarter. Higher rate CDs matured alongside overall downward deposit repricing. Year over year, our quarterly margin expanded by 71 basis points, reflecting the transformative securities restructuring we completed in 2024. In addition to high-quality loan growth, supporting an improved earning asset mix, and effective management of funding costs. For 2026, we are targeting annual loan growth of about 5%, driven by commercial.

Given the number of loans that closed in the fourth quarter, coupled with larger anticipated payoffs and paydowns that we have seen in recent years, we expect commercial growth to be lighter in Q1 and build through the year. Deposits remain a top priority for us, amid a highly competitive landscape. We are guiding to a low single-digit deposit growth year over year, and remain focused on growing lower-cost core deposits, including demand, now, and savings across both our consumer and commercial lines of business. Turning to fee revenues, Noninterest income was $11.9 million for the quarter, $45 million for the year, supported in part by several unique factors.

This included higher than typical company-owned life insurance, for quality income in 2025. The year prior, noninterest income reflected the $100 million net loss associated with the investment securities restructuring, and the $13.7 million gain on our insurance subsidiary sale. COLI revenue was $2.8 million in the fourth quarter, a 2.1% decrease from the linked period, and $11.4 million for the year, compared to $5.5 million in 2024. The year-over-year increase was due in part to higher revenue in 2025 following the surrender and redeploy strategy we executed last January, the carrier's late June redemption of the surrender policy proceeds.

We originally expected third and fourth quarter income to each be approximately $275,000 less than the level reported in the second quarter. However, results exceeded expectations given the performance of the underlying policies. Accordingly, we expect COLI income to normalize in 2026, to approximately $10.5 million on a full-year basis. Full-year investment advisory income of $11.7 million was an increase of $1 million or over 9% from 2024. Career Capital experienced positive net flows. As new business and market-driven gains offset outflows, pushing AUM to $3.6 billion at year-end, up $500.4 million or 16% from one year prior.

Career Capital is one of the largest RIAs in our region, providing customized investment management, retirement planning, and consulting services, for mass affluent and high-net-worth individuals and families, businesses, institutions, and foundations. We look forward to continuing to nurture its growth and are targeting a low to mid-single-digit increase in investment advisory income in 2020, which is partly dependent on market conditions. Commercial back-to-back swap activity was again strong in the quarter, with associated fee income of $1.1 million, up $263,000 more than 31% from the third quarter. Full-year 2025 swap fee income of $2.5 million was up $1.8 million from the prior year.

We expect swap fees to moderate to a range between $1 million and $2 million, which is more in line with the 2022 and 2023 levels experienced. We reported quarterly noninterest expense of $36.7 million compared to $35.9 million in the third quarter, reflecting accruals for performance-related incentive compensation in 2025. Owner expense was $142 million compared to $178.9 million in 2024, where results were impacted by the previously disclosed fraud event and auto lending settlements. The year-over-year increase in salaries and benefits expense was driven in part by higher claims activity in our self-funded medical plan. We have discussed throughout much of 2025.

We expect the higher claims trend to continue into 2026, and a higher run rate is reflected in our 2026 expense guidance. Higher occupancy and equipment expense also contributed to the variance and primarily reflects the ATM conversion and upgrade project that we completed in 2025. Prudent expense management remains a top priority, reflecting our commitment to maintaining the positive operating leverage we have achieved. We are targeting low single-digit noninterest expense growth in 2026, primarily driven by a mid-single-digit increase in salaries and benefits reflecting the full impact of investments made in talent during the year and annual merit-based increases.

The 2026 effective tax rate is expected to be between 16.5% to 17.5%, including the impact of the amortization of tax credit investments placed in service in recent. This was down from the 18% we reported in 2025, primarily due to the taxable COLI surrender and redeploy transaction executed during the year. We were budgeting full-year net charge-offs of 25 to 35 basis points of average loans. While our experience in recent years has been lower than this, including the 24 basis points we reported in 2025, we are being conservative with our outlook at this time.

As a reminder, we finished 2025 with an ACL total loans ratio of 102 basis points, a coverage ratio that is aligned with our credit risk framework. That concludes my guidance for 2026. And I will turn the call back to Marty. Thanks, Jack. We are proud of the progress our team has made and confident in our ability to execute on our strategic plan. As we look ahead, we are focused on organic credit discipline growth, centered on deep relationships. Prudent management of expenses, balancing people and technology investments with a firm commitment to positive operating leverage. And continuing to build a strong capital position that supports our efforts to deliver meaningful long-term value to shareholders.

As a small-cap financial holding company primarily serving Upstate New York, we believe our size, scale, and market position create distinctive advantages. Both competitively as an investment opportunity. Having simplified our business and strengthened our balance sheet over the last twenty-four months, we are intently focused on driving sustainable growth through our community bank and wealth management firm. With more than $6 billion in assets on our balance sheet and another $3.6 billion under advisement, our size and scale are differentiators. Our deep roots and long history going back more than two hundred years in some of our legacy markets are complemented by exciting growth opportunities in the metros of Buffalo, Rochester, and Syracuse.

And supplemented by the high returns of our Mid Atlantic team. We look forward to delivering organic growth in support profitability and high-quality earnings. That we believe support a higher multiple. I would like to thank you for your attention this morning. That concludes our prepared remarks. Operator, please open the call for questions. Thank you.

Kate Croft: When preparing to ask your question, please ensure your device is unmuted locally. The first question comes from Damon DelMonte from KBW. Your line is now open. Please go ahead.

Damon DelMonte: Hey, good morning, everyone. Hope you are all doing well today. Thanks for taking my questions. First question, just wanted to start off on the margin, Jack. I appreciate the guidance here. Just kind of curious as far as, like, your expected cadence of the margin over the course of the year. I mean, is there a little bit of step down from where we ended 25 before we kind of grind up higher over the course of the year or are there other variables in play?

Jack Lance: Thanks, Damon. So when we the year, December margin was at about three fifty-six. And that was impacted partially by the sub-debt raise that we did mid-month. And then the retirement of the $65 million of the two outstanding facilities did not occur until mid-January. So margin was impacted by about six basis points on a monthly basis because of that. You know, after that retirement that occurred in January, we can see margins start to expand incrementally on a monthly basis throughout the year.

Damon DelMonte: Got it. Okay. That is helpful. Thank you. And then, I guess, staying on the margin topic, you know, I know your guidance does not contemplate any rate cuts, but if we do have a 25 basis point cut, can you just remind us how you expect the margin to respond in the near term?

Jack Lance: Yeah. I think we have demonstrated the ability to reprice deposits pretty aggressively. So as you saw in December, there was a modest amount of margin compression. Absent the sub-debt repricing, margin would have been largely or sorry, the sub-debt issuance margin would have been largely flat in the fourth quarter. So I think that our guidance holds up. We saw 25 basis points of rate adjustment.

Damon DelMonte: Got it. Okay. And then with regards to the outlook for loan growth, I think, Marty, in your prepared comments, you indicated that the indirect auto portfolio will likely trend lower this quarter and the growth would be driven on the commercial side. I guess first, what is the, is it intentional runoff on the indirect auto? And then secondly, do you feel better about your C&I prospects or your CRE prospects for the growth? Thanks.

Marty Birmingham: So we have been being very intentional with the management of the outstandings of our indirect portfolio, Damon. So yes, that is how we are planning to drive our footings in that portfolio in terms of what Jack talked about and our outlook for it. And relative to commercial, we have had a very strong year in '20. We had a very strong fourth quarter with closings. Our pipeline has consistently been around, as for the company, around $700 billion ish. For the last several years. And we see good opportunity geographically enough state. New York. And we see it kind of being equal weighted relative to C&I and CRE.

I think we have seen an increase in small business, CRE, and confidence of in our borrowers of all types and sizes. C&I, starting in the '25 and really continuing this point. So I think it is Jack commented, it is going to be a little bit lumpy and our timing will probably be towards the back half of the year in terms of the materialization of loan production and commercial. Yeah. And just to add a little color on the equal weighting there, that would be on a percentage basis, Damon. So CRE having a larger portfolio, we would anticipate some more balance sheet growth in the CRE portfolio versus C&I, but both are continued drivers of growth.

As is the small business lending unit.

Damon DelMonte: Got it. Okay. Great. And then if I could just sneak one more in. Nice to see some share buyback during the quarter. Just curious, you know, on your thoughts going forward into '26. Seems like shares are probably still attractive at these levels, but just curious on your thoughts.

Jack Lance: So I think we are very pleased with what how we were able to execute in the fourth quarter. I think it is fundamental, as we think about it, one of our constraints is our common equity Tier one at 11%. And we were able to buy back 337,000 shares think the earn back was a year or less. And remains attractive capital allocation option for us. We did, as shared, roll over our sub-debt, we borrowed an incremental $15 million. So that could provide some opportunity for us. But as I say, we want to be judicious relative to our constraint capital. Relative to CET1.

Damon DelMonte: Great. Thank you very much for answering my questions.

Jack Lance: Thanks, Damon.

Kate Croft: Thank you. As a reminder to ask a question, please press star. The next question comes from Manuel Navas from Piper Sandler. Your line is now open. Please go ahead.

Manuel Navas: Hey, good morning. Just wanted to I appreciate the ROA improvement target. I just wanted to hear a little bit about potential areas for upside or downside on the ROA.

Jack Lance: Yeah. Yeah. You know, this is Jack, I guess. What are the areas that could push on ROA is you know, accelerated pace of asset originations. But I think we are, you know, pretty prudent in our model as far as we are focusing our growth. We have pretty strong pricing constraints out there. While we remain competitive, we do prioritize profitability over growth. Fairly comfortable with the ROI getting ROA guidance that we put out.

Manuel Navas: That is great. And with the going back to the pace of buybacks for a moment, it growth is a little bit more back half a year. Is that mean you can use my have a little bit more buybacks in the first half of the year? Is that reasonable assumption? How does that work with your progression of growth across the year?

Jack Lance: Yeah. As Marty mentioned, we raised $15 million of additional liquidity through the December sub-debt offering. And deployed a portion of that throughout December. There is still some liquidity available from that issuance. On the common equity tier one side, the low mark for us is 11%. That is basically where my threshold is where I do not want to break below. We ended the year at 11.1%, and we are projected to add another 40 to 50 basis points of CET1. So we have capacity to continue to execute on that additional activity. In greater depth about any of the initiatives that you have to kind of generate that low sum digits for the year.

And then I will step back into the queue. Yeah. This is Jack. I can take that one again. So as we mentioned in the in the call, we are focused on mainly on core deposit acquisitions. So that is DDA, savings, Now accounts, we are really projecting our money market and time deposits to remain flattish throughout the rest of the year. So that growth in those core deposits is kind of comes along with inflow of loans and spread throughout the year. So I would not expect much volatility outside of the seasonal flows we have from public deposits.

And then as far as initiatives are concerned, the past year or so, we have spoken about the success of our treasury management offering on the commercial side and commercial deposit growth. Was a success for 2025. We expect to continue that momentum in 2026. Typically, the deposit relationships follow the extension of credit. I think we put a lot of effort into positioning our sales force commercial, retail, those dealing with our relationship businesses understanding the importance of deposits and getting incentives reset this year so that we can report strong performance there. So we feel good about our preparation as we turn the calendar to 2026 to really pursue this aspect of what can possibly influence our NIM.

Thank you. Thank you for the commentary. Thank you.

Kate Croft: We have no further questions at this point, so I would like to hand back to Marty for any final remarks.

Marty Birmingham: Thank you very much, operator, for your help this morning. Thanks so much for all who have participated. We look forward to continuing to update you on our performance after the conclusion of the first quarter.

Kate Croft: This concludes today's call. Thank you all for joining. You may now disconnect your lines.