Community Financial System, Inc. Q2 2026 Earnings Call

Good day, and welcome to the Community Financial System, Inc. second quarter 2026 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, 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 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 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 filings, including the Risk Factors section for more details. Discussion may also include reference 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, Betsy.

Good morning, everyone. Thank you for joining us today. This was another consecutive record quarter, which I would classify as solid, with continued expansion in net interest income, strong fee performance in banking, employee benefits, and wealth management, and managed recurring run rate expenses. Both credit and liquidity remained top tier. Insurance revenues were short of expectations, and we also had a few expense items which we do not consider recurring. I'm particularly encouraged by the continued client and talent acquisition momentum across all of our markets in banking, the new product launches and growing capabilities in our employee benefits business, the above-market results in our wealth management business, and the addition of ClearPoint. Clearly, insurance will be challenged this year and fall short of our expectations. That is driven by meaningfully lower contingencies, soft premium markets, and also some organic challenges.

You will notice that we had a nice gain of over $3 million on an investment during the quarter that's related to an insurance investment. Great example of the optionality associated with our presence in the broader insurance space. We made more than five times our money in this particular situation. We're also looking at a very strong pipeline of M&A opportunities in insurance, which may put us on a nice track for 2027 revenue expansion. A couple of items of note. First, an update on our de novo efforts. We finished the second quarter right around $140 million in deposits across our de novos. Between the de novos and our acquisition of the Santander branches in the Lehigh Valley, we expect to end the year at approximately $700 million of new additive funding in our growth expansion markets and are quickly putting that to work in quality loans.

That is right in line with our strategic plan. You will notice that even with this sizable aggregate addition of deposits that were priced higher than our legacy ones, our overall cost of deposits continued to come down, hopefully directly addressing some prior concerns. Second, we've spent a fair amount of time talking about our commercial banking business and the success there, but here's a data point on the terrific things that our mortgage team is doing as well. Right now, our mortgage pipeline is at its highest point it has been for the past seven years, and as we know, this is not a booming mortgage market. As of the latest HMDA data, we're the number 2 bank originator in our footprint. Four years ago, we were number 5.

Speaking of housing in our markets, based on the May 2026 data from ICE, Scranton, PA is the market with the highest increase in housing price in the U.S. Rochester, New York is the 2nd. Albany, New York is the 5th. Syracuse is the 6th. Allentown is the 14th. This is driven by inventory being down 50% compared to historical averages. Needless to say, this all bodes well for us. Third, as it relates to activity across our markets, a few data points. Four years ago, Central New York was delivering less than 400 new units of housing per year. Last year, the permits filed were over 2,400. By most estimates, we need over 3,000 to meet the housing demand.

On the banking side, I have seen more discussions around multifamily and even hospitality deals in Central New York in the past six months than I have seen in the past five years cumulative. With that said, it is still early days, and it is not what is driving our growth yet. Our differentiated growth comes from market share gains across all of our footprint. There isn't much of a difference in the growth rates of our regions. This past quarter was particularly strong in New England and Pennsylvania. Looking at the pipeline, I expect virtually all regions to have a strong second half of the year. We also have insurance and benefits customers seeing nice lifts in their operations from activity across all of our footprint. Lastly, our banking assets now sit at $17.4 billion.

Our wealth assets under management and administration sit at $17.1 billion, and our retirement assets under administration are $16.5 billion. In other words, both our employee benefits and wealth management businesses now have a similar amount of assets and care as our banking business, which further underscores the diversification strategy of our company. You can expect continued focus and investment across all of our businesses and driving the growth of all of them in line with our previously communicated strategies. With all of that said, this was a record quarter for our company with overall operating pre-tax, pre-provision earnings of 14.9% year-over-year. Banking pre-tax earnings were up 13.2%. Employee benefits pre-tax earnings were up 16.2%. Wealth management pre-tax earnings were up 46.5%, and insurance was down 10.8% year-over-year.

More importantly, our trajectory remains very attractive, and we expect acceleration in results across all of our businesses in the second half of the year. As a reminder, in the fourth quarter, we begin unshackling ourselves from the weight of our securities portfolio as we start getting back meaningful cash flows, which should provide a nice tailwind into future quarters. I will now pass it to Marya for more color on the numbers and our updated guidance. Marya? Thank you, Dimitar. Good morning, all.

As Dimitar noted, the company's second quarter performance was solid. GAAP earnings per share of $1.16 increased $0.19, or 19.6%, from the second quarter of the prior year, and increased $0.08, or 7.4%, from linked first quarter results. Operating earnings per share and operating pre-tax pre-provision net revenue per share were record quarterly results for the company. Operating earnings per share were $1.16 in the second quarter as compared to $1.04 one year prior and $1.15 in the linked first quarter. Second quarter operating PPNR per share of $1.62 increased $0.21 from one year prior and increased $0.01 on a linked quarter basis. These record operating results were driven by a new quarterly high for net interest income. The company's net interest income was $139.1 million in the second quarter.

This represents a $4.4 million, or 3.3%, increase over the linked first quarter and a $14.4 million, or 11.5%, improvement over the second quarter of 2025 and marks the ninth consecutive quarter of net interest income expansion. The company's fully tax-equivalent net interest margin increased four basis points from 3.45% in the linked first quarter to 3.49% in the second quarter, reflective of lower funding costs. During the quarter, the company's cost of funds was 1.18%, a decrease of two basis points from the prior quarter, primarily driven by lower deposit costs. Operating non-interest revenues increased $4.8 million or 6.4% compared to the prior year's second quarter and increased $0.3 million, or 0.4%, from the linked first quarter.

The increase in operating non-interest revenues compared to the second quarter of 2025 was reflective of increases in employee benefit services, wealth management services, and banking non-interest revenues, partially offset by a decrease in insurance services non-interest revenues due to a softer insurance market and lower organic growth. Operating non-interest revenues represented 36% of total operating revenues during the second quarter, a metric that continuously emphasizes the diversification of our businesses. The company recorded a $4.6 million provision for credit losses during the second quarter. This compares to $4.1 million in the prior year's second quarter and $5.6 million in the linked first quarter. During the second quarter, the company recorded $137.7 million in total non-interest expenses, an increase of $4.7 million, or 3.5%, from the linked first quarter, and an increase of $8.6 million, or 6.7%, from the prior year's second quarter.

The increase from the linked first quarter was due in part to a $2.1 million increase in salaries and employee benefits, reflective of one additional payroll day and true-up of performance-based annual management incentive plan expense, $0.7 million of expenses associated with ClearPoint, as well as a one-time $0.6 million early termination charge related to a debit card processing platform conversion. $3.4 million of the increase in total non-interest expenses from the second quarter of 2025 was attributed to salaries and employee benefits, primarily due to incremental costs associated with acquisitions in de novo bank branches opened between the periods, along with the impact of annual merit-based increases.

Occupancy and equipment expenses increased $2.4 million from the prior year's second quarter, driven by incremental costs associated with the opening of 16 de novo branches and three regional headquarters, along with the seven branches acquired from Santander in the prior year's fourth quarter. Year-to-date operating non-interest expenses were $261.2 million, an increase of $15.2 million or 6.2% from the first six months of 2025. Excluding operating expenses related to acquisitions completed in the last 12 months, operating non-interest expenses increased $10.4 million or 4.2% from the same prior year period. Ending loans increased $151.6 million or 1.4% during the second quarter and increased $763.7 million or 7.3% from one year prior. The increase from one year prior reflected organic growth in the overall business and consumer lending portfolios, while the increase during the second quarter primarily reflected organic growth in the business lending portfolio.

The company's ending total deposits increased $1.01 billion, or 7.4%, from one year prior and decreased $159.7 million, or 1.1%, from March 31st, 2026. The decrease in total deposits during the second quarter was primarily reflective of seasonal outflows of municipal deposits. The increase in total deposits over the last 12 months included $543.7 million of deposits assumed from the Santander branch acquisition and $120.1 million of deposits assumed from the ClearPoint acquisition. Moving on to asset quality. The non-performing loans ratio increased two basis points, and the net charge-off ratio increased one basis point from the linked first quarter, while the loans 30 to 89 days delinquent ratio decreased nine basis points from last quarter, aligned with typical seasonal trends.

The company's allowance for credit losses was $91.7 million, or 81 basis points of total loans outstanding at the end of the second quarter, an increase of $1.5 million during the quarter. The increase was primarily attributed to reserve building in the business lending portfolio. The allowance for credit losses at the end of the second quarter represented eight times the company's trailing 12-month net charge-off. We are pleased with the second quarter results, which reinforces our commitment to expand operating leverage and scale as a diversified financial services company. 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.

With that, I would like to provide a more detailed update to our expectations for full year 2026 as we enter into the second half of the year, inclusive of the estimated impact of the completed ClearPoint acquisition. We are currently expecting 5%-6% growth in loan balances, 3%-4% growth in deposit balances, 10%-11% growth in net interest income, 6%-7% growth in non-interest revenues, and a provision for credit losses in the range of $20 million-$25 million. In addition, our expectation is for continued net interest margin expansion over the next six months, exiting 2026 in the low to mid 3.5 range. We expect modest temporary pressure in the third quarter within a range of up one basis point to down two basis points, due in part to seasonally higher overnight borrowing levels.

Core non-interest expenses are expected to be in the range of $550 million-$555 million, or an increase of 7%-8% from 2025. This includes approximately $8 million-$9 million of incremental expenses associated with the branches acquired from Santander and approximately $4 million-$5 million of incremental expenses associated with ClearPoint, including non-operating intangible asset amortization. These estimates do not include the impact of pending or future acquisitions. Additionally, we continue to anticipate an effective tax rate between 23% and 24%. That concludes my prepared earnings comments. Dimitar and I will now take questions. Betsy, I will 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 touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Steve Moss with Raymond James. Please go ahead. Good morning.

Morning, Steve. Morning. Morning, Dimitar.

Morning, Marya. Starting off on the competitive environment in Upstate New York. It sounds like there's going to be a bit of an acceleration here in overall businesses, including loan growth. Just kind of curious what you guys are seeing these days. Where is competition more intense and where there's opportunity.

Thank you, Steve. As I mentioned, it's really across the footprint. I couldn't tell you that Upstate is any better or different than, frankly, New England or Pennsylvania. It is competitive. I think our expectations are, as Marya said, 5%-6% on the loan growth side for the year. I think we're tracking just about in that range right now, towards the higher end. We also have some second half of last year was stronger than the first half. We have different comps. It is active across the board. I would say that we've seen a little bit more competition as it relates to pricing, including some structures as well.

People are kind of really focused on putting assets on the books, certainly our growth could have been even higher this quarter if we had taken a similar approach. To me, it was a little bit interesting because rates went up during the quarter while actual rates offered to customers went down in our markets, just compressing spread pretty meaningfully. We did not all partake in a lot of those. We still feel that our pipeline is pretty solid, and we'll be able to hit those growth rates.

Do you think, going forward for the second half of the year, is it just going to be more commercially driven and are you just going to be trying to hold indirect auto flat? I realize there's some competition in that market this quarter here.

Yeah. I think, one, in the third and the fourth quarter, we really bear the benefits of our activities on the mortgage side. I expect that the mortgage portfolio is going to move. As I mentioned, our pipeline today in that book is the highest it's been in seven years. Those have a pretty good timeline to closing. As you can estimate, if we see the pipeline today, most of it will clear out this quarter, and then we'll be rebuilding again. I think the third and the fourth quarter will be good in mortgage. On the auto side, is I think that the pricing has improved a little bit, so we're more active on that side as well. I think we'll see where it takes us.

I do think that the consumer is going to be stronger, in the second half of the year than certainly it was in the first half of the year. Commercial, I think remains in a very good spot. We have very good pipelines. I think we may even have opportunities to do a little bit better on pricing if our competitors feel similarly that rates should be moving up rather than down.

Okay. Got it. Then in terms of on the fee income side, insurance here, just kind of curious, how to think about contingency fees going forward. I hear you're softer, and I'm not exactly sure how much you had in contingency fees this quarter. Just kind of curious, as we go into 2027, it's probably going to be a bit more muted on the contingency side and obviously probably on growth too.

Yeah. I think that's right. I mean, out of the shortfall in insurance year to date compared to where we thought we were going to be, about $1 million is just dealt in contingencies. The team has done a very nice job in terms of controlling costs. It's hard to overcome that. The rest of it has been organic softness, premiums. It's a little bit hard to tell where it's going to settle. We think the second half of the year will be better. We expect some acceleration. We expect to make up some ground that's not going to take us to our normal growth rate. We're down 6.5% year to date. We hope to make that up, not finish necessarily the year down, but we'll see how it shakes out. It could go either way.

I will say that this environment it's made things a little bit more active on the M&A side, as I mentioned. We have multiple ways to grow revenues there. The pipeline right now on the M&A side is the best it's been, including some things that could be much more needle movers than historically for us. I think if we're able to execute well on that side, again, looking forward into 2027, we'll be in much better shape.

Awesome. Appreciate all that color there, Dimitar. I'll step back in the queue here.

Yep. The next question comes from Manuel Navas with Piper Sandler.

Please go ahead. Hey, good morning.

This is Grant Zerlin on for Manuel.

Hi. I had a question on how do deposit pipelines look going forward, noting the muni seasonality this quarter.

How are de novo branches doing gathering deposits?

Sure. As you pointed out correctly, the second quarter, we have a meaningful amount of seasonality as the teachers and other employees basically take the summer and there's payments made at the end of June to all of those employees. You see an outflow as property taxes start coming in here at the end of the third quarter and the fourth quarter, that will rebuild back into liquidity. These are just kind of normal temporary fluctuations across our footprint. As it relates to de novos, as I mentioned, we ended the quarter at $140 million in deposits, right on track of in terms of what we were planning and hoping for for the year. Activity levels are pretty good. We're very pleased with the outcomes there. Overall deposits are not easy to come by. That's not just for us.

I think it's the same for everybody in the industry. Deposits are always the hard part of the equation. That is the lifeblood of the bank. We continue to remain very focused on that. Pricing has become a little bit less constructive on that side. We've decided not to participate in some of those opportunities. We're certainly seeing things that are going off at rates above wholesale funding rates, which doesn't make a lot of sense to me. We're not going to participate in that. We have a much stronger balance sheet than most and a lot more flexibility than most. Our loan to deposit ratio is 76%. We have a lot of runway there as opposed to other folks.

The other thing I would note is, again, we have a tremendous amount of cash flows coming from our portfolio starting here in the fourth quarter into next year. The next 18 months, we're looking at over $1 billion of cash flows coming our way. That's a great way for us to also optimize how we fund the growth on the loan side.

Thank you. Just switching over to repurchases, I noticed a decrease this quarter. Is there a right pace for repurchases going forward?

We don't have a pre-established pace. I think we remain opportunistic on that front. If there's moments of softness in the market, we make sure that we have a lot of strength in the company that we really become active when things are softer. There's no predetermined amount that we would like to purchase. As I mentioned, there's a decent amount of opportunities on the M&A side as well, especially on the insurance side. We're kind of cognizant of how we deploy cash in the best way for our shareholders.

Thank you. That's it from me.

As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Matthew Breese with Stephens. Please go ahead. Good morning.

Hey, Matt. Marya, I heard you loud and clear on the near term kind of NIM guide.

I'm curious, as you think about the NIM longer term competitive factors, but really the repricing of fixed-rate loans, when do those repricing benefits start to kind of peter out? Is that a 2027 or 2028 type factor for you, or is it longer considering the component to your book?

I would say it's longer considering all the components. You just heard Dimitar talk through some of the different things we're saying and seeing in the markets when historically with NIM and based on the past year. We expanded 4 basis points in Q2, 20 basis points year-over-year. Obviously that's our ongoing efforts that we're seeing come to fruition and also outstanding cost of funds, which we noted a couple of times during the call already, which came into Q2 at 1.18%. As we see and look at NIM Q3, as we mentioned, a little bit of pressure there. That's just seasonal for us. We expect it to again go back expansionary Q4. We look at the variable price book for 2027. It really is playing out over the next 12 months.

Again, the securities cash flows that are coming through, those we expect to have impact beginning in Q1. One, we are taking the position that looking at our portfolios, we're very cognizant of how the next sort of 8 quarters are playing out because of all the moving parts. I would say that just in general, we want to stress that we are exiting again full-year low to mid 3.5% range in terms of NIM, and that we have all this room coming up between the variable loans repricing and the invested securities to redeploy into loans. That's a really positive benefit for us.

I think, Matt, I would just add, as we look at our ALCO modeling, the margin trend continues and continues to the point where I don't believe it, to be honest with you because of just banks being very good at competing their margins away. If the curve stays where it is and spreads remain roughly in line, certainly the new originations are coming in at a higher rate than the back book in aggregate. It varies by portfolio, but in aggregate they're coming in higher. We have a long tail here of repricing and especially as some of the cash flows are moving from securities from 2% into loans at 6%. That provides a very nice tail to repricing for future years.

Very helpful. Have you started, I mean deposit costs were obviously very low this quarter, have you started to feel some pressure there and might we see higher deposit costs even for you in the coming quarters here as competition builds?

I don't know that it will be that much higher for us, to be honest with you. I think we just have a lot more levers in our balance sheets. Like I said, we've got billions of dollars in securities that will churn. That means that we don't have to participate in some of the things that are happening at the market. When you see a lot of things starting with a 4 handle, when you see municipal money short term being a bit higher than wholesale funding that is even unsecured, we don't have to participate in that because we have flexibility. I don't think the overall cost of deposit go up in a meaningful way for us. There will be some quarters, like Marya said.

I think in the third quarter could you see our cost of funds creep up because of the overnight borrowings? That's probably likely. That's what's going to put some pressure on the margin in third quarter. Cost of deposits themselves, I don't really expect to move much.

Okay. Dimitar, I felt like your comments around infrastructure build, multifamily, your core markets, but a lot of them kind of in the chip-impacted markets were really encouraging. I know to date you've been a little bit hesitant to put any chips on it just because these things can change, they can get extended, et cetera. Could you just reframe for us where kind of the ball lies today, potential impacts to the balance sheet, when that might occur, if it's already occurred, and maybe just give us your updated thoughts there.

Yeah. I would frame it, Matt, as we've moved from the kind of speculation stage which lasted for basically four years almost. If you recall, this was announced at the end of 2022. This has been kind of in the discussions for a while, and we've kind of moved past that stage into the stage of people actually putting in for permits, trying to find financing, and putting some real money on the table. That's kind of where we are today. Are we at the stage where we're actively lending into those opportunities, or our customers are growing to the point where it's meaningfully impacting their insurance premiums or their employee benefits services? We're not there yet. I think that's probably going to start seeing a little bit more of that over the next 12 months. Is it going to be noticeable on our balance sheet?

I doubt it, to be honest with you, simply because of the scale of our balance sheet today versus having another $50 million or $75 million of incremental opportunities, and that's just kind of a speculation. I don't think it's going to be much more than that. It's not going to move the needle yet in the next 12 months. Like I said, all of our regions are performing really, really well. If I gave you them, their growth rates, and I asked you to guess which one was Central New York, I don't think you would be able to tell. In a couple of years, I hope that that number will be kind of sticking out a little bit more on the page, but we're just not there yet.

Great. Okay. Last one from me. You mentioned in the release some investments towards AI, and I'm curious, one, what kind of staff do you have dedicated to AI presently? Two, if there's been any sort of tangible benefits yet, and three, if you think we'll see any real kind of pronounced expense or revenue-related benefits over the near to medium term. That's all I had. Thank you.

Thank you, Matt. Yeah. It is something that we're very focused on. As I mentioned in our last call, we've been on that journey for two-plus years now. We have both added and also redeployed resources from other areas into, I would call, efficiency opportunities predominantly, at this point and this stage in time. As it relates to purely staffing, I can think of it as more than 1,000 people, with a handful of them being kind of fully dedicated to just purely AI. Essentially, the rest of them being augmented in multiple ways, their production levels through AI. I think so far the transformational areas that we've seen are really more on the app development side, which is very similar for pretty much everybody else out there. Certainly our ability to develop, launch, and integrate products at a much faster pace of innovation than before.

We have some very, very interesting things that we're working on that I would call transformational in some of our businesses. The benefit of being a well-diversified company with different levels of regulation across different businesses is that it allows us to be much more experimental, I would put it that way, in areas outside of the bank, and take some learnings out of that and then push it back into the larger enterprise. We're focused on that. I don't think we're at the point where we're going to tell you what the impact is. I'm going to know much better in about six months if some of these transformational things are truly happening. I think in another six months you might start seeing their impact on the margin in some of our businesses. We're not there yet. We're very well down the path.

We really need to see these things happen. At a high level, what it is allowing us to do today is to have a much more efficient allocation of labor in our franchise. If you step back and look at our cost base today, if you actually take out the acquisitions, you'll see that our employee cost has actually not gone up that much over the past 12 months. Today, we have the same number of employees we did at the beginning of the year before the acquisition of ClearPoint and some other add-ons across some of the other businesses.

Some of these small add-ons that we've done, we've been able to basically offset the headcount add with other efficiencies. Those businesses have the same number of employees today as they did in the beginning of the year while adding to the revenues. That's kind of what we're focused on. You kind of see some of that rate really kind of on the employee side first kind of moderate. Then we'll start seeing it a little bit more on the margin as the investments mature.

Appreciate all the detail. I'll leave it there. Thank you. This concludes the question and answer session.

I would like to turn the call back over for any closing remarks.

Thank you, Betsy, thank you everyone for joining us, and for the questions. As always, we remain excited about the future ahead of us and look forward to speaking with you in a couple of months.

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