CBU Q3 2026 earnings call transcript, October 27, 2026

Good day, and welcome to the Community Financial System, Inc.'s 3rd Quarter 2026 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 1 on your telephone keypad. 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 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 Krivinov, President and CEO. Please go ahead. Thank you, Chloe. Good morning. Thank you for joining us today. Our company performed very well in the third quarter. As expected, our results accelerated with operating diluted earnings per share increasing 16.5% year-over-year and 9.5% quarter-over-quarter, representing our sixth consecutive quarter of record results.

Record revenues and profitability in banking, record revenues and profitability in insurance services, record revenues and profitability in wealth management services. Solid revenue performance in employee benefit services, which was challenged by elevated expenses due to startup legal costs associated with a number of new fund launches in our collective investment trust business. A couple of items of note. Wealth management revenue was up 41% year-over-year and pre-tax earnings were up 42%, driven by both very strong organic performance and the addition of ClearPoint. We remain very excited about the opportunities ClearPoint is providing us. We are already seeing tangible client cross-service opportunities with banking. Insurance services revenue was up 8.9% year-over-year, while keeping expenses basically flat, resulting in pre-tax earnings growth of 41%. As previously mentioned, the M&A activity is really strong, and these results do not yet incorporate the more sizable opportunities we're working on this quarter should they come to fruition. Employee benefit services revenue was up 5.6%. year-over-year, while pre-tax earnings were down 3.5% predominantly due to the aforementioned legal expenses. Banking had a very strong quarter with both margin expansion and organic growth. Commercial and consumer lending were both strong. Deposits experienced typical seasonal fluctuations, while liquidity and credit remain a source of strength.

I would expect some seasonal slowdown in consumer lending in Q4, plus the impact on demand of higher rates in mortgage and auto lending. The commercial pipeline remains strong, but we also expect some larger payoffs, so I wouldn't extrapolate from Q3. As noted, we pulled forward our December securities maturities as we took advantage of the shape of the curve and our own liquidity needs and produced a positive net present value transaction. In addition, we believe that this illustrates the positive dynamics embedded in our balance sheet with over $600 million in 2027. I don't know. I'll pass it to Mirai for more details.

Thank you, Dimitar, and good morning, all. As Dimitar noted, the company's operating performance accelerated in the third quarter. Gap earnings per share of $1.16 increased 12 cents, or 11.5%, and was consistent with linked second quarter results, including the loss on set in the third quarter, in connection with our decisions to pull forward our December investment. Gap earnings per share and operating pre-tax, pre-provision net revenue per share were record quarterly results for over $1.27 in the third quarter, as compared to $1.09 one year prior and $1.16. PNR per share of $1.77 increased 21 cents. One year prior, an increased record operating results were driven by a new quarterly high for non-interest income and operating non-interest revenue.

This income was $143.5 million in the third quarter. This represents a $4.4 million, or 3.2%, increase over the linked second quarter and a $15.4 million, or 12%, improvement over the third quarter. It marks the company's fully tax equivalent net interest margin increased seven basis points from 3.49% in the linked second quarter to 3.56% in the third quarter, and net interest margin included the accretive impact of the payday. of higher cost overnight borrowing using proceeds 196.8% in the prior quarter. Operating non-interest revenues increased 8 million or 10.2% compared to the prior year's third quarter. 7.4 million or 9.3% operating non-interest revenues was reflective of increases in employee benefit services, wealth management services, insurance services, 8.1 million.

and 2.9 million year-to-date. Operating non-interest revenues represented 38% of total operating revenues during the third quarter, a metric that continuously emphasizes the diversification. The company recorded a 5.6 million provision for credit losses during the third quarter. This was consistent with the prior year's third quarter and compares to 4.6 million in the linked second quarter.

During the third quarter, the company recorded 141 million in total non-interest expenses, an increase of 3.3 million or 2.4% from the linked second quarter and an increase of 12.7 million or 9.9% from the prior years due in part to a wealth of benefits driven by one of the additional payroll day and incremental expenses associated with ClearPoint, as well as a one-time 0.8 million consulting expense related to the renegotiation. 7.4 million of the increase in total non-interest expenses from the third quarter of 2025 was attributed to salaries and employee benefits, primarily due to the acquisitions completed between the period. Incentive compensation and medical costs along occupancy and equipment expenses increased 2.6 million from the prior year's third quarter, driven by incremental cost.

Related to acquisitions completed in the last 12 months, year-to-date operating non-interest expenses increased 18.7 million, or 5.1%, from the same prior year.

Ending loans increased 235.2 million, or 2.1%, during the third quarter, and increased 767.8 million, or 7.1%, from one year prior. Increases reflected organic growth in the overall... ...business and consumer lending portfolios. The companies ended 3 million, from one year prior, and increased 150, or 1.1%.

The increase in total deposits over the past 12 months included 543.7 million of deposits, assumed from the Santander branch acquisition, and 120.1 million of deposits, assumed from the Clear Bank, moving on to asset quality. The non-performing loans ratio increased 2 basis points, and the loan's 30-89 days delinquent ratio increased 9 basis points from last quarter. But remain strong compared to the net charge-off ratio increased 6 basis points from the linked second quarter due to 2.7 million of charge-offs recognized in the third quarter of 2026 on two individually assessed business lending relationships for which specific allowance.

The company's allowance for credit losses was 92 million, or 80 basis points of total loans outstanding at the end. The credit losses at the end of the third quarter represented approximately seven times the company's trailing 12 months. The company's diversified revenue profile, strong liquidity, and historically good asset quality.

We continue to expect three to four percent growth in deposit balances, six to seven percent growth in non-interest revenues, and expect loan growth to moderate in the fourth quarter, driven by some seasonal slowdown in consumer lending, as well as some larger commercial. We expect the full year 2026 provision for credit losses to be in the range of $22 to $25 million. Of the August 3rd set, $6.8 million of lower yielding U.S. Treasury securities, we now expect 11 to 11.5 percent. and net interest income, and for net interest margin to exit, near-term margin pressure is possible, expected to be in the range of $5 to $557 million, or an increase of 7 to 8 percent from 2025. This includes... ...approximately $8 to $9 million of incremental expenses associated with the branches acquired from Santander of incremental expenses, including non-operating intangible asset amortization, and these estimates do not include the impact of pending or future acquisitions.

This concludes my prepared earnings comments, and Dimitar and I will now take questions.

I'll hand 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 telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Steve Ma.

with Raymond James. Please go ahead. Hi, good morning. Maybe start off on loans here.

Hey, to start off on loans here, just kind of curious, you know, I hear you on moderation in auto and mortgage. Just curious, you know, with regard to, you know, how to think about the commercial loan pipeline and what you're seeing for strength or weakness there, just given larger payoffs.

Yeah. Hey, Steve. The pipeline is strong. It is pretty comparable to where it was last quarter, which means that it's close to its high marks. Activities is solid. So there's really to be concerned about. We just know that we've got a couple of larger payoffs, which is not the worst thing that can happen to a loan. So we're going to absorb those and we're going to replace. some in the fourth quarter. And depending on timing, depending on closings, you know, we feel that the range that we provided is the operating range. Yeah. And then also just curious, what are you guys seeing for loan pricing these days and competition in the market?

Yeah. So I think in the last couple of months, our blended originations have been right around 6.6. And this is kind of a cross-world portfolio.

We talked about earlier this year that the pricing in auto was just frankly silly and wanted to be.

And that's out of the deal. You know, you're seeing things in high sevens and even eight handles. Mortgage products that has an impact on demand. We've seen that. I think it's across the board. I'm confident we're going to do better than most other folks. We are a very purchase-focused shop and we have multiple products and solutions for folks.

and for mortgages. And then on the commercial side, you know, I think trending kind of in the high sixes, introduced the number seven in certain situations. It is competitive. Okay, great. Appreciate it. All that color there. And then maybe just on the fee-based businesses, Dimitar, you hinted at, you know, the potential acquisitions. I was kind of curious, you know, is there any particular line of business you guys are maybe more focused on at the moment for acquisitions or any color you could shed there? Yeah, our acquisition pipeline is robust as it relates to insurance in particular. And we've talked about this a little bit in the prior calls. This year, while the organic growth has been challenged for multiple reasons, we've all seen some kind of sanity return in terms of pricing on the M&A side. And we've made up some ground year to date. You know, we were down the first quarter almost 10% year over year. We narrowed it down to 6.5%. Now we're kind of in the low 3% year over year. And we think we've got good opportunities. Continue both on the M&A side and the organic side in the fourth quarter and narrow that gap. So I mentioned last quarter that if everything that we're working on transpires, we're going to be very well positioned for 27 on the insurance side. And I'm on very good track there for robust growth and 27. Great. Super, I appreciate all that color there. And I'll step back in the queue here.

Nice quarter. Thank you. Thank you. The next question comes from David Conrad with KBW. Please go ahead.

Morning, David. I think what you're seeing on the balance sheet as it relates to the cash position is really more driven by the seasonality that we have in terms of predominantly the municipal side of our deposit beta. There's some seasonality clearly also in the general deposit basis. People spend money for vacations during the third quarter. So usually in the third quarter, we see the kind of the some of those personal deposits, the municipal deposits flow out in the third back at the end of the third quarter and into the fourth quarter as people make. So that's really what's driven that cash position. We talked. Last, last call that we expected to be in a higher, higher during the quarter to your point because we sold off some of our, we funded during the quarter through our securities. And then in terms of beta, David, really hard to tell. It is very early, you know, the decision. The kind of the have more a couple when they're going to happen. I think just in terms of how we've been approaching it throughout the year, you can see we have driven costs down as we've optimized volume versus rate on the deposit side. We certainly have a lot of strength in our liquidity position to allow us to do that.

So that might push the numbers up a little bit. We'll see. We're by far not the most aggressive person in that market, but it's higher than before. At the same time, kind of on the core accounts, we haven't really touched any rates. It's going to shake out.

Okay, then second question with the, you know, going into next year with the 600 million of cash flows off the... the bond book. Would that be more...would you more like to optimize that in the loan, you know, funding loan growth and maybe further reducing borrowings? And I guess remind me where you would prefer securities earning assets be as a target. Yeah, I think if you just kind of look at what our balance sheet needs are, we would probably target to have securities to assets. We kind of hide teams to 20% as opposed to where they are today. So as you can do the math, that's a lot of sheet that will be used in much more productive ways going forward. If it relates to the maturities in 2020, I'm sure as well, of FHLB borrowings kind of in the middle of the year. So that would be... a use for some of those cash flows, certainly long growth, a little bit more color on how we think about what we did this quarter versus opportunities going forward in terms of accelerating some of those maturities. It has to be a positive present value transaction for us, right? So if you think about what we did in August, we had five months left on those treasuries until they mature. So in other words... cash flows sooner than the $3 million loss, and the math just worked. So we think that... So if we have similar opportunities in 2027, we're certainly going to keep an open eye towards those to fund growth and maybe not have to be as active on some of the more pricey deposit side.

Perfect. Thank you.

The next question comes from Manuel Navas with Piper Sandler. Please go ahead.

Pardon me. I have rejoined our speakers. You may begin again. Okay. Thank you, Chloe. Apologies, everybody. We got disconnected somehow. Manuel, we were just in the midst of your question, so sorry for that. Sorry. So, I was kind of asking for an update on the de novo branches. It seemed a lot of the year-over-year deposit growth was Santander and ClearPoint. Just kind of kind of wanted to zero in on how the de novo branches are doing. What's kind of the deposit cost there? Any kind of update there? Yeah. So, on the de novo branches, as of basically yesterday, we sit at roughly $175 million in deposits in those. So, we're very encouraged. We've mentioned previously that our goal for the year was to get to $200 million. And I think we're going to have a pretty good shot at being. Somewhere around there. The majority of the deposits in those branches have been and continue to be and likely will be for a little bit commercially focused. So, I don't have the exact number, Manuel, on costs, but you can imagine that some of those are higher costs than the traditional retail. The retail is going to build over time. But more importantly, as we look at our aggregate deposit costs, you've seen those have continued.

That's great. You gave a little bit of color that the insurance business is catching up. You have some M&A possibilities there, and all kind of drive to potentially a better outlook for next year in insurance. Can you just talk through employee benefit services and wealth management into next year as well? Yeah, so I'll start with wealth management. We have a couple of things going on there. So on the organic side, we have tailwinds from just market values. So that's been positive, and that continues to help. At the same time, we're very focused on new advisory sales in the business. And the past three years, and I'm including this year kind of as a projection, we've been running somewhere between $750 million and $1 billion of new advisors. So that's a strong tailwind kind of purely organically. And then you have is only going to impact us for basically kind of two quarters in a month. And next year, we're going to have the benefit of that for the full year. And certainly, they're doing better than we expected them to do as well. So I expect that next year in wealth management, assuming no change in market values, which is a very big assumption and likely incorrect because they're going to go up or they're going to go down. We're going to have a robust double-digit growth in wealth management in 2027. As it relates to employee benefit services, recalling that business roughly is to market as well. And half of it is

that we take care of across the country. We're just about at a million of those. We're kind of in the high single digits, somewhere around 7%. for planning purposes for 27. I really appreciate that. Shifting gears for a moment, what's roughly the average price on the share repurchase? And where does that kind of fit in with capital deployment, with the fee businesses that you're looking at? Any thoughts on bank M&A and, of course, kind of the pace of the buyback? Sure. So we've been, I think, this year, this past quarter as well, our average price has been in the low 60s, kind of right around where we are today. We're a very profitable company. We generally have a lot of money. We don't really have a predetermined pace of buybacks. It is opportunistic. It is clearly dependent. On the price, it is dependent on what other priorities we have. Our number one priority is always organic growth. We have to fund that. In the bank, that means that we're funding balance sheet growth. For every dollar you make in the bank, roughly half of it stays on the balance sheet and equity to support the growth. In the other businesses, really, it's through the P&L. You see certain quarters, there's going to be a little bit more movement, but that's our capital. After deployment on the expense side, it's really invested through the P&L in the non-banking businesses.

That's always priority number one. Priority number two is inorganic growth. We are, I would call, an active acquirer across our businesses. In the past three years, we've completed roughly 25 acquisitions. That's a lot. We know how to do these things. They vary from a book of business to a... An active hire to a slightly larger practice to the clear points in the center of the world. So that will always be a tool in our toolkit, and I expect that that will remain to be active. Those things write organic growth and buyback shares and continue to grow our capital base along...

and going forward to the latter part of your question on Bank M&A. I'd say it's a little bit quiet, right? Time out there. I appreciate the commentary, Austin. Back into the queue. The next question comes from Matthew Breeze with Stevens Inc. Please go ahead.

more in the Likai Valley, and we're off to a pretty good start there and kind of adding to the existing commercial team, so as well, by the day, from what's happening in our more established markets in upstate. We've had a, in Vermont, we've re-engaged as well in a, you know, just encouraged by the execution across the footprint, and, and I'm all. Encouraged by the ability for us to, we're working on and seeing. What we want us to do is act more actively and say, hey, the pricing in this part of our footprint is not as favorable in another part of the footprint.

Great. Mariah, just on the security sale, I guess one thing I was a little bit surprised by was just that it looks like investment yields are actually down a little bit quarter to quarter. Maybe help me better understand that. I would have thought given the sale of some of the lower yielding stuff that goes higher and, you know, if it's a timing difference, maybe help me out with where you expect things to shake out over the next couple of quarters. Sure. Yeah, I think. Probably a little bit of a timing difference based on the date that the sale was executed. In general, this is a transaction for us. We'd be happy that it costs. We also just...

...did not receive an FRB or FHLB dividend in Q3, and we will in Q4. So as we look forward, we expect that to smooth out, and Dimitar already went into some greater detail on what's going to happen in 2027 with the $600 million CI. I believe, to your specific question, it was more of a timing. ...situation as it was August 3rd, and the way that we, when we calculate the portfolio and look at things going forward, given the positive state of the portfolio, the rate environment, and again, the two dividends that we will see, we will continue for Q4 to see an expansion of one to three basis points in Dim, and then, as we mentioned in the script, for guidance at mid to high.

Okay. And then, Dimitar, one big picture question for you. You know, increasingly, we've been fielding questions around risks to deposit bases like yours tied to Agenic AI, products like Muse that was, that came out and, you know, just the ability to move dollars around much more efficiently. I'm just curious how you'd respond to that if you think a franchise like yours is more or less at risk and perhaps why. I'll leave it there, thank you. Sure, thanks Matt. Great question and, you know, it's kind of like the Yogi Berra thing that predictions about, predictions are very difficult especially about the future. I really think about it as it relates to our company is ultimately Muse, which, and it's actually been I think about it as well. It's available for a little bit in different ways.

It has to do with friction, but also with having something tangible around you. So branches actually show up quite high on most consumer surveys for reason where people bank.

Health and family for everybody, right? So trust is extremely important as it relates to finances.

Is that there is no response.

You may trust.

Let's say in an extreme example. However, if Muse does something that you didn't ask it to do, and the power of Muse is really being able to practically do things that you didn't even ask it to do. But if it does something that you didn't ask it to do, or if it makes a mistake, you have no recourse against anything. So in other words, there's no one to complain to. There's no one who can fix anything for you. You're going to get a beautiful response that says you're right. You push back. I messed up. And that's about it. That's going to be a challenge.

Versus the friction that's embedded in doing business with us versus MUSE.

Our business is a friction, right? Like nobody wants a mortgage. They want a home. So when we...

They're expecting their money tomorrow. They're not expecting their money... We need to continue to work on the equation of providing that value, moving as much friction as we can.

And then the operating side of the balances is the key to all of this. Because if you think about where you leave your money, the money that we compete for is the operating accounts. It is not the investment parts. It's been going on for a long time on the investment side. If you look at the fastest growing deposits, the fastest deposit growers in the country in the past year, they were not any banks. They were the Morgan Stanleys of the world. They were the Goldman's of the world. It is those investment dollars. That game has been going on. I don't know that Muse is going to change that dramatically for us because we don't have a lot of those monies. But the operating accounts is where we deliver the value and the convenience and the trust. And if you look at the size of our average account at $12,000, those are truly operating money. Those are not investment dollars. So how much is it worth to a customer to optimize a couple of hundred bucks of that versus the convenience and the trust that comes with everything else that we provide?

Excellent. I appreciate that. I'll leave it there.

The next question comes from Eric Bedell with Bloomberg Intelligence. Please go ahead.

More discussions from some of that. Architectural engineering firms, we're seeing some of that, but in terms of percent, is it driving our business at this point in time? Not yet. With that said, I think there's going to be 4,000 workers here on site pretty soon, and that has, right? They need to go to lunch. They need housing. They need medical care. They need all of it.

People really come on site. Great. Thank you. I'm just kind of curious on expenses from here. Should we be larger than kind of the mid-cellinger-digit range into next year or more de novo expansion? Anything just along those lines would be great.

Yeah. I mean, generally, our approach on expenses is lower. Just lower is our goal.

Positions. I would like to be even a little bit lower than that in terms of expense growth. Again, it's been.

Excluding acquisitions kind of on an organic basis is a range that is probably going to be on our scorecard for 2027.

The next question comes from Daniel Cardenas with Brianne Capital. Please go ahead.

Yeah, great question. We expect that it's going to be on both sides.

If you look at the Syracuse market and if you just pull up the results from the 2026 FDIC survey, you're going to see that the market has grown meaningfully. I think 3% market share to over.

The market is going to grow faster than it has been, but that we're going to continue to have opportunities to deepen our market share because of the level of activity that we have.

So it will be helpful. We've looked at the historical precedents in Saratoga County and in other places around the country.

The impact is hard to see. In Saratoga County, certainly it was deposits grew meaningfully faster than the rest of upstate for kind of the period between 2010 and market share gains that we're going to have.

This concludes our question and answer session. I would like to turn the conference back over to Dimitar Kravinov for any closing remarks. Thank you for joining us and we look forward to speaking with you again in January.

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