Community Financial System Q2 Earnings Call Highlights

Key Points

• Record Q2 performance: GAAP and operating EPS rose to $1.16, while net interest income increased 11.5% year over year to $139.1 million. The net interest margin expanded to 3.49%, marking its ninth consecutive quarter of net interest income growth.
• Growth outlook remains positive: Management expects 2026 net interest income growth of 10%–11%, loan growth of 5%–6% and deposit growth of 3%–4%. More than $1 billion in securities cash flows over the next 18 months could support loan redeployment and future margin expansion.
• Insurance business remains a weak spot: Insurance earnings declined 10.8% amid softer premium markets, lower contingencies and organic-growth challenges. Management expects improvement in the second half but does not anticipate a return to normal growth this year.

Community Financial System NYSE: CBU reported record second-quarter operating results as net interest income expanded for a ninth consecutive quarter, while executives said insurance revenue remained below expectations amid softer premium markets, lower contingencies and organic-growth challenges.

GAAP earnings per share were $1.16, up 19.6% from the second quarter of 2025 and 7.4% from the preceding quarter, Chief Financial Officer Marya Burgio Wlos said. Operating earnings per share were also $1.16, compared with $1.04 a year earlier and $1.15 in the first quarter. Operating pre-tax, pre-provision net revenue per share reached a quarterly record of $1.62.

President and CEO Dimitar Karaivanov characterized the period as “another consecutive record quarter,” citing net interest income growth, fee performance in banking, employee benefits and wealth management, and managed recurring expenses. He said credit quality and liquidity remained “top tier,” while noting certain nonrecurring expenses and weaker-than-expected insurance results.

Net Interest Income and Margin Expand

Second-quarter net interest income rose to $139.1 million, an increase of $4.4 million, or 3.3%, from the first quarter and $14.4 million, or 11.5%, from a year earlier. The company’s fully tax-equivalent net interest margin increased four basis points sequentially to 3.49%, supported by lower funding costs.

Cost of funds declined two basis points from the prior quarter to 1.18%, primarily because of lower deposit costs. Karaivanov said the company has avoided participating in certain highly priced deposit opportunities, noting that some rates in the market were above wholesale funding costs. He also pointed to the company’s 76% loan-to-deposit ratio and expected securities-portfolio cash flows as providing funding flexibility.

The company expects net interest income to grow 10% to 11% for the full year. Management forecast continued margin expansion over the final six months of 2026, with the company exiting the year in the low- to mid-3.5% range. However, Wlos said third-quarter margin could face temporary pressure of between one basis point of expansion and two basis points of contraction, partly because of seasonally higher overnight borrowings.

Management expects more than $1 billion of cash flows from the securities portfolio over the next 18 months, beginning to become meaningful in the fourth quarter. Karaivanov said that redeploying securities yielding about 2% into loans yielding roughly 6% could provide a longer-term margin tailwind.

Loans, Deposits and Expansion Efforts

Ending loans increased $151.6 million, or 1.4%, during the second quarter and rose $763.7 million, or 7.3%, from a year earlier. The quarterly increase primarily reflected organic growth in business lending, while year-over-year growth included expansion across business and consumer portfolios.

The company’s total deposits declined $159.7 million, or 1.1%, from March 31, primarily due to seasonal municipal deposit outflows. Deposits were up $1.01 billion, or 7.4%, from a year earlier, including $543.7 million assumed through the Santander branch acquisition and $120.1 million from the ClearPoint acquisition.

Karaivanov said the company’s de novo branches held approximately $140 million in deposits at the end of the second quarter. Combined with acquired Santander branches in the Lehigh Valley, Community Financial System expects roughly $700 million of new additive funding in growth-expansion markets by year-end.

Management expects full-year loan growth of 5% to 6% and deposit growth of 3% to 4%. Karaivanov said commercial lending pipelines remain solid, mortgage activity should contribute more in the third and fourth quarters, and auto lending activity has improved as pricing has become more attractive.

The company’s mortgage pipeline was at its highest level in seven years, Karaivanov said, adding that Community Financial System ranked as the No. 2 bank originator in its footprint under the latest HMDA data, compared with No. 5 four years ago.

Fee Businesses and Insurance Pressure

Operating non-interest revenue increased $4.8 million, or 6.4%, from the prior-year quarter and rose $0.3 million sequentially. Higher employee benefits, wealth management and banking fee revenue were partly offset by lower insurance-services revenue. Operating non-interest revenue represented 36% of total operating revenue in the quarter.

Karaivanov said employee benefits pre-tax earnings rose 16.2% year over year, wealth management pre-tax earnings increased 46.5%, and banking pre-tax earnings increased 13.2%. Insurance pre-tax earnings declined 10.8%.

Insurance revenue has been pressured by meaningfully lower contingencies, soft premium markets and organic challenges, according to Karaivanov. He said approximately $1 million of the year-to-date insurance shortfall versus expectations related to contingencies. While management expects better insurance performance in the second half, Karaivanov said the business is not expected to return to its normal growth rate this year.

The company recorded a gain of more than $3 million on an insurance-related investment during the quarter. Karaivanov said the investment returned more than five times its original value. He also described the insurance acquisition pipeline as the strongest it has been and said potential transactions could support revenue expansion in 2027.

Expenses, Credit and Outlook

Total non-interest expense was $137.7 million, up 3.5% from the first quarter and 6.7% from a year earlier. Sequential expenses included a $2.1 million increase in salaries and benefits associated with an additional payroll day and incentive-plan accruals, $0.7 million of ClearPoint-related costs, and a one-time $0.6 million early-termination charge related to a debit-card processing-platform conversion.

For the full year, the company expects core non-interest expense of $550 million to $555 million, an increase of 7% to 8% from 2025. The estimate includes approximately $8 million to $9 million of Santander branch-related expenses and $4 million to $5 million associated with ClearPoint, including non-operating intangible-asset amortization.

The provision for credit losses was $4.6 million, compared with $5.6 million in the first quarter and $4.1 million a year earlier. The allowance for credit losses increased $1.5 million during the quarter to $91.7 million, or 81 basis points of total loans, primarily reflecting reserve building in business lending. The allowance equaled eight times trailing 12-month net charge-offs.

Community Financial System expects full-year credit-loss provisions of $20 million to $25 million and an effective tax rate of 23% to 24%.

About Community Financial System (NYSE:CBU)

Community Financial System NYSE: CBU is the bank holding company for Community Bank, National Association, a full-service commercial bank headquartered in DeWitt, New York. Through its principal subsidiary, the company offers a range of banking and financial services designed to meet the needs of both consumer and business clients. Its organizational structure centers on community-based banking operations supported by centralized technology, risk management and administrative functions.

The company's product offerings include deposit accounts, residential and commercial mortgage loans, commercial and consumer lending, treasury and cash management services, and electronic banking.

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