Community Financial System Q3 Earnings Call Highlights

Key Points

• Record third-quarter performance: Operating diluted EPS rose 16.5% year over year to $1.27, marking the company’s sixth consecutive quarter of record results. Growth was supported by stronger banking profitability and record results in insurance and wealth management.
• Net interest income and margin expanded: Net interest income reached a record $143.5 million, up 12% year over year, while the fully tax-equivalent net interest margin increased to 3.56%. Management expects another 1–3 basis points of margin expansion in the fourth quarter.
• Loan growth outlook moderated: Third-quarter loans grew 7.1% year over year, but management reduced its full-year loan-growth forecast to 5%–5.5% because of seasonal consumer weakness, higher borrowing rates and expected commercial loan payoffs.

Community Financial System NYSE: CBU reported record operating results for the third quarter of 2026, with operating diluted earnings per share rising 16.5% from a year earlier and 9.5% from the prior quarter, President and Chief Executive Officer Dimitar Karaivanov said during the company’s earnings call.

The company recorded its sixth consecutive quarter of record results, supported by higher banking profitability as well as record revenue and profitability in its insurance and wealth-management businesses. GAAP earnings per share were $1.16, up 11.5% from the year-earlier quarter and unchanged from the second quarter, including a loss related to the sale of investment securities. Operating earnings per share reached $1.27, compared with $1.09 a year earlier and $1.16 in the second quarter.

Net Interest Income and Margin Expand

Chief Financial Officer Marya Burgio Wlos said net interest income rose to a quarterly record of $143.5 million, up 3.2% from the second quarter and 12% from the prior-year period. It marked the company’s tenth consecutive quarter of net interest income growth.

Fully tax-equivalent net interest margin increased 7 basis points sequentially to 3.56%, aided by higher earning-asset yields and lower funding costs. The result included the effect of using proceeds from the Aug. 3 sale of $296.8 million in lower-yielding U.S. Treasury securities to pay down higher-cost overnight borrowings.

The company’s cost of funds fell 2 basis points from the second quarter to 1.16%, primarily reflecting lower deposit costs. Wlos said the securities sale contributed approximately 3 basis points to third-quarter margin expansion. Community Financial System expects net interest margin to expand another 1 to 3 basis points in the fourth quarter and to exit 2026 in the mid- to high-3.5% range.

Karaivanov said the company has more than $600 million of securities maturing in 2027 and would seek to use those cash flows in more productive ways, including supporting loan growth and reducing borrowings. He said management would prefer securities as a percentage of assets to move closer to the high teens to 20% range.

Loan Growth Expected to Moderate in Fourth Quarter

Ending loans increased $235.2 million, or 2.1%, during the third quarter and rose $767.8 million, or 7.1%, from a year earlier. Growth reflected organic expansion in commercial and consumer lending portfolios.

Management expects growth to moderate during the fourth quarter because of seasonal softness in consumer lending, higher mortgage and auto rates, and anticipated larger commercial loan payoffs. The company lowered its full-year loan-growth outlook to 5% to 5.5%.

Karaivanov said the commercial loan pipeline remained strong and near recent highs, although the company expects to absorb and replace several larger payoffs. Blended loan originations have been around 6.6% in recent months, he said, with commercial lending pricing trending in the high-6% range. Mortgage demand has softened as rates have moved into the high-7% range and above for some products, he added.

Total deposits rose $154.7 million, or 1.1%, from June 30 and increased $808.3 million, or 5.7%, year over year. Third-quarter deposit growth was driven mainly by seasonal municipal deposit inflows in September. The annual deposit increase included $543.7 million assumed through the Santander branch acquisition and $120.1 million from the ClearPoint acquisition.

The company’s de novo branches had roughly $175 million in deposits as of the call, Karaivanov said, approaching management’s $200 million target for the year. Deposits at those branches have been predominantly commercial and may carry higher costs than traditional retail deposits, he said.

Fee Businesses Lift Noninterest Revenue

Operating noninterest revenue increased $8 million, or 10.2%, from the year-earlier quarter and $7.4 million, or 9.3%, sequentially. The gains reflected growth across employee benefit services, wealth management, insurance services and banking-related fees. Operating noninterest revenue accounted for 38% of total operating revenue during the quarter.

ClearPoint Trust contributed $2.1 million in noninterest revenue in the third quarter and $2.9 million year to date. Wealth management revenue increased 41% year over year, while pretax earnings rose 42%, supported by organic performance and the ClearPoint acquisition.

Karaivanov said wealth management has generated between $750 million and $1 billion in annual new advisory sales over the past three years, including management’s expectations for 2026. He expects the business to post robust double-digit growth in 2027, assuming market values do not materially change.

Insurance services revenue rose 8.9% from a year earlier while expenses were largely flat, driving a 41% increase in pretax earnings. Karaivanov said the company’s insurance acquisition pipeline is robust and that potential transactions under consideration could position the business for stronger growth in 2027.

Employee Benefit Services revenue grew 5.6%, though pretax earnings declined 3.5% due mainly to startup legal expenses tied to new collective investment trust fund launches. Management expects the segment’s planning growth rate for 2027 to be in the high-single digits, supported by market performance and participant growth.

Expenses, Credit Quality and Outlook

Total noninterest expenses were $141 million, up 2.4% sequentially and 9.9% year over year. Sequential expense growth included an additional payroll day, ClearPoint-related expenses and an $800,000 one-time consulting expense associated with renegotiating a debit-card branding contract. Year-over-year costs also reflected acquisitions, incentive compensation, medical expenses, merit increases, and costs tied to recently opened de novo branches, regional headquarters and acquired Santander branches.

Excluding expenses from acquisitions completed during the past 12 months, year-to-date operating noninterest expense increased 5.1%. Karaivanov said management’s goal is to hold organic expense growth in the 4% to 5% range in 2027, excluding acquisitions.

The company recorded a $5.6 million provision for credit losses, compared with $4.6 million in the prior quarter. The net charge-off ratio increased 6 basis points sequentially, reflecting $2.7 million of charge-offs on two individually assessed business lending relationships for which specific allowances had previously been established. The allowance for credit losses totaled $92 million, or 80 basis points of loans, and represented about seven times trailing 12-month net charge-offs.

For the full year, Community Financial System continues to project deposit growth of 3% to 4%, noninterest revenue growth of 6% to 7%, an effective tax rate of 23% to 24%, and credit-loss provisions of $22 million to $25 million. It now expects net interest income to increase 11% to 11.5% in 2026 and core noninterest expenses to total $553 million to $557 million.

About Community Financial System (NYSE:CBU)

Community Financial System, Inc NYSE: CBU is a diversified financial services company headquartered in DeWitt, New York. Formerly known as Community Bank System, Inc, the company traces its banking history to 1866 and operates through Community Bank, N.A., along with other financial services businesses.

Its banking operations provide consumer and commercial deposit accounts, residential and commercial lending, agricultural financing, municipal banking, cash management, and other financial products.

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