Community Financial System, Inc. 2026 Q3 Earnings Call

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. 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, and 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 remained 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 of securities maturities coming due in 2027. I will now pass it to Marya for more details.

Thank you, Dimitar, and good morning all. As Dimitar noted, the company's operating performance accelerated in the third quarter. GAAP earnings per share of $1.16 increased $0.12 or 11.5% from the third quarter of the prior year and was consistent with linked second quarter results, including the loss on sales of investment securities recognized in the third quarter in connection with our decision to pull forward our December investment security maturities. 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 $1.27 in the third quarter as compared to $1.09 one year prior and $1.16 in the linked second quarter. Third quarter operating PPNR per share of $1.77 increased $0.21 from one year prior and increased $0.15 on a linked quarter basis.

These record operating results were driven by a new quarterly high for net interest income and operating non-interest revenues. The company's net interest 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 of 2025 and marks the tenth consecutive quarter of net interest income expansion. 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, reflective of higher interest-earning asset yields and lower funding costs. The increases in net interest income and net interest margin included the accretive impact of the paydown of higher cost overnight borrowings using proceeds from the August 3rd sale of $296.8 million of lower yielding U.S. Treasury securities. During the quarter, the company's cost of funds was 1.16%, a decrease of two basis points from the prior quarter, primarily driven by lower deposit costs.

Operating non-interest revenues increased $8 million, or 10.2%, compared to the prior year's third quarter and increased $7.4 million, or 9.3%, from the linked second quarter. The quarter-over-quarter and year-over-year increases in operating non-interest revenues was reflective of increases in Employee Benefit Services, wealth management services, insurance services, and banking non-interest revenues. Our recent acquisition of ClearPoint Trust contributed $2.1 million of non-interest revenues during the third quarter 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 of our businesses. 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 year's third quarter. The increase from the linked second quarter was due in part to a $1.5 million increase in salaries and employee benefits, driven by one additional payroll day and incremental expenses associated with ClearPoint, as well as a one-time $0.8 million consulting expense related to the renegotiation of a debit card branding contract.

$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 incremental costs associated with acquisitions completed between the periods, higher performance-based incentive compensation, and medical costs along with the impact of annual merit-based increases. Occupancy and equipment expenses increased $2.6 million from the prior year's third quarter, driven by incremental costs associated with the opening of seven de novo branches and three regional headquarters over the last 12 months, along with the seven branches acquired from Santander in the prior year's fourth quarter. Excluding operating expenses 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 period. 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.

The increases reflected organic growth in the overall business and consumer lending portfolios. The company's ending total deposits increased $808.3 million or 5.7% from one year prior and increased $154.7 million or 1.1% from June 30, 2026. The increase in total deposits during the third quarter was primarily reflective of seasonal inflows of municipal deposits in September. 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 ClearPoint acquisition. Moving on to asset quality. The non-performing loans ratio increased 2 basis points, and the loans 30 to 89 days delinquent ratio increased 9 basis points from last quarter, but remained strong compared to the industry.

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 allocations had previously been established. The company's allowance for credit losses was $92 million or 80 basis points of total loans outstanding at the end of the third quarter, an increase of $0.3 million during the quarter. The allowance for credit losses at the end of the third quarter represented approximately seven times the company's trailing 12-month net charge-off. 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 an update to our expectations for full year 2026 as we enter into the fourth quarter.

We continue to expect 3%-4% growth in deposit balances, 6%-7% growth in non-interest revenues, and an effective tax rate between 23% and 24%. As Dimitar noted, we expect loan growth to moderate in the fourth quarter, driven by some seasonal slowdown in consumer lending as well as some larger commercial loan payoffs. As a result, we now expect full year 2026 loan growth of 5%-5.5%. We expect the full year 2026 provision for credit losses to be in the range of $22 million-$25 million. Factoring in the accretive impact of the August 3rd sale of $296.8 million of lower yielding U.S. Treasury securities, we now expect 11%-11.5% growth in net interest income and for net interest margin to exit 2026 in the mid to high 3.5 range.

Near term margin pressure is possible if higher market rates dampen loan demand and pressure deposit rates. Core non-interest expenses are expected to be in the range of $553 million-$557 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 and the impact of certain one-time items. These estimates do not include the impact of pending or future acquisitions. That concludes my prepared earnings comments, and Dimitar and I will now take questions. Chloe, I will now turn it back to you to open the line.