Community Financial System, Inc.

Good day and welcome to the Community Financial System, Inc.' 's first 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded and the discussion may contain forward-looking statements within the provision of the Private Security Legitimation Reform Act of 1995 that are based on the current expectation, estimates, and projection and about the industry, markets, and economic environment in which the company operates. These statements involve risk 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 reference to certain non-GAAP financial measures. Reconciliation 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 Dmitry Krivonov, President and CEO.

Please go ahead. Good morning, everyone. I would like to first highlight a very recent recognition our company received.

Last week, we were named Center State CEO of Business of the Year with over 50 employees here in Central New York. This is one of the most prominent recognitions in Central New York. I believe it is a great illustration of the activity, commitment, visibility, investment, and impact we're having. And the results we're about to discuss come in no small part due to all of the above. A major thank you to all of our teams across banking, insurance, employee benefits, and wealth management.

Great things are happening in upstate, and great things are happening at our company. Now on to results. We're off to a very good start in 2026.

Organic growth is visible across all of our businesses. From new business efforts, combined with the benefit of supportive interest rate environment and market values, resulted in 9% total revenue growth. Our balance sheet, as always, is a source of strength for us and our clients with excellent liquidity and credit metrics. Expenses and return on investments remain a focus. All in all, 17% growth in operating diluted earnings per share compared to last year's period is a result we feel very good about. Focusing on each specific business, Banking and corporate is benefiting from organic growth, expanding margin, and our recent branch acquisition in one of the most attractive markets in the Northeast. 29% bottom line improvement year over year is peer leading. Market share gains have been and will continue to be the main source of growth for us. Employee benefit services is expanding at the expected pace of mid to high single digits. We're starting to see some tangible results of our recent investments. Insurance services had a difficult come from last year due to the timing of contingency payments, which as a reminder came in the first quarter of 2025 versus our typical pattern of mostly second quarter event. This, however, has not changed our expectations for overall insurance performance during the year. Wealth management services also experienced mid-single-digit revenue growth and high single-digit bottom line growth in line with overall expectations. In summary, We did have a very good start to 2026. Organic activity is strong. Targeted inorganic discussions are active across all of our businesses. We have excellent capital and liquidity and look forward to continued strong performance throughout the year. Mariah will provide you with more details on the financials.

Mariah?

Thank you, Dimitar, and good morning all. As Dimitar noted, the company's first quarter performance was strong. Including acquisition expenses, gap earnings per share of $1.08 increased 15 cents, or 16.1% from the first quarter of the prior year, and increased 5 cents, or 4.9% from late fourth quarter results. Operating earnings per share and operating pre-tax, pre-provisioned net revenue per share for record quarterly results for the company. Operating earnings per share were $1.15 in the first quarter as compared to $0.98 one year prior and $1.12 in the linked fourth quarter. First quarter operating TPNR per share of $1.61 increased $0.21 from one year prior and increased $0.03 on the linked quarter basis. These record operating results were driven by a quarter-over-quarter decline in operating non-interest expenses and a new quarterly high for net interest income. The company's net interest income was 134.7 million in the first quarter. This represents a 1.3 million, or 1% increase, over the linked fourth quarter and a 14.5 million, or 12.1% improvement, over the first quarter of 2025 and marks the eighth consecutive quarter of net interest income expansion. The company's fully tax equivalent net interest margin increased six basis points from 3.39% in the late fourth quarter to 3.45% in the first quarter, driven by low funding costs. During the quarter, the company's cost of funds was 1.2%, a decrease of seven basis points from the prior quarter primarily driven by lower deposit costs. Operating non-interest revenues increased 3.2 million or 4.2% compared to the prior year's first quarter and decreased 3.2 million or 3.8% from the linked fourth quarter. The increase in operating non-interest revenues compared to the first quarter of 2025 was reflective of increases in banking, employee-benefit services, and wealth management services non-interest revenues, partially offset by a decrease in insurance services non-interest revenues due to changes in the timing of collections of contingent commission revenues. Operating non-interest revenues represented 37% of total operating revenues during the first quarter, a metric that continuously emphasizes the diversification of our businesses. The company reported a $5.6 million provision for credit losses during the first quarter. This compares to $6.7 million in the prior year's first quarter and $5 million in the late fourth quarter. During the first quarter, the company recorded $133 million in total non-interest expenses, a decrease of $5.5 million or 4% from the late fourth quarter and an increase of $7.7 million or 6.2% from the prior year's first quarter. The decrease from the prior year's fourth quarter was due in part to seasonal factors and the absence of certain one-time items described last quarter, as well as acquisition expenses associated with the Santander branch acquisition. 3.9 million of the increase in total non-interest expenses from the first quarter of 2025 was attributed to salaries and employee benefits, primarily due to the incremental costs associated with acquisitions and de novo bank branches opened between periods, along with the impact of annual merit-based increases. Occupancy and equipment expenses increased 2.2 million from the prior year's first quarter, driven by incremental costs associated with the opening of 15 de novo bank branches and three regional headquarters along with the seven branches acquired from Santander in the prior year's fourth quarter. Additionally, acquisition expenses of .4 million were incurred in the first quarter of 2026 associated with a pending acquisition of ClearPoint Federal Bank and Trust. Pending loans increased 181.4 million or 1.7% during the first quarter and increased 710 million or 6.8% from one year prior, primarily due to organic growth in the overall business and consumer lending portfolios. The company's ending total deposits increased 978.1 million, or 7% from one year prior, and increased 483 million, or 3.4% from the end of 2025. The growth in total deposits during the first quarter was primarily reflective of seasonal inflows of municipal deposits. Increase in total deposits over the past 12 months included the 543.7 million of deposits assumed from the Santander branch acquisition. Moving on to asset quality. The non-performing loans ratio decreased four basis points, and the net charge-off ratio increased two basis points from the linked fourth quarter while the loans 30 to 89 days delinquent ratio increased five basis points from last quarter aligned with typical seasonal trends. The company's allowance for credit losses was 90.2 million or 81 basis points of total loans outstanding at the end of the first quarter, an increase of 2.3 million during the quarter. The increase was primarily attributed to reserve building in the business lending portfolio reflective of organic, The allowance for credit losses at the end of the first quarter represented seven times the company's trailing 12-month net charge-off. We are pleased with the first 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, the financial expectations that we provided earlier this year for pull year 2026 remain consistent. That concludes my prepared earnings comments, and Dimitar and I will now take questions. Steve, I will turn it back to you to open the line. Thank you.

Thank you. We will now begin the question and answer session.

To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time a question has been addressed and you would like to withdraw a question, please press star then 2. At this time, we will pause momentarily to assemble a roster.

The first question comes from Steve Moss with Raymond James. Good morning, Dimitar and Mariah. How are you guys doing?

Morning, Steve. Morning.

Morning. You know, nice quarter here and, you know, maybe just starting on the loan side, you know, good commercial loan growth and just kind of curious where you are on the pipeline. I apologize that I missed it, Dimitar, because I hopped in in the middle of your prepared remarks. Just curious color on that aspect of the loan book to start.

Yeah, the commercial pipeline is in excellent shape. I think it's actually the highest it's been. It is meaningfully higher than last year at this time. Of course, there is a fair amount of uncertainty as to the timing and the pull-through of the pipeline. But right now, activity is very good. It's been very good. It's been building. we have a little bit less payoffs than we did last year so far. And I know, I think you all know that impacted us meaningfully last year. So right now we're in pretty good shape.

Okay. And then on the auto side here, you know, strong quarter for that. I know you were upbeat on it, but just kind of curious what you're seeing going forward in terms of pricing and, and, where it could go for the rest of the year?

Yeah, for us, again, as a reminder, the auto piece for us is really a function of really pricing and kind of overall demand in the market, because we don't really do anything as it relates to credit. That piece stays for us pretty constant. So as long as they fit in the credit box, then the question is, where are we on pricing? We entered this year with probably a little bit more of an aggressive stance on that, kind of expecting rates to trend down over time. So I think we gained a little bit more market share than certainly last year. Kind of learned our lesson a little bit last year. Last year we were down meaningfully in the first quarter, that business, and this year we didn't want to start deep in the hole. So with that said, again, for us, activity is strong. You know, demand is okay. Pricing is now a little bit better than it was in the beginning of the year. So we'll see where we ultimately end up. But our guidance and kind of our goal for that business continues to be mid-single digits.

Okay. Got it. And then on the fee side here, You mentioned the contingent piece more in the second quarter. Kind of was an eyeball going back. Looks like that contingent benefit you typically get is about $1.5 million, $2 million. Is that about fair for the second quarter?

IT, yes, yes. That's in the range.

Okay. Got it. And then just one more on expenses here. You know, good to see where they came in. Just thoughts, updated thoughts here on, you know, the cadence of expense growth throughout the year and where you're looking for things to add.

Yeah, I mean, our guidance stays intact on that side. I mean, if you look at it year over year, we're running just above six, and that includes the impact of acquisitions from last year. I think as we get in the latter part of this year, and we kind of are comparing truly apples to apples, if you will, in terms of the expenses we had in the NOBA expansion last year and acquisitions, you know, that rate will, my guess is and my hope is and my expectation is that it will continue to go lower from six. So, again, it will be within the range. We're going to drive it as low as we can. Our goal is not to spend money. Our goal is to make money. And that's going to continue to be a focus for us.

Okay, great. I appreciate all that color, and I'll step back in the queue here.

Thank you. The next question comes from David Conrad with KBW.

Hey, good morning. You had really good NIM expansion this quarter, but I thought it was interesting that the investment yields actually went down for BIP. So maybe refresh us on your your NIM expectations for the year and talk about how, you know, the portfolio balances may be used to pay down borrowings or fund loan growth or where you expect the securities balances to go. Thank you.

Yeah, hi. So NIM did outperform our Q4 guide as we expanded, you know, six basic points in Q1. You know, for us, this is a result of strong loan growth, ongoing repricing efforts. We also had a super yield curve than we've had in recent quarters. So, you know, we are pleased with these results. Looking forward, you know, we expect, you know, for Q2, three to five basis points of expansion. We are going to continue to capitalize on the loan and deposit efforts. You know, fully realize the late 2025 cuts Just a note here, Q2 NIM, you know, will be partially aided by an FRB dividend. Just, you know, for your notes there. In terms of, you know, looking at the overall portfolio, if we have the opportunity, we will, you know, pay down borrowings. But we see a steady state for now. And again, you know, I want to reiterate, you know, the guidance of three to five for Q2. and, you know, are pleased with how our book looks at the moment.

Okay. Thank you.

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

Just to follow up on the NIM discussion, So the expectation is low yields kind of flat to up, or what kind of direction on the low yields? And then the deposit cost performance has been excellent. Is there any more room for it to come down, or you kind of have to shift acquiring deposits within the NOVA branches? Can you just talk about deposit costs going forward?

Sure. Morning, Manuel. So for us, the environment, continues to be more supportive on the asset side. So as we think about the trajectory for margin here, it will be predominantly driven by the asset side. Now, there will be quarters, like this quarter, where we're absorbing some of the hit on the asset side while you're trying to reprise deposits. So for us, frankly, being flat in loan yields in the quarter, having absorbed 2 and 1 half cuts, essentially, was pretty good. Going forward, again, we expect that, you know, given where new production is, which is right around six, and given where the back book is, which is right around 5.68, that should give you, you know, 30-plus basis points to work with there as we continue to reprise the book. On the deposit side, we have pretty active deposit management across the board. So we were able to pull through as much as we could out of those deposit changes for the quarter. Clearly, if there's no cuts, there is more limited opportunity to do that. Could there be another couple of basis points? I think that's possible. Also keep in mind, in the second quarter, we're going to be sitting on a little bit more of liquidity, at least for the first 45 days or so, that is municipal related and those tend to be higher cost deposits. So there's just natural mechanical ins and outs of deposit costs through the quarters depending on the municipal flows.

I appreciate that commentary. Shifting over to capital deployment, you had a little bit of a buyback this quarter. Can you just talk about your appetite there and any other kind of thoughts on updated thoughts M&A, where you sit and have key businesses versus whole bank, obviously De Novo's progressing. Could we just have a checkup on that?

Sure. So our company is fortunate that we generate a fair amount of capital, and it's really up to us to decide how we allocate that, and we're fortunate that we have four businesses that we can allocate it across. So our first priority is always going to be organic growth across those businesses. For the banks, it's kind of easy to ballpark because that's tied to the growth of the balance sheet. For the other businesses, it's a little bit harder because it's really in the expense base that we're making investments. So they're not necessarily directly, immediately from the capital account. So that remains our first priority. As I mentioned in my remarks, we continue to have active and very targeted discussions across all of our businesses on the inorganic side. So as you know, for us, historically, that's been, I would call them singles and doubles, kind of a string of pearls in some of the non-banking business strategies. Occasionally on the bank side, as you know, we tend to like things that we can meaningfully grow and expand and create returns for shareholders. So they tend to be on the lower end as well in terms of size. We prefer to use cash As you all know, sometimes we may have to use stock, and, you know, sometimes we want to buy back that stock if we end up using stock for an acquisition. With that said, the buyback this quarter was really kind of opportunistic in the sense of, one, we need to clean up some of our equity dilution to provide, you know, kind of a neutral outcome to our shareholders. And then secondly, there was clearly some disruption with the prices during the quarter. So we took a little bit of advantage of that, knowing where the earnings of the company are kind of projected to be versus what the market price might be at a moment in time. So we're going to continue to be opportunistic. You know, I think if you look at our price to earnings projected forward, assuming all of you are correct, it's pretty attractive compared to historical measures. It's pretty attractive compared to the overall index. So we think that our stock is reasonably attractive to look at if there is moments of further disruption.

I appreciate that. Thank you.

Thank you. The next question comes from the line of Matthew Breezy with Stephens, Inc.

Hey, good morning. I have a few questions for me. You know, just thinking back to some of the strategic initiatives, taking market share in some of the economically more vibrant areas in your footprint, could you just maybe give us some idea where we are on that priority and where you've kind of, you know, made the most progress, whether it's Rochester, Buffalo, you know, Yeah, just wanted an update there, and then maybe some thoughts around local investments, whether it's chip manufacturing or otherwise, and are you starting to see any tangible impacts yet?

Sure. Thanks, Matt.

So we've really been on this journey of revamping the organic capability of the company, you know, going back multiple years. And it started before I was at the company and started in Albany. And that was a very successful initiative. and we now have a very vibrant and sizable business in Albany. And then we basically recreated the same thing in central New York and then in western New York as well. And where we sit today, what's really, really encouraging from my perspective is I look at where the growth has come or it's coming in a particular quarter. And this quarter and the past quarter, it was broad-based. It was across every single one of the regions. Now, we've had quarters, you know, in the past where the capability of the team and diversification would be in a way where, you know, we might have a great quarter in Pennsylvania and we might have an excellent quarter in Western New York and we might have an excellent quarter in Syracuse. And that's what's kind of been in New England as well. It's been really good consistently. So it's been a nice, spread of effort. It has been a nice spread of activity level across all the markets, expectations and presence and, again, incentives and just focus of the teams. We're pretty well, I think, established in terms of our talent acquisitions across those markets. There's a few other targeted areas that we may look at. I said this before, and then there is some sort of a disruption that occurs that allows us to take another swing and add some of the best players in those markets. We had something like that happen in New England recently. So we expanded that team. So we'll continue to be on the front foot of those opportunities. But yeah, I mean, it's kind of a long-winded way of saying it is across the board. It is consistent. We feel really good about our opportunities, our people, our talent, our reputation, our brand. Those are things that are hard to replicate. It's not the pricing. It's not structure. It's none of that. It is the hard things that we've been focused on. So we feel really good about that. As it relates to Central New York and some of the activity here, I think, as you know, we kind of have formally the major project here in Central New York is underway. with Micron, I think the thing to just kind of keep in mind, this is a long tail event for us and everybody else here in central New York. It's going to play out over a decade plus. With that said, some of the tangible things are starting to show up. There's going to be 4,000 workers coming on site pretty soon. Now they're transient. So are they going to open banking accounts with us? Probably not. They probably already have banking accounts from the multiple sites they do work across the country. But are they going to consume a whole bunch of things around our markets, which is going to help our customers? Absolutely. So that's going to be kind of the initial impact. And then we're going to have some people that are more permanent around these facilities. And it's not just Micron. It's all the suppliers around it. It's some of the onshoring we've talked about from Canada and some other markets. That's going to continue to be the case. So we're in a good spot. If you, maybe this is helpful to you to all kind of ballpark what this could be again over multiple years. If you look at the size of the investment in ships and kind of advanced technology manufacturing that is to occur in central New York and you compare it to those investments across the rest of the country and you look at the size of the investment versus the GDP of each one of those areas. It is only here in Central New York where that impact is literally 250% of the GDP of Central New York. So it is very large.

It's going to be a very long time, but it is a very large impact.

Great. I did not realize it was that large of an impact to local GDP. I didn't think I quite heard you on the ClearPoint deal. Is that closed yet, or when is that expected to close? And then during the quarter, were there any other kind of notable fee income business lines, acquisitions that didn't get its own formal 8K deal?

Yeah, so no, nothing different on the fee income side in terms of acquisitions during the quarter. It relates to ClearPoint. We and ClearPoint are prepared to close. We have everything lined up in terms of our own preparations. There's really not a lot in terms of conversions or technology or people impact. So it's a very straightforward execution with low risk. However, we're still waiting on regulatory approval. And that could be any day or it could be later. We don't quite know if these things work. So whenever we receive that, we'll be prepared to close pretty shortly after.

Okay. Last one for me, just on expenses and the press release, you had mentioned kind of the usage of AI. I'm curious how and where you're using this and any notable applications that have perhaps saved you money or helped on the revenue front. And that's all I had. Thank you.

Yeah, thanks, Matt. I mean, I do want to let people go to the rest of their days because we can spend a lot of time, as you know, talking about AI. I will say that we've been on this journey for literally two years now, and I'll give credit to one of our directors, retiring directors, Sally Steele, who pushed us into being much more front-footed than probably we were going to be back in 2024. So we've been at this for quite a while. As we've talked about, our goal has been to continue to scale the company without necessarily growing the expense base and the headcount and really take activities that are less value-added to our customers and focus our people on high-value-added activities. With all that said, I'm a believer in what Alex Karp said at Palantir, which is AI's impact needs to be transformational, which is doing five times as much with half the cost. And until I really see that and can really look all of you in the face and tell you that this is what's happening and this is why the margin is going to go where it's going to go, we're going to be a little bit quieter on this.

We're just going to keep working in the background. Understood. That's all I had. Thank you. Thank you.

To ask a question, you may press star then 1 on your touchtone phone.

The next question comes from Manuel Navas with Piper Sandler.

Hey, just want to jump back in. The expense level, it's targeting seemingly annualizing to below your four-year guide. Where are kind of some of the increases across the year as you invest in your businesses?

So I think, Manuel, a couple of things there as you think about expenses. One, there's less days in the quarter, in the first quarter. So that naturally is going to lead to a few more payroll days. You know, it's a meaningful added expenses. We also expect that there will be some continued opportunities for, whether it's the talent acquisition or maybe some smaller kind of role acquisitions that we're going to ultimately try to absorb with minimal cost, but along the way, they might produce some cost. So we, you know, again, not knowing what's in the future for us, it's a little bit hard to know. Also, medical is a swing factor as well. We had a pretty good quarter in medical expenses, and that could reverse pretty quickly. There's a lot of things that kind of go into that expense base, and a couple of million dollars can be an easy delta in a quarter and actually moves the numbers in terms of growth rate quite meaningful.

Emmanuel, I appreciate that. Sorry, I was just going to go through that, you know, we are staying and consistent with our guide that we provided. So, again, 4% to 7% growth, you know, mid-single digit, and, you know, the dollar amount there is you know, anywhere between 535 and 550 million, with an average of about 135 million a quarter, which you saw it come in, you know, under the 133 in terms of core expense based this Q1. So, you know, we're on track to stick within those guardrails. And, you know, to Dimitar's point, you know, we're diligently reviewing and ensuring that what we are, and what we're investing in is focused first on growth from the perspective of talent acquisition and business acquisition and, you know, obviously also tech and occupancy. So just to give you the more color.

That's great. And I just have two kind of specific modeling questions. What is the dividend benefit in the second quarter that you expect? Do you have a rough idea of that yet? And then the other piece was, What was the repurchase price on the buyback? You're being opportunistic. I just want to kind of get a feel for your, what price is your appetite?

So I think on the buyback, Manuel, it was in the low 60s. And I think as it relates to the dividend, we'll probably have to follow up with you separately.

Okay, that's great. I appreciate it. Thank you. Thank you. Again, if you have a question, please press star, then 1. This concludes our question and answer session.

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

Thank you, everybody, for joining us for our first quarter. And we look forward to speaking with you again in July.

Have a great day.

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