COMMUNITY FINANCIAL SYSTEM, INC. Q3 FY2024 earnings call

• PPNR was $1.29 per share, consistent with prior quarter and up 11.2% Y-o-Y. - Provision expense increased due to industry trends towards credit normalization and Fed easing cycle expectations. - Incentive compensation expense increased as estimate refined for full-year results. - Banking business had strong quarter with net interest income growth and 13th consecutive quarter of loan growth. - Opened first branch from strategic branch expansion plan in Syracuse, with progress on other locations. - Benefit Administration and Insurance Services performed well, with BPAS recognized and Insurance Services revenue at new high. - Wealth Management Services saw organic growth supported by market growth. - Active in M&A but risk-reward equation didn't work out for recent opportunities. - Hosted Investor Day at NYSE, encouraging investors to view recorded event.

Banking Business: Net interest income surpassed the prior peak from Q4 2022 and was up YTD compared to 2023. Ending loans increased $227.8 million or 2.3% in Q3, marking 13th consecutive quarter of loan growth, with ending loans up $801.6 million or 8.5% Y-o-Y. Ending total deposits increased $338.3 million or 2.6% in Q3, driven by seasonal inflow of municipal deposits, with ending deposits up $445.4 million or 3.4% Y-o-Y. Benefit Administration (BPAS): Revenues and profitability expanded, and was recognized for the third year in a row as a top five record keeper across multiple categories by the National Association of Plan Advisors. Insurance Services: Reached a new high in revenues, with OneGroup recently recognized as the 66th largest broker in the US by the Insurance Journal. Wealth Management Services: Organic growth was supported by strong market growth, with revenue gains reinvested in adding sales capacity and addressing geographical presence gaps.

• Expect continued NII growth into Q4 and full year. - Encouraged by revenue outlook in all four businesses and prospects for continued organic growth. - Branches to be rolled out in late first quarter and second quarter of 2025, with plan to be net neutral on expense base.

• M&A opportunities had risk-reward equation not working out due to various reasons. - Credit risk considerations with provision expense increase due to industry trends and Fed easing cycle expectations.

Q: Could you give sense for expectations around deposit cost, deposit betas and loan repricing outlook?

A: Matt, on deposit cost, rates adjusted post Fed cut with some deposits capturing 50% of cut, and loan repricing with fixed rate loans having $1.5B in cash flows over next 12 months at over 5% rate, floating and adjustable loans also contributing.

Q: Discuss size of chunkier credits closed this quarter and forward loan growth outlook?

A: $200+ million loan growth in Q3 was from marquee opportunities, but expect closer to prior couple quarters' run rate going forward.

Q: Fair to assume reserve continues to increase moderately and provision will increase?

A: CECL model considered, with ACL coverage at 74 basis points and charge-offs at 11 basis points, expecting moderate reserve increase.

Q: Thoughts on expense run rate going forward?

A: Mid-single-digit growth rate on full year basis, with investments in organic growth capabilities starting to show results.

Q: Details on NPL uptick due to one commercial credit?

A: It's a fully paying, long-standing relationship borrower going through restructuring, put on nonaccrual but loan is fully paying and expected to continue.

Q: Pipeline and mix of loan and deposit growth?

A: Pipeline looking good, consistent with first and second quarters, with deposits outside municipals trending better than historical medians.

Q: Dollar amounts of rate-moved deposit buckets and margin trajectory?

A: Money market balances ~$2.4B, with ~$1B of rate-sensitive money, and margin expected to drift up 4-5 basis points per quarter.

Q: Update on branch plan rollout and timing?

A: Branches slated for late first and second quarter 2025, with plan to be net neutral on expense base, some delays due to logistical reasons and colder months.