Third Quarter 2026 Earnings - COMMUNITY FINANCIAL SYSTEM INC

Financial Performance:

• Operating diluted EPS increased 16.5% YoY and 9.5% QoQ to $1.27, marking the sixth consecutive quarter of record results; GAAP EPS was $1.16.
• Net interest margin (NIM) expanded 7 basis points to 3.56%, driven by higher asset yields and lower funding costs (1.16% cost of funds).
• Non-interest income reached a record $143.5 million, up 12% YoY, representing 38% of total operating revenues; 10th consecutive quarter of net interest income expansion.
• Operating non-interest revenues grew 10.2% YoY and 9.3% QoQ; ClearPoint contributed $2.1 million in Q3 revenue.
• Total non-interest expenses rose 9.9% YoY to $141 million, driven by acquisition costs, branch expansions, and incentive compensation.
• Loans ended up 7.1% YoY ($235.2 million growth in Q3); total deposits up 5.7% YoY, with $543.7 million from Santander and $120.1 million from ClearPoint.
• Provision for credit losses was $5.6 million (consistent with prior year); allowance for credit losses is 80 basis points of loans (7x trailing 12-month charge-offs).

Guidance and Future Outlook:

• Revised full-year 2026 loan growth outlook to 5–5.5% (down from previous expectations) due to anticipated consumer lending slowdown and commercial payoffs.
• Full-year 2026 provision for credit losses expected between $22M–$25M; effective tax rate 23–24%.
• NIM expected to exit 2026 in the mid-to-high 3.5% range; net interest income projected to grow 11–11.5% for the full year.
• Core non-interest expenses (excluding acquisitions) projected to increase 7–8% to $553–$557 million for full year 2026.
• 2027 outlook: Wealth management targeted for double-digit growth; Employee benefit services expected to grow ~7%; Insurance services expected robust growth driven by organic recovery and M&A.
• Deposit balances expected to grow 3–4% annually; liquidity remains strong with $600 million in securities maturities in 2027.

Business Segments and Product Lines:

• Wealth Management: Revenue up 41% YoY, pre-tax earnings up 42%; growth driven by organic performance and ClearPoint acquisition; $750M–$1B annual advisory sales target.
• Insurance Services: Revenue up 8.9% YoY with flat expenses, yielding 41% pre-tax earnings growth; acquisition pipeline robust with focus on insurance.
• Banking: Strong margin expansion and organic growth; commercial lending pipeline remains strong despite seasonal consumer slowdown; commercial loan pricing trending in high 6s to 7s.
• Employee Benefit Services: Revenue up 5.6% YoY, but pre-tax earnings down 3.5% due to startup legal costs for new collective investment trust fund launches.
• ClearPoint Acquisition: Fully integrated, providing cross-selling opportunities with banking and contributing significantly to fee-based revenue.

Market and Competitive Landscape:

• Geographic Expansion: Strong execution in Upstate NY, Pennsylvania, and New England (NH/MA); acquired Santander branches in Lehigh Valley successfully established with new leadership; de novo branches accumulating ~$175M deposits, on track for $200M year-end.
• Semiconductor Impact: Direct Micron-related loan volume remains low; growth expected from Tier 2/3 suppliers, construction, and local service providers as workforce increases (4,000 workers).
• Market Share: Upstate NY market share grew from 7% to over 9% in three years; competitive pricing environment noted in auto lending, while mortgage rates (high 7s to 8s) dampen demand.
• Technology Risks: Management views AI-driven deposit migration (e.g., "Muse") as a risk to investment accounts but less so for operating accounts due to high trust/convenience barriers.

Risks and Challenges:

• Credit Quality: NPL ratio increased 2 bps; 30-89 day delinquency ratio up 9 bps; NCO ratio up 6 bps due to specific $2.7M charge-offs on two business lending relationships.
• Expense Growth: One-time legal costs for new funds and integration costs for Santander/ClearPoint acquisitions impact near-term profitability in employee benefits.
• Interest Rate Sensitivity: Higher mortgage/auto rates may dampen loan demand; potential near-term margin pressure if deposit beta increases or loan demand weakens.
  Regulatory/Competition: Competitive M&A environment in insurance requires continued acquisition strategy to close the growth gap; AI accountability issues noted as a potential long-term risk to trust-based banking.

Management Commentary and Tone:

• Tone is highly confident, citing record profitability across all segments and acceleration of organic growth.
• Management emphasized "friction" as a competitive moat, arguing that customers value trust and accountability over the efficiency of AI-only solutions for operating accounts.
• Confident in the strength of the balance sheet, liquidity, and diversified revenue model (38% non-interest income).
• Acquisition strategy described as "active" with a focus on inorganic growth to complement organic gains, particularly in insurance.

Analyst Questions and Answers:

• Loan Pricing & Pipeline: Commercial pipeline is strong (comparable to prior quarter highs) despite seasonal consumer slowdown; pricing in commercial loans is in the high 6s to 7s range.
• Deposit Beta & Cash Use: Cash balance fluctuations driven by municipal seasonality; deposit beta remains uncertain until rate path is clearer; cash will be used to optimize securities-to-assets ratio (targeting 19-20%) and fund loan growth.
• De Novo Branches: Currently hold ~$175M in deposits, expected to hit $200M; majority are commercial, carrying slightly higher costs than retail.
• Share Repurchases: Opportunistic buybacks at low $60s average; capital prioritized for organic growth and acquisitions first.
• Micron/Chip Factories: No significant direct lending yet; growth expected from downstream suppliers and local service needs (housing, insurance) as workforce scales.
• Expense Outlook: Targeting 4–5% organic expense growth in 2027, excluding acquisition-related costs.

Other Key Points:

• Executed an accretive transaction in August selling $296.8M of lower-yielding Treasuries to pay down high-cost overnight borrowings, contributing 3 basis points to NIM expansion.
• Deemed $600M in 2027 securities maturities as a strategic opportunity to fund growth rather than replenish low-yield assets.
• No FRB/FHLB dividends received in Q3; dividends expected in Q4 to smooth NIM metrics.
• Santander acquisition contributions ($543.7M deposits) and ClearPoint acquisition contributions ($120.1M deposits) accounted for significant YoY deposit growth.