Community Financial System, Inc.

Good day and welcome to the Community Financial System, Inc.' 's second quarter 2025 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 2. Please note that this event is being recorded and discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed Refer to our SEC filings, including the risk factors section, for more details. Discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in our earnings release. I would now like to turn the conference over to Dimitar Koraivanov, President and CEO. Please go ahead.

Dimitar Koraivanov, President and CEO, Thank you, Michael. Good morning, everyone, and thank you for joining our Q2 2025 earnings call. My general summary of the quarter is one of continued solid progress across our diversified business and record operating results per share. In our banking business, net interest income continues to expand on the heels of both increasing asset yields and growth imbalances. Core funding is growing, and consumer lending had a very strong quarter with momentum continuing into the third quarter. Commercial banking balances were impacted by some constructive repayments of criticized credits and the resolution of a couple of non-performing assets. However, the pipeline is very good, and I expect a very strong third quarter that will put us back on track to our previously communicated growth targets. Banking fee income also remains strong. Credit results were impacted by the resolution of our two largest non-performing assets, with one being paid off with a very small charge and they are being written down and taken into OREO. Outside of those previously reserved for situations, net charges were minimal at less than two basis points. Our employee benefit services business was basically flat year over year and quarter over quarter. With that said, there are two parts to that story. Our record-keeping business is growing at high single digits, while our fiduciary trust business has been experiencing some headwinds as we work to reposition the business and reinvest in the next stage of growth. With that said, I'm very encouraged by the early results of those initiatives, the pipeline that is already built, and expect that we will be well positioned in 2026 and beyond. In insurance services, it is important to note that we had a pull forward of the timing of contingency payments in Q1 of this year versus typically Q2. Year-to-date, the business is up 13% in revenue and operating margin is up to 23%, driving operating pre-tax earnings expansion of 70%. Wealth management services came off a very strong Q1, and also, as we talked about back in January, we exited certain non-productive revenue arrangements. As a result, revenue growth was muted year over year, while both operating pre-tax earnings and margin expanded compared to the same quarter last year. Pre-tax operating earnings were up 16%. In summary, we're well on our way towards our goals for the year. We also had a very exciting branch acquisition announcement last month, and I expect to close that transaction in the fourth quarter of this year. The transaction provides our banking business with a very strong presence in a market that is of high strategic importance to us, high quality liquidity, no asset issues or concentrations, limited execution risk, and comes with no share issuance. In other words, our shareholders get to keep all the upside as we deploy the cash proceeds into earning assets over the next few years. It is unusual for a banking transaction to check multiple of these boxes for us, and very unusual to check all of them, so we're very excited. In addition, other productive discussions are occurring across our fee-income businesses, and I'm hopeful that we will continue to productively deploy capital in the second half of this year. I will now pass it on to Mariah for more details on the financials.

Thank you, Dimitar, and good morning. As Dimitar noted, the company's second quarter performance was solid. GAAP earnings per share of $0.97 were up $0.06, or 6.6%, over the second quarter of the prior year, and were up $0.04, or 4.3%, over linked first quarter results. GAAP earnings per share included the impact of $0.02 in restructuring expenses associated with a workforce optimization plan, and in addition, $0.01 tied to performance-based incentive accrual. 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 $1.04 in the second quarter as compared to $0.95 one year prior and $0.98 in the linked first quarter. Second quarter operating PPNR per share of $1.41 was up $0.12 from one year prior and was up $0.01 on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $199.3 million in the second quarter. Operating revenues were up $16.1 million, or 8.8%, from one year prior, and were up $3.3 million, or 1.7%, from the linked first quarter, driven by record net interest income results in our banking business. The company's net interest income was $124.7 million in the second quarter. This represents a $4.5 million or 3.8% increase over the linked first quarter result and a $15.3 million or 14% improvement over the second quarter of 2024 and marks the fifth consecutive quarter of net interest income expansion. The company's fully tax equivalent net interest margin increased six basis points from 3.24% in the linked first quarter to 3.3% in the second quarter. Higher interest earning asset yields and stable funding costs drove increases in both net interest income and net interest margin in the quarter. During the quarter, the company's cost of funds was 1.32%, a decrease of one basis point from the prior quarter, while the company's cost of deposits remained low relative to the industry at 1.19%. Operating non-interest revenues were up 0.7 million, or 1%, compared to the prior year's second quarter and represented 37.4% of total operating revenues, a metric that continuously underscores the diversification of our businesses. Banking-related operating non-interest revenues were up 0.9 million, or 5%, from the linked first quarter, driven by higher customer interest rate swap fee revenues and CRE financing and advisory revenues. This was offset by 2.2 million or 3.9% decrease in non-banking financial services non-interest revenues over the same period due to seasonal factors in the employee benefits, insurance, and wealth businesses. The company recorded a 4.1 million provision for credit losses during the second quarter. This compares to 2.7 million in the prior year's second quarter and 6.7 million in the linked first quarter. During the second quarter, the company recorded $129.1 million in total non-interest expenses. This compares to $119 million of total non-interest expenses in the prior year's second quarter. Expense control remains a focus. The $10.1 million or 8.5% increase between the time periods was primarily driven by an increase of $5.6 million or 7.6% in salaries and employee benefits and $1.4 million or 9.3% and data processing and communication expenses, and the impact of a $1.5 million non-operating restructuring charge. The increase also included approximately $1.5 million in expenses associated with the bank's de novo branch expansions. Ending loans increased $98 million, or 0.9% during the second quarter, primarily driven by net organic growth in the consumer indirect lending portfolio. The company continues to invest in its organic loan growth capabilities and expects continued expansion into undertapped markets within our Northeast footprint. Ending loans were up $495.3 million, or 4.9%, from one year prior, primarily due to growth in the business lending and consumer mortgage portfolios. The company's ending total deposits increased $563.9 million, or 4.3%, from one year prior and decreased 190.3 million or 1.4% from the end of the linked first quarter. The decrease in total deposits during the quarter was driven by seasonal outflow of municipal deposits. Non-interest bearing and lower rate checking and savings accounts continue to represent almost two-thirds of the total deposits reflective of the core characteristics of the company's deposit base The company did not hold any brokered or wholesale deposits on its balance sheet during the quarter. The company's liquidity position remains strong, as readily available sources of liquidity totaled $5.9 billion, or 246% of the company's estimated uninsured deposits and of collateralized and intercompany deposits at the end of the second quarter. The company's loan-to-deposit ratio at the end of the second quarter was 76.8%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. All the companies and the bank's regulatory capital ratios continue to substantially exceed well-capitalized standards. The company's Tier 1 leverage ratio increased 13 basis points during the second quarter to 9.42%, which is significantly higher than the regulatory well-capitalized standard of 5%. During the quarter, The company charged off one non-owner-occupied CRE loan relationship and received substantial repayment of one multifamily CRE loan relationship, both of which were previously allocated specific reserves. As a result, net charge-offs in the quarter were elevated relative to recent results, but non-performing and delinquent loan metrics were favorably impacted. Non-performing loans totaled 53.3 million or 51 basis points of total loans outstanding at the end of the second quarter. This represents a 21.7 million or 21 basis point decrease from the end of the linked first quarter. Comparatively, non-performing loans were 50.5 million or 50 basis points of total loans outstanding one year prior. Loans 30 to 89 days delinquent were also down on a linked quarter basis from 59.2 million or 57 basis points of total loans at the end of the first quarter to 53.3 million or 51 basis points of total loans at the end of the second quarter. The company recorded net charge-offs of 5.1 million or 20 basis points of average loans annualized during the second quarter. This was up 3.8 million over the prior year's second quarter and up 1.9 million from the linked first quarter driven by the charge-off associated with the previously mentioned CRE loan relationship during the quarter, totaling $4.3 million. The company's allowance for credit losses was $81.9 million, or 78 basis points of total loans outstanding at the end of the second quarter, down $1 million during the quarter, due in part to the decrease in specific reserves previously mentioned and up $10.4 million from one year prior. The allowance for credit losses at the end of the second quarter represented over five times the company's trailing 12-month net charge-offs. We are pleased with the second quarter results. It is an exciting time, especially given our announcement of the acquisition of the seven Santander branches in Pennsylvania, which accelerates our retail growth strategy. To echo Dimitar's comments, This transaction ensures that our shareholders keep all the upside as we deploy the cash proceeds into earning assets. Looking forward, we believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically good asset quality provide a solid foundation for continued earnings growth. That concludes my prepared earnings comments and I will now take questions. Michael, I will turn it back to you to open the line. Thank you.