Community Financial System, Inc.

Good day and welcome to the Community Financial Assistance, Inc. Second Quarter 2026 Earnings Conference Call. All participants will be in a 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 a touchtone phone. 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 the company's SEC filings, including the risk factors section, for more details. Discussion may also include reference to certain non-GAAP financial measures. Reconciliations 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 Dimitar Karaivanov, President and CEO. Please go ahead.

Thank you, Betsy. Good morning, everyone. Thank you for joining us today. This was another consecutive record quarter, which I would classify as solid, with continued expansion in net interest income, strong fee performance in banking, employee benefits, and wealth management, and managed recurring run rate expenses. Both credit and liquidity remained top tier. Insurance revenues were short of expectations, and we also had a few expense items which we do not consider recurrent. I'm particularly encouraged by the continued client and talent acquisition momentum across all of our markets in banking, the new product launches and growing capabilities in our employee benefits business, the above market results in our wealth management business, and the addition of ClearPoint. Clearly, insurance will be challenged this year and fall short of our expectations. That is driven by meaningfully lower contingencies, stalled premium markets, and also some organic challenges. However, you will notice that we had a nice gain of over $3 million on investment during the quarter. That's related to an insurance investment. Great example of the optionality associated with our presence in the broader insurance space. We made more than five times our money in this particular situation. We're also looking at a very strong pipeline of M&A opportunities in insurance, which may put us on a nice track for 2027 revenue expansion. A couple of items of note. First, an update on our de novo efforts. We finished the second quarter right around $140 million in deposits across our de novos. Between the de novos and our acquisition of the Santander branches in the Lehigh Valley, we expect to end the year at approximately $700 million of new additive funding in our growth expansion markets and are quickly putting that to work in quality loans. That is right in line with our strategic plan. You will notice that even with this sizeable aggregate addition of deposits that were priced higher than our legacy ones, Our overall cost of deposits continues to come down, hopefully directly addressing some prior concerns. Second, we spent a fair amount of time talking about our commercial banking business and the success there, but here's a data point on the terrific things our mortgage team is doing as well. Right now, our mortgage pipeline is at its highest point it has been for the past seven years, and as we know, this is not a booming mortgage market. As of the latest HMDA data, we're the number two bank originator in our footprint. Four years ago, we were number five. Speaking of housing in our markets, based on the May 2026 data from Miles, Frampton, PA is the market with the highest increase in housing price in the United States. Rochester, New York is the second. Albany, New York is the fifth. Syracuse is the sixth. Allentown is the 14th. This is driven by inventory being down 50% compared to historical averages. Needless to say, this all bodes well for us. Third, as it relates to activity across our markets, a few data points. Four years ago, Central New York was delivering less than 400 new units of housing per year. Last year, the permits filed were over 2,400. By most estimates, we need over 3,000 to meet the housing demand. On the banking side, I have seen more discussions around multifamily and even hospitality deals in Central New York in the past six months than I have seen in the past five years cumulatively. With that said, it is still early days and it is not what is driving our growth yet. Our differentiated growth comes from market share gains across all of our footprint. There isn't much of a difference in the growth rates of our regions. This past quarter was particularly strong in New England and Pennsylvania. Looking at the pipeline, I expect virtually all regions to have strong second half of the year. We also have insurance and benefits customers seeing nice lifts in their operations from activity across all of our footprint. Lastly, our banking assets now sit at $17.4 billion. Our wealth assets under management and administration sit at $17.1 billion. And our retirement assets under administration are $16.5 billion. In other words, both our employee benefits and wealth management businesses now have a similar amount of assets and care as our banking business, which further underscores the diversification strategy of our company. You can expect continued focus and investments across all of our businesses and driving the growth of all of them in light with our previously communicated strategies. With all of that said, this was a record quarter for our company with overall pre-tax, operating pre-tax pre-provision earnings of 14.9% year over year. Banking pre-tax earnings were up 13.2%. Employee benefits pre-tax earnings were up 16.2%. Wealth management pre-tax earnings were up 46.5%. and insurance was down 10.8% year over year. More importantly, our trajectory remains very attractive and we expect acceleration in results across all of our businesses in the second half of the year. As a reminder, in the fourth quarter, we begin unshackling ourselves from the weight of our securities portfolio as we start getting back meaningful cash flows, which should provide a nice tailwind into future quarters. I will now pass it to Marya for more color on the numbers and our updated guidance. Marya?

Thank you, Dimitar. Good morning, all. As Dimitar noted, the company's second quarter performance was solid. Gap earnings per share of $1.16 increased 19 cents, or 19.6%, from the second quarter of the prior year, and increased 8 cents, or 7.4%, from linked first quarter results. 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 $1.16 in the second quarter as compared to $1.04 one year prior and $1.15 in the late first quarter. Second quarter operating CP&R per share of $1.62 increased $0.21 from one year prior and increased $0.01 on a linked quarter basis. These record operating results were driven by a new quarterly high for net interest income. The company's net interest income was $139.1 million in the second quarter. This represents a $4.4 million or 3.3% increase over the linked first quarter and a $14.4 million or 11.5% improvement over the second quarter of 2025 and marks the ninth consecutive quarter of Net Interest Income Expansion. The company's fully tax-equivalent net interest margin increased four basis points from 3.45% in the linked first quarter to 3.49% in the second quarter, reflective of lower funding costs. During the quarter, the company's cost of funds was 1.18%, a decrease of two basis points from the prior quarter, primarily driven by lower deposit costs. Operating non-interest revenues increased $4.8 million or 6.4% compared to the prior year's second quarter and increased $0.3 million or 0.4% in the late first quarter. The increase in operating non-interest revenues compared to the second quarter of 2025 was reflective of increases in employee benefit services, wealth management services, and banking non-interest revenues Partially offset by a decrease in insurance services non-interest revenues due to a softer insurance market and lower organic growth. Operating non-interest revenues represented 36% of total operating revenues during the second quarter, a metric that continuously emphasizes the diversification of our businesses. The company recorded a $4.6 million provision for credit losses during the second quarter. This compares to $4.1 million in the prior year second quarter and $5.6 million in the linked first quarter. During the second quarter, the company recorded $137.7 million in total non-interest expenses, an increase of $4.7 million or 3.5% from the linked first quarter and an increase of $8.6 million or 6.7% from the prior year second quarter. The increase from the linked first quarter was due in part to a $2.1 million increase in salaries and employee benefits, reflective of one additional payroll day and drew up a performance-based annual management incentive plan expense, $0.7 million of expenses associated with ClearPoint, as well as a one-time $0.6 million early termination charge related to a debit card processing platform conversion. 3.4 million of the increase in total non-interest expenses from the second quarter of 2025 was attributed to salaries and employee benefits, primarily due to incremental costs associated with acquisitions and de novo bank branches open between the periods, along with the impact of annual merit-based increases. Occupancy and equipment expenses increased 2.4 million from the prior year's second quarter, driven by incremental costs associated with the opening of 16 de novo branches and three regional headquarters, along with the seven branches acquired from Santander in the prior year's fourth quarter. Year-to-date operating non-interest expenses were $261.2 million, an increase of $15.2 million, or 6.2% from the first six months of 2025. Excluding operating expenses related to acquisitions completed in the last 12 months, Operating non-interest expenses increased $10.4 million or 4.2% from the same prior year period. Pending loans increased $151.6 million or 1.4% during the second quarter and increased $763.7 million or 7.3% from one year prior. The increase from one year prior reflected organic growth in the overall business and consumer lending portfolios while the increase during the second quarter primarily reflected organic growth in the business lending portfolio. The company's ending total deposits increased $1.01 billion or 7.4% from one year prior and decreased $159.7 million or 1.1% from March 31, 2026. The decrease in total deposits during the second quarter was primarily reflective of seasonal outflows of municipal deposits. The increase in total deposits over the last 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 two basis points and the net charge-off ratio increased one basis point from the linked first quarter, while the loans 30 to 89 days delinquent ratio decreased nine basis points from last quarter, aligned with typical seasonal trends. The company's allowance for credit losses was $91.7 million, or 81 basis points of total loans outstanding, at the end of the second quarter, An increase of $1.5 million during the quarter. The increase was primarily attributed to reserve building in the business funding portfolio. The allowance for credit losses at the end of the second quarter represented eight times the company's trailing 12-month net charge-off. We are pleased with the second 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, I would like to provide a more detailed update to our expectations for full year 2026 as we enter into the second half of the year, inclusive of the estimated impact of the completed FairPoint acquisition. We are currently expecting five to six Thank you for joining us. and the low to mid 3.5 range. We expect modest temporary pressure in the third quarter within a range of up one basis point to down two basis points due in part to seasonally higher overnight borrowing levels. Poor non-interest expenses are expected to be in the range of 550 to 555 million or an increase of 7 to 8% from 2025. This includes approximately 8 to 9 million of incremental expenses associated with the branches acquired from Santander and approximately 4 to 5 million of incremental expenses associated with ClearPoint, including non-operating intangible asset amortization. These estimates do not include the impact of pending or future acquisitions. Additionally, we continue to anticipate an effective tax rate between 23 and 24%. That concludes my prepared earnings comments, and Dimitar and I will now take questions. Betsy, I will turn it back to you to open the line. Thank you.