Community Bank System Aktie

Good day, and welcome to the Community Financial System, Inc.'s First Quarter 2026 Earnings Conference Call.

[Operator Instructions] Please note that this event is being recorded and the discussion may contain forward-looking statements within the provision of the Private Securities Litigation Reform Act of 1995 that are based on the current expectations, estimates and projections and 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. 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 Dimitar Karaivanov, 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 CenterState CEO 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. Strong new business efforts, combined with 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 comp 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 our 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.

Marya will provide you with more details on the financials. Marya?

Thank you, Dimitar, and good morning, all. As Dimitar noted, the company's first quarter performance was strong. Including acquisition expenses, GAAP earnings per share of $1.08 increased $0.15 or 16.1% from the first quarter of the prior year and increased $0.05 or 4.9% from linked fourth quarter results.

Operating earnings per share and operating pretax pre-provision net revenue per share were 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 PPNR per share of $1.61 increased $0.21 from one year prior and increased $0.03 on a linked quarter basis. These record operating results were driven by a quarter-over-quarter decline in operating noninterest 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 6 basis points from 3.39% in the linked fourth quarter to 3.45% in the first quarter, driven by lower funding costs. During the quarter, the company's cost of funds was 1.2%, a decrease of 7 basis points from the prior quarter, primarily driven by lower deposit costs.

Operating noninterest 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 noninterest revenues compared to the first quarter of 2025 was reflective of increases in Banking, Employee Benefit Services and Wealth Management Services noninterest revenues, partially offset by a decrease in Insurance Services noninterest revenues due to changes in the timing of collections of contingent commission revenue.

Operating noninterest 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 linked fourth quarter.

During the first quarter, the company recorded $133 million in total noninterest expenses, a decrease of $5.5 million or 4% from the linked 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 onetime items described last quarter as well as acquisition expenses associated with the Santander branch acquisition.

$3.9 million of the increase in total noninterest 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 the 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 3 regional headquarters, along with the 7 branches acquired from Santander in the prior year's fourth quarter.

Additionally, acquisition expenses of $0.4 million were incurred in the first quarter of 2026 associated with the pending acquisition of ClearPoint Federal Bank & Trust.

Ending 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. The 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 nonperforming loans ratio decreased 4 basis points and the net charge-off ratio increased 2 basis points from the linked fourth quarter, while the loans 30 to 89 days delinquent ratio increased 5 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 CRE growth.

The allowance for credit losses at the end of the first quarter represented 7x the company's trailing 12-month net charge-offs. 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 full 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.

[Operator Instructions] The first question comes from Steve Moss with Raymond James.

Nice quarter here. And maybe just starting on the loan side, good commercial loan growth. And just kind of curious where you are on the pipeline. I apologize if I missed it. I hopped in the middle of your prepared remarks. Just curious, just a color on that aspect of the loan book to start.

Yes, 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, a strong quarter for that. I know you were upbeat on it. Just kind of curious what you're seeing going forward in terms of pricing and where it could go for the rest of the year.

Yes. 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 space for us is 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 in 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, 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 in 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 the eyeball going back, it looks like that contingent benefit you typically get is about $1.5 million, $2 million. Is that about fair for the second quarter?

Yes, that's in the range.

Okay. Got it. And then just one more on expenses here. Good to see where they came in. Just thoughts -- updated thoughts here on the cadence of expense growth throughout the year and where you're looking for things to settle out.

Yes. Our guidance stays intact on that side. I mean if you look at it year-over-year, we're running just above 6%, 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 de novo expansion last year and acquisitions, that rate will -- my guess is and my hope is and my expectation is that it will continue to go lower from 6%.

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.

The next question comes from David Konrad with KBW.

You had really good NIM expansion this quarter, but I thought it was interesting that the investment yields actually went down 4 bps. So maybe refresh us on your NIM expectations for the year and talk about how the portfolio balances may be used to pay down borrowings or fund loan growth or where you expect the securities balances to go?

Yes. So NIM did outperform our Q4 guide as we expanded 6 basis points in Q1. For us, this is a result of strong loan growth, ongoing repricing efforts. We also had a steeper yield curve than we've had in recent quarters. So we're pleased with these results.

Looking forward, we expect for Q2, 3 to 5 basis points of expansion. We are going to continue to capitalize on the loan and deposit efforts, fully realize the late 2025 cuts. Just to note here, Q2 NIM will be partially aided by an FRB dividend, just for your notes there.

In terms of looking at the overall portfolio, if we have -- we see an opportunity, we will pay down borrowings, but we see a steady state for now. And again, I want to reiterate the guidance of 3 to 5 for Q2 and are pleased with how our book looks at the moment.

The next question comes from Manuel Navas with Piper Sandler.

Just a follow-up on the NIM discussion. So the expectation is loan yields kind of flat to up? Or what kind of direction on the loan 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 to acquiring deposits within the de novo branches? Can you just talk about deposit costs going forward?

Sure. 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 reprice deposits.

So for us, frankly, being flat in loan yields in the quarter, having absorbed 2.5 cuts essentially was pretty good. Going forward, again, we expect that given where new production is, which is right around 6 and given where the back book is, which is right around 5.68, that should give you 30-plus basis points to work with there as we continue to reprice the book.

On the deposit side, we've discussed that 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 through the quarter. Clearly, with -- 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 on M&A, where you sit now fee businesses versus whole bank? Obviously, the de novo is progressing. Could we just have a check up 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 4 businesses that we can allocate it across. So our first priority is always going to be organic growth across those businesses.

For the bank, 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 nonbanking 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 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 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.

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.

The next question comes from the line of Matthew Breese with Stephens Inc.

A few questions for me. 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 made the most progress, whether it's Rochester, Buffalo, Eastern Pennsylvania, New Hampshire?

Yes, 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 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, if you -- what's really, really encouraging from my perspective, as 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 in the past where the capability of the team and the diversification will be in a way where 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 -- and 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 happening in New England recently. So we expanded that team. So we'll continue to be on the front foot of those opportunities.

But yes, 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. 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 in and 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 chips and kind of advanced technology manufacturing that is to occur in Central New York and you compare it to those investments, the rest -- 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's a very large impact.

Great. I did not realize it was that large of an impact to local GDP. Dimitar, 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 8-K?

Yes. So no, nothing different on the fee income side in terms of acquisitions during the quarter. As 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 how these things work. So whenever we receive that, we'll be prepared to close pretty shortly after.

Okay. And last one for me, just on expenses. In 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.

Yes. 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 2 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. We are -- 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 5x 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.

[Operator Instructions] The next question comes from Manuel Navas with Piper Sandler.

Just wanted to jump back in. The expense level, it's targeting seemingly annualizing to below your full 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 quarter -- there's less days in the quarter in the first quarter. So that naturally is going to lead a few more payroll days. It's a meaningful add in expenses.

We also expect that there will be some continued opportunities for whether the talent acquisition or maybe some smaller kind of growth acquisitions that we're going to ultimately try to absorb with minimal cost, but along the way, they might produce some cost. So we -- 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. So 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.

And Manuel, to add to that. Sorry, I was just going to go through that we are staying consistent with our guide that we provided. So again, 4% to 7% growth, mid-single digit and the dollar amount there is anywhere between $535 million and $550 million with an average of about $135 million a quarter, which you saw it come in under $133 million in terms of core expense base this -- in Q1.

So we're on track to stick within those guardrails. And to Dimitar's point, we're diligently reviewing and ensuring that what we are spending on and what we're investing in is focused first on growth from the perspective of talent acquisition and business acquisition, and obviously, also tech and occupancy. So just to give a little more color.

That's great. And I just have 2 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've been 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 dividends, we'll probably have to follow-up with you separately.

[Operator Instructions] 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.

Good day, and welcome to the Community Financial Systems Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions].

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 references 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, Dave. Good morning, everyone. Thank you for joining our Q4 and full year 2025 earnings call. My summary of the quarter is that I'm pleased with the revenue strength across all of our businesses -- very pleased with the liquidity and credit quality of our balance sheet and that we also had more than the usual noise in our expense base.

Marya will provide you the details with some high-level reconciliations to the prior quarter expenses, but overall, I would say that most of the delta is driven by items that are tied to actual earnings performance plus recent transactions and consolidations.

Overall, 16% operating earnings growth in 2025 while making the largest organic growth investments that our company has ever made and actively deploying capital in high-return businesses is something I'm very happy with. I'm most happy about the progress we continue to make in our brand, reputation, talent, capabilities, presence and the market share gains that are accruing as a result of it.

One recent data point in our banking business during the fourth quarter, we were selected as a 2025 Company of the Year in Banking by the Buffalo Business First.

Looking at a bit more details in the businesses. The largest percentage improvement in pretax income compared to the third quarter was visible in our employee benefit services business, which grew pretax income by 10% quarter-over-quarter.

As discussed previously, we spent most of 2025, revamping our growth strategy in the trust fund administration side of the business and expect to start seeing the fruits of that in the second quarter of 2026. While full year performance was in the low single digits, Q4 marked a year-over-year improvement of 8% in revenue and 13% in pretax income as this momentum is beginning to take shape.

We expect that 2026 growth will revert back to mid- to high single digits.

In our banking business, in 2025, we benefited from both mid-single-digit asset growth and expanding margin which rolled very meaningful operating income growth of 22% on a full year basis. I would note that our 5% loan growth compares favorably to the industry and local peers and came in spite of very elevated pay downs of over $300 million in the commercial business.

We have continued to add talent and customers from recent disruptions around our footprint and in our expanded footprint.

Insurance Services had a strong year as well with top line growth of 8% and operating income growth of 42%. We expect mid-single-digit growth going into 2026.

In Wealth Management Services, revenues, as expected, were impacted by some realignment of producers, which also as expected, resulted in positive margin and operating pretax income with growth of 15%. We expect mid-single-digit growth in 2026 as we account for the full run rate of these changes.

In aggregate, we had a very strong year in banking, insurance and wealth. All of those businesses were ahead of industry metrics and peers in their bottom line improvement. Given that banking accounted for the majority of the very significant investments we're making, I'm very pleased with the bottom line result there of 22% growth.

We were less successful in our employee benefit services in 2025 due to both some revenue challenges and planned investment in the fund administration side.

With that in mind, the trends there, as mentioned, are positive, and I expect meaningful improvement in 2026. I would also call out the impact of New York state income taxes as our tax rate is now almost 2% higher than 18 months ago. That is real money, but we will keep working through those headwinds as well.

For 2026, one of our main areas of focus is expense management and beginning to harness more fully the investments and focus we have in AI and automation. As a quick statistic on that, due to our focus on automation, we have saved over 200,000 hours over the past 3 years, and that has allowed us to keep our head count roughly flat while growing the overall business meaningfully. We now need to see it fully in the bottom line.

Now let's talk about returns. The pretax tangible returns for the quarter were 61% for employee benefit services, 39% for Wealth Management services, 26% for banking and corporate and 8% for Insurance Services.

The return on Insurance Services is impacted by the increase in allocated capital due to our investment in LEAP and seasonally lower revenues in Q4. Similar to last quarter, we continue to aggressively pursue opportunities to deploy capital at high tangible returns. Durable growing subscription-like revenues remain our main focus and point of excitement.

Our recently announced transaction with ClearPoint is a great example of that. We're excited about both the quality and durability of the trust revenue that it will provide and also the multitude of opportunities for us to deploy both expanded wealth management and banking products to the customer base.

Lastly, I would note that in spite of the meaningful inorganic growth, our share count is flat for the year, to reinforce our feelings. As shareholders, we love our company and its prospects and want to own more, not less of it. We're also not too excited about trading shares in our high-quality diversified income streams for lower quality ones unless there are significant offsetting benefits.

With that, I will pass it on to Marya for more details.

Thank you, Dimitar, and good morning, all. As Dimitar noted, the company's fourth quarter and full year performance was robust in all 4 of our businesses. Including acquisition expenses, GAAP earnings per share of $1.03 increased $0.09 or 9.6% from the fourth quarter of the prior year and decreased $0.01 or 1% and from linked third quarter results due to $0.04 per share of expenses associated with the Santander branch acquisition.

Operating earnings per share and operating pretax preprovision net revenue per share or record quarterly and annual results for the company. Operating earnings per share were $1.12 in the fourth quarter as compared to $1, one year prior and $1.09 in the linked third quarter.

Fourth quarter operating PPNR per share of $1.58 increased 18x from one year prior and increased $0.02 on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $215.6 million in the fourth quarter.

Operating revenues increased $8.7 million or 4.2% from the linked third quarter and increased $19.5 million or 10% from 1 year prior, driven by record net interest income in our banking business.

The company's net interest income was $133.4 million in the fourth quarter. This represents a $5.3 million or 4.1% increase over the linked third quarter and a $13.5 million or 11.2% improvement over the fourth quarter of 2024 and marks the seventh consecutive quarter of net interest income expansion.

The company's fully tax equivalent net interest margin increased 6 basis points from 3.33% in the late third quarter to 3.39% in the fourth quarter, driven by lower funding costs.

During the quarter, the company's cost of funds was 1.27%, a decrease of 6 basis points from the prior quarter, driven by lower deposit costs and a lower average overnight borrowing balance due in part to the funding inflow from the Santander branch acquisition.

Operating noninterest revenues increased $6.1 million or 8% compared to the prior year's fourth quarter and increased $3.5 million or 4.4% and from the linked third quarter, reflective of increases in overall banking and nonbanking financial service revenues and included the onetime impact of a $1.6 million income distribution from a limited partnership investment.

Operating noninterest revenues represented 38% of total operating revenues during the fourth quarter, a metric that continuously emphasizes the diversification of our businesses.

The company recorded a $5 million provision for credit losses during the fourth quarter. This compares to $6.2 million in the prior year's fourth quarter and $5.6 million in the linked third quarter.

During the fourth quarter, the company recorded $138.5 million in total noninterest expenses. This represents an increase of $10.2 million or 8% from last quarter. Excluding the impact of the $2.1 million quarter-over-quarter increase in acquisition expenses due to the Santander branch acquisition, noninterest expenses increased $8.1 million or 6.4% from last quarter. [indiscernible] million of the increase from the linked quarter was from salaries and employee benefits, which was impacted by an increase in performance-tied incentive compensation, including a $1 million true-up of long-term incentive program related expense, a $0.8 million true-up of annual management incentive plan expense, along with a $0.6 million incentive accrual tide revenue and bottom line performance in the CRE finance and advisory business line.

Operating expenses associated with the 7 branches acquired from Santander totaled $1 million during the fourth quarter, while expenses associated with the bank Noble branch expansions increased $0.6 million between linked quarters as additional branches were open for business. The increase in other expenses was impacted by previously announced branch consolidation activities, specifically $0.8 million of net property-related write-downs recognized during the quarter, along with $0.6 million of charitable contribution expenses that were accelerated prior to 2026 tax law changes.

Excluding the above-mentioned acquisition expenses, write-downs, charitable contributions and performance-related incentive accruals and Q4 noninterest expenses were $131.9 million, an increase of $4.3 million or 3.4% quarter-over-quarter. -- ending loans increased $199.5 million or 1.9% during the fourth quarter and increased $517.4 million or 5% from 1 year prior. -- primarily due to organic growth in the overall business and consumer lending portfolios.

The loan growth also included approximately $32 million of acquired loans associated with the Santander branch acquisition. The company continues to invest in its organic loan growth opportunities and expect continued expansion into the undertapped markets within our Northeast footprint.

The company's total ending deposits increased $5.4 million or 7% from 1 year prior and increased $33.2 million or 2.3% from the end of the linked third quarter. The growth in total deposits during 2025 was comprised of growth in all of the company's regions. The increase in total deposits between both periods was primarily driven by the $543.7 million of deposits assumed from the Santander branch acquisition.

Moving on to asset quality. The nonperforming loans and net charge-off ratios were consistent with the linked third quarter, while the loans 30 to 89 days deli decreased 10 basis points from last quarter, aligned with typical seasonal trends. The company's allowance for credit losses was $87.9 million or 80 basis points of total loans outstanding at the end of the fourth quarter, an increase of $3 million during the quarter. These increases were primarily attributed to reserve building in the business lending portfolio, reflecting the growth in size and volume trends of recently originated commercial loans.

The allowance for credit losses at the end of 2025 represented over 6x the company's net charge-offs during the year. We are pleased with the fourth quarter and full year results, all of which reinforce our commitment to scale as a diversified financial services company.

During 2025, the company made significant progress on our de novo expansion plans, opening 15 new branches across our footprint. Additionally, during the fourth quarter, we successfully integrated 7 former Santander branches in the Lehigh Valley market, which accelerates our retail strategy in a market we anticipate significant growth.

Furthermore, we were excited to recently announce an agreement to acquire ClearPoint Federal Bank & Trust, a national leader in a niche trust administration market. This acquisition significantly expands the revenue and offering of our wealth management business and is expected to close in the second quarter of 2026.

Looking forward, we believe the company's diversified revenue profile, strong liquidity and historically good asset quality provides a solid foundation for continued earnings growth.

More specifically, for 2026, we expect 3.5% to 6% growth in loan balances, 2% to 3% growth in deposit balances, 8% to 12% growth in net interest income for 8% growth in noninterest revenues and a provision for credit losses in the range of $20 million to $25 million.

For noninterest expenses are expected to be in the range of $535 million to $550 million, or an increase of approximately 4% to 7% from 2025, including approximately $8 to $9 million of incremental expenses associated with the branch of the quarry from Santander, which includes the nonoperating amortization on annual. These figures do not include the impact of pending or future acquisitions.

Additionally, we anticipate an effective tax rate between 23% and 24%. Finally, as a reminder for the first quarter, noninterest expenses typically trend higher compared to fourth quarter levels due to merit increase, higher FICA and payroll taxes and seasonal snow removal costs.

That concludes my prepared earnings comments, but I do want to say one more thing. It was a catch. No bills. And with that, Dimitar and I will now take questions. Dave, I will now turn it back to you to open the line. Thank you.

[Operator Instructions] Our first question comes from Steve Moss with Raymond James.

Maybe just starting on with loan pricing here. I hear you guys in terms of loan growth opportunities. Just curious, I know pricing got a little more competitive here over the last 3 to 4 months. Just kind of curious what you guys are seeing and kind of what you guys think will be the drivers of growth in 2026.

Yes. So for the fourth quarter, Steve, originations were in the low 6s and I think the curve hasn't really moved much so far in this quarter. So we're probably kind of in that range -- all we call, clearly, the trend is lower. So I think at some point this year, we will be below 6%. It could be the end of this quarter could be next quarter, who knows. But yes, the trend is clearly lower on that fortunately for us, we have a lot of fixed assets repricing to continue.

So if you look at kind of that low 6s compared to the current yields that we have on the loan portfolio, there's still a decent amount of gap for us to benefit from.

Okay. Appreciate that. And then in terms of the noninterest income guide, I think, is what it was. Marya, I missed your comment there. Was that 4% to 8% growth for 2026?

3% to 12% growth for NII. Is that what you asked, Steve?

Non II, I'm sorry.

Sorry, sorry, sorry. 48%, Yes, 4% to 8%, yes. Sorry.

And then in terms of the employee services -- employee benefit services business, obviously, a healthy step up and Dimitar, I hear you in your comments in terms of the investment in some accelerating here. Just kind of curious, I think you said mid- to high single-digit growth. Maybe is there just a little bit of like onetime stuff in nature in the fourth quarter or seasonality that we should think of? I realize some of these asset values, acquisitions and stuff, just kind of thinking about the cadence of that trajectory a little bit.

Yes. So in the Employee Benefit Services, if you kind of split it up and kind of look at what happened in 2025, in the retirement side of the business, we actually grew high single digits. So that was a very productive outcome on the retirement side. In the institutional trust side, we were basically flat year-over-year and a little bit down on pretax because of the investment on the expense side.

So as you think about 2026, if you split up the 2 businesses, retirement is at higher asset values this year so far than last year. So we will continue to see some pickup there. It's probably going to taper down, if asset values don't continue to increase. just on an average basis, it's going to taper down over the year. So that's going to impact that growth trajectory.

And on the institutional trust side, we feel like we have really kind of turned the corner there on the revenue side, and we're sitting at the highest assets we have had in that business as well. So between that and the -- I think we got more than 20 fund launches coming here in the first and second quarter. We're going to have an acceleration on that side of the house to get us back to that mid- to high single digits.

So I think in the aggregate basis, we were sitting here, of course, depending on market conditions would be mid- to high single digits for the overall line of business. And you're right on the seasonality. There is more in the fourth quarter in that business. So you're going to see like you expect in 2020 to fourth quarter or else go to the higher mark for 2026.

And the next question comes from David Konrad with KBW.

Just taking a step of a big picture here. I mean you put up, I think, roughly about 38% of your revenues is fee income. You have a pure leading 22.7 ROTCE, it looks like, based on your guide, that ratio might hold back a little bit. But just kind of thinking about over the next 3 to 5 years, where do you think the fee ratio to revenues could go to? And the implications of that to your RoTCE.

Yes. Great question, David, and 1 that we certainly hear a lot and we ask ourselves a lot as well. And I I'll start it this way. We love all of our 4 businesses. And we are experiencing right now in the banking business, which is the largest, we're experiencing tailwinds on the margin side, which we haven't had historically.

So even as the other businesses are doing really well themselves, it is hard to overrun the bank, given that you have margin expansion and asset growth at the same time. Now that's not going to be forever. The margin expansion party, I think, is going to slow down here this year and beyond. So that's going to temper down some of that growth rates on the bank side.

At the same time, we continue to also invest heavily in inorganic and organic opportunities on the fee income side. So the short of it is, I don't know where it's going to settle. We want to have more of all of them, more of all of our core businesses. I think all eco,we understand where tangible returns are the highest.

So if we have a dollar of capital to invest, it's going to go to the highest tangible return we can find. And that's why you've seen us not only invest in the banking business, but in the insurance business, in the benefits business in the wealth business now with ClearPoint.

Just as a reference point, we complete probably somewhere between 8 and 12 acquisitions every year, and most of them you don't see it because they're in the fee income businesses. So they're kind of small singles and doubles that over time that up. And I think we'll have more opportunities to continue to do that and maybe take some larger swings along the way as well.

The next question comes from Matthew Breese with Stephens Inc.

Dimitar, the ClearPoint transaction and its market share, and I think you described it as the death care industry I don't know much about that. I don't know if I know any of the banks that are in that arena. Could you maybe just introduce us to what that industry is and what you expect to do with their book there, it looks to be about $8 million in fee income. Maybe set the table for us on that.

Sure, Matt. Thank you for the question. So what ClearPoint does and kind of the background of the industry more kind of at large is that as the cost of debt care, basically people planning for the funerals and their time in the cemeteries and taking care of the expenses that come with that, the cost for those services has increased over time pretty meaningfully.

And as a result, there's multiple ways that people save for those events in those life events. Depending on the state, it could be trust, it could be insurance or it could be deposits, like in New York State. So there's preneed deposit accounts, which we already have, and I'm sure other players in New York state have as well. So that business, as you can imagine, if there is one thing that's certain is that none of us are going to be around forever. So there is -- and the population is aging. So that's a tailwind, if you will, in the space.

There's a few larger players. ClearPoint is one of the leading ones. There are some other banks, large regional banks that are in this space as well. And then there's a lot of kind of smaller entities around it. So one, we like the -- we like the space, we like the niche. We love business store. We can compete nationwide with a differentiated offering in a space that's not easy to penetrate. It's fairly complicated. It's state-by-state rules. It is nationwide. So we have a clear right to win here with ClearPoint. So we love that.

And then secondly, the customer base here is basically the funeral homes and cemeteries and larger aggregators in the space. And right now, ClearPoint that's predominantly the record-keeping side of those trust relationships, they're increasingly growing into the asset management side of those relationships as well. for the monies in the trust. We think that we bring on day 1 a tremendous platform through our Noniham advisers business with HCFs and 3 CFPs and close to $10 billion of assets and nationwide reputation.

So we think there's exciting opportunities there. We also know that on the -- purely on the banking side, we have some products that fit very neatly with the space as well. So we have a dedicated score product, which one of it is actually services and demos to clients is in the funeral space, -- so that's a pretty nice ability kind of on day 1 to provide additional offering. We also through the SBA can certainly provide a lot of SBA type financing for some of those funeral homes as well. So there's a lot of multiple ways for us to make a lot more money than what they do today on their own.

Very helpful. Excited to see what you can do that with that business despite the obvious morbidity. On expenses, there's a lot of moving parts there, but I just wanted to get a sense for where the starting point is in 1Q '26. Is it fair to use kind of the upper end of the 550 range in the first part of the year and maybe moving towards the middle as the year progresses?

Yes, yes. That is fair. As we mentioned in the prepared remarks, Q1 tends to lean a little bit heavier, and as you heard us talk through Q4, primarily comprised of de novo Santander bonus accruals. We also had a rebate in Q3 for our medical expenses that didn't carry over Q4. So you saw a little bit of noise there too. Outside of these items, what we're looking forward to most, I think, in 2026, is seeing that the fruits of our investments come to light with people, systems and other infrastructure that we've talked about throughout '25 and we're confident that we'll see the returns, as you can see from '25, but also pulling through even more in '26. So yes, look, I'll be seen ahead. We're excited.

And then last one is just on the NIM. It feels like there's still some structural upside to the NIM. I was hoping you could comment on that. And then I believe if I have my notes right, you start to see a bit more of the securities book repriced towards the end of the year. So might we see some acceleration in NIM expansion as that occurs.

Yes. So first, for Q4, we are happy with that expansion of 6 basis points. That was primarily attributed to loan growth, deposit growth, ongoing repricing efforts that we're really diligent with -- at this company, also lower overnight borrowing balance, which was help there. For Q1, we're guiding 2 to 4 bps for NIM just expecting a little bit of pressure on the loan side as Dimitar noted earlier and looking to see some of the realization of the late cuts in 25 coming through Q1 as well.

To your point about the securities rebalancing at the end of the year that we have talked through that and that is happening. So we do expect expansion don't necessarily want to guide out too far, but certainly, that is a tailwind for us, and it does begin at the end of this year, yes.

Right. Did you describe 2 to 4 basis points of NIM expansion in 1Q or?

Expansion, yes for Q1.

And the next question comes from Manuel Navas with Piper Sandler.

Following up on that securities book repricing. What is assumed in the NII guide? Is that the securities are reinvested, put into loan growth? -- pay off something, what is kind of assumed currently with those maturities?

Yes. So the -- because the timing of the securities really is in the fourth quarter and late in the fourth quarter, it doesn't really impact the guide for the year. And I think by then, we'll see what the balance sheet looks like. We certainly -- our plan #1 and foremost is to deploy those into loans.

And we believe we've got tremendous momentum in terms of talent and presence and opportunities in the market to do that. And kind of looking forward beyond '26, we have '27 where we have another $600 million of securities maturing. Those are kind of spread out a little bit more evenly through 2027.

We're going to evaluate those as the time comes. Generally, we want to be lending now buying securities. So if we're not able to deploy them immediately into on growth, what's likely to happen is they're going to offset some of our longer-term borrowings, which also matured roughly on the similar time line in '27. So -- but again, it's pretty early to be talking about '27 for '26, there's not a lot of impact in the guide from securities.

Does the deposit growth guide include some remixing. How much of it is from new branches. Just thinking that it could have been higher if the de novos are working sooner, but maybe they're not all online Yes. Can you just kind of talk about de novo progress in that deposit guide?

Sure, absolutely. So on the de novo side, as we mentioned, we opened 15 this year. The vast majority of the openings occurred in the late third quarter, fourth quarter. So those are very young branches, if you want to call it that way. We ended the year with roughly $100 million of footings across the various branches that we've opened.

I think the goal for us for this year is to double that, which I think is possible. So again, these are going to become more productive as they mature usually takes kind of 18 to 24 months before you can kind of really see some of the momentum. With that said, we're very pleased with where we are.

The customer base, not just retail, but commercial is really stepped up and contributed and the deposits that we currently have in the de novos, roughly 60% are commercial deposits. So we're very pleased with the efforts from our commercial bankers of clients and all the events and the reactivity. And so to your point, we hope that it accelerates.

For us, again, this is a growth strategy on the deposit side, which we expect ultimately brings over $1 billion over a 7- to 10-year period. And I think we're tracking pretty well towards that.

This concludes our question-and-answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks.

Thank you, Dave, and thank you all for your interest. And as always, Marya and I are available for any follow-up. Stay warm.

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

Good day, and welcome to the Community Financial Systems Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 references 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, Bailey. Good morning. Thank you all for joining our Q3 2025 earnings call. We had an excellent quarter. Strong and diversified revenue growth remains a core differentiator for our company. Market share gains across all of our businesses continued. We remain focused on expenses even as we are making a $100 million investment in facilities, talent and technology across all of our businesses. Risk metrics remain excellent.

The strength of our capital, liquidity and credit continues to provide the base for our growth. All in all, record operating earnings per share up 23.9% year-over-year.

In terms of capabilities and reputation, our employee benefit services business, BPIS, was recognized again as one of the top 5 recordkeepers nationwide by the National Association of Plan Advisors. Our insurance services business, One Group, was ranked as the 68th largest property and casualty broker in the country by the Insurance Journal. One Group is now the third largest bank-owned broker. In our Wealth Management services business, Nottingham Advisors was recognized as a 5-star Wealth management team by investment teams. Our banking business, Community Bank was recognized by S&P Global as one of the top 20 banks in the country in their inaugural deposit rankings. Also importantly, the culture and values of our company and people led to our recognition by the United Way of Central New York with their Community Champion Award.

All of these things matter. They make a difference. They make us who we are and lead to the results you see. We have deep national level talent and capabilities and are now becoming nationally recognized. We have also been fortunate to have excellent capital deployment opportunities year-to-date. We are on track to deploy approximately $100 million in cash capital in transactions that push forward our strategic priorities, diversified higher growth subscription-like revenue streams in insurance benefits or wealth and for the banking business, strong funding and liquidity in attractive high-priority markets.

You will note that this quarter, we also provided in the press release the tangible returns for each one of our businesses. I believe those speak for themselves and are largely self-explanatory for our capital allocation strategy. The pretax tangible returns for the quarter were 63% for Insurance Services, 62% for employee benefit services, 48% for wealth management services and 25% for banking and corporate. We will continue to aggressively pursue similar opportunities to deploy capital at high tangible returns. I am optimistic that we will continue to do so, in particular, in our insurance and wealth businesses.

In addition, we also had the opportunity after our prior earnings release to buy back approximately 206,000 shares at what we believe was meaningfully below intrinsic value for our company. This largely eliminated any share dilution to our shareholders for the year. I will now pass it on to Marya for details on the financials.

Thank you, Dimitar. Good morning. As Dimitar noted that the company's third quarter performance was robust in all 4 of our businesses. GAAP earnings per share of $1.04 increased $0.21 or 25.3% from the third quarter of the prior year and increased $0.07 or 7.2% from linked second quarter results. Operating earnings per share and operating pretax, pre-provision net revenue per share were record quarterly results for the company.

Operating earnings per share were $1.09 in the third quarter as compared to $0.88 1 year prior and $1.04 in the linked second quarter. Third quarter operating PPNR per share of $1.56 increased $0.27 from 1 year prior and increased $0.15 on a linked-quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $206.8 million in the third quarter.

Operating revenues increased $7.6 million or 3.8% from the linked second quarter and increased $17.7 million or 9.4% from 1 year prior, driven by record net interest income in our banking business. The company's net interest income was $128.2 million in the third quarter. This represents a $3.4 million or 2.7% increase over the linked second quarter and a $50.4 million or 13.7% improvement over the third quarter of 2024 and marks the sixth consecutive quarter of net interest income expansion.

The company's fully tax equivalent net interest margin increased 3 basis points from 3.3% in the linked second quarter to 3.33% in the third quarter. Higher loan 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 1.33%, an increase of 1 basis point from the prior quarter, driven by a higher average of overnight borrowing balance, while the company's cost of deposits decreased 2 basis points and remained low relative to industry at 1.17%.

Operating noninterest revenues increased $2.3 million or 3% compared to the prior year's third quarter and increased $4.1 million or 5.6% from the linked second quarter, reflective of revenue growth in all 4 of our businesses. Operating noninterest revenues represented 38% of total operating revenues during the third quarter, a metric that continuously emphasize the diversification of our businesses.

The company recorded a $5.6 million provision for credit losses during the third quarter. This compares to $7.7 million in the prior year's third quarter and $4.1 million in the linked second quarter. During the third quarter, the company recorded $128.3 million in total noninterest expenses. This represents an increase of $4.1 million or 3.3% from the prior year's third quarter.

The increase included approximately $2.3 million of expenses associated with the bank's de novo branch expansion and an increase of data processing and communication expenses that included a $1.4 million consulting expense in connection with the contract renegotiation with our core system provider. The impact of the consulting item on total noninterest expenses was offset by medical rebates and an incentive true-up, which drove a $1.5 million or 1.9% decrease in salaries and employee benefits.

In the fourth quarter, we anticipate approximately $1 million of incremental expense driven by the prepayment of charitable contribution commitments in response to tax l changes and incentive compensation adjustments contingent on final scorecard items. The effective tax rate during the third quarter of 24.7% increased from 23% in the prior year's third quarter, driven by increases in certain state income taxes.

The effective tax rate for the first 9 months of 2025 was 23.3%, only slightly higher than the 22.9% for the first 9 months of 2024. Ending loans increased $231.1 million or 2.2% during the third quarter and increased $498.6 million or 4.9% from 1 year prior, reflective of organic growth in the overall business and consumer lending portfolio.

The company continues to invest in its organic loan growth opportunities and expect continued expansion into undertapped markets within our Northeast footprint. The company's ending total deposits increased $580.7 million or 43% from 1 year prior and increased $355.1 million or 2.6% from the end of the linked second quarter. The increase in total deposits between both periods was driven by growth in non-time deposits across governmental and nongovernmental customers.

Noninterest-bearing and relatively low rate checking and savings accounts continue to represent almost 2/3 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 $6.2 billion or 240% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits at the end of the third quarter.

The company's loan-to-deposit ratio at the end of the third quarter was 76.5%, providing future opportunities 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 4 basis points during the third quarter to 9.46%, which is significantly higher than the regulatory well-capitalized standard of 5%.

The company's asset quality metrics were generally stable during the third quarter. Nonperforming loans totaled $56.1 million or 52 basis points of total loans outstanding at the end of the third quarter. This represents a $2.7 million or 1 basis point increase from the end of the linked second quarter. Comparatively, nonperforming loans were $62.8 million or 61 basis points of total loans outstanding 1 year prior.

Loans 30 to 89 days delinquent decreased on a linked quarter basis from $53.3 million or 51 basis points of total loans at the end of the second quarter to $51.6 million or 48 basis points of total loans at the end of the third quarter. The company recorded net charge-offs of $2.5 million or 9 basis points of average loans annualized during the third quarter. This represents decreases of $0.3 million from the prior year's third quarter and $2.6 million from the linked second quarter.

The company's allowance for credit losses was $84.9 million or 79 basis points of total loans outstanding at the end of the third quarter, an increase of $3.1 million during the quarter and an increase of $8.8 million from 1 year prior. The increases were primarily attributed to reserve building in the business lending portfolio, reflecting the growth in size and volume of recently originated commercial done.

The allowance for credit losses at the end of the third quarter represented over 6x the company's trailing 12 months net charge-offs. We are pleased with the third quarter results and momentum behind recent initiatives that reinforce our commitment to scale as a diversified financial services company. We anticipate closing on the acquisition of 7 Santander branches in the Lehigh Value market on November 7, which accelerates our retail strategy in the banking services business in a market we anticipate significant growth.

Additionally, we are excited to announce a minority investment in Leap Holdings, Inc., which intentionally complements our insurance services business. Looking forward, we believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit bank and historical good asset quality provides a solid foundation for the continued earnings growth. That concludes my prepared earnings comments.

Dimitar and I will now take questions. Bailey, I will turn it back to you to open the line.

[Operator Instructions] First question comes from Tyler Cachatore with Stephens.

This is Tyler on for Matt Breese. If I could just start on the minority investment into LEAP, and I think you touched on it a bit in the prepared remarks. Should we look at this as a first step to something bigger, maybe a precursor to a larger investment if things work out? And are you able to provide what the impact to revenues and expenses are as we move forward?

Thanks, Tyler. The way I would think about it is we invested in a business that we believe is highly attractive, growing at very high growth rates, but got a tremendous team that fits squarely in our thesis to grow insurance services. So we took a stake in something that we really like and love.

And obviously, we would love to have more of it if we're so lucky sometime down the line. But I think at this point, we are where we are in terms of our investment in LEAP. So we'll see how well the future holds for us. As it relates to financial impact, I think the best way to think about it is roughly neutral. kind of some of the ins and outs of the way the accounting works kind of leads to that outcome. And kind of given its relative size, it doesn't really dramatically change things for us. So I wouldn't really expect much in the web contribution for 2026.

Great. And then just moving to deposit costs. If you could just talk about how deposit costs -- about deposit costs and how the legacy footprint is doing versus more concerted efforts in areas like Albany, Buffalo and Rochester. Is there a notable difference in the cost of deposits there? And how should we think about cost of deposits overall moving forward?

Yes. I don't think that we have seen any dramatic difference in the cost of deposits. If you're referring to kind of our legacy footprint versus the de novo expansion. We're pursuing very much the same strategies. I will say we're a little bit more intentional around commercial growth in those de novo markets. So that kind of leads maybe a little bit on the margin of higher cost, while the retail side kind of builds up one small checking account at a time.

And that will take just a little bit more time, but that's kind of the strategy. But all of that said, as we've discussed before, our de novo initiative is not really moving the needle in the way of cost of deposits for the aggregate company because of its relative size, right? So over 10 years, we're hopeful that it's going to be a very meaningful contributor to us. But right now, it's not, and it's not going to be for a little bit.

And by the time those 10 years kind of come, we're going to have built the retail checking accounts, as I talked about, kind of $1,000 account at a time. So right now, our expectation is that deposit costs are going to continue to trend down with some of the rate cuts is expected by the market and the de novo initiative doesn't really impact that trend for us.

That's helpful. And then if I could just squeeze one more in. I was wondering if you're seeing any spread compression on incremental CRE loans? And if so, to what extent? And then if you could provide us what your current CRE loan yields are?

Yes. So the way I would think about loan yields is everything is priced roughly spread over 3 or 5 years, right? So if you look at the 3 things that we do, now I'll touch on not just commercial, but kind of the overall portfolio, as I'm sure everybody has got a similar question here. If you look at -- let's start with the commercial side, you basically have a fixed and kind of a variable component to those pricing somewhere 230, 240 over the 3- or 5-year part of the curve. So as you can easily see that those parts of the curve have moved down dramatically since the beginning of the year.

So if you're looking at 50-ish on those rates in the market and you putting your spread, now you're looking at kind of high 5s, low 6s in terms of commercial originations. This quarter was a little bit higher, but I expect that we'll continue to kind of see a down trend in those rates as just the market is evolving. We do have some aggressive competitors on the CRE side, in particular, in our markets, particularly in upstate New York and to some extent, Vermont.

And you're seeing rates there, promotional rates that are now in the mid-5s. That's not where we are, but that's what some folks are in our markets. If you look at our mortgage portfolio, you're typically pricing that kind of 260, 270 over the 10-year. So you can do the math, you're kind of in the mid-6s right now. That's clearly -- also has a trend towards lower, and I expect that we're going to continue to see that.

Again, the back book in that product for us is 530-ish. So there's still plenty of room for us to reprice mortgage cash flows up. And then in our consumer installment lending business, which is our auto business, we basically have new volume rates that are roughly in line with portfolio rates. So growth there is going to be driven by volume, not by rate.

Our next question comes from Steve Moss with Raymond James.

Maybe just on the loan growth side here, good to see broad-based growth kind of as you were expecting here, Dimitar. Just kind of curious where does the pipeline stand? And are you still as optimistic on growth, just given maybe incrementally more competition here?

Yes. Steve, we remain very constructive on the growth side. So if you look at our pipeline today, our commercial pipeline is at its highest level it's ever been. So I expect that, that will do well. Depending on the pull-through of course, timing matters. But a lot of that pipeline will come to fruition over the next couple of quarters. When you look at our mortgage pipeline today, the pipeline is actually higher than it was this time last year, which I think says a lot for the execution of our team on the mortgage side as well given the markets we're in.

And then on the consumer, on the auto side, things are a little bit more unpredictable, but typically, the fourth quarter is a little bit slower. So we'll see how that goes. If I was to ballpark it today, I would guess that the fourth quarter is plus or minus $20 million or $30 million in line with third quarter. That would be kind of my high-level guess, but we'll see where things shake out.

So I think our kind of guidance for the year of 4% to 5% is very much intact with an expectation for a strong fourth quarter as well. Most of the growth for us has been is and will continue to be market share gains. And we've talked about this before. But for us, I think if you look at how we're performing versus the majority of folks in our markets, we're outperforming. And that is because we're gaining a lot of market share from some of the larger super regionals that we compete with, and I expect that to continue.

Okay. And I guess on the margin front, you still have relatively favorable yields with loans. You've got the Santander deposits coming in. Just kind of curious how you guys are thinking about the blended margin here for the quarter. I'm assuming deal might be a little bit more accretive just given loans are kind of trending the right way here, and you can deploy some of that liquidity potentially.

Steve, I'll take that one. So you're correct. we're thinking about things the same way. I think for us, we're still in the 3% to 5% range that we guided in Q2 as we continue to look at the balance sheet and bring all the moving parts together including Santander.

We continue to hold funding costs, as we mentioned, at an industry level of 1.17%. That's really helpful for us as we go forward. We expect costs to stay at those levels and likely even to go lower as we address exception pricing in line with Fed fund cuts and as Dimitar just noted, price our loan portfolios effectively.

So we've been really successful in that perspective. And we do expect the results to come through in the margin with Santander coming on about halfway through Q4 will have less overnight borrowings, which will be offset by some fixed asset pricing lower. But again, overall, we're pleased with the expansion year-to-date, and we do expect to see that in Q4 as well.

Okay. And then on the expense side here, Marya, I think I heard you a $1 million increase in total expenses quarter-over-quarter. And I'm assuming that's excluding Santander, if that's correct?

Yes, that's correct. So just wanted to give a little guidance on what we're going to see in Q4 given that we're going to prepay some charitable contribution commitments due to some tax changes as I'm sure you're aware. And then just looking at the compensation adjustments we accrued heavily in the first half of the year.

And then as we trued up in Q3, we expect that, that might increase again in Q4 as we get our final scorecard in line and everything looking like we're going to close up.

Okay. And then on the fee income side here, definitely continue to see good growth with employee benefit services. Just kind of curious, Dimitar, I'm assuming it's steady as she goes, but just anything unique with that business that maybe adds a little more upside?

Or I mean market has obviously been favorable to help in asset growth. So I'm assuming pretty much regular investments and regular trends.

Yes. I think on the employee benefit services, Steve, we have a little bit more seasonality in Q4 because a couple of the acquisitions that we did over the past 18 months, going to have a lump lumpy revenue in October as they complete the work. That may even out a little bit more next year. But right now, I think Q4, assuming the market values stay where they are, I expect it to be better than Q3.

Our next question comes from David Konrad with KBW.

Just kind of a little bit of a follow-up question on NIM. Just want a little bit color on the investment portfolio. It looks like it went down quarter-over-quarter in yield and we're kind of down in the low 2% level. So maybe just an outlook there on maybe cash flows or what the duration is and where we can go from yields from here.

I think, David, on the investment portfolio, some of that noise is due to dividends that we received from the FHLB or the FR 3. So the timing of that kind of impacts some of those yields quarter-over-quarter. We haven't really made any meaningful purchases in that portfolio nor do we expect to do any meaningful purchases and the vast majority of it is treasury. So it kind of yield with the yield. So generally, fairly steady.

We're going to provide a little bit refreshed disclosure in our investor deck that we're going to file in terms of the cash flows. But you can think of it as 2026, it's roughly $350 million of cash flows, heavily, heavily weighted towards the fourth quarter. And then 2027, we have over $600 million, 2028, it's another $600 million. another $300 million to $400 million in 2029. These are all treasury maturities. So we know what we're going to get, when we're going to get and we know what it yields. So I think those will be the cash flows that for us, ultimately, they're going to have 2 uses, highest and best use is for us to redeploy those into loans, which is plan A.

Plan B is if loan growth or opportunities are not attractive at that time, we're going to be paying down some of our FHLB borrowings. Also, we've turned out to match those cash flows in a meaningful way. So 2027, we have some FHLBs that are kind of in the mid-4s. We have similar in 2028. So if we're not deploying those funds from the treasury securities portfolio, which is kind of roughly 150, 160-ish in terms of yield, if they're not going into loans, at the very least, we're going to be very additive just by paying down some of the FHLB borrowings.

And that's going to -- if that happens, which is plan B, then you're looking at the balance sheet shrinking and margin going up by default as well.

This concludes our question-and-answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks.

Thank you, Bailey, and thank you all for joining us today. At a conclusion, I would like to note that while both Mara and I attend a number of investor conferences and events during the year, we consistently find that dedicated one-on-one time with investors and prospective investors is the best way for us to have a well prepared for and productive meeting. We're very open and available, so please reach out to us if our story is of interest, and we'll be happy to spend an hour with you. Thank you all, and we'll talk to you again in January.

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

Good day, and welcome to the Community Financial Systems, Inc.'s Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. 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 Karaivanov, President and CEO. Please go ahead.

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 in balances. Our 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 nonperforming 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 remained strong. Credit results were impacted by the resolution of our 2 largest nonperforming assets with 1 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 charge-offs were minimal at less than 2 basis points. Our employee benefit services business was basically flat year-over-year and quarter-over-quarter. With that said, there are 2 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 pretax 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 nonproductive revenue arrangements. As a result, revenue growth was muted year-over-year, while both operating pretax earnings and margin expanded compared to the same quarter last year.

Pretax 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, auto 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 Marya 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 the workforce optimization plan and in addition, $0.01 tied to performance-based incentive accruals. Operating earnings per share and operating pretax preprovision net revenue per share or record quarterly results for the company.

Operating earnings per share were $1.04 in the second quarter as compared to $0.95, 1 year prior and $0.98 in the linked first quarter. Second quarter operating PPNR per share of $1.41 was up $0.12 from 1 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 1 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 results 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 6 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 1 basis point from the prior quarter, while the company's cost deposits remained low relatively interest rate at 1.19%. Operating noninterest revenues were up $0.7 million or 1% compared to the prior year second quarter and represented 37.4% of total operating revenues a metric that continuously underscores the diversification of our businesses.

Banking-related operating noninterest 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 nonbanking financial services, noninterest 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 second quarter and $6.7 million in the late first quarter. During the second quarter, the company recorded $129.1 million in total noninterest expenses. This compares to $119 million of total noninterest expenses in the prior year 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% in data processing and communication expenses and the impact of a $1.5 million nonoperating restructuring charge.

The increase also included approximately $1.5 million in expenses associated with the bank's de novo branch expansion. 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 expect continued expansion into undertapped markets within our Northeast footprint.

Ending loans were up $495.3 million or 4.9% from 1 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 1 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.

Noninterest-bearing and lower rate checking and savings accounts continue to represent almost 2/3 of the total deposits reflective of the corteristics of the company's deposit base. The company did not hold any brokerage for 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, net 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 on nonowner-occupied CRE loan relationship and received substantial repayment of 1 multifamily CRE loan relationships, both of which were previously allocated specific reserves. As a result, net charge-offs in the quarter were elevated relative to recent results, but nonperforming and delinquent loan metrics were favorably impacted.

Nonperforming 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, nonperforming loans were $50.5 million or 50 basis points of total loans outstanding 1 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 second quarter and up $1.9 million from the linked first quarter, driven by the charge-offs 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 1 year prior. The allowance for credit losses at the end of the second quarter represented over 5x 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 7 Santander brands 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 Dimitar and I will now take questions. Michael, I will turn it back to you to open the line. Thank you.

Thank you. [Operator Instructions] And your first question today comes from Steve Moss with Raymond James.

This is Thomas on for Steve. Just wanted to start off maybe on loans here. Can you speak to the competitive landscape you're seeing in terms of lending? I know you said that competition was getting tougher in prior quarters. Is that still the case? And maybe just where is loan pricing these days?

Thomas, Yes. It is certainly a lot more competitive today than it was the last couple of years. I think as we discussed in the last quarter, there's a lot of competitors that didn't participate much in the market because of liquidity and all kinds of other constraints. And now we're trying to make it up. I would sort of trying to make it up on both rates and credit.

And as I talked about in my remarks, we were able to offload a number of criticized credits during the quarter. I think there will be some more in the rest of the year as well, which we're happy to part ways with, and we're happy for other people to take them. So -- that is fine. As it relates to us, we're going to continue to outperform because for us, it's mostly about market share gains and things that we've been at it for a number of years in terms of reputation and people and activity in the market.

So as I said, I expect that we're going to start seeing some of that kind of accruing here in the third quarter and into the fourth quarter. And I expect that on a full year basis, we will do better than our peers. In terms of yields, we're seeing pressure on that as well. I think if you step back and you look at the second quarter, the 3-year and the 5-year treasury, which is the majority of where we price off of in our lending portfolio, those just rates were down close to 30 basis points on an average basis versus the first quarter.

So effectively, there's already been a cut and more into those rates. So that's reflected into the yields at which things are coming in. And then you have the competition, which has accounted for probably another 15 to 20 basis points on top of that. And in the second quarter, our originations were kind of in the 6.75% range in aggregate. varied by portfolio. But I expect that, that number is probably trending lower as opposed to higher over time. Competition is high on both rate and credit, as I mentioned.

Okay. All that's very helpful. And so how are you feeling about the 2 to 7 basis points of quarterly NIM expansion from here? Is that still a good range?

I can take that. I would say we're in the range closer to 3% to 5% at this point. Dimitar just outlined some of the metrics that are contributing to that number for us, but I can't underscore enough the progress that we're seeing in the markets and the pipeline strength. So we're very bullish on that overall.

Okay. And then the last 1 for me. It sounds like you guys with the $600 million of acquired deposits, is it likely that, that will sort of just boost your liquidity and that will be invested over time? Or are you -- you considering securities purchases? Or just maybe your updated thoughts around that?

Yes. I think we look at that as loan growth for us over the next number of years. So between our organic growth on the deposit side and this transaction, we've got a number of years of loan growth here ahead of us. So initially, some of those proceeds are likely to stay in short-term instruments, and then we're going to deploy them over time. So obviously, as we deploy them over time, the impact of that transaction also improves for our shareholders.

and your next question comes from Manuel Navis with D.A. Davidson. .

This is [ Sharon ] on from Manuel. I was wondering, could you talk a little bit about OpEx trends from here? Does some of the restructuring of the personnel this quarter, lower costs in the third quarter? And is there any shift to the overall expense trajectory?

So yes, you had -- there was a lot in that question. So good it's a long one. But -- so the restructuring charge that you saw come through -- that is due to we're consolidating some branches. We're looking to evolve our platform of service. So we look at it as a very positive thing. And as we continue to open the de novos and expand in Eastern Pennsylvania, this is an important point for us.

In terms of OpEx, you're going to see it sort of be flat as we move forward. We're as we mentioned in our opening remarks, we're focused on it and looking to ensure that everything that we're investing in has trajectory to push the business forward. Dimitar also mentioned that in his opening remarks when it comes to our fee income businesses. So look, when you're growing a business, there's going to be times as things move up that you are looking at increasing some expenses, but we don't see that as a go forward.

We're just looking at some of these as onetime.

Great. And then shifting over a little bit to the branch acquisition. How is that going so far? Like is it as expected? And then -- can you discuss a little bit more about how this transaction builds into your -- ties into your previously planned de novo extensions?

Sure. So we're right on track with our expectations. It is very early days. So we expect that we're going to work through the regulatory side of this year in the summer and then closing is slated for the fourth quarter, probably sometime in November is our goal. I will say it's exactly what we've been looking for. It is a perfect complement to our organic strategy in that market. So we have 3 de novo branches opening up in the Lehigh Valley.

Actually, 1 of them is already open. So by the end of the year, we're between the acquisition and those 3 branches, we're going to have 10 branches right into the heart of the valley and then 12 more broadly in the kind of the greater area, which brings us to a top 5 market share in terms of presence. And that is when good things start happening. So we're very excited about that. And if we could replicate that in every 1 of our markets, we would love to, but those are hard to come by.

And your next question comes from Matthew Breese with Stephens.

I was hoping we could learn a little bit more about the pipeline. You mentioned a couple of times there, but it's robust and you're bullish on it. I also just wanted to kind of hear a little bit more about -- or a reminder of financial targets. I think you were referring back to the Investor Day in September when you said kind of through-cycle loan growth of 5% to 7%. Do you think the pipeline supports that?

Sure. So Matt, I'll take that. So if you look at our business on the lending side. Basically, there's 3 things we do, right? We do mortgages or home equities. We do auto loans. That's our consumer lending in aggregate, and then we do commercial, of which there's virtually 2 products, for the most part, CRE and C&I.

And across all of those, we generally target mid-single-digit growth in all those portfolios, some years, some of them will be stronger. Some years, they will be a little bit weaker. But again, the aggregate number is somewhere in the mid-single digits. Earlier this year, we talked about probably that being a little bit closer to the lower end of that. So if I don't know, it's mid-single digits or 4 to 6 to 7. In the past few years, we're growing kind of 7% plus. We expected this year will be closer to kind of the 4% to 5% handle given we expected competition, we expected more pressure in that sense.

So when I say we're thinking that we'll be back on track for all of those metrics, I mean that range. So 4 plus or minus a little bit is probably a reasonable number for us this year. We're certainly -- we started a little bit slower on the consumer lending on the indirect portion of that. We've made up a lot of that ground in the second quarter, and we're now positive and momentum there continues.

Mortgages holding up pretty well in a very tough market with where rates are. All the yields I talked about, the pressure that's actually not occurred on the mortgage side because that's of the long end of the curve. So that's really putting an impact on demand, but we're quoting our own and outperforming the industry.

And then in the commercial business, it's been a little bit of a story of 2 tails because you have -- the C&I business has grown very, very well this year. In fact, probably on track for high single digits to double-digit growth even. And at the same time, we've again cleaned up some of the exposures on the CRE side. I would say some of those were higher risk and some of these more unproductive because the nonperforming assets. So you might see the balance come off, but it's not accruing interest anyways.

So -- and now we've got capacity to get back and refill some of those buckets a little bit more. Again, the activity is very good. We have had just kind of in the context of payoffs -- we've had over $100 million of payoffs year-to-date in the commercial business. Probably 40% of those were in assets that we were happy to see go. And we probably have another $100 million to go in terms of prepayments in the second half of the year. But given the pipeline, we think we're going to absorb that and actually grow meaningfully.

Great. I appreciate all that. 2 or 3 others for me. The first 1 is just going back to the branch acquisition. Could you give us some sense for composition of the deposits being acquired the all-in cost? And then particularly in this day and age with mobile banking, I'd love to hear your thoughts on retention?

Sure. If you kind of look at the aggregate population there, these are deposits that look very much like ours in terms of their granularity. The average account size is less than 20,000 if you look at kind of the split between transaction and DDAs versus CDs, it's somewhere in the 65-35 split range.

With that said, basically, the CDs are the same customers with -- they're not single product customers, very, very few, very small percent. They're single product customers, so it's the same customer that just park money out of transaction account into CD for the rate environment. As we look at and the opportunity to deploy that capital and that liquidity, we feel that the next couple of years, we'll be able to make a decent dent into it, but over 5 and 6. We'll probably bring that to our normal kind of target of loan-to-deposit ratio.

So as you think about the long term, probably 75% to 85% loan-to-deposit ratio by year 5 or 6. So yes, I mean, the blended cost of funds there is just below 2%, and that's a little bit dated. So it's probably a little bit lower today. So very high-quality deposits in a really great market for us.

Great. I appreciate that. The next 1 is just on the -- could you remind us where you are in terms of the de novo branch build-out. I think the total was maybe like 15 or 16 branches that you wanted to open. How many of those are, in fact, open today? How many do you expect will be opened by the end of this year?

And then on the other side of that, I think I saw on the -- in the applications, there's something like maybe 17 branch closings submitted. Could you help me out on potential branch closures near term?

Sure. So on the de novo, it's 19. What has opened so far 7. So we've opened 7 total across the footprint. We just opened 3 in Q2, and there will be 2 in July. So that's going extremely well. We're really happy with the progress there. They're beautiful branches. They're very well staffed. The sentiment around as we definitely talk to the field and get out to talk to customers and our employees that are opening these branches is extremely positive.

So we're really happy with that strategy, and we'll continue to do our best to get those stood up all 19, by the end of the year, possibly a couple will fall into Q1 of '6, but that's all on track. So really, really happy with that progress. In terms of closures 17 is correct.

Matt, you may recall, we've committed consistently that our branch expansion will be net neutral to our shareholders. So we're closing as many as we are opening and basically reallocating resources and some of that you saw this quarter with a restructuring charge.

Great. I appreciate that. And then the other 1 I wanted to ask is just on loan yields, they were up 5 basis points this quarter, just a bit more than what I was expecting. Was there anything atypical or unusual there? You had mentioned some payoffs. I'm curious if there was repayment of interest income that was on new accrual? Or is this a decent pace of loan yield expansion in the absence of rate cuts?

It's the latter. So yes, you're exactly correct. There's nothing atypical that we're seeing. We obviously are looking at this on a daily, weekly basis and all is in line there.

And then just the last 1 is just any updates the CHIPS Act was kind of in focus of the new administration earlier this year? And is there anything upsetting the apple cart there? And I was curious if Micron is still on track to break ground later this year? And that's all I had.

Yes. So it is still on track. I believe the fourth quarter is when they're going to break ground. There is a public process as it relates to some of the environmental concerns that's ongoing right now. So -- and I think actually, the number -- the investment number actually went up the expected investment. So that's all good.

As we've said before, that's really not what we're growing because of today and not what we're going to grow because of the next probably couple of years. But as the impact of that 16-year investment, come into play, certainly over time, there will be a positive lift for everybody involved.

[Operator Instructions] And the next question comes from David Konrad with KBW.

Just 1 for me, just on fee income. You mentioned some seasonality, some pull forward in insurance this quarter. I think you're up like 1% year-over-year this quarter. So just kind of thinking about the run rate over the next 2 quarters as stuff picks up a little bit and kind of your year-over-year expectations for '25?

David, -- so on the insurance, we usually get the contingent payments in the second quarter. This year, we got them in the first quarter. So the first quarter was quite robust for us in insurance. We did communicate that that's probably not sustainable. 27% revenue growth was not the run rate of the business.

We traditionally target high single-digit to low double-digit growth rate in that business between organic and inorganic. And year-to-date, we're at 13%. We certainly expect that this year will not be an exception from our targets. So where do we end up at a little bit in the high single digits or maybe just a hair in the double digits, who knows, but that's kind of the ultimate target business is doing well.

Pipeline is pretty good. The seasonality there again is typically the second quarter this year was more in the first quarter. We're going to have a nice third quarter. That's usually another big renewal quarter for us. And then the fourth quarter is usually a little bit slower. But in the aggregate basis, I think we're very much on track to get to our historical growth rate, which over the past 10-plus years has been the 11% actually in that business.

This concludes our question-and-answer session. I would like to turn the conference back over to Dimitar Karaivanov any closing remarks.

Thank you to you, Michael, for hosting the call, and thank you for everybody who joined and we look forward to speaking with you in a couple of months.

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