- Revenue: New quarterly record of $183.2 million, up 4.5% year-over-year and 3.3% from the linked first quarter.
- GAAP Earnings per Share (EPS): $0.91, up 19.7% from the first quarter and $0.02 higher than the prior year's second quarter.
- Operating Earnings per Share: $0.95, up 15.9% from the first quarter and down $0.01 from the prior year's second quarter.
- Net Interest Income: $109.4 million, up from $107 million in the first quarter.
- Net Interest Margin: Increased to 3.04% from 2.98% in the first quarter.
- Employee Benefit Services Revenue: $32.1 million, up 12% year-over-year.
- Insurance Services Revenue: $13.3 million, up 12% year-over-year.
- Wealth Management Services Revenue: $8.7 million, up 10.6% year-over-year.
- Non-Interest Expenses: $119 million, up 5.3% year-over-year and 0.8% from the first quarter.
- Provision for Credit Losses: $2.7 million, up from $0.8 million in the prior year's second quarter.
- Net Charge-Offs: $1.3 million or 5 basis points of average loans annualized.
- Effective Tax Rate: 22.8%, up from 21.4% in the prior year's second quarter.
- Loan Growth: Increased by $140.4 million or 1.4% during the second quarter.
- Deposit Decrease: Decreased by $214.1 million or 1.6% during the second quarter.
- Liquidity Position: $4.44 billion in readily available liquidity at the end of the second quarter.
- Tier One Leverage Ratio: 9.07%, exceeding the regulatory well-capitalized standard of 5%.
- Share Repurchase: 250,000 shares repurchased at an average price of approximately $45 per share.
- Dividend Increase: $0.01 or 2.2% increase to $0.46 per share, marking the 32nd consecutive year of dividend increases.
Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Community Financial System Inc (CBU, Financial) recorded a new quarterly revenue record, with GAAP earnings per share of $0.91 and operating earnings per share of $0.95.
- The company achieved significant growth in its employee benefit services and insurance services businesses, with revenues up 12% year-over-year.
- Community Financial System Inc (CBU) repurchased 1 million shares at attractive prices, indicating strong capital management.
- The company's wealth management services business saw a 10.6% increase in revenues, reaching a new high in assets under management and administration.
- Community Financial System Inc (CBU) has a strong liquidity position, with readily available sources of liquidity totaling $4.44 billion at the end of the second quarter.
Negative Points
- Total deposits decreased by $214 million during the second quarter, driven by seasonal outflows of municipal deposits.
- The company's cost of deposits increased by 9 basis points in the quarter to 1.23%, indicating rising funding costs.
- Non-interest expenses increased by $6 million or 5.3% from the prior year's second quarter, impacting overall profitability.
- The provision for credit losses increased to $2.7 billion during the second quarter, compared to $0.8 million in the prior second quarter.
- The effective tax rate for the second quarter of 2024 was 22.8%, up from 21.4% in the second quarter of 2023, leading to higher tax expenses.
Q & A Highlights
Community Financial System Inc (CBU) Q2 2024 Earnings Call Highlights
Q: What is the balance sheet exposure to pure floating rate loans today and adjustable and fixed rate loans on the opposite side?
A: We have just under $1 billion in floating rate loans tied to indices like prime or SOFR. Additionally, we have about $250 million in adjustable rate loans and $1.5 billion in fixed rate loans expected to mature within the next 12 months. The blended rate for these loans is around 6%, with floating rate loans at approximately 8%.
Q: Is there a pathway back to a NIM in the 350s to 4% range as the fixed rate book reprices?
A: Yes, over the next 12-24 months, there is significant upside from loan churn. As deposit costs stabilize, the asset side will gather more steam. Over a three-year timeframe, it is possible to return to those NIM ranges.
Q: Can you provide an update on the fee income outlook and trends in fee lines like mortgage banking, insurance, and employee benefit services?
A: We remain optimistic about our fee income outlook. Employee benefit services and wealth management services should perform well as market conditions remain strong. Our insurance business has shown double-digit year-over-year growth, and we expect continued strength. Mortgage banking had a strong quarter, but replicating this performance may be challenging.
Q: What are your expectations for deposit costs and the impact of potential rate cuts?
A: Our deposit beta is around 22%, and we expect a slight continuation of higher costs but at a slower pace. A Fed rate cut would negatively impact floating rate loan yields but could be offset by decreased interest-bearing deposit costs. The path to higher NIM and NII is not necessarily linear, with potential sideways movement in Q3 before resuming growth in Q4 and into 2025.
Q: How do you balance the use of buybacks with potential M&A opportunities?
A: We have repurchased 1 million shares at $45 each, finding it a better investment than acquiring another bank. M&A dialogue is strong, with sellers recognizing the value of our stock. We will balance buybacks and M&A opportunities based on risk and reward, focusing on strong balance sheets, liquidity, and market presence.
Q: Are you seeing any pressure on credit quality in consumer or commercial segments?
A: We are not seeing significant pressure on credit quality. Our markets have unique dynamics, such as high housing demand and economic activity in upstate New York. We are monitoring rent increases and other factors but remain confident in our asset quality.
Q: What is the impact of the recent insurance acquisition on revenues and expenses?
A: The recent insurance acquisition was small, contributing a couple of hundred thousand dollars in quarterly revenue and expected to add about $0.5 million annually. This aligns with our strategy of rolling up smaller agencies to enhance our revenue base.
Q: What are your thoughts on the size of potential M&A targets?
A: We are interested in transactions under $2 billion, with some discussions involving targets under $1 billion. We find better risk-reward in smaller deals, especially those with strong liquidity profiles and market presence.
Q: How do you view the potential reduction in fee income revenue mix from M&A?
A: While any bank acquisition will dilute our fee income ratio, our non-banking businesses grow faster than our banking business, helping offset this dilution. We also integrate our fee income capabilities into acquired franchises, which helps balance the mix over time.
Q: Are you seeing any areas of concern in credit quality?
A: We are not seeing significant concerns in credit quality. Our markets are experiencing strong economic activity, and our asset quality remains stable. We continue to monitor market dynamics but remain confident in our credit performance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
