Community Financial System Inc (CBU) Q2 2024 Earnings Call Trans

Gain: New quarterly record of $183.2 million, up 4.5% year-over-year and 3.3% from the first quarter.
GAAP earnings per share (EPS): $0.91, up 19.7% from the first quarter and $0.02 higher than the second quarter of the previous year.
Operating profit per share: $0.95, up 15.9% from the first quarter and down $0.01 from the second quarter of the previous year.
Net interest income: $109.4 million, up from $107 million in the first quarter.
Net interest margin: Up from 2.98% in the first quarter to 3.04%.
Employee benefits revenue: $32.1 million, up 12% year-over-year.
Revenue from insurance services: $13.3 million, up 12% year-over-year.
Asset management services turnover: $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 second quarter of the previous year.
Net depreciation: $1.3 million or 5 basis points of average annual borrowings.
Effective tax rate: 22.8%, up from 21.4% in the second quarter of the previous year.
Loan growth: Increase of $140.4 million or 1.4% in the second quarter.
Decrease in deposit: Decrease of $214.1 million or 1.6% in 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%, which is higher than the statutory capital standard of 5%.
Share buyback: Bought back 250,000 shares at an average price of approximately $45 per share.
Dividend increase: Increase of $0.01 or 2.2% to $0.46 per share. This is the 32nd consecutive year that the dividend has been increased.

Release Date: July 23, 2024

For the full transcript of the earnings call, please refer to the full earnings call transcript.

Positive points

Community Financial System Inc (CBU, Financial) posted 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 benefits and insurance services, with revenues growing 12% year-on-year.
Community Financial System Inc (CBU) bought back 1 million shares at attractive prices, indicating strong capital management.
The company’s asset management services saw revenue increase 10.6% and reached a new record for assets under management and administration.
Community Financial System Inc (CBU) has a strong liquidity position, with readily available liquidity sources totaling $4.44 billion at the end of the second quarter.

Negative points

Total deposits declined $214 million in the second quarter, reflecting seasonal outflows of municipal deposits.
The company’s deposit costs rose 9 basis points in the quarter to 1.23%, indicating rising funding costs.
Non-interest expenses increased $6 million, or 5.3%, from the second quarter of last year, impacting overall profitability.
The provision for credit losses increased to $2.7 billion in the second quarter, compared to $0.8 million in the previous quarter.
The effective tax rate for the second quarter of 2024 was 22.8%, up from 21.4% in the second quarter of 2023, resulting in higher tax expenses.

Q&A highlights

Community Financial System Inc (CBU) Q2 2024 Earnings Call Highlights

Q: How much exposure on the balance sheet is there to purely floating rate loans today and floating and fixed rate loans on the other side?
a: We have just under $1 billion of floating rate loans tied to indices such as prime or SOFR. In addition, we have approximately $250 million of floating rate loans and $1.5 billion of fixed rate loans that are expected to mature within the next 12 months. The blended interest rate for these loans is approximately 6%, with floating rate loans at approximately 8%.

Q: Is there a way to get back to a NIM in the 350 to 4% range as the fixed book value is adjusted?
a: Yes, over the next 12-24 months there is a significant upside due to loan churn. As the cost of deposits stabilizes, the asset side will gain steam. Over a three-year time frame, it is possible to get back to those NIM ranges.

QCan you provide an update on the outlook for fee income and trends in fee lines such as mortgage banking, insurance and employee benefits?
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 delivered double-digit year-over-year growth and we expect continued strength. Mortgage banking had a strong quarter, but matching this performance may be a challenge.

Q: What are your expectations regarding deposit costs and the impact of possible interest rate cuts?
a: Our deposit beta is around 22% and we expect some continuation of higher costs, but at a slower pace. A Fed rate cut would negatively impact floating rates on loans, but could be offset by lower interest-bearing deposit costs. The path to higher NIM and NII is not necessarily linear, with possible sideways movements in Q3 before growth resumes in Q4 and into 2025.

Q: How do you balance using share buybacks with potential merger and acquisition opportunities?
a: We bought back 1 million shares at $45 each, as we believe this is a better investment than acquiring another bank. The M&A dialogue is strong, with sellers recognizing the value of our shares. We will balance buybacks and M&A opportunities based on risk and reward, focusing on strong balance sheets, liquidity and market position.

Q: Do you see any pressure on credit quality in the consumer or business segment?
a: We do not see significant pressure on credit quality. Our markets have unique dynamics, including high housing demand and economic activity in upstate New York. We are monitoring rent increases and other factors, but remain confident in the quality of our assets.

Q: What is the impact of the recent acquisition of an insurance company on revenues and costs?
a: The recent insurance acquisition was small, contributing a few hundred thousand dollars to quarterly revenues and is expected to add approximately $0.5 million annually. This fits with our strategy of rolling out smaller agencies to grow our revenue base.

Q: What are your thoughts on the size of potential acquisition targets?
a: We are interested in transactions below $2 billion, with some discussions for targets below $1 billion. We find a better risk-reward in smaller deals, particularly those with strong liquidity profiles and market presence.

Q: How do you view the potential reduction in the revenue mix from M&A?
a: While any bank acquisition will dilute our fee income ratio, our non-banking businesses are growing faster than our banking businesses, which helps offset this dilution. We also integrate our fee income capabilities into acquired franchises, which helps balance the mix over time.

Q: Do you see any areas of concern regarding credit quality?
a: We see no significant credit quality concerns. 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 full transcript of the earnings call, please refer to the full earnings call transcript.