Community Financial Expands Margin as Deposit Costs Recede
Record net interest income reached $139.1 million as lower funding costs supported another quarter of margin expansion.
Community Financial System (CBU), the regional banking and financial-services company, expanded its net interest margin by 3 bps QoQ to 3.46% as deposit costs receded and organic loan growth lifted net interest income. NII rose 3.3% QoQ and 11.5% YoY to a record $139.1 million.
The margin advance moderated from the first quarter’s 6-bps increase, taking reported NIM from 3.37% in the fourth quarter to 3.43% in the first and 3.46% in the second. The latest gain came primarily from funding: the average interest-bearing deposit rate declined 3 bps QoQ to 1.44%, while earning-asset yield rose just 1 bp and would have fallen 1 bp excluding a semiannual Federal Reserve Bank dividend.
Ending loans increased 1.4% QoQ and 7.3% YoY to $11.28 billion, with organic business lending driving the sequential gain. Deposits fell 1.1% QoQ to $14.71 billion because of seasonal governmental outflows, though they remained 7.4% above the prior-year level, including balances assumed through the Santander and ClearPoint acquisitions. The loan-to-deposit ratio rose to 76.7% from 74.9% in the first quarter.
Operating noninterest revenue was nearly flat QoQ at $79.3 million and rose 6.4% YoY. Banking noninterest revenue declined 2.4% sequentially to $21.3 million as customer interest-rate-swap fees fell, while reported noninterest revenue benefited from a $4.7 million equity-securities gain. Expenses rose 6.7% YoY to $137.7 million, reflecting higher compensation, technology and occupancy costs, including a one-time $0.6 million platform-conversion charge.
Banking and Corporate adjusted return on equity edged up to 14.58% from 14.49% QoQ. Wealth Management produced the highest adjusted ROE among the nonbank businesses at 28.88%, down from 42.07%, while Employee Benefit Services improved to 28.38% and Insurance remained at 8.74%.
Credit costs eased even as the company added reserves against organic commercial-real-estate growth. The provision declined 18.3% QoQ to $4.6 million, and the allowance increased $1.5 million to $91.7 million, or 0.81% of loans. Net charge-offs ticked up 1 bp to 0.12% annualized, while nonperforming loans rose 2 bps to 0.50%; total delinquencies improved 8 bps to 1.04%.
Community Financial raised its quarterly dividend by $0.02 to $0.49 a share and limited second-quarter repurchases to 8,471 shares. Its tier 1 leverage ratio increased 6 bps QoQ to 9.26%, though it remained 16 bps below the year-earlier level after acquisition-related intangible growth and $26.5 million of repurchases over the past year.
The funding backdrop continued to support the outlook: average total deposit cost fell 3 bps QoQ and 12 bps YoY to 1.07%, with 66% of deposits held in no- and relatively low-rate checking and savings accounts. Continued business-loan growth left further NII gains increasingly tied to maintaining that deposit-cost advantage as margin expansion slowed.