That is proving a tough yr for dividend traders. As a number of large-cap corporations have diminished or suspended their dividend funds because of the persevering with financial malaise brought on by the COVID-19 pandemic, income-oriented traders have sought recent concepts that provided relative security.
Group banks with manageable publicity to lending on this recession may present risk-adjusted income-investing alternatives. One compelling instance is Group Bank System (NYSE:CBU), which has branches in upstate New York, western Massachusetts, Vermont, and northeastern Pennsylvania. Its most up-to-date earnings outcomes, launched Monday, illustrate its attractiveness as a dividend play now.
A conservative strategy to anticipated pandemic-influenced losses
Group Bank System reported second-quarter web revenue of $35.2 million, down from $45 million in Q2 2019. Diluted earnings per share fell from $0.86 to $0.66. The decline in earnings was primarily pushed by greater loan-loss provisioning, in addition to bills associated to the corporate’s current buy of New York-based group bank Steuben Belief.
Within the context of the COVID-19 pandemic, it is necessary to scrutinize a bank’s provision for credit score losses. Group Bank System added $9.eight million to these reserves within the second quarter, in opposition to $1.Four million within the comparable prior-year quarter. Of that sum, $3.2 million was associated to the Steuben acquisition, leaving $6.6 million which largely stemmed from defaults anticipated in its portfolio resulting from COVID-19. Up to now this yr, the corporate has provisioned $12.2 million in anticipated pandemic-influenced losses.
And but Group Bank System solely reported $900,000 and $1.6 million in charge-offs within the second and first quarters of 2020, respectively. In different phrases, whereas the corporate has elevated its allowance for loan losses on its stability sheet by way of $12.2 million in new loss provisions, it solely recorded precise loan losses of $2.5 million via the primary six months of the yr.
The huge gulf to this point between the corporate’s expectation of losses and its recording of charge-offs is probably going due partially to a conservative strategy by administration that seeks to arrange for the worst-case situation. Moreover, a few of its clients’ impending defaults have been averted or delayed, because the bank has actively participated within the Treasury’s CARES Act’s Paycheck Safety Program. By way of June 30, Group Bank System has equipped roughly 3,400 PPP loans to its enterprise clients, totaling over $500 million.
The Syracuse skyline in upstate New York. Picture supply: Getty Photographs.
Diversified income streams
Group Bank System’s web curiosity margin dipped 43 foundation factors from the prior-year quarter to three.37%, reflecting the prevailing low-interest-rate surroundings. Complete web curiosity revenue slid by 5.4% to $82.2 million.
Lately, the corporate has diversified its revenues past lending. This quarter, non-interest revenue, together with deposit providers, mortgage banking, worker advantages administration, and wealth administration, added as much as almost $53 million, or 39% of general income.
Administration has exhibited an acquisitive streak currently, snapping up not solely Steuben Belief, but in addition Kinderhook Bank, one other New York-based competitor, in July 2019. Because it expands its asset base and its geographical footprint, Group Bank System is opening up alternatives to cross-sell providers and pitch its non-interest merchandise to new clients. This could present the corporate with extra insulation in opposition to credit score losses and the vagaries of concentrated lending versus a few of its group banking friends.
A persuasive dividend story
In May, Group Bank System declared its second quarterly dividend of 2020, holding its payout regular at $0.41 per share. The corporate has elevated its quarterly dividend by 37% cumulatively during the last 5 years, and its robust stability sheet, modest loan losses, and manageable payout ratio of 48% point out that it is unlikely to chop or droop it this yr. Though its share price has declined by 17% yr to this point (falling largely in tandem with the banking sector), this descent has lifted the stock’s yield to 2.9% — a good-looking payout for complete return traders.
With a market capitalization of simply $Three billion, Group Bank System is not a headline-grabbing firm. Nonetheless, it boasts an extended report of earnings progress, and administration is eager to make opportunistic acquisitions that may increase income. Even factoring in its 2020 stock price dip, the bank has returned a mean of 21% yearly to traders during the last 10 years on a total-return foundation. In a interval of financial turmoil, Group Bank System is making a case that smaller could be safer for alert revenue traders.