Community Financial System Inc (CBU) 2010 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome, everyone, to the Community Bank second-quarter earnings conference call. Please note that this presentation contains 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. Such statements involve risk and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the Company's annual report and Form 10-K filed with the Securities and Exchange Commission.

  • Today's call presenters are Mark Tryniski, President and Chief Executive Officer, and Scott Kingsley, Executive Vice President and Chief Financial Officer of Community Bank System. Gentlemen, you may begin.

  • Mark Tryniski - President and CEO

  • Thank you George. Good morning and thank you all for joining our second quarter conference call. Second quarter was a very strong one for us in nearly every respect, with a record level of earnings per share. Net earnings performance was driven by the effective deployment of surplus liquidity as a result of strong deposit growth over the past two years, significantly lower deposit funding costs, effective expense control.

  • In summary, revenues were up 12% and operating expenses were down which is always a good outcome for shareholders.

  • The operating performance of our markets was also very solid in the quarter, with good growth in both core deposits and loans. We achieved growth in all of our lending categories and had very good execution by our frontline branch folks and our lenders this quarter. Our markets remained stable but credit growth is a challenge, though we are encouraged by the results this quarter. We're also very pleased by the performance of the 18 branches we acquired from Citizens at the end of 2008.

  • Over the past 12 months, loans in those markets have grown 28% and core deposits have grown 18%. That performance, coupled with the deployed liquidity acquired in the transaction, has been highly accretive to our earnings results.

  • Asset quality metrics continue to hold up well with nonperforming loans at 68 basis points and net charge-offs at 20 basis points. The only soft spot in the quarter from my perspective was that NPAs continued to move up. The underlying dynamic there is that not credits or tipping over any faster, but that the timeline necessary to resolve and dispose of those that have tipped over is elongated, which is a point of continued focus by management and our workout folks.

  • There are three other points to make regarding current initiatives of importance. First, we continue to be fully immersed in our effort to implement a new core banking system with a conversion date of early September. At this point I believe we are where we need to be with respect to those efforts and I'm hopeful to report in October on a successful implementation.

  • Secondly, we've also been fully engaged over the past two quarters in our efforts to eliminate the impact of the provisions of Regulation E related to the overdraft programs. That represents a very important product for our customers, as reflected in the 94% opt-in rate, and an equally important revenue stream for the Company. Our efforts to date have resulted in the protection of almost 90% of that revenue stream and we're not done yet.

  • That level of opt-in, coupled with the revenue growth associated with new account openings, should serve to substantially mitigate the potential adverse affect of this regulation.

  • Third, we're in the process of building two new branches -- one in Orchard Park, New York and another in Montrose, Pennsylvania. The Orchard Park branch is a southern suburb of Buffalo with over $500 million of deposits, and it gives us further extension into Erie County where we already have two branches. The Montrose branch is in the heart of the Marcellus Shale gas activity, where we already have about ten branches, and which is a market we expect to perform very well over the next decade.

  • One broad point I thought worthy of observation with respect to the trend of our overall performance over the past four quarters, that our capital levels continue to strengthen nicely and our return on equity has also grown over the same period. Our Tier 1 ratio has improved to 7.75% and our tangible equity ratio has grown to nearly 6%. Most banks are expected to grow capital in this environment, but to grow our earnings even faster than your capital accumulation is a particularly productive outcome for shareholders.

  • Also productive for shareholders is the 9% increase in our dividend announced in the quarter, reflecting the current and expected strength of our operating performance.

  • Lastly, looking ahead to the second half of the year, we're working off the foundation of a strong balance sheet, solid asset quality, strong earnings momentum and are hoping for a continuation of the financial and operating performance delivered in the first half of the year. Scott?

  • Scott Kingsley - EVP and CFO

  • Thank you, Mark, and good morning everyone. First as we mentioned in our release, second-quarter earnings of $0.48 per share were 71% better than the $0.28 that reported in the second quarter of 2009. Cash earnings per share, which excludes the after-tax effect of the amortization of intangible assets and acquisition-related adjustments, were $0.52 per share for the quarter or 8% above GAAP reported results.

  • Our declared dividend of $0.24 per share represents 50% of quarterly GAAP earnings and just 46% of cash earnings. These favorable and improving operating results continue to contribute to meaningful capital growth.

  • I will first discuss some balance sheet items. Our business lending portfolio grew $12 million in the second quarter despite the continuation of generally soft market demand characteristics. While acknowledging some additional increases in nonperforming loans, this portfolio's overall asset quality results remain solid. Second quarter business lending net charge-offs were at 0.25% of total business loans, consistent with the 28 basis points average incurred over the last four quarters.

  • Our consumer mortgage portfolio was up $60 million from March, but still reflected our continuing decision not to portfolio certain lower rate longer-term assets and sell those originations to Fannie Mae. Asset quality results continue to be very favorable in this portfolio with total net charge-offs over the last nine quarters of under $900,000, or less than four basis points of loss.

  • Our home equity portfolio of approximately $312 million was consistent with the end of the first quarter of 2010 and was also likely influenced by lower long-term mortgage rates. In addition, we have experienced lower line utilization in the first half of this year, indicative of our customers' desire to continue to delever despite the low rate environment. Asset quality results continue to be very favorable in this portfolio with very low loss rates, consistent with our consumer mortgage portfolio.

  • Our consumer indirect portfolio of nearly $512 million was also consistent with the end of March, and reflected another challenging yet modestly improving quarter for most participants in the automotive industry. A byproduct of historically low new vehicle sales has been an improvement in used-car valuations, where the largest majority of our lending is concentrated.

  • Net charge-offs for the last eight quarters have averaged 48 basis points, which is higher than we experienced for the six quarters ended June 30, 2008, but still reasonable at manageable levels. With our continued bias toward A and B paper grades, yields have trended down slightly since last year's second quarter.

  • Average deposits for the quarter were up $31 million from March, comprised of a $97 million increase in core counts and a $66 million reduction in time deposits. Core deposits now represent nearly 74% of total deposits, a continuation of a very favorable mix funding change we work diligently at.

  • Quarterly average investment assets increased $138 million from the first quarter of 2010 while average overnight invested cash equivalents were down $122 million from the previous quarter, reflective of our first-quarter decision to deploy it a portion of our excess liquidity in intermediate term US Treasury securities.

  • The weighted average life to maturity of our investment portfolio stood at 5.7 years at the end of June compared to 5.3 years at the end of December.

  • Net unrealized gains in our $1.1 billion available for sale portfolio at quarter end were $33.5 million despite the carrying value of our Level 3 investment assets, which is almost entirely comprised of pooled trust preferred securities being nearly $23 million below their book value. The valuation of these assets continues to reflect market volatility and uncertainty as well is the absence of an active market for these types of securities. Despite continued increases in the interest deferral and default rates of collateral in our pools over the last several quarters, our holdings which are super senior, continue to fully perform.

  • Also, although not reflected anywhere in our financial results, net unrealized gains in our $600 million held-to-maturity portfolio were an additional $31 million at June 30.

  • Our capital levels in the second quarter remain strong. The Tier 1 leverage ratio stood at 7.75% at quarter end and tangible equity to net tangible assets was 5.92% at quarter end, a 108 basis point improvement from last June. As I've mentioned before, our calculation of the Company's tangible equity ratio includes adding back to both the numerator and the denominator $19 million of deferred tax liabilities associated with tax-deductible goodwill created from several of our asset acquisitions, primarily branch transactions. Exclusion of this realized tax benefit would render our comparisons to peers incomplete.

  • Shifting now to the income statement, our reported net interest margin for the second quarter was 4.10%, up 70 basis points from the first quarter of 2010 and 37 basis points better than last year's second quarter. Proactive management of deposit funding costs and a more productive deployment of net liquidity have continued to have a positive effect on margin results.

  • Second quarter noninterest income was up 8.4% over the prior year despite a $0.4 million decline in mortgage banking related revenues, reflective of the record secondary market activities experienced in the first half of 2009.

  • Deposit service fees increased 10% over last year, derived from organic core deposit growth over the past several quarters.

  • Our employee benefits administration and consulting business posted a 10% increase of revenue over the second quarter of 2009, a combination of new client generation, expanded service offerings and increased asset based fees.

  • Second quarter Wealth Management revenues increased 17.6%, reflective of favorable market valuation comparisons and generally improving conditions.

  • Operating expenses of $44.2 million were $3.3 million below the second quarter of 2009 and reflected solid cost management across all areas of the Company. As a reminder, the second quarter of 2009's operating expenses included a $2.5 million special assessment levied by the FDIC.

  • Implementation of several expense reduction programs allowed the Company to report lower total operating expenses despite the year-over-year increases in merit-based compensation as well as higher technology and volume-based processing costs. As Mark mentioned, the Company continues to have significant resources dedicated to conversion of core banking systems scheduled for later in the third quarter.

  • Our effective tax rate in the second quarter of 2010 was 26.7% compared to 21.5% in the second quarter of 2009, reflective of a higher level of income from fully taxable sources.

  • In summary, our high-quality first half 2010 earnings were the result of our continued focus on both the right and the left side of the balance sheet, as well as productive improvements from both the top and the bottom of our income statement. Our ability to reward shareholders with a 9% increase in their cash dividend stems directly this commitment to a disciplined and balanced approach to our business regardless of market conditions.

  • I will now turn it back over to George to open the lines for questions.

  • Operator

  • (Operator Instructions) Jason O'Donnell, Boenning & Scattergood Inc.

  • Jason O'Donnell - Analyst

  • Just a couple of questions here. Can you just talk a little bit about your expectations for operating expenses going forward? Obviously they have been very well contained. And I'm specifically interested in what the financial impact might be of the systems conversion for the third and fourth quarters.

  • Scott Kingsley - EVP and CFO

  • Sure. I think it's -- we've commented before; we implemented about a $6 million expense reduction initiative, which is at this point has been fully executed. I think we're getting the benefit of that and you can see that in the first and second quarter of the year. I think that we would expect a continuation for the most part of that expense base run rate for the remainder of this year.

  • With respect to the IT conversion in September, there will be some charges, some nonrecurring charges and costs that will get expensed more in the third quarter and in the fourth quarter. I think there is some of that that we've been accumulating here as we've been marching along the path towards integration. But I think we will they'll likely be at a level in the third quarter where we will separate those out from the other operating expenses.

  • Jason O'Donnell - Analyst

  • Okay, great. I guess switching gears a little bit, can you just talk about the competitive landscape in your market? Particularly on the C&I and CRE side, how competitive has pricing been at this point and are there any opportunities to steal share?

  • Scott Kingsley - EVP and CFO

  • Well it's really -- the answer to that question is a function of market, really. It's interesting, over the past couple of years, the differential in our markets and the competitive landscape and also the demand characteristics of the markets as we have gone through this more difficult economic period over the past couple of years.

  • Right now our northern market, northern New York market is seeing the best environment in terms of demand characteristics, credit demand particularly, as well as an opportunity with a slightly lower competitive environment. In Pennsylvania on the other hand, the Scranton Wilkes-Barre markets we're in, the demand characteristics are lower and the competitive environment is a bit higher than I would say the Finger Lakes region, if you will, of New York. The operating environment is somewhere in between.

  • In terms of the opportunities on the C&I side, we had pretty good growth in the second quarter. I think that the returns, the economics if you will, of those -- of that loan growth has been pretty fair. I think we tend to be relatively disciplined in any (inaudible) with respect to looking at what the economic characteristics of those C&I opportunities are with respect to pricing, which may ultimately even cost us opportunities in the market place. But I think we try to be certain that our shareholders are getting properly compensated for the risks that we're taking.

  • I haven't seen any -- I wouldn't say I've seen any atypical pricing environments in really any of our markets. I think some are more competitive than others. I don't think we've seen anything really atypical, but I think generally speaking we think we're getting sufficiently paid for the credit risks we're taking in our markets.

  • Jason O'Donnell - Analyst

  • Great. That's perfect. Great quarter. Thank you.

  • Operator

  • Rick Weiss, Janney Montgomery Scott.

  • Rick Weiss - Analyst

  • Good morning. I was wondering if you would talk a little bit about the margin, if you the improvement is sustainable. And why don't we just assume -- let's say interest rates remain low for the next year.

  • Scott Kingsley - EVP and CFO

  • I will take a shot at that one. I think we knew that we were going to get marketing improvement from the first quarter to the second quarter because we had the full impact of the investment strategies we implemented in the first quarter through the end of the second quarter. I would say that 4.10% was a little bit higher than what we had been projecting, but really on the funding cost side. I don't think we had been projecting the ability to continue to push funding costs down as much as they went down in the quarter.

  • That being said, most of the remaining time deposit instruments that we have in our portfolio are of a very short-term in nature. A huge disproportionate amount of them are one-year CDs. So we again will probably get a little bit of benefit as those continue to roll over, assuming that funding levels remain and our demand levels remain pretty consistent.

  • So maybe to introduce it, Rick, we don't see the need in the near-term to introduce a deposit gathering rate on any of the instruments out there. And we don't see anybody in our market places that look like they're using this opportunity to go get disproportionate share.

  • So I would say generally speaking I think the risks to the margin are on the re-pricing of the asset side right now, that the runoff of the current portfolio being replaced by stuff that's modestly lower rate, I think that is the risk to the sustaining of the margin.

  • Rick Weiss - Analyst

  • Got it. Thank you.

  • Operator

  • David Darst, FTN Midwest Securities Corp.

  • David Darst - Analyst

  • Scott, I'm trying to reconcile the average securities portfolio amounts during the quarter relative to the period end. It looks like the averages were lower for cash and higher for some of the securities balances. Were there any calls or any larger maturities late in the quarter?

  • Scott Kingsley - EVP and CFO

  • There may have been a few, David, but nothing profound. I think our strategy, generally speaking, I think we are very -- just to give you an example, David, we're very comfortable with $65 million of average cash equivalents throughout the quarter. Loan demand characteristics would suggest right now that we would have a tremendous quarter if we were to go through that kind of an average cash equivalent and convert it all to loans.

  • But to answer your question, I think there have not been outsized changes or calls or maturities in the portfolio. That being said, the second half of the year we do have meaningful cash flows coming off the portfolio. Our objective is to stay neutral relative to deployment.

  • David Darst - Analyst

  • Okay. And those are the ones that you -- that is the asset re-pricing risk that you're highlighting.

  • Scott Kingsley - EVP and CFO

  • I think so, too. But I will say the asset re-pricing even on the lending side is something we need to pay attention to, remembering at the same point in time that the cash flows off some of our installment portfolios are pretty rapid. Indirect auto [invests] $18 million to $20 million in cash flows per month that need to be replaced, and they're unlikely to be replaced at rates that are higher than the existing blended portfolio.

  • David Darst - Analyst

  • So based on the expected maturities and cash flows from the bond portfolio, how much would that put the margin at risk for?

  • Scott Kingsley - EVP and CFO

  • There is probably between somewhere between $75 million and $100 million of expected maturities or expected cash flows, including some of the MBS securities between now and the end of the year. To the extent that we cannot replace those with a similar-looking yield characteristic, I would go along that line.

  • I think again we are -- the mix of our portfolio today is about one-third municipal instruments. I think both been a productive instrument for us historically and at the same point in time offered a little bit more slope from a curve standpoint than maybe some other similar mortgage-backed or Treasury instruments.

  • Mark Tryniski - President and CEO

  • I think (technical difficulty) [another point] to make as well on that question is we expect to get some, but slowing, continuation of downward re-pricing on our CD book. In the past quarter the yield on the time deposit book was about [1.88]. So that is still pretty high.

  • There is room for that to come down a fair bit further. So I think we -- there will be some offset to the asset re-pricing that Scott talked about with the continued downward re-pricing in the CD book.

  • David Darst - Analyst

  • Does all of that give you comfort that you still -- you will be able to maintain a 4% plus margin?

  • Scott Kingsley - EVP and CFO

  • Again, I think said before that I think 4.10% probably kind of surprised us a little bit, but certainly getting to a 4 number as the front number is not surprising.

  • David Darst - Analyst

  • Okay. And then, how about available for sale versus held to maturity? You said the AFS is 1.3 --

  • Scott Kingsley - EVP and CFO

  • AFS is 1.1. Held to maturity is 0.6. And the reason that most of the $400 million of Treasury securities we purchased from November to April we put into held to maturity more to protect the capital levels as opposed to capitalize on them, per se.

  • You certainly know what has happened in that environment since we made our purchases. The rates on those intermediate term securities have gone down noticeably, which is what puts us in this huge unrealized gains position. But as you appreciate (inaudible) held to maturity we're not getting any of the benefit of that in our capital structure anyways.

  • David Darst - Analyst

  • Correct. Great, thanks. Great job.

  • Operator

  • Damon DelMonte, Keefe, Bruyette & Woods.

  • Damon DelMonte - Analyst

  • You guys mentioned you're putting up a branch in Pennsylvania near the Marcellus Shale area. Could you talk a little bit about your expectations from not just that branch, but the branches you have in that market?

  • Mark Tryniski - President and CEO

  • Sure. We've got, as I said, about ten branches that are in and around where the principal portion of the activity has started to evolve there. If you look at the deposit growth in those branches, it's been very good.

  • We are starting to see as well a lot of credit opportunities to put in place the equipment, the infrastructure and all of those kinds of things attendant to what is going to be, we expect, at least a decade or longer of potential significant growth in those markets. So there is a lot of opportunity there. I think we're pretty well positioned in our current branch footprint to capitalize on that.

  • We've got some dedicated resources, in fact, in those markets pursuing that business and developing business opportunities on both sides of the balance sheet in those markets, as well as the wealth management things. So there is a lot -- that represents a very attractive kind of ten-year and beyond opportunity for us. The Montrose area specifically was one which we didn't have a branch that close to that market, and wanted to be there because of the opportunities related to the Marcellus Shale gas.

  • Damon DelMonte - Analyst

  • Great. That's helpful. Thank you. And then I guess, Mark, on the topic of M&A you guys historically have been acquisitive. I think that general consensus is that higher regulatory costs are going to make some smaller banks kind of reconsider their business model. I wanted to know what your thoughts were on the return of traditional M&A throughout your markets.

  • Scott Kingsley - EVP and CFO

  • I think it's clear -- I think I said on the last call I expected and was starting to see a slight unthaw. I think that has continued. And if you look at the banking industry more broadly, you are starting to see kind of more non-FDIC kinds of transactions. I think the thaw is continuing.

  • I think within our markets, because the market has held up better in the downturn, there is the same kind of underpinnings to motivate M&A activity in upstate New York and Northeast Pennsylvania as there is in other places. So I would expect maybe we'll see a little less activity, but I still expect that there will be the evolution of opportunities to participate on an M&A basis and growth going forward.

  • I think that we have opportunities to continue to improve our franchise and to grow earnings without having to do a -- we're not going to rely solely on M&A for creating value for our shareholders. But that is certainly a part of our strategy and not an unimportant part as well.

  • I would just refer to the Citizens transaction, which was -- has been an incredibly successful transaction for us in terms the -- not only do we have run off, you saw as I quoted the loan and deposit growth has been tremendous. In fact, it has led the Company if you look at all of our other markets over the past 12 months. So that has been a highly accretive opportunity for us and those are the kinds of things we will look to.

  • I think we will have more of those opportunities. I suspect some of the larger banks may continue to look to dispose of branches in different markets. I think you will see smaller community banks that maybe have some asset quality challenges, coupled with the ever visible hand of the regulator, may decide that the sale is a good opportunity. So I think the environment continues to evolve.

  • I think we will have those opportunities. We will continue to be disciplined and look first at those kinds of opportunities that are a good qualitative fit for us, and then as well represent the appropriate value opportunity for sustainable earnings and shareholder value.

  • Damon DelMonte - Analyst

  • Great, thank you. That's helpful. I guess my last question, I apologize if you already answered this, but what is your interest rate sensitivity position right now?

  • Scott Kingsley - EVP and CFO

  • We're still a bit asset sensitive. I think that -- so another reason we still have calculable upside from a margin standpoint and a net interest income standpoint in an up rates environment. The deployment of the liquidity that we did in the first half of the year mitigated some of that or effectively we're getting the benefit of some of that already now, David. It's closer to neutral than it was in December but we're still modestly asset sensitive.

  • Damon DelMonte - Analyst

  • Great, thank you very much.

  • Operator

  • Whitney Young, Raymond James.

  • Whitney Young - Analyst

  • Do you guys have what the revenues currently are from interchange fees?

  • Scott Kingsley - EVP and CFO

  • That right now is running somewhere around -- a little less than $3 million a quarter, I would say, to $7 million to $8 million a quarter.

  • Whitney Young - Analyst

  • Okay, and have you guys thought at all about what the impact of the reform bill might be and how you might mitigate that?

  • Scott Kingsley - EVP and CFO

  • After my careful analysis of the 2000 pages, Whitney -- no, that was just a little humor. I think it is difficult to decipher. I don't know if a lot of institutions that have gotten their arms around that yet.

  • I think we are presumably exempt, but clearly -- because we're under the $10 billion. But I think there is an expectation for banks like us that the market rates for that activity is going to be driven by the rules of the big banks, which is for the most part all things seem to work. And that is going to trickle downhill in any event.

  • So I think we will see some impact. I wouldn't venture a guess as to whether it's 5% or 95%. I think it is a little too -- bit of an unknown at this point. Clearly the regulations haven't been written, either, as to exactly what the rate structure is going to be like there.

  • Adding to the complexity is the fact that we are presumably exempt. Yet we will also be affected by the related market forces on -- from the big banks. So it's a good question. I wish I had an answer. I just can't speculate at this point.

  • Whitney Young - Analyst

  • Sure. Sure. The really strong core deposit growth, is that still driven primarily by higher savings rates? Or are you seeing some new dynamics in there?

  • Scott Kingsley - EVP and CFO

  • I think there are two things driving it. I think one is higher savings rates. If you look at our deposit growth five years ago or ten years ago, it has never been anything like this.

  • I think we're executing very well. I think we have better products. I think our folks out in our markets are doing a great job. I think that is part of it.

  • As I said, there's a couple of underlying dynamics. One is that the savings rate I think is higher. Scott referred to a deleveraging. I think there's some of that going on. If you look at consumer debt continues to decline across the country.

  • And secondly I think you're seeing a move away from time deposits. As they get closer zero, you're better off having transactional availability on those deposits. I think a lot of the things -- like the money markets, the nonbank money market funds are clearly not attractive at all, so that the banking products now are a better alternatives than what the nonbank money markets are.

  • I think for all of those reasons you have seen a move into core deposits. I know we like to look at the numbers and pat ourselves on the back. I do think a lot of it is the dynamics in the market place.

  • When the interest rate environment changes, you are going to see a change in that. Instead of reporting 18% growth in core deposits, we may report a 10% outflow. But I think they'll change categories.

  • I think we will still have those customers (multiple speakers). You will see, like us, if you look at the dynamics over the course of the past 12 months, our core deposits are up $434 million and our time deposits are down $319 million.

  • Whitney Young - Analyst

  • And you don't think you've lost customers there?

  • Mark Tryniski - President and CEO

  • Not -- no, I don't. So I think when the interest rate environment changes, the dynamic changes. I think you're just going to see some reversals of that trend as well and just some potential movement back into money market mutual funds.

  • Whitney Young - Analyst

  • Right. And then how much deposit growth do you think you could generate from opening a couple of branches a year like what you've been doing?

  • Mark Tryniski - President and CEO

  • I think that's a fair question. We model that. I wouldn't, I guess, disclose what we have in our model because they are pretty wide estimates to begin with.

  • We think that there is opportunity, specifically in those two markets, as it relates to Orchard Park. Because of the nature of that market, there are a lot of deposits there. I think it is four out of the top five banks in that market are all very large institutions. We compete very well against the very large institutions.

  • So I think the opportunity there -- and we also have a couple of branches within 15 to 20 miles or less of Orchard Park. So I think we're going to get some very good synergies. We're already doing some business in that market through our other branches, so it makes a lot of sense for us. I like our opportunities.

  • I would tell you that our forecast would suggest that those branches will be breakeven in -- I think it is four years. And we tend to be conservative on our projections. In the Montrose opportunity we have a number of other branches there, so I think we are not an unknown brand in that market.

  • I think that market is going to have a lot of organic growth to it. And I think we're in a good position, particularly in that community. If you look at the deposit base relative to the other banks that are there, I like our chances.

  • Whitney Young - Analyst

  • Great. One last question; you spoke a little bit about the opportunities in the Marcellus Shale area, and I guess I'm interested on the lending side of things really what those opportunities are. Are they direct relationships with the companies extracting gas? Is it more just the long-term economic impact of the area? How much of it is just the general growth versus specific opportunities there?

  • Scott Kingsley - EVP and CFO

  • It is a bit of both. We aren't doing a lot of lending directly to the gas drillers. The lending opportunities we had have really been in two buckets. What I would put in the bucket is related to the lending in the sense that you've got -- you need a lot of -- for instance, water is an important commodity in hydro fracking. You need a lot of equipment around that, for instance water trucks.

  • So the ability to finance water trucks and those kinds of things, companies that provide services to the drilling companies, welding services and equipment services and other kinds of transportation related services, those are the kinds of opportunities we're seeing that are directly related to the drilling.

  • On the other side, you have -- there are -- they're looking at in that market a population growth of 100,000 people. So, you have the need for housing, you have the need for retail and all of the things that go with a vastly growing population. So we're seeing opportunities in that piece of it as well. Some of it is direct, Whitney, and some of it is more indirect, but it is a little of both.

  • Whitney Young - Analyst

  • Okay, great. Thank you so much.

  • Operator

  • I have no further questions in queue at this time.

  • Mark Tryniski - President and CEO

  • Excellent. Thank you George. Thank you all for joining us this morning. We look forward to the third quarter call.

  • Scott Kingsley - EVP and CFO

  • Thank you.

  • Operator

  • That does conclude today's conference. Thank you for your participation. Everybody may disconnect.