Financial Institutions Inc (FISI) 2024 Q3 法說會逐字稿

Thank you for standing by.

Ladies and gentlemen, welcome to the Financial Institutions Incorporated third quarter, 2024 earnings call.

My name is Candace and I will be your event coordinator today.

All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer.

At the end.

If you would like to register a question, please press start followed by one on your telephone keypad.

I would now like to turn the conference call over to Kate Ross Head of Investor Relations.

Please go ahead.

Thank

You

For joining us for today's call.

Providing prepared comments will be President and CEO Martin K. Birmingham and CFO W. Jack Plants.

You'll be joined by additional members of the company's leadership team during the question and answer session.

Today's prepared comments and Q&A will include forward-looking statements.

Actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties and other factors.

We refer you to yesterday's earnings release and investor presentation as well as historical CC filings which are available on our investor relations website for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements.

We'll also discuss certain non GAAP financial measures intended to supplement and not substitute for comparable GAAP measures.

Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to form A K or in our latest investor presentation available on our IR website www.sisi/investors.com. Please note that this call includes information that may only be accurate as of today's date.

October 25th, 2024.

So now turn the call over to President and CEO Marty Birmingham.

Thank you, Kate.

Good morning everyone and thank you for joining us today.

Our third quarter results were highlighted by strong deposit growth incremental net interest margin expansion, solid expense management and continued build in our regulatory and tangible capital ratios.

Third quarter, 2024 income available to common shareholders was $13.1 million or 84 cents per diluted share compared to $25.3 million or $62 per diluted share in the link quarter, which benefited from a $13.5 million pre tax gain on the sale of our insurance business.

Third quarter return on average assets was 89 basis points and our efficiency ratio was 65% year-to-date.

ROA A of 90 basis points and efficiency ratio of 72% were impacted by our previously disclosed fraud event and the sale of our insurance subsidiary, excluding these items adjusted.

ROA A for the first nine months of the year with 100 basis points and efficiency ratio was 65% reflecting the strength of our core business.

Before discussing our third quarter results in greater detail, I would like to provide an update on the wind down of our banking as a service offering and that was last month after a careful review undertaken in conjunction with our annual strategic planning process and considering balance sheet allocation only about 2% of the bank's total deposits are fast related and they're primarily associated with four live partnerships.

These deposits amounted to $103 million on September 30th and they averaged $109 million in the third quarter with a cost of 3.84%.

Our initial B partner engagement focused on core funding capabilities, a modest amount of credit extension and transaction related fees.

As we continue to evaluate the financial results associated with this offering management determined that the business unit economics were not contributing to the company's franchise value as anticipated.

Furthermore, was that an that an exit from the line of business would not have a material impact on the company's future financial performance.

Since launching our V offering in 2021 our investments have largely been focused on building a scalable technological interface to engage with our best partners.

This interface also enables smooth integration with other software and tools we rely on including our customer relationship management solution that supports all business lines.

We intend to redeploy our investments of time and talent including head count to support the significant opportunities we have in five star banks, community banking franchise.

If we work with our customers to wind down their respective relationships, we intend to take the same measured approach that we have since our entry in the past.

In order to support orderly transition or our partner firms and their customers, we're having productive and regular discussions with my partners about orderly wind down and completion remains targeted for some time.

In 2025 we currently expect to see the outflow of mass deposits begin more notably in the first quarter.

In our core community banking business, we see good opportunities for deposit gathering among our existing markets and within our consumer, commercial and municipal customer base as experienced in the third quarter.

Third quarter, balance sheet results were highlighted by total deposit growth of $173.3 million or 3.4% from June 30th as public and non public deposit increases more than offset of decreased reciprocal balances.

In addition to seasonality, typical of our public deposits, this portfolio maintained higher account balances during typical outflow cycles while also growing deposits with new and existing municipalities.

This was complemented by solid growth in non public deposits.

During the quarter, total deposits were relatively flat EUR a year.

It's both public and non public deposit growth enabled us to reduce reliance on broker deposits which were down just over $313 million from September 30th 2023 total loans were down slightly from June 30th 2024 as increases in commercial mortgage and stability and residential loans and lines were offset by declines in commercial business and consumer indirect loans.

Competition for capable commercial operators and high quality CRE sponsors continue to be very high and we like many other banks are seeing business owners utilize excess cash rather than credit in the higher interest rate environment that said we continue to see excellent opportunities in our geographic markets to drive credit discipline, low growth.

Our commercial pipelines are in a rebuilding phase and we would expect the demand to pick up with additional rate cuts overall, we remain confident in the health of our portfolios but we did see an increase in non performing loans in the third quarter as a result of a $15.5 million commercial relationship that was moved to not accrual.

We were pleased to report zero commercial net charge off again in the third quarter, the $31.4 million and non performing commercial loans at September 30 2024 largely relates to two separate commercial relationships in upstate New York which are experiencing issues that are specific to these particular borrowers.

We believe we are appropriately reserved each and are working closely with all parties involved to resolution.

Given the nature of the projects we do expect that This will take some time.

Credit quality remains strong within our Mid Atlantic portfolio where our clients operate largely in suburban communities outside Baltimore and Washington DC.

Our mid Atlantic team as intended has brought relationships with very strong and experienced developers and provides us with geographic and asset class diversity loans in this market total $338 million in September 30th 2024.

We're also seeing intense competition in the residential lending space.

The housing inventory remains low in our upstate New York markets.

As a result, residential loans in line were relatively flat on a linked quarter basis at $724.4 million credit metrics remain favorable and we reported zero basis points of residential net charge offs in the third quarter in a stable level of non performers.

Consumer indirect loans totaled $874.7 million in September 30 2024 down $19.9 million or 2.2% from June 30th.

While indirect that charge offs increase from the link quarter, they remain about half the level we experienced in the first and fourth quarters.

We've intentionally reduced our indirect portfolio over time being thoughtful and considering is percentage of our overall loan portfolio.

And we focusing on our core upstate New York markets by exiting the Pennsylvania Auto market.

At the same time, we've improved the profitability of this line of business and continue to see healthy spreads and favorable credit mix and new production, indirect lending remains a core lending competency and is a useful balance sheet management tool.

Given the short duration associated cash flow and higher yields, we will continue to maintain this portfolio given the demand and practicality in our core markets where public transportation is fairly limited for the last '20 years in positive and negative economic cycles.

This loan category is performed consistently in a narrow range of acceptable credit metrics and risk adjusted returns.

Our balance sheet remains healthy overall and we look forward to continue to build relationships with depositors and borrowers throughout our upstate New York and Mid Atlantic markets.

I'd now like to turn the call over to Jack for additional details on financial results and our 2024 guidance.

Thank you, Marie.

Good morning everyone.

We reported net interest margin on a fully taxable equivalent basis of 289 basis points for the third quarter of 2024.

About two basis points from the link to second quarter.

Menin was negatively impacted by the commercial relationship placed on.

Not a rule during the quarter that Murray discussed which reduced margin by three basis points.

That interest income of $40.7 million was down 512,000 from the linked quarter.

With the majority of that variance attributable to the reversal of interest income for the single commercial relationship.

Interest earning asset yields increased three basis points modestly outpacing our overall cost of funds which increased two basis points.

While the average yield on interest bearing liabilities increased from the second quarter as a result of growth and higher cost time deposits, we were pleased to see a slowing of disintermediation from non interest bearing accounts.

For average balances of about $1 billion were stable quarter.

Over quarter, average total deposits were down about 2% on a linked quarter basis.

Largely due

To the timing of seasonal public deposited flows.

In addition to a decrease in reciprocal deposits which offset an increase in average non public deposits.

We continue to be proactive in managing funding costs where we can and further reduced short term borrowing from the third quarter.

Since year on 2023 we've reduced total borrowings and broker deposits by about $307 million or 54% and looking at our total deposit portfolio relative to the magnitude of FO MC rate increases that occurred in 2022 and 2023.

And the recent 50 basis point decrease, we experienced a cycle to date beta of 53% excluding the cost of time deposits.

The non maturity deposit portfolio had a beta of 32% year-to-date nim of 2.85%.

At the low end of the 2.85 to 2.95% range.

We guided in January at this time.

We're narrowing our expected range for full year 2024 NM, 2.85 to 2.9%.

As a reminder, this guidance was it continues to be based on a spot rate forecast that does not factor in potential future rate cuts given quarter end balances and the continued lending competition I've already discussed.

We now expect 2024 annual loan growth to come in at the low end of our guided range 1 to 3%.

All year-to-date cash flows have been lighter than originally modeled at the outset of the year.

We do expect the anticipated rate cuts will be accompanied by increased demand from commercial borrowers.

We're currently projecting more than $1.1 billion in total cash flow over the next '12 months off the loan and securities portfolios combined non interest income totaled $9.4 million in the third quarter compared to '$24 million in the second quarter.

When we recorded $13.5 million in pre tax gains on the sale of our insurance.

We had a small additional gain of $138,000 related to this transaction in the third quarter of 2024.

Also contributing to the linked order variant with the net loss of $170,000 on tax credit investments in the third quarter.

This compares to a net gain of $406,000 in the second quarter related to a historic tax credit investment with a New York State refundable component placed in the service in that period, limited partnership income of $400,000 in the recent quarter.

With about half the level we recorded in the second quarter and swap fee income was down $165,000 due to a lower level of back to back swap activity in the third quarter.

As compared to the linked quarter, recurring non interest income, which we typically provide guidance on of $9.1 million was down modestly from $9.3 million in the linked quarter.

This excludes gains and losses on investment, securities, investment, tax credits and other assets as well as limited partnership and insurance income investment advisory income which comes primarily from career capital totaled $2.8 million relatively flat.

With the second quarter, our Wealth Management subsidiary had $3.2 billion in assets under management as of September 30th 2024 with year-to-date a growth of approximately $319 million or 10% coming from a combination of market appreciation and positive net inflows of $44 million as a result of business development effort, non interest expense was $32.5 million in the third quarter of 2024.

Down modestly from $33 million in the second quarter.

This was primarily due to a lower FDIC assessment in part due to improvement in our leverage ratio and lower other expenses including other bank charges and timing of director compensation and donations.

We recorded a provision for credit losses of $3.1 million in the third quarter of 2024 compared to $2 million in the second quarter.

Third quarter, 2024 provision was driven by a combination of factors including a slight increase in the national unemployment forecast.

And higher qualitative factors overall partially offset by lower loan balances.

Income tax expense was 1.1 million in the quarter, representing an effective tax rate of 7.4%.

Our year-to-date effective tax rate is 12.6%.

And within our guided range for the full year of '11 to 13% our accumulated other comprehensive loss was $102 million in September 30th 2024 an improvement of $23.7 million from June 30th.

We reported a T CE ratio at September 30th of 6.93% intangible common book value per share, $27and 28cent excluding the A OC I impact the T CE ratio and tangible common book value per share would have been 8.38% and $33.2 respectively.

We continue to expect these metrics to return to more normalized levels over time.

Given the high credit quality and cash flow nature of our investment company, our core financial performance through the first nine months of the year has been strong and generally, in line with our expectations, as mentioned, we've lowered the expected high end range of full year margin to 2.9% and expect 2024 full year loan growth to come in at the low end of our guided range of 1 to 3%.

Additionally, we now expect full year net charge offs to fall within a range of between '20 to 30 basis points of average loans down from the 30 to 40 basis points.

We originally guided.

There are no other changes to our previously published guidance which you'll find outlined in our latest investor presentation that concludes my prepared remarks and I'll turn the call back to Marty.

Thanks Jack.

Amid a continued challenging operating environment, our companies remain intently focused on liquidity, capital and earnings.

The actions we've taken over the course of this year have allowed us to expand capital ratios meaningfully including a common equity tier one ratio of 10.28% up 85 basis points from 9.43% at year end 2023.

Many of the strategic actions we've taken from the sale of our insurance business to adjustments within our indirect business to our decision to wind down our banking as a service offering have also been focused around supporting our core community banking franchise in our existing footprint.

We remain very focused on driving sustainable growth across each of our retail banking, commercial banking and wealth management business lines and by extension, driving value into the company for the benefit of our shareholders, customers, associates and communities that concludes our prepared remarks.

Operator.

Please open the call for questions.

We will now begin the question and answer session.

If you would like to ask a question, please press star followed by one on your telephone keypad.

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When preparing to ask you a question, please ensure your device is submitted locally.

We will make a quick pause here for the questions to be registered.

Our first question comes from Damon Delmonte from KBW.

I just wanted to start off with a question on margin.

I appreciate the the updated guidance here for the fourth quarter.

Jack just kind of want to get your thoughts.

So you know, if we have a couple more rate cuts here in '24 and we, we have a more steady flow of '25 basis point cuts in in '25.

Can you just give us a little perspective on how you're thinking about the margin kind of given the cash flow expectations and, and what you're seeing for loan growth?

Sure.

So I'll

Just reconfirm that a little over 30% of our loan portfolio is priced off of.

So for prime and on the commercial side that adjusts with, you know, on the prime side with rate cuts and then so for adjust monthly, on the consumer side, the the prime adjustments generally adjust on a monthly basis.

And when we provided our margin guidance at the beginning of the year was based upon a flat environment.

We did some modeling around the impact and I I for rate cuts and we, we modeled out that we were fairly neutral for the first 50 basis points of cuts.

The expectation on that side was that there was going to be a longer lag for deposit repricing.

We've actually seen our competitors be a little bit more aggressive and adjusting their rates on a posted basis.

And as such, we've reacted a little bit more faster than we would have anticipated.

So we've already started to price down segments of the consumer, commercial, municipal and reciprocal portfolios.

And our expectation is that we, we continue that with additional rate cuts.

So we'll provide full year guidance on our fourth quarter call for 2025.

My expectation is that we kind of remain in that neutral band in the near term.

Got you.

Okay.

That's helpful and then with regards to the outlook for loan growth, I think Marty, you made a comment that the the commercial pipeline seem to be to rebuilding right now.

So does that give you you know, better confidence for kind of maybe mid single digit growth as we go through 2025?

It does.

Damon, thanks for the question of participating this morning.

It, it, it certainly does.

As you know, I also commented last '18 months we've been focused on, you know, the credit capital earnings and in light of the operating environment, in light of you know, commentary around concerns over credit, etcetera.

So we've been selective during this period and we have been signaling to our lending teams and to our customers of our interest to start to rebuild the pipeline and to build momentum in support of growth in the range you just talked about for 2025.

Got it.

Okay.

That's great.

And then maybe just one more quick one here for Jack on expenses, you know, came in lower than what we were looking for this quarter and, and down a little bit from last quarter, I guess, you know, how, how do you think about when you kind of reset the button and, and going into '25 do you think you can kind of, you know, maintain a modest, you know, like low single digit type growth outlook here or do you, do you have any anticipated expenditures that you're aware of or you can disclose,

You know, we're certainly focused on reinvesting in our core lines of businesses for future growth payment.

But our mindset over the past couple of years has been certainly focused on expense management and, and prudent expense management in that regard.

So as far as full year expense guidance is concerned for 2025 again, we'll provide that update with the fourth quarter call, but I would point to our exit from bass and the fact that there were '14 FTEs associated with supporting that line of business that are going to be redirected towards our, our more mature lines of business.

And in my mind, that's cost avoidance where we would have had to have gone out and hired to support growth in future periods.

Got you.

Makes

Sense.

Okay.

That's all that I had.

I appreciate the call this morning.

Have a great one.

Thanks.

Thanks.

Our next question comes from David Meap.

Nick from Stevens.

Hey, good morning.

Hey, good morning, David.

Hi, David.

Can you guys hear me morning?

I think I kind of talked about the betas that you kind of saw on the way up and I would love to hear your thoughts and kind of expectations around the loan and deposit betas on the way down through 2025.

And if you kind of expect those figures to be fairly similar to what they were on the up cycle.

Yeah, this is Jack, I'll

Take that question.

So as I mentioned earlier, when we were doing our modeling at the beginning of the year and considering future rate cuts, we had expected to be a bit slower on the downward repricing, at least for the first couple of rate cuts, our deposit data.

So a longer lag than than we had experienced previously, you know, what we have seen is that we, we shortened that lag more than anticipated.

The, the debate, the beta again are in line with what we would have anticipated.

So my perspective in the near term, the impact to margin would be, would be neutral.

But as we continue to see the fed act with additional rate cuts, you know, I see beta catching up to where they would have been historically over time.

Okay, great.

And then just on slide, '23 of the presentation, it looks like in most segments, loans are rolling off at a higher rate than the current rate.

I don't think those loans are longer duration and we see some yield pick up there.

So I was just wondering if you could provide some commentary around that.

Yeah, so that's been

The story as far as our ability to expand margin throughout 2024 was that the roll off yield on the loan portfolio are being reinvested at higher rates.

And we've been pretty selective as far as our pricing requirements for deals that we've approved this year on the commercial side in order to preserve and expand margin.

That philosophy hasn't changed, which is why we've seen a lower level of loan growth maybe than some of our peers.

Because we've been selective in that regard.

That story continues and we continue to be focused on spread maintenance and driving towards you know, expansion on the earning asset side.

I appreciate that.

And the last one for me is I'm sorry if I missed this.

Just in terms of the best wind down, do you expect any one time cost associated with that?

No material, one time costs?

Okay, great.

I appreciate you taking my questions.

Thanks, David.

Thanks David.

And we currently have no further questions in the queue.

I will turn the call back over to Martin Birmingham for closing remarks.

Thanks very much for your help.

This morning operator.

Thanks to all who have participated in our call.

We look forward to reporting on the results with you in January.

Thank you everyone for your participation.

You may not disconnect from the call.

Have a nice day.