Financial Institutions Q4 2024 Earnings Call Transcript

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Operator

Hello, everyone, and welcome to the Financial Institutions Inc. 4th Quarter and Year End 2024 Earnings Call. My name is Chach, and I'll be coordinating your call today. After the presentation, there will be a Q and A session. I'd now like to hand over to your host, Kate Croft, Director, Investor Relations to begin.

Operator

Please go ahead.

Kate Croft
Kate Croft
Director of Investor & External Relations at Financial Institutions Inc.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham and CFO, Jack Plant. They will be joined by additional members of the company's leadership team during the question and answer session. Today's prepared comments and Q and 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.

Kate Croft
Kate Croft
Director of Investor & External Relations at Financial Institutions Inc.

We refer you to yesterday's earnings release and investor presentation as well as historical SEC 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 in its exhibit to Form 8 ks or in our latest investor presentation available on our IR website, www.fisi investors.com. Please note this call includes information that may only be accurate as of today's date, January 31, 2025. I'll now turn the call over to President and CEO, Marty Furmankhaus.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our Q4 was busy and highly productive, highlighted by our successful equity offering and subsequent restructuring of our available for sale investment securities portfolio. We sold $653,500,000 of low yielding securities and reinvested the proceeds into higher yielding agency wrapped securities. The result is a balance sheet that we expect to contribute to a much stronger earnings profile moving forward, including expanded net interest income, net interest margin, return on average assets and an improved efficiency ratio.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

We recorded a $100,200,000 pretax loss associated with the securities repositioning, which resulted in net losses available to common shareholders for the Q4 of $66,100,000 or $4.02 per diluted share and $26,000,000 or $1.66 per diluted share for 2024. The after tax impact of the securities loss was about $75,000,000 and this was fully offset by a portion of the capital we raised. Market reception was very positive to our common equity offering, which was more than 4 times oversubscribed, and we were pleased to see that the over allotment was executed quickly. As a result, we issued $115,000,000 of new capital to many new shareholders and several existing ones through the offering, generating net proceeds of $108,500,000 We intend to thoughtfully deploy the remaining dry powder in a way that supports shareholder value and may elect to call a portion of our sub debt that is set to reprice this year. We believe our stronger capital position and improved earnings outlook position us well to drive sustainable and profitable growth even as we invest in people, process and technology to support our vision of being a high performing financial institution.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Jack will provide more details on our financial results and 2025 expectations shortly, but I would like to first touch on a few highlights. Regulatory and tangible capital ratios expanded meaningfully. Our common equity Tier 1 ratio increased 60 basis points from September 30 and 145 basis points from year end 2023, while our TCE ratio increased 147 and 240 basis points respectively. Accumulated other comprehensive loss was $52,600,000 at year end, down from $102,000,000 at September 30, 2024 reflecting the balance sheet restructuring. Margin expansion continued, up 2 basis points from the 3rd quarter to 2.91% in the 4th quarter.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Full year NIM of 2.86% was on the low end of our guided range. Commercial loan growth was strong, up 3.8% during the quarter and 4.5% during the full year 2024. Asset quality results remained relatively stable, including annual net charge offs to average loans of 20 basis points consistent with 2023. Turning to deposits, we remain committed to core in market deposit gathering with relationship based accounts and then the wind down of our BaaS offering. BaaS deposits were approximately $100,000,000 at year end 2024 or less than 2% of total deposits.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

We have 1 live BaaS partner and 3 in the off boarding phase. Given the progress made in developing migration plans and the partner's success in identifying new banking providers. We expect the majority of these deposits to outflow in the first half of the year. Deposits totaled $5,100,000,000 at the end of 2024 declining $202,000,000 from September 30 due primarily to typical seasonal reductions in public depositor accounts, which should replenish with normal Q1 tax collection and financing inflows. From the end of 2023, the $108,000,000 decline in total deposits is attributed to reductions in broker deposits and lower reciprocal balances.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Overalls were up 1.7% from September 30 and relatively flat with year end 2023 and solid commercial loan growth during both the quarter year was partly offset by a planned reduction in our consumer indirect portfolio. As we shared previously, we manage our indirect portfolio based on a blend of demand and spread maintenance and intentionally allow runoff to outpace originations while we maintain a strong focus on profitability and favorable credit mix. With respect to commercial, growth for both the quarter year was led by commercial mortgage. As you'll see in our earnings release, we've added additional portfolio granularity of construction, multifamily, non owner occupied and owner occupied commercial mortgage loans. New CRE production of $74,300,000 in the Q4 was led by multifamily, office, hospitality and land development.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

We saw notable draws on existing industrial and land development as well. From a geographic standpoint, 4th quarter CRE production was basically an even split between our upstate New York and the Atlantic markets. Commercial business loans were up about $11,000,000 or 1.7 percent from September 30, 2024. While it's a highly competitive market, we see good opportunities to drive credit disciplined commercial business loan growth in 2025. There is significant economic development activity taking place across our New York footprint.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

The Syracuse Rochester Buffalo Corridor was recognized as a tech hub by the federal government for the region's coordinated focus on semiconductor manufacturing and our branch network is well situated in that geography. We believe more of the opportunities stemming from these investments will come to fruition in 2026 and beyond. Given that the most significant project is effective to break ground in November, we could start to see some impact later this year. As the quality metrics were fairly stable and the approximately $41,000,000 of non performing loans we reported at year end continue to relate to the 2 separate commercial relationships that we previously discussed. We continue to work closely with all parties involved, but do expect that resolution will take time.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Commercial and residential net charge offs were essentially non existent in 2024. Consumer indirect net charge off did increase from the 3rd quarter but remained lower than the levels we reported at year end 2023. We recorded a provision for credit losses of $6,500,000 in the Q4 of 2024 compared to $3,100,000 in the Q3. A higher provision for loan losses in the Q4 as compared to the Q3 is attributed to a combination of factors including higher loan growth as well as increases in net charge offs and qualitative factors. The higher qualitative factors were primarily associated with elevated indirect delinquencies when comparing the 3rd and 4th quarters, which is somewhat seasonal.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

As a result, the allowance for credit losses on loans to total loans increased 6 basis points to 1.07% as compared to September 30. At the moment, we remain comfortable given the health of our portfolios and commitments to credit disciplined lending. I would like to now turn the call over to Jack for additional commentary on our financial results and 2025 expectations.

Jack Plants
Jack Plants
CFO at Financial Institutions

Thank you, Marty. Good morning, everyone.

Jack Plants
Jack Plants
CFO at Financial Institutions

As expected, Q4 and full year 2024 financial results reflect the recent capital raise and the securities restructuring, while the core business continued to perform solidly. Considering the challenges we faced during the last 12 months and the strategic actions we executed on, I'm proud of what our team accomplished. I'd like to start by laying out some of our 2025 expectations and providing a bit more color on how our historical performance, balance sheet composition and local market dynamics inform our expectations around these metrics. From a profitability standpoint, for the full year 2025, we are targeting return on average assets of at least 110 basis points, return on average equity of at least 11.25% and an efficiency ratio below 60%. The balance sheet restructuring we completed in late December will create a meaningful lift in our net interest margin starting in the Q1.

Jack Plants
Jack Plants
CFO at Financial Institutions

The securities sold had an average yield of 1.74% and those purchased were 5.26 percent, resulting in an overall yield on the portfolio of 4.25 basis points. Continued lift in margin in the remaining quarters of 2025 is expected to come from a combination of low production and mix as well as downward deposit pricing due largely to maturities and renewals of time deposits. As a result, we expect a full year 2025 net interest margin of between 345 and 355 basis points, using a spot rate forecast as of year end that does not factor in future rate cuts. And looking at our Q4 2024 experience, interest earning asset yields decreased 8 basis points, while our overall cost of funds decreased 10 basis points, reflecting the impact of rate cuts in the latter part of 2024. While approximately 40% of our loan portfolio is floating, with the majority priced off of prime and silver indices, management was successful in addressing deposit repricing across all higher cost concentrations in retail, commercial and public deposit sectors.

Jack Plants
Jack Plants
CFO at Financial Institutions

In terms of loan growth, we are expecting low single digit growth of between 1% the possibility of returning to a healthier mid single digit total loan growth rate in the future given our 4th quarter performance and the size of our pipeline, but we have chosen to be conservative in our estimates for this year. Increased competition, uncertainty about the impacts the proposed policy changes from Washington will have on business, operating, supply and labor costs as well as the expected timing of some of the chips manufacturing investments that led us to take a more conservative approach to our 2025 modeling. Commercial lending is expected to be the driving force of 2025 growth with portfolio expansion towards the mid single digit rate with CRE, C and I and business banking all contributing. I would also like to note that we are currently projecting $1,200,000,000 in total cash flow over the next 12 months from the loan and securities portfolios combined, which we will seek to redeploy in the credit disciplined lending. Residential loans and consumer indirect portfolios are expected to remain fairly flat through the year.

Jack Plants
Jack Plants
CFO at Financial Institutions

On the residential side, production is expected to be matched by anticipated runoff. Competition is very high in this space and while interest rates have come down somewhat, we believe we're still several quarters away from notable refinancing activity. Consumer indirect balances are expected to end the year relatively flat. Run off may continue to outpace production in the Q1 of the year, which is typically a bit slower due to the seasonality of loan demand, but we expect that to shift in the middle of the year. Deposit balances are expected to remain somewhat flat for the year, with FAST related deposit outflows partially offsetting anticipated growth in other categories.

Jack Plants
Jack Plants
CFO at Financial Institutions

Our marketing efforts are focused around core non public deposit growth. We're prepared to supplement that with short term borrowings and broker deposits as needed, though well below levels we've carried in the past. We are projecting quarterly non interest income of $9,500,000 to $10,000,000 in 2025, excluding losses on investment securities, impairment on tax credits and other categories that are difficult to predict, such as limited partnership income. Q4 2024 non interest income was impacted by the restructuring as well as discrete events like the sale of our insurance subsidiary, which created additional noise in full year results. And looking at what we consider to be recurring non interest income, results were $8,800,000 for the quarter compared to $9,100,000 in the 3rd quarter and $8,900,000 in the year ago period.

Jack Plants
Jack Plants
CFO at Financial Institutions

Investment advisory revenue is a key contributor of non interest income for us and primarily comes from Carrier Capital. Assets managed by our wealth management subsidiary associated revenues were down on a linked quarter basis due to some organizational changes. We saw the departure of 2 advisors during the quarter. However, we recently hired a new team that has already brought in business which more than offsets the outflow we experienced. We expect non interest expense of approximately $35,000,000 per quarter in 2025.

Jack Plants
Jack Plants
CFO at Financial Institutions

This represents a 5% increase in core annual operating expenses versus 2024. Included in this are expenses for in process initiatives that we believe will support incremental performance, both from a revenue perspective such as enhancements to our treasury management capability as well as enhanced efficiency, including service software to facilitate effective change management and prioritize headcount. We believe we'll be able to effectively manage expenses even as we invest in our people, processes and technology to support our future growth and performance, including a sub-sixty percent efficiency ratio. I do want to address the elevated Q4 2024 expenses. The primary driver of this was a $1,300,000 pension plan settlement accounting charge that was triggered in the 4th quarter as a result of lump sum withdrawals during the year.

Jack Plants
Jack Plants
CFO at Financial Institutions

We had amended the plan in the Q4 of 2023 to remove a lump sum distribution threshold and several terminated vested participants took advantage of the opportunity in 2024. This will ultimately reduce the size and scale of our pension plan going forward. And while we may see settlement charges in future years, they're not expected to be at this level. The computer and data processing expense increase of about $1,300,000 related to some of the ongoing initiatives I mentioned, which are factored into our 2025 guidance. FDIC assessment expense was about $500,000 higher than in the Q3 as a result of an increase in the assessment rate given the 4th quarter securities loss.

Jack Plants
Jack Plants
CFO at Financial Institutions

For this reason, FDIC expense is expected to remain elevated through 2025, though to a lesser degree than in the recent quarter and this is also reflected in our guidance. The 2025 effective tax rate is expected to be between 17% 19%, including the impact of amortization of tax credit investments placed in service in recent years. We are budgeting full year net charge offs of between 25 to 35 basis points of average loans. While our experience in each of the last 2 years has been lower than this, we are being conservative with our outlook at the start of the year. Overall, our performance targets in 2025 are focused on profitability 1st and foremost.

Jack Plants
Jack Plants
CFO at Financial Institutions

We are not focused simply on growth. We are focused on profitable growth. We are not just focused on expense management. We are prioritizing investments that support incremental revenue generation and efficiency in how we operate. With the success of the capital raise and restructuring in the recent quarter, we are very well positioned to execute on those objectives in 2025.

Jack Plants
Jack Plants
CFO at Financial Institutions

That concludes my prepared remarks. I'll now turn the call back to Marty.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Thank you, Jack. We've been on a journey to transform this company into a more efficient and profitable institution. Over the past 18 months, we have looked closely at our organizational structure, our business lines and the composition of our balance sheet, taking necessary action to ensure all are contributing to our success in both the near and long terms.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

We believe we are poised to deliver on our performance goals that will support the long term value creation objectives that our management team and Board are focused on. With respect to our Board, earlier this week, we were pleased to announce the appointment of a new Director, Angela Panzarella. Panzarella brings extensive business and non profit leadership experience both globally and in upstate New York as well as past public company Board experience. As we continue to grow and evolve as a company, we look forward to benefiting from her perspective and counsel. That concludes our prepared remarks.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Operator, please open the call for questions.

Operator

Thank you. Our first question today comes from Damon DelMonte from KBW. Your line is now open.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

Hey, good morning, everyone. I hope everybody is doing well and thanks for taking my questions. Just a quick question on loan growth and the outlook. Kind of given some of the commentary about the positive trends in the market, the fact that indirect auto is not going to be paying off at the same level as it has been recently. Just kind of wondering the thoughts behind the conservative 1% to 3% growth kind of feels like it could be more towards the middle single digits.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

So just kind of curious as to how you guys are looking at that?

Jack Plants
Jack Plants
CFO at Financial Institutions

Hey, Damon, this is Jack. Thanks for that question. So looking at the portfolio as a whole, I think you're spot on, on the mid to single digit range and the commercial portfolio. We do have some kind of demand that's still on the sidelines for construction lending, where there's a few they're waiting for some additional rate cuts to come to fruition before that activity heats up. The activity that we're seeing in the Syracuse market is more towards the back half of the year, primarily in the Q4 of 2026.

Jack Plants
Jack Plants
CFO at Financial Institutions

So we're just conservative with loan growth estimates at this stage of the game, but we're optimistic that they'll heat up in the back half of the year with some rate cuts and then some of that activity that we're talking about from economic development in Syracuse region.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. Okay. That's helpful. Thank you. And then with respect to the margin outlook, appreciate the guidance for the full year.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

I think at the time of the offering, we kind of estimated about a 38 basis point benefit to the margin. Just given the modest increase here in the Q4, is it fair to kind of assume something in the high 3.20s for a starting point in the Q1 of 'twenty five and then kind of a march towards a level that gets you to a full year in that 3.45 to 3.55?

Jack Plants
Jack Plants
CFO at Financial Institutions

Yes. We're actually looking at the 1st quarter margin in the 3.30 range and then expansion beyond that. And that's really driven by the cash flow that's coming off the loan portfolio. If you look at our investor presentation, there's a slide in there that shows roll off yield versus roll on yield and how that contributes to earning asset improvement over time. That's a contributing factor.

Jack Plants
Jack Plants
CFO at Financial Institutions

And then in the Q4, we saw our cost of funds decline 10 basis points from the linked quarter with the first 75 basis points of cuts to come to fruition. And we were positively surprised by our ability to have a faster reaction to rate cuts across all deposit portfolios than originally anticipated. And there's some additional lag that's coming to play for catch up on deposit pricing in 2025 as well.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. Okay. That's great color. Okay. That's all that I had.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

I'll step back for now. Thank you.

Jack Plants
Jack Plants
CFO at Financial Institutions

Thanks, Damon.

Operator

The next question is from Tyler Cacciatore from Stephens. The line is now open.

Tyler Cacciatori
Associate at Stephens Inc

Hey, good morning. This is Tyler Cacciatore on for Mad Breeze.

Jack Plants
Jack Plants
CFO at Financial Institutions

Good morning, Tyler. Hi, Tyler.

Tyler Cacciatori
Associate at Stephens Inc

I just wanted to start off on the reserve build. I know you talked about it a little bit and saw that the reserve increased 6 basis points to 1.07. I was just hoping you could provide some more color on about what drove that and if we should expect to see some continued reserve build? And if so, do you have a targeted level in mind?

Jack Plants
Jack Plants
CFO at Financial Institutions

Yes, this is Jack. I'll take that. So as we said on the call, the Q4 was largely influenced by the loan growth that we observed in the Q4 that we had to reserve for. On the qualitative side, a lot of our qualitative factors are influenced by quantitative behavior in the underlying loan portfolio, one of which is the delinquency rate on the indirect portfolio, which increased in the Q4 as expected from a seasonal perspective. However, it was lower than what we experienced in the Q4 of 2023.

Jack Plants
Jack Plants
CFO at Financial Institutions

And then on the commercial portfolios, the qualitative drivers are influenced by national portfolio metrics. So when you look at commercial real estate portfolio behavior at a national level, it experiences higher delinquency levels than what we have internally. So we have to factor that in from a CECL perspective, but we believe the credit quality of that portfolio is a little bit stronger. And we're comfortable with the 107 basis points coverage ratio that we're at right now. So if you think about provision modeling going into 2025, I would focus on our guidance on NCOs in that 25 basis point to 35 basis point range, loan growth that we've projected, as well as the coverage ratio maintenance at 107%.

Jack Plants
Jack Plants
CFO at Financial Institutions

170 basis points, sorry.

Tyler Cacciatori
Associate at Stephens Inc

Okay, great. Thanks. And then just one more for me. Tangible book came in a bit below what we're expecting. What was the period end AOCI?

Jack Plants
Jack Plants
CFO at Financial Institutions

We saw AOCI tick up another $25,000,000 at the end of the quarter, just driven by end of period increases in the belly of the curve around the 5 year point, which really impacts the mark on the securities portfolio. Yes, the AOC mark total I think was $50,000,000 Yes.

Tyler Cacciatori
Associate at Stephens Inc

Okay, great. Thank you. Thank you for answering my questions. That's it for me.

Operator

The next question is from Frank Schiraldi from Piper Sandler. Your line is now open.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Good morning. Just wanted to ask about the follow-up on 2025 guide. The deck just you guys talk about the per expense quarterly expense of roughly $35,000,000 per quarter. Just wondering if you can following the 4Q where you had some little bit of noise in terms of non recurring items, if you could just talk through maybe the cadence of expense growth through the year, is it starting point at 35% and then you feel like you can hold it at those levels or any color there for modeling?

Jack Plants
Jack Plants
CFO at Financial Institutions

Yes. I mean, the year over year normalized NIE expense growth is expected to be about 5%. There was a lot of noise in 2024, so I understand the question. When we look at 4th quarter NIE, if you back out the $1,300,000 of pension settlement accounting expense that we had, we were right around $35,000,000 NIE mark. So that quarterly guidance is fairly consistent with our 4th quarter results on a normalized level.

Jack Plants
Jack Plants
CFO at Financial Institutions

Okay.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

And then just in terms of the your confidence level in getting to that, some of those profitability metrics, you mentioned the efficiency ratio of sub-sixty percent. I think incremental rate cuts would still help if you get them and you're pretty conservative on your loan growth expectations. So just curious, maybe talk a little bit about your confidence level there. And then what is the primary risk do you think as you look out to 2025 of kind of missing that mark?

Jack Plants
Jack Plants
CFO at Financial Institutions

So loan growth certainly influences our ability to achieve the efficiency ratio. We've demonstrated very strong corporate responsibility as it pertains to expense management. About 80% of our revenue stream is driven by non interest income and our margin expansion, as I mentioned earlier, is really influenced by the roll on yield of the loan portfolio coming in above what's rolling off. However, I feel that our loan growth projections are conservative. So I'm fairly comfortable with our ability to achieve that sub-sixty efficiency ratio.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Okay, great.

Jack Plants
Jack Plants
CFO at Financial Institutions

Did I answer the question?

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Yes, yes. And then just following up, I mean, I think you've already answered this. Just clarification on that, it sounds like the 107, the reserve to loan ratio, pretty comfortable there. Just curious if you could talk about what the I'm sorry if I missed it, what the reserve levels are on the new commercial to just maybe try to get a sense of any variability there going forward as you grow that book as opposed to consumer?

Jack Plants
Jack Plants
CFO at Financial Institutions

Yes, they're north of 100 basis points on the commercial portfolio. I don't have that directly in front of me.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Okay. But it doesn't sound like you feel like that's going to put a lot more pressure on that or more pressure on the reserve to loan ratio necessarily going forward.

Jack Plants
Jack Plants
CFO at Financial Institutions

That's fair. Okay.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

All right. I appreciate it. Thank you.

Jack Plants
Jack Plants
CFO at Financial Institutions

Yes. Thanks, Greg.

Operator

We have no further questions. I'd like to hand back to Marty Birmingham to conclude.

Martin Birmingham
Martin Birmingham
President & CEO at Financial Institutions Inc.

Just want to thank everybody for their participation this morning. We look forward to continuing the conversation with our 2nd quarter results.

Executives
    • Kate Croft
      Kate Croft
      Director of Investor & External Relations
    • Martin Birmingham
      Martin Birmingham
      President & CEO
    • Jack Plants
      Jack Plants
      CFO
Analysts
Earnings Conference Call
Financial Institutions Q4 2024
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