Q2 2022 Financial Institutions Inc Earnings Call
I'll announce from the call over to President and CEO , Marty Birmingham.
Thank you, Shelley. Good morning, everyone, and thank you for joining us today.
During the second quarter, our operating performance reflected the hard work of our entire team in yield a very solid result.
including net income available to common shareholders of $15.3 million or $0.99 per diluted share.
Results are up from the linked first quarter, but down from the year-ago period, when we recorded a sizable benefit for credit losses of $4.6 million. Having returned to a more normalized loan loss provisioning environment this year, after two years that were significantly impacted by the pandemic, we recorded a provision of $563,000 in the most recent quarter, which was positively impacted by a $2 million commercial loan recovery. For more information, please visit www.fema.gov
In addition, our second quarter 2022 results were impacted by a 1.3 million of non-recurring restructuring charges related to locations that were closed and consolidated as part of our 2020 Retail Bank Network Optimization.
We have made significant progress on liquidating most of these properties and this chart reflects a fair market value adjustment based on existing purchase offers and current market conditions.
Excluding these non-recuring charges.
Adjusted three tax pre-provision income was 21.3 million, which was 594,000 higher than the first quarter of 2022 and 361,000 higher than the second quarter of 2021. And 361,000 higher than the second quarter of 2021.
The second quarter was a productive one for our company. As we delivered organic loan growth, maintained strong asset quality and took steps to position our company for continued success in an evolving economy. The second quarter was a productive one for continued success in an evolving economy.
We are making important progress on our digital transformation, which I'll put you on in more detail in my concluding remarks.
Total loans were up an annualized 3.3% from March 31st, even as Paycheck Protection Program loans continue to wind down as expected.
We also sold about 31 million of indirect loans during the period. We work forward to the opportunity to sell this small pool of indirect loans given the strong demand and growth we've experienced in this line of business in recent years.
We will continue to evaluate future opportunities to sell indirect production as we manage our balance sheet and remix the loan composition with growth in other loan portfolios, namely commercial.
excluding Triple P loans.
In the indirect portfolio sale, total loans grew more than 9% on an annualized basis.
On the commercial side, excluding the impact of...
Triple P loans, we grew our commercial business portfolio 5.7% on a NAMUized basis from March 31st, while commercial mortgage was up 3.7% NAMUized. I note that a fair amount of that growth came late in the second quarter. So we'll see the full benefit of that loan production and that interest income during the third quarter.
Contributing to these results with strong performance out of the gate from our new Mid-Atlantic team and Washington D.C. Region.
Since joining 5-star bank in February , they have brought on approximately 24 million outstanding as of June 30th and have built an ample pipeline to support future growth.
Clearly, our community banking approach is resonating with customers in this market, and we believe it will continue to be a competitive damage moving forward.
Looking ahead, we remain focused on partnering with high quality commercial sponsors in our markets.
Commercial real estate demand continues unabated, even amid the current interest rate environment, as developers in our upstate New York markets continue to advance projects.
During the residential lending, balances were relatively flat from March 31st. First mortgage volumes continued to trend lower, but we have seen increases in home equity volumes. Like much of the nation, residential lending opportunities in our markets have been impacted by higher interest rates, inflationary pressures, low housing stock, and changes in buyer appetite.
As we manage through these challenges, we continue to focus on driving operational efficiencies and recruiting top-tier talent to support this key lot of business and maximize opportunities for growth moving forward.
Consumer indirect continues to be a core competency and growth engine for our company, up nearly 13% annualized from March 31st, even with the sale of a portion of the loans late in the quarter. We continue to benefit from high auto valuations and a robust network of more than 500 franchise new auto dealerships.
We remain focused on rate and our on-lapering approach to credit discipline.
Our prune approach to credit transcends all lending categories and resolving continued strong and stable credit quality metrics.
including not performing loans at 6.5 million or 17 basis points total loans and net recoveries of one million or 11 basis points of average loans.
Our allowance for credit losses to total loans measure 113 basis points
at quarter end up three basis points from March 31st.
Our insurance and wealth management businesses have achieved solid results in the second quarter and first half of 2022. Jack will provide additional details on their performance during his remarks, but overall, we believe these debase businesses remain well positioned.
to support revenue growth and profitability.
Buying retention in our insurance business has been very strong and we believe new business development and cross-sell opportunities of our robust product offering are durable, bolstered by two acquisitions in 2021 that expanded our upstate New York presence and enhanced the employee benefits business.
On the wealth management side, there's no doubt that the first half of 2022 has been challenging throughout the industry, and we did experience a market driven decline in assets on the management.
Year-to-date, our investment advisory income is up about 5% from the first half of 2021, and our teams at Career Capital and HFP Capital are closely engaged with clients to provide steady guidance and counsel amid historic pressures.
It's now my pleasure to turn the call over to Jack for additional details on our financial results and an update on 2022 guidance. Jack?
Thank you Marty. Good morning everyone.
I'll begin by providing commentary on performance in key areas with comparisons of the first quarter of 2022.
That interest income was $41.6 million.
up to 2 million from the link quarter as a result of a higher average interest earning assets in a higher interest rate environment.
Just over 23 million and approximately $25 million of triple P loans were forgiven in the second and first quarters of 2022 respectively. And first quarters of 2022 respectively.
with a related fee accretion of $756,000 in the second quarter as compared to $971,000 in the first quarter.
Less than $1 million of 2020 vintage loans and $8.7 million of 2021 vintage loans remained on the balance sheet a quarter-round.
NIM, on a fully taxable equivalent basis, with 319 basis points for the second quarter of 2022.
Up 8 basis points from the link quarter, and 13 basis points from the second quarter of 2021.
Our margin has improved as a result of the rising interest rate environment, along with lower levels of federal reserve interest-hearning cash this year, this compared to 2021.
In investment securities were down because of the impact of rising interest rates on the market value of the portfolio and the deployment of portfolio cash flow to fund loan originations during the second quarter.
As a reminder, our investment security portfolio is primarily comprised of mortgage-backed securities with intermediate durations.
These securities provide ongoing cash flow and is historically generated incremental yield over federal reserve balances.
cash flow from the portfolio allows for reinvestment into loans or additional investment securities.
Our cost of funds is 28 basis points in the current quarter.
Up six eighths points from the link quarter.
The increase was primarily driven by the impact of higher rates on wholesale borrowings and reciprocal deposits.
Non-interest income of $11.4 million was up modestly from the linked quarter's $11.3 million.
Revenue categories with the largest changes quarter over quarter were as follows.
Games on sale of loans of 828,000 were up significantly from the net loss of 91,000 reported in the length quarter and included 586,000 associated with the sale of indirect loans that Marty mentioned earlier.
Insurance income was $863,000 lower. Primarily the result of contingent revenue received in the first quarter each year.
And income from limited partnerships was 553,000 lower based on performance of underlying investments in the current quarter. The MacRink quarter. The MacRink quarter.
Non-interface expense was $2.8 million higher than the linked quarter.
Primarily as a result of $1.3 million of restructuring charges.
Higher equipment costs associated with technology.
and the relocation of our Regional Administrative Office in the Buffalo area.
along with higher salaries and employee benefits.
tax expense with $3.9 million in the quarter, representing an effective tax rate of 19.8%.
Compared to 3.4 million in an effective tax rate of 18.7% in the first quarter of 2022. In minutes 24 do we take questions in regards to Hul senses.
accumulated other comprehensive loss increased by a $32.6 million in the quarter.
Driven by the un-realized law position of our available for sale security.
Good morning, everyone, and thank you for joining us today. During the second quarter, our operating performance reflected the hard work of our entire team in yielded very solid results, including net income available to common shareholders of 15.3 million or 99 cents per diluted share. Results are up from the link first quarter, but down from the year ago period. When we recorded a sizable benefit for credit losses of 4.6 million, having returned to a more normalized loan loss provisioning environment this year, after two years that were significantly impacted by the pandemic, we recorded a provision of 563,000 in the most recent quarter, which was positively impacted by a $2 million commercial loan recovery. In addition, our second quarter, 2022 results, were impacted by a 1.3 million of non-returie restructuring charges related to locations that were closed and consolidated as part of our 2020 retail bank network optimization. We have made significant progress on liquidating most of these properties, and this charge reflects the fair market value adjustment based on existing purchase offers and current market conditions. Excluding these non-returie charges, adjusted pre-tax, pre-provision income was 21.3 million, which was 594,000 higher than the first quarter of 2022 and 361,000 higher than the second quarter of 2021. The second quarter was a productive one for our company. As we delivered organic loan growth, maintained strong asset quality, and took steps to position our company for continued success in an evolving economy. We are making important progress on our digital transformation, which I'll put on in more detail in my concluding remarks. Total loans were up and annualized 3.3% from March 31st, even if paycheck protection program loans continued to wind down as expected. We also sold about 31 million of indirect loans during the period. We were forwarded the opportunity to sell this small pool of indirect loans, given the strong demand and growth we've experienced in this slide of business in recent years. We will continue to evaluate future opportunities to sell indirect production as we manage our balance sheet and remix the loan composition with growth in other loan portfolios, namely commercial. Excluding triple p loans and the indirect portfolio sale, total loans grew more than 9% on an annualized basis. On the commercial side, excluding the impact of triple p loans, we grew our commercial business portfolio 5.7% on an annualized basis from March 31st, while commercial mortgage was up 3.7% annualized. I note that a fair amount of that growth came late in the second quarter, so we'll see the full benefit of that loan production and that interest income during the third quarter. Contributing to these results with strong performance out of the gate from our new mid-Atlantic team that serves the Baltimore and Washington DC region. Since joining 5-star bank in February , they have brought on approximately 24 million outstanding as of June 30th and have built an ample pipeline to support future growth. Clearly, our community banking approach is resonating with customers in this market and we believe it will continue to be a competitive advantage moving forward. Looking ahead, we remain focused on partnering with high-quality commercial sponsors in our markets. Commercial real estate demand continues unabated, even amid the current interest rate environment, as developers in our upstate New York markets continue to advance projects. During the residential lending, balances were relatively flat from March 31st. First mortgage volumes continued to trend lower, but we have seen increases in home equity viable. Like much of the nation, residential lending opportunities in our markets have been impacted by higher interest rates, inflationary pressures, low housing stock, and changes in buyer appetite. As we manage through these challenges, we continue to focus on thriving operational efficiencies and recruiting top-tier talent to support this key lot of business and maximize opportunities for growth moving forward. Consumer indirect continues to be a core competency and growth engine for our company, up nearly 13 percent annualized from March 31st, even with the sale of a portion of the loans late in the quarter. We continue to benefit from high auto valuations and a robust network of more than 500 franchise new auto dealerships. We remain focused on rate and our unlavering approach to credit discipline. Our prune approach to credit transcends all lending categories and resulted in continued strong and stable credit quality metrics, including not performing loans at 6.5 million or 17 basis points total loans and net recoveries of 1 million or 11 basis points of average loans. Our allowance for credit losses to total loans measured 113 basis points at quarter end up 3 basis points from March 31st. Our insurance and wealth management businesses achieved solid results in the second quarter in 1st half of 2022. Jack will provide additional details on their performance during his remarks, but overall, we believe these debase businesses remain well positioned to support revenue growth and profitability. My retention in our insurance business has been very strong and we believe new business development and cross sell opportunities of our robust product offering are durable. We are also bolstered by two acquisitions in 2021 that expanded our upstate New York presence and enhanced the employee benefits business. On the wealth management side, there is no doubt that the first half of 2022 has been challenging throughout the industry and we did experience a market driven decline in assets on our management. Year-to-date, our investment advisory income is up about 5% from the first half of 2021. And our teams at Cougar Capital and HFD Capital are closely engaged with clients to provide steady guidance and counsel amid historic pressures. So now my pleasure to turn the call over to Jack for additional details on our financial results and an update on 2022 guidance. Jack, thank you Marty. Good morning everyone. I'll begin by providing commentary on performance in key areas with comparisons to the first quarter of 2022. That interest income was $41.6 million. Up to 2 million from the linked quarter as a result of a higher average interest earning assets and a higher interest rate environment. Just over 23 million and approximately $25 million of triple p loans were forgiven in the second and first quarter of 2022 respectively. With a related fee accretion of $756,000 in the second quarter is compared to $971,000 in the first quarter. Less than $1 million of 2020 vintage loans and 8.7 million of 2021 vintage loans remained on the balance sheet at quarter-round. NIMM on a fully taxable equivalent basis was 319 basis points for the second quarter of 2022. Up 8 basis points from the linked quarter and 13 basis points from the second quarter of 2021. Our margin has improved as a result of the rising interest rate environment along with lower levels of federal reserve interest earning cash this year is compared to 2021. Investment securities were down because of the impact of rising interest rates on the market value of the portfolio and the deployment of portfolio cash flow to fund loan originations during the second quarter. As a reminder, our investment securities portfolio is primarily comprised of mortgage back securities with intermediate durations. These securities provide ongoing cash flow and is historically generated incremental yield over federal reserve balances. Cash flow from the portfolio allows for reinvestment into loans or additional investment securities. Our cost of funds was 28 basis points in the current quarter. Up 6 basis points from the linked quarter. The increase was primarily driven by the impact of higher rates on wholesale borrowings and reciprocal deposits. Non-interesting of $11.4 million was up modestly from the linked quarter's $11.3 million. Revenue categories with the largest changes quarter of a quarter were as follows. Gains on sale of loans of 828,000 were up significantly from the net loss of 91,000 reported in the linked quarter and included 586,000 associated with the sale of indirect loans that Marty mentioned earlier. Insurance income was 863,000 lower. Primarily the result of contingent revenue received in the first quarter each year. And income from limited partnerships was 553,000 lower based on performance of underlying investments in the current quarter. Non-interest expense was $2.8 million higher than the linked quarter. Readers of result of $1.3 million of restructuring charges. Higher equipment costs associated with technology and the relocation of our regional administrative office in the Buffalo area along with higher salaries and employee benefits. Income tax expense was $3.9 million in the quarter, representing an effective tax rate of 19.8%. It was $3.4 million in an effective tax rate of 18.7% in the first quarter of 2022. Accumulated other comprehensive loss increased by $32.6 million in the quarter. Everybody, unrealized loss position of our available for sale security.