Q3 2024 Financial Institutions Inc Earnings Call
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Speaker Change: Thank you for standing by ladies and gentlemen, welcome to the financial institution incorporated third quarter 2020 bolt on its call my.
Speaker Change: My name is Candice Sonography, Oregon coordinator today.
Speaker Change: All lines have been placed on mute during the presentation portion of the call with an opportunity for a question and answer the end. If you would like to register a question. Please press star one on your telephone keypad I would now like to turn the conference call over to Kate Walsh head of Investor Relations. Please go ahead. Thank you for joining us for today's call providing prepared com.
Speaker Change: <unk> will be president and CEO Marty Birmingham.
Speaker Change: Yes.
Kate Walsh: They will be joined by additional members of the company's leadership team during the question and answer session.
Kate Walsh: 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.
Kate Walsh: 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 our safe Harbor description and a detailed discussion of the risk factors relating to forward looking statements.
Kate Walsh: Well also discuss certain non-GAAP financial measures intended to supplement and not.
Our comparable GAAP measures reconciliations of these measures to GAAP financial measures are provided in the earnings release filed as an exhibit to a form 8-K or in our latest investor presentation available on our IR website, Www Dot ISI dash clusters dotcom. Please.
Please note that this call includes information that may only be accurate.
Speaker Change: October 25, 2024, I'll now turn the call over to President and CEO Marty Birmingham.
Marty Birmingham: Thank you Kate good morning, everyone and thank you for joining us today.
Marty Birmingham: Our third quarter results were highlighted by strong deposit growth incremental net interest margin expansion solid.
Marty Birmingham: The expense management.
Marty Birmingham: Continued build in our regulatory and tangible capital ratios.
Marty Birmingham: Third quarter 2024 income available to common shareholders was $13 1 billion.
Marty Birmingham: 84 cents per diluted share compared to $25 3 million or $1 62 per diluted share in the linked quarter, which benefited from a $13 5 billion pre tax gain on the sale of our insurance business.
Marty Birmingham: Third quarter return on average assets was 89 basis points and our efficiency ratio was 65%.
Marty Birmingham: Year to date.
Marty Birmingham: 90 basis points and efficiency ratio of 72% were impacted by our previously disclosed all of that and the sale of our insurance subsidiary.
Excluding these items adjusted <unk>.
Marty Birmingham: In the first nine months of the year was 100 basis points.
Marty Birmingham: Instancy ratio was 65%.
Marty Birmingham: The strength of our core business.
Marty Birmingham: Okay.
Marty Birmingham: 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 almost last month. After a careful review undertaken in conjunction with our annual strategic planning process.
Marty Birmingham: And considering balance sheet allocation only about 2% of the bank's total deposits or pass related.
Marty Birmingham: And they are primarily associated with four partnerships.
Deposits amounted to 103 million at September 30, and they averaged 109 million third quarter with a cost of $3 eight 4%.
Marty Birmingham: Our initial bass partner engagement focused on core funding capabilities, a modest amount of credit extension and transaction related fees.
Marty Birmingham: As we continue to evaluate the financial results associated with this offering.
Marty Birmingham: Management determined that the business unit economics were not contributing to the company's franchise value as anticipated.
Marty Birmingham: Furthermore, was that is that an exit from the line of business would not have a material impact on the company's future financial performance.
Marty Birmingham: Since launching our pass offering in 2021, our investments have largely been focused on building a scalable technological interface to engage with our best partners.
Marty Birmingham: 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.
Marty Birmingham: We intend to redeploy our investments of time and talent, including head count to support our significant opportunities. We have five star Bank community banking franchise.
Marty Birmingham: If we work with our customers to wind down their respected relationships, we intend to take the same measured approach that we have since our entry in the past.
Marty Birmingham: In order to support orderly transitions for our partner firms and their customers.
Marty Birmingham: We're having productive in regular discussions with five partners about orderly wind down and completion remains targeted for some time in 2025.
Marty Birmingham: We currently expect to see the outflow of bass deposits begin more notably in the fourth quarter.
Marty Birmingham: And our core community banking business, we see good opportunities for deposit gathering in our existing markets and within our consumer commercial and municipal customer basis as experienced in the third quarter.
Marty Birmingham: Third quarter balance sheet results were highlighted by total deposit growth of $173 3 million.
Marty Birmingham: Or three 4% from June 30.
Marty Birmingham: As public and nonpublic deposit increases more than offset a decrease in reciprocal balances.
Marty Birmingham: 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.
Marty Birmingham: This was complemented by solid growth in nonpublic, starting this quarter total deposits were relatively flat year over year as both public and nonpublic deposit growth enabled us to reduce reliance on broker deposits, which were down just over 313 billion from September 32023.
Marty Birmingham: Yeah.
Total loans were down slightly from June 32024, as increases in commercial mortgage and stability in residential loans and lines were offset by declines in commercial business and consumer indirect loans.
Marty Birmingham: Competition for capable commercial operators and high quality CRE sponsors continue to be very high we like many other banks are seeing business owners utilize excess cash rather than credit and the higher interest rate environment.
Marty Birmingham: That said, we continue to see excellent opportunities in our geographic markets to drive credit disciplined loan growth.
Marty Birmingham: Our commercial pipelines are rebuilding space and we would expect demand to pick up with additional rate cuts.
Marty Birmingham: Overall, we remain confident in the health of our portfolios.
Marty Birmingham: We did see an increase in nonperforming loans in the third quarter as result of a $15 5 million commercial relationship that was moved to non accrual. We were pleased to report zero commercial net charge offs again in the third quarter.
Marty Birmingham: $31 $4 billion in nonperforming commercial loans at September 32024, 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.
Marty Birmingham: Working closely with all parties involved towards resolution.
Marty Birmingham: Given the nature of the projects, we do expect that this will take some time.
Marty Birmingham: Credit quality remained strong within our mid Atlantic portfolio, where our clients operate largely in suburban communities outside Baltimore and Washington D C.
Our mid Atlantic team as intended as brought relationships with very strong and experienced developers and provides us with geographic and asset class diversity.
Marty Birmingham: Loans in this market totaled 338 million at September 30 of 2024.
Marty Birmingham: We're also seeing intense competition in the residential lending space because housing inventory remains low and our upstate New York markets. As a result residential loans and lines were relatively flat on a linked quarter basis at $724 4 million.
Marty Birmingham: Metrics remained favorable and we reported zero basis points of residential net charge offs in the third quarter and a stable level of non performers.
Marty Birmingham: Consumer indirect loans totaled $874 7 million at September 32024, down $19 9 million or two 2% from June 30.
Marty Birmingham: While indirect net charge offs increased from the linked quarter. They remain about half the level, we experienced in the first and fourth quarters.
Marty Birmingham: We've intentionally reduced our indirect portfolio overtime.
Marty Birmingham: Thoughtful in considering as a percentage of our overall loan portfolio and refocusing on our core upstate New York markets.
Marty Birmingham: The Pennsylvania auto market.
Marty Birmingham: At the same time, we've improved the profitability of this line of business to continue to see healthy spreads and favorable credit mix in new production.
Marty Birmingham: Indirect lending remains a core lending competency and as a useful balance sheet management tool given the short duration associated cash flow and higher yields.
We'll continue to maintain this portfolio given the demand in practicality in our core markets, where public transportation is fairly limited.
Marty Birmingham: For the last 20 years and positive and negative economic cycles. This loan category has performed consistently in a narrow range of acceptable credit metrics and risk adjusted returns.
Marty Birmingham: Our balance sheet remains healthy overall, and we look forward to continuing to build relationships with depositors and borrowers route our upstate New York and mid Atlantic markets.
Speaker Change: I'd now like to turn the call over to Jack for additional details on financial results and our 2020 for guidance.
Jack: Thank you Marty good morning, everyone.
Jack: We reported net interest margin on a fully taxable equivalent basis of 289 basis points from the FERC order of 2024.
Jack: Up two basis points linked to second quarter.
Jack: <unk> was negatively impacted by the commercial relationship placed on non accrual during the quarter, the very best cost, which reduced margin by three basis points.
Yeah.
Net interest income of $40 7 million was down 512000 from the linked quarter with the majority of that variance attributable to the reversal of interest income for the single commercial relationship.
Jack: Interest, earning asset yield increased three basis points modestly outpacing our overall cost of funds, which increased two basis points.
Jack: While the average yield on interest bearing liabilities decreased from the second quarter as a result of higher cost time deposits.
Jack: We're pleased to see a slowing of disintermediation from noninterest bearing accounts for average balances from about 1 billion are stable.
Jack: Okay.
Jack: Average total deposits were down about 2% on a linked quarter basis, largely due to the timing of seasonal public deposits plus in addition to a decrease in reciprocal deposits, which offset an increase in average nonpublic deposits.
Jack: We continue to be proactive in managing our funding costs, where we can and further reduced short term borrowings in the third quarter.
Jack: Since year end 2023, we've reduced total borrowings and broker deposits by about $307 million or 54%.
Jack: And looking at our total deposit portfolio relative to the magnitude of rate increases that occurred in 2022, and 2023 and the recent 50 basis point decrease we.
Jack: We experienced a cycle to date beta of 53%.
Jack: Excluding the cost of time deposits the non maturity deposit portfolio had a made up 32%.
Jack: Year to date NIM of two 8% the low end of the $2, 85% to 295% range be guidance in January.
Jack: At this time, we are narrowing our expected range for full year 2020 for NIM.
Jack: $2 85 to two 9%.
Jack: As a reminder, this guidance was continues to be based on a spot rate forecast that does not factor in potential future rate cuts.
Jack: Given quarter imbalances in the continued lending competition that Marty discussed we now expect 2024 annual loan growth to come in at the low end of our guided range, 1% to 3%.
Jack: Our year to date cash flows have been lighter than originally model outside of beef. We do expect that the anticipated rate cuts will be accompanied by decreased demand from commercial borrowers.
Jack: We're currently projecting more than one 1 billion and total cash flow over the next 12 months off the loan and securities portfolios combined.
Yeah.
Speaker Change: Noninterest income totaled $9 4 million of third quarter compared to $24 million in the second quarter.
Speaker Change: When we recorded $13 $5 million.
Speaker Change: Pre tax gains on the sale of our insurance.
Yeah.
Speaker Change: We had a small additional gain of 138000 related to this transaction third quarter of 2024.
Speaker Change: Also contributing to the linked quarter variance the net loss of 170000 on tax credit investments in the third quarter.
Speaker Change: This compares to a net gain of 406000 in the second quarter related to a historic tax credit investment with a New York State Refundable component placed into service in that period.
Speaker Change: Limited partnership income of 400000 in the recent quarter. It was about half the level, we reported in the second quarter and swap fee income was down 165000 due to a lower level of back to back swap activity in the third quarter as compared to the linked quarter.
Speaker Change: Recurring noninterest income, which we typically provide guidance on.
Of $9 1 million was down modestly from $9 $3 million in the linked quarter.
Speaker Change: This excludes gains and losses on investment Securities investment tax credits and other assets as well as limited partnership in insurance income.
Speaker Change: Yeah.
Speaker Change: Investment Advisory income, which comes primarily from Courier capital.
Speaker Change: <unk> totaled $2 8 million.
Speaker Change: Relatively flat with the second quarter.
Speaker Change: Our wealth management subsidiary had $3 $2 billion in assets under management at September 32024.
Speaker Change: With year to date AUM growth of approximately $319 million or 10% coming from a combination of market appreciation and positive net inflows of $44 million.
Speaker Change: As a result of business development.
Speaker Change: Yeah.
Speaker Change: Noninterest expense was $32 5 million in the third quarter of 2024 down modestly from $33 million in the second quarter.
Speaker Change: This was primarily due to a lower FDIC assessment in part due to improvement in our leverage ratio.
Speaker Change: And lower other expenses, including other bank charges and timing of director compensation donations.
Speaker Change: 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.
Speaker Change: Third quarter 2020 for provision was driven by a combination of factors, including a slight increase from 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.
Speaker Change: Presenting an effective tax rate of seven 4%.
Speaker Change: Our year to date effective tax rate was 12, 6% and within our guided range for full year of 11% to 13%.
Speaker Change: Our accumulated other comprehensive loss was $102 million at September 32024, and.
Speaker Change: An improvement of $23 7 million from June 30.
Speaker Change: We reported a TCE ratio at September 36, 93%.
Speaker Change: And tangible common book value per share $27 28.
Speaker Change: Excluding the OCI impact the TCE ratio and tangible common book value per share would have been 838%.
$33 <unk>, respectively.
Speaker Change: We continue to expect these metrics to return to more normalized levels over time, given the high credit quality Ashwin nature of our investment.
Speaker Change: Yeah.
Our core financial performance through the first nine months of the year has been strong and generally in line with our expectations.
Speaker Change: As mentioned, we have lowered the expected high end range full year margin to two 9% and.
Speaker Change: And expect 2020 for full year loan growth to come in at the low end of our guided range, 1% to 3%.
Speaker Change: 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 guidance.
Speaker Change: Okay.
Speaker Change: There are no other changes to our previously published guidance, which you'll find outlined in our latest investor presentation.
Speaker Change: That concludes my prepared remarks, I'll now turn the call back to Marty.
Thanks Jack.
Marty Birmingham: Amid a continued challenging operating environment. Our company has remained intensely focused on liquidity capital and earnings.
Marty Birmingham: The actions we've taken over the course of this year have allowed us to expand capital ratios meaningfully.
Marty Birmingham: Including our common equity tier one ratio of 10, two 8% up 85 basis points from 943% at year end 2023.
Marty Birmingham: Many of the strategic actions we've taken.
Marty Birmingham: The sale of our insurance business to adjustments within our indirect business to our decision to wind down our banking as a service offering.
Marty Birmingham: Also have been focused around supporting our core community banking franchise in our existing footprint.
Marty Birmingham: We remain very focused on driving sustainable growth across each of our retail banking commercial banking and wealth management business lines and by extension <unk>.
Marty Birmingham: Giving value into the company for the benefit of our shareholders customers associates and communities.
Marty Birmingham: That concludes our prepared remarks, operator, please open the call for questions.
Marty Birmingham: Thanks.
Speaker Change: We will now begin the question and answer session, if you'd like to ask a question. Please press star followed by one on the telephone keypad AC.
Speaker Change: Change your mind. Please press star followed by Central Bank ask your question. Please ensure your device you said when you take a look.
Speaker Change: We will make a quick pause here for questions to be registered.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Our first question comes from Damon Delmonte from K B W.
Damon Delmonte: Just wanted to start off with a question on margin.
I appreciate the updated guidance here for the fourth quarter, Jack just kind of want to get your thought though.
Damon Delmonte: Have a couple more rate cuts here in 'twenty, four and we have a more.
Damon Delmonte: Eddy flow, a 25 basis point cut in 25.
Damon Delmonte: Can you just give us a little perspective on how you're thinking about the margin kind of given the cash flow expectations and what you're seeing for loan growth.
Speaker Change: Sure so.
Speaker Change: <unk>.
Speaker Change: Just reconfirm that a little over 30% of our loan portfolio is priced off of so for Brian.
Speaker Change: And then on the commercial side that adjust with.
Speaker Change: On the prime side with rate cuts and then sulfur adjust monthly.
Speaker Change: On the consumer side, the prime adjustments generally adjusts on a monthly basis.
Speaker Change: When we provided our margin guidance at the beginning of the year. It was based upon a flat environment. We did some modeling around the impact to NII for rate cuts.
We modeled out that were fairly neutral for the first 50 basis points of course, the expectation on that side was that there was going to be a longer lag for deposit repricing.
Speaker Change: Actually seen our competitors be a little bit more aggressive in adjusting our rates on a posted basis and as such we've reacted a little bit more.
Speaker Change: Faster than we would've anticipated. So we've already started to price down segments of the consumer commercial municipal and or cyclical portfolios and our expectation is that we continue that with additional rate cuts. So.
Speaker Change: We will provide full year guidance.
Speaker Change: Fourth quarter earnings call for 2025, my expectation is that we.
Speaker Change: Kind of remain in that neutral band in the near term.
Okay.
Speaker Change: That's helpful and then with regards to the outlook for loan growth.
Speaker Change: I think Marty you made a comment that the commercial pipeline seem to be to rebuilding right. Now so does that give you.
Speaker Change: Better confidence for kind of maybe mid single digit growth as we go through 2025.
Marty Birmingham: It does Damien thanks for the question of participating this morning, it certainly does.
Marty Birmingham: Also commented last 18 months, we've been focused on liquidity capital earnings.
Marty Birmingham: And in light of the operating environment in light of commentary around concerns over credit et cetera. So we've been selective.
Marty Birmingham: During this period and we have been signaling to our lending teams and to our customers of our interest too.
Marty Birmingham: To rebuild the pipeline and to build momentum.
Marty Birmingham: In support of growth in the range you just talked about for 2025.
Speaker Change: Got it Okay. That's great and then maybe just one more quick one here for Jack on expenses.
Speaker Change: <unk> came in lower than what we were looking for this quarter and down a little bit from last quarter. I guess, how do you think about when you kind of reset the button and going into 'twenty. Five do you think you can kind of maintain a modest.
Speaker Change: Like low single digit type growth.
Outlook here or do you do you have any anticipated expenditures that you are aware our.
Speaker Change: Or you can disclose.
We're certainly focused on reinvesting in our core lines of business for future growth.
Speaker Change: Our mindset over the past couple of years has been certainly focused on expense management and prudent expense management in that regard.
Speaker Change: So as far as full year expense guidance is.
Speaker Change: Concern for 2025 again, we'll provide that update with the fourth quarter call.
I would point to our exit from Vas and the fact that there were 14.
Speaker Change: Ftes associated with supporting that line of business that are going to be redirected towards R. R.
Speaker Change: More mature lines of business and in my mind, Thats cost avoidance, where we would've had to have gone out and hired to support growth in future periods.
Speaker Change: Gotcha that makes sense okay.
That's all I had I appreciate the color. This morning have a great one.
Speaker Change: Statement.
Speaker Change: Okay.
Speaker Change: Our next question comes from David Glick from Stephens.
Speaker Change: Hey, good morning, David <unk> on for Matt Breese.
Speaker Change: Hey, Good morning, David Hi, David can you guys hear me.
Speaker Change: Yes, good morning.
David Glick: Are you guys kind of talked about.
David Glick: 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 to deposit betas on the way down through 2025.
David Glick: And if you kind of expect those figures to be fairly similar to what they were on the up cycle.
David Glick: 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 would expect it to be.
David Glick: A bit slower on the downward re pricing at least for the first couple of rate cuts on deposit betas.
David Glick: A longer lag.
David Glick: But we had experienced previously.
David Glick: We have seen is that we shortened that lag more than anticipated.
The debate the betas again are in line with what we would have anticipated so from my perspective in the near term.
David Glick: Impact to margin would be would be neutral as we continue to see the fed <unk>.
David Glick: Act with additional rate cuts IC fetus catching up.
It's where they went about historically.
Hi.
David Glick: Okay.
David Glick: Okay great.
Speaker Change: And then just on slide 23 of the presentation.
Speaker Change: It looks like the most segments loans that are rolling off at a higher rate than the correct rate.
Speaker Change: I would think those loans or longer duration and we'd see some you'll pick up there I was just wondering if you could provide some commentary around that.
Speaker Change: So that's been the story as far as our ability to expand margin throughout 2024 was that roll off yield on the loan portfolio are being reinvested at higher rates.
Speaker Change: And we've been pretty selective as far as our pricing requirements for deals that we have.
Speaker Change: 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.
Speaker Change: We've been selective in that regard.
Speaker Change: That story continues.
Speaker Change: You need to be focused on.
Speaker Change: Spread maintenance and driving towards.
Speaker Change: Expansion on the earning asset side.
Speaker Change: 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 onetime costs associated with it.
No material onetime costs.
Speaker Change: Okay, Great I appreciate you taking my questions.
Speaker Change: Thanks, David Thanks, David.
Speaker Change: And we currently have no further questions in the queue I will turn the call back over to Martin <unk> for closing remarks.
Martin <unk>: Thanks very much for your help this morning, operator, thanks to all who have participated in our call. We look forward to reporting on.
Martin <unk>: Our results with you in January.
Martin <unk>: Yeah.
Speaker Change: Thank you everyone for your participation you may now disconnect from nickel have a nice day.
Speaker Change: [music].