Q4 2024 Financial Institutions Inc Earnings Call
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Speaker Change: Hello everyone and welcome to the Financial Institutions Inc fourth quarter and year-end 2024 earnings call.
Speaker Change: As a result, we issued $115 million of new capital to many new shareholders and several existing ones through the offering.
Speaker Change: The net proceeds of $108 5 million.
Speaker Change: 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 set.
Speaker Change: Set to reprice this year.
Speaker Change: 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 and support our vision of being a high performing financial institution.
Speaker Change: Jack will provide more details on our financial results in 2025 expectations, shortly but I would like to first touch on a few highlights.
Speaker Change: Regulatory and tangible capital ratios expanded meaningfully.
Speaker Change: Our common equity tier one ratio increased 60 basis points from September 30, and 145 basis points.
Speaker Change: And 2023.
Speaker Change: <unk> ratio increased 147, and 240 basis points respectively.
Cumulated other comprehensive loss was $52 6 million at year end down from $102 million at September 32024, reflecting the balance sheet restructuring.
Speaker Change: Arjun expansion continued up two basis points from the third quarter to 91%.
Speaker Change: In the fourth quarter full year NIM of 286% was on the low end of our guided range.
Speaker Change: Commercial loan growth was strong up three 8% during the quarter and four 5% during the full year 2020.
Speaker Change: Asset quality results remained relatively stable, including annual net charge offs to average loans up 20 basis points consistent with 2023.
Speaker Change: Turning to deposits.
Speaker Change: Remain committed to core in market deposit gathering with relationship based accounts.
Speaker Change: The wind down of our bass offerings.
Speaker Change: As deposits were approximately $100 billion at year end 2024 or.
Speaker Change: We're less than 2% of total deposits.
Speaker Change: <unk> vast partner in three of the Onboarding phase given the progress made in developing migration plans and the partner success in identifying new banking providers.
Speaker Change: Expect the majority of these deposits to outflow in the first half of the year.
Speaker Change: Deposits totaled $5 1 billion at the end of 2024 declining $202 million from September 30, primarily due to typical seasonal reductions in public deposit accounts, which should replenished with normal first quarter tax collection and financing inflows.
Speaker Change: So at the end of 2023 $108 million decline in total deposits is attributed to reductions in broker deposits.
Speaker Change: Reciprocal balances.
Speaker Change: Total loans were up one 7% from September 30, and relatively flat with year end 2023.
Speaker Change: Our commercial loan growth during both the quarter and year was partly offset by a planned reduction in our consumer indirect portfolio.
Speaker Change: As we've shared previously we manage our indirect portfolio based on a blend of demand and spread maintenance and intentionally allowed runoff to outpace originations, while we maintain a strong focus on profitability.
Speaker Change: Spread effects.
Speaker Change: With respect to commercial growth for both the quarter and year was led by commercial mortgage as.
Speaker Change: As Youll see in our earnings release, we've added additional portfolio granularity of construction multifamily owner occupied and owner occupied commercial mortgage loans.
Speaker Change: CRE production of $74 3 million in the fourth quarter was led by multifamily office hospitality and land development.
Speaker Change: We saw notable draws on existing industrial land development as well.
Speaker Change: From a geographic standpoint quarter CRE production was basically an even split between our upstate New York as the Atlantic markets.
Speaker Change: Commercial business loans were up about $11 million or one 7% from September 32024.
Speaker Change: It's a highly competitive market, we see good opportunities to drive credit disciplined commercial business loan growth in 2025.
Speaker Change: There is significant economic development activity, taking place across our New York footprint.
Speaker Change: <unk> Rochester, Buffalo corridor was recognized as a tech hub by the federal government for the region's coordinated focus on semi conductor manufacturing and our branch network is well situated in that geography.
Speaker Change: We believe more of the opportunity stemming from these investments will come to fruition in 2026 and beyond.
Speaker Change: That the most significant project is expected to break ground in November we could start to see some impact later this year.
Speaker Change: Asset quality metrics were fairly stable and the approximately $41 million of nonperforming loans, we reported at year end continue to relate to the two separate commercial relationships that we've previously discussed.
We continue to work closely with all parties involved but don't expect that resolution will take time.
Speaker Change: Commercial and residential net charge offs were essentially nonexistent in 2024.
Speaker Change: Consumer indirect net charge offs did increase from the third quarter, but remained lower than the levels. We reported at year end 2023.
We recorded a provision for credit losses of $6 5 million in the fourth quarter of 2024.
Speaker Change: Compared to $3 1 million in the third quarter.
Speaker Change: Our provision for loan losses in the fourth quarter as compared to the third quarter is attributed to a combination of factors, including higher loan growth as well as increases in net charge offs and qualitative factors.
Speaker Change: The higher qualitative factors were primarily associated with elevated indirect delinquencies when comparing the third and fourth quarters.
Speaker Change: Is somewhat seasonal.
Speaker Change: As a result, the allowance for credit losses.
Speaker Change: Loans to total loans increased six basis points to 1.07%.
Speaker Change: As compared to September 30.
Speaker Change: Is that what we remain comfortable given the health of our portfolio and commitments to credit disciplined lending.
Jack: I would like to now turn the call over to Jack for additional commentary on our financial results in 2025 expectations.
Jack: Thank you Marty good morning, everyone.
Jack: As expected fourth quarter and full year 2024 financial results reflect the recent capital raise and the securities restructuring all.
Jack: All the core business continued to perform solidly.
Jack: Considering the challenges we faced during the last 12 months 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 local market dynamics inform our expectations around these metrics.
Jack: From a profitability standpoint for the full year 2025, we are targeting return on average assets of at least 110 basis points.
Jack: Return on average equity of at least 11, 5% and an efficiency ratio below 60%.
Jack: The balance sheet restructuring, we completed in late December we will create a meaningful lift in our net interest margin starting in the first quarter.
Jack: The Securities sold had an average yield of 174%.
Jack: Purchased were $5 two 6%.
Jack: Resulting in an overall yield on the portfolio of 425 basis points.
Jack: Continued lift in margin in the remaining quarters of 2025 is expected to come from a combination of low production and mix.
Jack: While the downward deposit pricing.
Jack: Largely the maturities and renewals of time deposits.
Jack: As a result, we expect our full year 2025, net interest margin of between 345 355 basis points.
Jack: Using a spot rate forecast as of year end it does not factor in future rate cuts.
Jack: Looking at our fourth quarter 2020 for experience.
Jack: Interest, earning asset yields decreased eight basis points.
Jack: Our overall cost of funds decreased 10 basis points.
Jack: I think the impact of rate cuts in the latter part of 2024.
Jack: While approximately 40% of our loan portfolio is floating.
Jack: <unk> already priced off of prime and sulfur indices.
Jack: It was successful in addressing deposit repricing across all higher cost concentrations retail commercial public deposit sectors.
Jack: In terms of loan growth, we are expecting low single digit growth of between one and 3%.
Jack: We are not discounting the possibility of returning to a healthier mid single digit total loan growth rate in the future given our fourth quarter performance and the size of our pipeline.
Jack: Have chosen to be conservative in our estimates for this year.
Jack: Increased competition.
Jack: Uncertainty about the impact of the proposed policy changes from Washington will have on the business operating supply and labor costs.
Jack: Well as the expected timing of some of the chips manufacturing investments.
Jack: Let us take a more conservative approach for 2025 modeling.
Jack: Commercial lending is expected to be the driving force of 2025% growth.
Jack: Folio expansion towards the mid single digit rate with.
Jack: With Cree C&I business banking all contributing.
Jack: I would also like to note that we are currently projecting $1 $2 billion in total cash flow over the next 12 months from our loan and securities portfolios combined.
Jack: We'll seek to redeploy into credit disciplined lending.
Jack: Residential loans and consumer indirect portfolios are expected to remain fairly flat through the year.
Jack: On the residential side production is expected to be matched by anticipated runoff.
Jack: Competition is very high in this space.
Jack: And while interest rates have come down somewhat.
Jack: I believe we're still several quarters away from normal refinancing activity.
Jack: Consumer indirect balances are expected to end the year relatively flat.
Jack: Runoff may continue to outpace production in the first quarter of the year, which is typically a bit slower due to the seasonality of loan demand.
Jack: We expect that to shift in the middle of the year.
Jack: Deposit balances are expected to remain somewhat flat for the year.
Jack: With vast related deposit outflows, partially offset an anticipated growth in other categories.
Jack: Our marketing efforts are focused around core nonpublic deposit growth.
Jack: We're prepared to supplement that with short term borrowings and broker deposits as needed.
Jack: Well below levels, we've carried in the past.
Jack: We are projecting quarterly noninterest income nine $5 million to $10 million in 2025.
Jack: Losses on investment Securities impairment on tax credits and other categories that are difficult to predict such.
Such as limited partnership income.
Fourth quarter 2020 for non interest income was impacted by the restructuring as well as discrete events like the sale of our insurance subsidiary, which created additional noise and full year results.
Jack: And looking at what we consider to be recurring noninterest income.
Jack: Results were $8 8 million for the quarter compared to $9 1 billion in the third quarter and eight.
Jack: $9 million in the year ago period.
Jack: Investment Advisory revenue is a key contributor noninterest income for US primarily comes from carrier capital.
Jack: Assets managed by our wealth management subsidiary associated revenues were down on a linked quarter basis due to some organizational changes.
Jack: We saw the departure of two advisers during the quarter.
Jack: However, we recently hired a new team and has already brought in business, which more than offset the outflows we experienced.
Jack: We expect noninterest expense of approximately $35 million per quarter in 2025.
Jack: This represents a 5% increase in core annual operating expenses versus 2024.
Jack: Included in this are expenses for in process initiatives that we believe will support incremental performance both from a revenue perspective.
Jack: Such as enhancements to our Treasury management capability.
Jack: As well as have enhanced efficiency.
Jack: Including service software to facilitate effective change management and prioritize head count.
Jack: We believe we will be able to effectively manage expenses, even as we invest in our people processes and technology to support our future growth and performance.
Jack: Including a sub 60% efficiency ratio.
Jack: I do want to address the albeit in fourth quarter 2020 for expenses.
Jack: The primary driver of this was a $1 $3 million pension plan settlement accounting charge that was triggered in the fourth quarter as a result of lump sum withdrawals during the year.
Jack: We had amended the plan in the fourth quarter of 2023.
Jack: Remove a lump sum distribution threshold.
Jack: Several terminated vested participants took advantage of the opportunity in 2024.
Jack: This will ultimately reduce the size and scale of our pension plan going forward.
Jack: While we may see settlement charges in future years, theyre not expected to be at this level.
Jack: The computer and data processing expense increase of about $1 $3 million related to some of the ongoing initiatives I've mentioned.
Jack: Which are factored into our 2025 guidance.
Jack: IC assessment expense was half a million dollars higher than in the third quarter.
Jack: As a result of the increase in the assessment rate given the fourth quarter Securities laws.
Jack: For this reason.
Jack: <unk> expense is expected to remain elevated through 2025.
Jack: Though to a lesser degree than in the recent quarter.
Jack: This was also reflected in our guidance.
Jack: The 2025 effective tax rate is expected to be between 17% to 19%.
Jack: Including the impact of amortization of tax credit investments placed in service in recent years.
Jack: Yeah.
Jack: We're budgeting full year net charge offs of between 25 to 35 basis points of average loans.
Jack: Our experience in each of the last two years has been lower than that.
Jack: We are being conservative with our outlook at the start of the year.
Jack: Overall, our performance targets in 2025 and focus on profitability first and foremost.
Jack: We're not focused simply on growth we are focused on profitable growth.
Jack: We are not just focused on expense management.
Jack: We are prioritizing investments.
Jack: Support incremental revenue generation and efficiency in how we operate.
Jack: The success of the capital raise and restructuring in the recent quarter.
Jack: We're very well positioned to execute on those objectives in 2025.
Speaker Change: That concludes my prepared remarks, I'll now turn the call back to Marty.
Marty: Thank you Jack.
Marty: We've been on a journey to transform this company into a more efficient and profitable institution.
Marty: Over the past 18 months, we've looked closely at our organizational structure, our business lines and the composition of our balance sheet.
Marty: Taking necessary actions to ensure all are contributing to our success in both the near and long term.
Marty: 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.
Speaker Change: With respect to our board earlier. This week, we were pleased to announce the appointment of a new director Angela Panzarella.
Speaker Change: Angela brings extensive business and nonprofit leadership experience both globally and in upstate New York as well as past public company Board experience.
Speaker Change: As we continue to grow and evolve as a company, we look forward to benefiting from her perspective and counsel.
Speaker Change: That concludes our prepared remarks.
Speaker Change: Operator, please open the call for questions.
Speaker Change: Thank you to ask a question. Please press star followed by one on your color. Thank you Pat now.
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Speaker Change: Our first question today comes from Damon Delmonte from <unk>. Your line is now open.
Damon Delmonte: Hey, good morning, everyone I hope everybody is doing well.
Speaker Change: For taking my question.
Speaker Change: Just quick question on loan growth and the outlook.
Speaker Change: Given some of the commentary about the the positive trend in the market.
Speaker Change: The fact that indirect auto.
Speaker Change: Not going to be paying off at the same level as it has been recently.
Speaker Change: Kind of wondering.
Speaker Change: Thoughts behind the conservative, 1% to 3% growth kind of feels like it could be.
Speaker Change: More towards the middle Middle single digits, just kind of curious as to how you guys are looking at that.
Speaker Change: Hey, David This is Jack Thanks for that question so.
Speaker Change: Looking at the portfolio as a whole I think youre spot on.
Speaker Change: Mid to single digit range in the commercial portfolio.
Speaker Change: We do have some pent up demand that's on the sidelines for construction lending.
Speaker Change: We are waiting for some additional rate cuts to come to fruition before that activity heats up.
Speaker Change: The activity that we're seeing in this Eric Hughes market. It is more towards the back half of the year early in the fourth quarter of 2026.
Speaker Change: We're just conservative with.
Speaker Change: Loan growth estimates at this stage of the game, but we're optimistic that they'll heat up.
Speaker Change: Back half of the year with some rate cuts and then some of that activity that we're talking about from economic development in this region.
Speaker Change: Got it okay. That's helpful. Thank you.
Speaker Change: And then with respect to the margin outlook I appreciate the guidance for the full year.
Speaker Change: I think at the time of the operating we kind of estimated about 30 38 basis point benefit to the margin.
Just given the modest increase there.
Speaker Change: Fourth quarter.
Speaker Change: Is it fair to kind of assume something in the high 300, <unk> for a starting point in the first quarter of 25, and then kind of.
Speaker Change: Our march towards a level that gets you to a full year in that $3 45 to $3 55.
Speaker Change: Yes, we're actually looking at.
Speaker Change: Quarter margin in the 330 range and then expansion beyond that and Thats really driven by the cash flow that's coming off of a 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.
Speaker Change: Two earning asset improvement over time, that's a contributing factor and then in the fourth quarter we saw.
Speaker Change: Cost of funds declined 10 basis points from one quarter.
Speaker Change: The first 75 basis points cuts to come to fruition and we were positively surprised by our ability to.
Speaker Change: Have a faster reaction to rate cuts across all deposit portfolios than originally anticipated and there is some additional lag that's coming to play for catch up on deposit pricing in 2025 as well.
Speaker Change: Got it okay. That's great color. Okay. That's all that I had I'll step back for now thank you.
Speaker Change: Thanks, David.
Speaker Change: The next question is from Tyler Cachet, sorry from Stephens. Your line is now open.
Tyler Cacciatore: Hey, Good morning. This is Tyler cacciatore on for Matt Breese.
Speaker Change: Right.
Speaker Change: Sure.
Speaker Change: Just wanted to start off on the reserve build I know you talked about it a little bit and so that the reserve increased six basis points to one point of seven.
Speaker Change: I was just hoping you could provide some more color 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: Yeah. This is Jack I'll take that so.
Speaker Change: We see it on the call the fourth quarter was largely influenced by the loan growth that we observed in the fourth quarter that we had to reserve for.
Jack: The qualitative side.
Jack: 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.
Jack: Polyol, which increased in the fourth quarter as expected from a seasonal perspective. However, it was lower than what we experienced in the fourth quarter of 2023.
Jack: And then on the commercial portfolio is the qualitative drivers are influenced by national portfolio metrics. So when you look at.
Jack: So our real estate portfolio behavior at a national level of experiences.
Jack: Higher delinquency levels and what we have internally. So we have to factor that in from a seasonal perspective, but we believe the credit quality of that portfolio, 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.
Jack: Ncos in that 25% to 35 basis point range.
Jack: Loan growth that we've projected.
Jack: As well as the coverage ratio maintenance at one 7%.
Jack: Okay.
Speaker Change: Okay, great. Thanks, and then just one more from me tangible book came in a bit below what we're expecting what was the period end Aoc.
Speaker Change: We saw a OCI tick up another $25 million at the end of the quarter, just driven by and the period increases in the belly of the curve around the five year point, which really impacts.
Speaker Change: Yeah.
Speaker Change: Mark on the Securities portfolio.
Speaker Change: So yes, the Aoc Mark total I think it was $50 million yes.
Speaker Change: Okay, great. Thank you. Thank you for answering my question Thats It for me.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star followed by one on yesterday.
Speaker Change: Pat now.
Speaker Change: The next question is from.
Speaker Change: Sure Ravi from Piper Sandler Your line is now open.
Speaker Change: Good morning.
Speaker Change: So just wanted to ask about the <unk>.
Speaker Change: A follow up on 2025.
Speaker Change: Taxes.
Speaker Change: Talk about the pur.
Speaker Change: Expense.
Speaker Change: Quarterly expense of roughly $35 million per quarter I'm, just wondering if you could.
Speaker Change: Following the <unk>, where you had some.
Speaker Change: A bit of noise in terms of nonrecurring items. If you could just talk through maybe the cadence of.
Speaker Change: Expense growth through the year that.
Speaker Change: Starting point at 35, and when you feel like you can hold it at those levels or.
Speaker Change: Any color there for modeling.
Speaker Change: Yes, I mean, the year over year normalized expense growth is expected to be about 5% and there was a lot of noise in 2024. So I understand the question. When we look at fourth quarter. If you back out the $1 $3 million of pension settlement accounting expense that we have.
Speaker Change: We were right around $35 million NIH, Mark so that quarterly guidance is fairly consistent with our fourth quarter results on a normalized level.
Speaker Change: Okay.
Speaker Change: And then just in terms of the <unk>.
Speaker Change: Your confidence level in getting to that.
Speaker Change: Some of those profitability metrics, you mentioned the efficiency ratio.
Speaker Change: 60%.
Speaker Change: <unk>.
Speaker Change: I think.
Speaker Change: Incremental rate cuts would still help if you get them.
Speaker Change: And we'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.
Speaker Change: Kind of missing that mark.
Speaker Change: Loan growth certainly influences our ability to achieve the efficiency ratio we've demonstrated.
Speaker Change: Our very strong corporate responsibility as it pertains to expense management.
Speaker Change: About 80% of our revenue stream is driven by noninterest income and our margin expansion and as I mentioned earlier is really influenced by the roll off yield of the loan portfolio.
Speaker Change: 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 60 efficiency ratio.
Speaker Change: Okay, Great can I answer the question.
Speaker Change: Yes, Yes, and then just following up I mean, I think you've already answered this.
Speaker Change: Just clarification on that sounds like the 107, the reserve to loan ratio.
Speaker Change: Pretty comfortable there.
Speaker Change: Just curious.
Speaker Change: If you could talk about what the and sorry, if I missed it what the.
Speaker Change: Reserve levels are on.
Speaker Change: On the new commercial.
Speaker Change: To just maybe try to get a sense of.
Speaker Change: The variability there going forward as you grow that book.
As opposed to consumer.
Speaker Change: Yes.
Speaker Change: From a 100 basis points.
Speaker Change: On the commercial portfolio I don't have that directly in front of me.
Speaker Change: Okay. So it doesn't sound like you feel like that's going to put a lot more pressure on that.
Speaker Change: Or more pressure on the reserve to loan ratio necessarily going forward.
Speaker Change: That's all.
Speaker Change: Okay, Alright, I appreciate it thank you.
Speaker Change: Yes, Thanks, Greg.
Speaker Change: We have no further questions I'd like to hand back to Marty Birmingham to complete.
Marty Birmingham: Just want to thank everyone for their participation. This morning, we look forward to continuing the conversation with our second quarter results.
Marty Birmingham: This concludes today's call. Thank you for joining you may now disconnect your lines.
Marty Birmingham: [music].