Q2 2025 Financial Institutions Inc Earnings Call
Hello everyone, and thank you for joining the financial institutions Inc. Second quarter, 2025 earnings, call. My name is Lucy and I will be coordinating your call today.
Speaker Change: During the presentation, you can register a question by pressing star, followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. It is now my pleasure to hand over to your host K Croft, director of investor relations to begin. Please go ahead.
K Croft: Thank you for joining us for today's call. Providing prepared comments will be present and CEO Murray.
Speaker Change: ringham and see if
Speaker Change: Joined by additional members of the company's leadership team during this question and answer session.
Speaker Change: Today is 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 and uncertainties and other factors. We refer you to yesterday's earnings release and investor presentation, as well as historical FCC 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 for installations of these measures to gaap financial measures. We're provided in the earnings release files as an exhibit to form a k or in our latest investor presentation available on our IR website.
Speaker Change: Www.fis.com, please note that this call includes information that may only be accurate. As of today's date, July, 25th 2025, 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 financial performance for the second quarter of 2025 was marked by growing Revenue that supported a 4% increase in net income available to Common shareholders to 17.2 million and a 5% increase in diluted earnings per share as compared to the link quarter.
Marty Birmingham: Our results contained a benefit from our prudent balance sheet stewardship, which translated into continued debt, interest margin expansion, up, 14 and 62 basis points from the LinkedIn and year ago. Quarter respectively, and net interest income growth up, approximately 5% and 19%.
Marty Birmingham: Complimenting knee growth was durable. Non-interest income of 10.6 million up, 2.4% from 10.4 million in the first quarter.
Marty Birmingham: Second quarter 2024, non-interest income of 24 million included, a 13.5 million gain associated with the sale of our former Insurance business.
Marty Birmingham: Excluding this game, not interest income was 10.5 million.
Marty Birmingham: We continue to deliver from a profitability standpoint achieving an annualized return on average assets of 113 basis points.
Marty Birmingham: Up, 3 basis points from the first quarter and an efficiency ratio of just below 60%.
Marty Birmingham: At the midpoint of 2025, we remain solidly on track to achieve the targets. We laid out at the start of this year and are affirming our full year 2025 guidance today.
Marty Birmingham: For the loans at period end of 4.54 billion were fairly consistent with March 31st as Commercial Business. Lending growth was more than offset by a reduction in consumer indirect balances.
Marty Birmingham: Laws.
Marty Birmingham: And a year-over-year basis total and average loans are each up about 2%.
Marty Birmingham: So a commercial loans of 2.94 billion were flat with March, 31 2025 and up 5% from June 3024.
Marty Birmingham: With respect to commercial business loans, we experienced a 2.4% increase during the quarter, which reflected both new originations and increased line utilization and balances in this category were up modestly year-over-year.
For flat with March, 31, 2025, and up 6%. Year-over-year driven by growth in our Upstate, New York markets,
Marty Birmingham: Our overall commercial law, portfolio remains healthy.
Marty Birmingham: Non-performing commercial loans declined by 7 million. From March 31 to June 30th of this year and while we did report 2.5 million of commercial net charge offs in the quarter.
Marty Birmingham: The higher charge off this quarter related to 1 of the 2 commercial relationships that have made up the majority of our non-performers for some time.
As we have shared with you, 1 of these is a commercial relationship made up of multiple credit facilities to a CRA sponsor in our Southern Tier region.
And the second quarter, the multi-bank group foreclosed on the related property and the associated assets were moved into a joint limited liability Corporation.
Marty Birmingham: Given this, the related assets are no longer reflected in non-performing loans.
Marty Birmingham: A 580,000 charge off was recorded in the second quarter related to this specific loan. That was part of the overall credit relationship.
Marty Birmingham: We also charged off a portion of another credit facility associated with this relationship for which we had a specific Reserve in place, driven by a change in the current appraised value of the underlying real estate serving as collateral.
Marty Birmingham: As of June 30th, our remaining credit exposure to this borrower, totaled 7.1 million.
Marty Birmingham: And we have a 2.9 Million specific Reserve associated with the relationship.
Marty Birmingham: The remaining mortgage loan and line of credit are secured by property in the Tomkins County Ithaca area and we continue to actively manage this situation in pursuit of resolution.
Marty Birmingham: given our existing commercial pipelines and our strong first quarter of loan growth,
Marty Birmingham: we continue to expect to achieve full year loan growth of between 1 and 3%.
Marty Birmingham: The pipeline is largely supported by commercial lending and our Upstate New York markets, where we have seen momentum in our roster region in particular.
Marty Birmingham: Low growth is paper to the Mid-Atlantic region, given High competition from lenders and increased refinance, activity for construction loans.
Which is a testament to the high quality of the sponsors we are working with.
Marty Birmingham: looking out further, we believe that we'll see, stronger, lending opportunities in early 2026
Marty Birmingham: With activity stimulated by the recently passed tax bill and pent-up demand, that would be accelerated by potential rate cuts.
Marty Birmingham: Residential Landing was up modestly from the end of the link quarter and flat with a year ago, with credit metrics remaining solid and favorable.
Marty Birmingham: While National Housing inventory is up, notably it continues to be very tight in our Upstate, New York markets, particularly in Rochester, as we continue to face High competition.
Marty Birmingham: Home equity lending remains a bright spot as homeowners opting to stay in their homes, focus on Home, Improvement or debt consolidation.
Marty Birmingham: Year to date closed home equity loans and lines of credit are up 44% from the comparable period in 2024 while year to date the application volume is up. 19%
Marty Birmingham: Consumer indirect balances were down, 2.3% from March, 31st, and 7 year-over-year to 833.5 million at June 3, 0.
Marty Birmingham: Consistent with much of the industry, many of the new car dealers. We work with saw a jump in sales in March as many consumers who were contemplating car purchases opted to do. So before Auto tariffs went into effect,
Marty Birmingham: Reduced consumer demand translated to a Slowdown in production, through much of the second quarter coupled with our spread to discipline that did not file. Dramatic pricing. Reductions observed from competitors.
Marty Birmingham: However, purchase activity experienced a rebound in June that has continued in July voting well for third quarter production.
Credit metrics for this asset class improved in the second quarter, our consumer, indirect net charge. Operatio was 45 basis points down from 103 basis points in the first quarter and non-performing Loans fell. 12% on a link quarter basis.
Marty Birmingham: We have a demonstrated track record through multiple economic Cycles.
Marty Birmingham: With a yield of 6.6% in the most recent quarter and newly originated. Loans coming on at more than 8%, as well as a small, average, loan sizes, and short, duration supporting steady cash flow. This portfolio provides us with very attractive risk adjusted returns.
Marty Birmingham: Overall, net charge offs were 36 basis points of average loans in the second quarter and 29 basis points for the first half of 2025, and our full year expectations are between 25 to 35 basis. Points are unchanged
Marty Birmingham: Period. End total deposits were down about 4% from March, 3120 2025, reflective of typical seasonality within our public deposit portfolio, as well as the continued off flow of banking as a service or Bass deposits.
Marty Birmingham: As a reminder public deposits sourced through the more than 300 municipalities that we serve throughout Upstate New York Peak in the first and third quarters.
Marty Birmingham: Total deposits were relatively flat with June 30th. 2024, as an increase in broker deposits offset bass deposit, outflows and a decrease in reciprocal, deposits.
Marty Birmingham: Average deposits were relatively flat as compared to both the length and year ago quarters.
Marty Birmingham: As a reminder, we are planning for flat deposits year-over-year in 2025 given the line down of our bass offering which had approximately 100 million of associated deposits. Year end 2024
Marty Birmingham: At the end of the second quarter, just 7 million of bass related, deposits remain on our balance sheet.
We're in the process of migrating our final live bass client to its new banking partner and expect that to be completed late in the third quarter.
Speaker Change: It's not my pleasure to turn the call over to jack for additional commentary, on our performance and our outlook for the second half of the year.
Jack: Thank you. Marty. Good morning, everyone.
Good morning. Shared our full year 2025 guidance remains unchanged.
Jack: Including net, interest margin of between 345 and 355 basis points.
The 14 basis points of margin expansion achieved during the quarter was a result of both. Improved yields on average earning assets to the 2 of 8 basis points, and our ability to effectively manage deposit costs.
Jack: was declined, 6 basis points for March, 31st 2025
Jack: Average low yields were up, 6 basis points.
Jack: And our average investment Securities portfolio yield increased by 9 basis points.
Jack: We actively manage our Investment Portfolio to balance duration, yield and risk.
Jack: Which led us to execute a modest restructuring of 60 million dollars in mortgage back securities.
Jack: The restructuring occurred in early June and the sole portfolio was anchored in bonds that were experiencing increased prepayment speeds.
Jack: This transaction did not result in a book loss.
Jack: We continue to anticipate incremental margin expansion through the remainder of the year as we focus on reinvesting, more than 500 million and expected Loan, cash flows into higher yielding loans while remaining focused on management of funding costs.
As a reminder, our modeling uses a spot rate forecasts as of the most recent quarter on and does not factor in future rate cuts.
As we've shared in the past, our balance sheet is fairly neutral for the first 50 basis points of potential cuts, and we'd expect to see benefit beyond that.
Jack: Largely due to lags and deposit repricing.
Jack: And the second quarter, not an interest income was 10.6 million.
Jack: Up 200,000 from 10.4 million recorded in the first quarter.
Jack: Second quarter company-owned life. Insurance income was 3 million.
Jack: From 2.8 million last quarter.
Jack: As a reminder, in the first quarter, we initiated a fully restructuring.
Jack: And given the late June Redemption of the surrendered policy proceeds from the carrier.
Jack: This contributed to higher levels of koi Revenue, in the first half of the year.
Jack: The expect our future quarterly run rate to be reduced by approximately 275,000 from recent levels.
Investment advisory Revenue increased approximately 5% on a link.
Jack: Quarter basis and 4% from the second quarter of 2024.
Jack: career Capital experienced positive, net flows, his new business in market-driven gains offset outflows
Jack: Driving AUM to 3.34 billion at June 30th.
Or 7% from March 31st.
Jack: We continue to expect non-interest income of between 40 to 42 million for the full year 2025.
Jack: Excluding losses on investment Securities impairment of investment tax credits.
And other categories that are difficult to predict.
Jack: Such as limited partnership income.
Jack: Non-interest, expense was 35.7 million in the second quarter?
Jack: Compared to 33.7 million in the linked quarter.
Jack: Our second quarter results, were somewhat elevated in part due to timing and some higher costs that are expected to be non-recurring.
Jack: Including certain benefits and technology related expenses.
Jack: as a reminder first quarter expenses, were lower than anticipated,
Given time and variances related to plan spending and a sizeable deposit related recovery recorded for that period.
Second quarter, salaries and employee benefit. Expenses were 1.2 million higher than the first quarter?
Given plans to adding additions.
Jack: As well as elevated. Medical claims in the second quarter.
Jack: Due to an increase in higher cost claims.
Jack: We have stop loss Insurance in force as part of our self-insured medical plan and we expect that the insurance to cover some of the higher cost claims in the second half of the year.
Jack: With overall medical expense expected to moderate.
Jack: As we shared with you, when we introduced our guidance in January and I this year includes a number of in process technology enhancement and upgrade initiatives.
Jack: Among these is an ATM conversion project which we began in late 2024 and is expected to be completed later this year.
Jack: This contributed to the 39200 increase in occupancy and Equipment, expenses over the first quarter. As did timing given a change in facilities, maintenance service centers,
computer and data processing expenses were also up 392,000
given higher expenses for in process initiatives and enhancements.
Jack: Related to cyber security and risk management software to support our Cree monitoring and stress testing process.
Jack: These increases were partially offset by lower Professional Services and other expenses as compared to the linked order.
Year is 8. Our expense run rate is on track with our full year guide of approximately 140 million and we remain intently focused on expense management, through the coming quarters to support positive, operating leverage of 2025
Jack: Our provision for credit losses. Was 2.6 million in the current quarter compared to 2.9 Million in the links quarter.
Jack: The lower provision on a linked. Quarter basis was driven by a combination of factors including Improvement in the forecasted loss rate for pool loans and a reduction in specific Reserves.
Jack: Partly offset by higher net charge offs.
Jack: In June 30th 2025, the loan loss Reserve coverage ratio was 104 basis points.
Jack: compared to 108 basis points in March, 31st 2025
if we continue to remain comfortable at this level, given our ongoing focus on credit discipline,
The effective tax rate is expected to fall between 17 to 19% for the year including the impact of the amortization of tax credit Investments placed in service in recent years.
Jack: A capital position remains strong with regulatory and tangible Capital ratios expanding.
Jack: I'm an equity. Tier 1 ratio, increased 46, basis points from March 31st and 81 basis points from June 30th 2024.
Our tce ratio increased 46 and 220 basis points respectively.
As we shared with you in our April, investor call. When the second quarter, we utilized a portion of the proceeds of our public Equity offering to call 10 million of fixed, the floating sub debt. That was issued in 2015 and began a re-pricing quarterly in April,
Jack: Outstanding the subordinated debt for the company currently total 65 million including the remaining 30 million tons from April 2015.
Jack: And the 35 million tons issued in October 2020.
Jack: We will continue to evaluate options for these sub that facilities moving forward.
Marty Birmingham: That concludes my burger marks, and I'll now turn the call back to Marty. Thanks Jack.
Into 2026.
Speaker Change: We believe We are on the right path. Squarely focused on the fundamentals of community banking.
Speaker Change: We have strong retail and Commercial Banking franchises that are complemented by a growing wealth management business.
Speaker Change: With a stronger Capital position and capacity for growth, a well, situated Branch Network and experienced in Market Talent. We believe we are well, positioned to maximize the strong organic growth opportunities. We see in our core Upstate New York markets,
This strengthens our confidence in our ability to deliver consistent execution, to drive value over the long term.
Speaker Change: I would like to thank you for your attention this morning. Next week, we look forward to engaging with many of you further at the KBW Community Bank investor conference in New York.
Speaker Change: That concludes our prepared remarks to operator, please open the call for questions.
Speaker Change: Thank you to register a question. Please. Press star. Followed by 1 on your telephone keypad. Now, if you change your mind, please press star followed by 2.
Speaker Change: I'm preparing to ask you a question. Please, ensure your device is unmuted locally.
Speaker Change: The first question is from Damon Delonte with KBW. Damon your line is now open. Please go ahead.
Hey, good morning, everyone. Hope you're all doing well and, um, thanks for taking my questions. Um, just wanted to start off with, uh, the outlook for loan growth. Um, well, first off, I mean, thanks for reaffirming the, the guidance of what you provided before, it's good to see that that thing's kind of remain on track. Um, so just kind of curious, you know, with the loan growth Outlook, um, you know, Marty would you say that the the trends in the upstate New York markets are much more. Um, providing much more opportunity for you than the the Mid-Atlantic area. Obviously, Mid-Atlantic last smaller of your overall portfolio, but just curious, if like you're seeing pockets of of growth across your footprint, which could maybe, you know, get you to the the higher end of your range for the full year.
So yeah, we have seen and our recent experience Upstate being, uh, having more momentum, more robust opportunities, Damon. The other thing that has impacted, uh, our overall growth has been as, as I mentioned, the prepayment of construction loans, um, I'm fairly meaningful number actually a year ahead of schedule. So, while that is challenging for us to drive the balance sheet, footings, it definitely reinforces the, uh, strong quality of the underlying credits and the, uh, sponsors that we are working with and would emphasize that point
Speaker Change: Gotcha, okay, that's helpful. Um, and then maybe um, maybe 1 for Jack. Um, when you were talking when you kind of given some of the the points of guidance, um, did you say that you thought the provision would be similar to this current quarters level or were you referencing net charge off?
Marty Birmingham: Um, provisioning for the quarter was impacted by the performance of our, uh, overall loan portfolio with higher prepayment speeds that came through as Marty reference. So given that ceil's of Lifetime loss estimate having a shorter average life on the portfolio. Reduces forecasted lifetime losses, which resulted in that lower provisioning level. So, all else equal I would expect our coverage ratio to remain in that 104 to 108, uh, basis point range for the rest of the year.
Uh, so that was some commentary on on provisioning uh as it pertains to charge offs.
Marty Birmingham: Uh, despite the higher charge offs in the second quarter, which were related to the commercial loans that Marty referenced in the call were maintaining our full year guidance of the NCO range.
Marty Birmingham: Okay. All right. Perfect. Um,
Marty Birmingham: And then, I guess this lastly on the on the expense front. Um I think you pointed out a couple couple items in the, the conversation line and I I can see line which kind of drove things up. So if we kind of, you know, zero in on that 140 million for the full year, we could probably pull back those 2 categories a little bit and uh that would probably get us get us on on par there that accurate.
Marty Birmingham: Yeah, we've continued to indicate that our um, quarterly expense guidance does have some volatility volatility associated with timing. You know, year to date our knees running around 70 million dollars, or full year, guidance was for 140 that remains intact.
Marty Birmingham: The second quarter was driven by some higher, uh, medical costs associated with our self-insured policy and some high-cost claimants. Uh, we do have stop loss insurance that we expect to kick in and, and normalize, uh,
for that volatility for the next 2 quarters.
Damon Delonte: Thanks, Damon.
We currently have no further questions so I'd like to hand back to Marty Birmingham for any final and closing remarks.
Marty Birmingham: Thanks for your help this morning, operator and thanks to those that have participated. We look forward to uh talking to you at the conclusion of our next quarter.
This concludes today's call, thank you for joining. You may now disconnect your line.