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FI

FINANCIAL INSTITUTIONS INC (FISI)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 was significantly impacted by a one‑time deposit-related fraud event, driving noninterest expense to $54.0M and diluted EPS to $0.11; net interest margin (NIM) stabilized at 2.78% and net income was $2.1M .
  • Deposits grew 3.5% QoQ to $5.40B and 5.0% YoY, supporting liquidity that management characterized as “nearly $1.5B”; anticipated 12‑month portfolio cash flow is ~$1.1B, underpinning plans to redeploy into higher‑yielding assets .
  • The sale of SDN Insurance Agency closed April 1, 2024, generating ~$27M in proceeds and an after-tax gain of ~$11.2M; management expects the transaction to add ≥40 bps to regulatory capital and >30 bps to TCE in Q2 .
  • Guidance: NIM 285–295 bps maintained; loan and deposit growth 1–3% maintained; effective tax rate updated to 13–15%; recurring noninterest income reset lower post-insurance sale and noninterest expense lowered, implying operating leverage improvement ex-fraud .
  • Potential stock catalysts: resolution/recovery from the fraud event, visible margin expansion as cash flows are redeployed, and capital ratio lift from the insurance sale .

What Went Well and What Went Wrong

  • What Went Well

    • Strong deposit growth across public, nonpublic, and reciprocal categories (+$183.8M QoQ), enabling reductions in short‑term borrowings and brokered deposits and supporting NIM stability; “our liquidity position may be the strongest it has ever been” .
    • NIM stabilized at 2.78% with monthly improvement through Q1; March NIM was 2.80%, and management reiterated full‑year NIM guidance of 285–295 bps with expected modest expansion .
    • Strategic portfolio actions: closed sale of insurance subsidiary (~$27M proceeds; ~4x 2023 insurance revenue), with management planning to redeploy proceeds to higher‑yielding earning assets and strengthen capital in Q2 .

  • What Went Wrong

    • A deposit-related fraud event drove ~$18.4M pre‑tax loss and ~ $660K legal/consulting fees, elevating noninterest expense to $54.0M (+54% QoQ), and compressed EPS to $0.11 .
    • Noninterest income fell to $10.9M (−$4.5M QoQ) primarily due to normalized company-owned life insurance (COLI) income following a Q4 redeploy strategy; investment advisory income also declined YoY .
    • Allowance coverage ratio declined to 0.97% from 1.14% in Q4 as delinquencies improved and consumer indirect balances fell; while net charge-offs improved to 0.28% (annualized), indirect auto charge-offs remained elevated vs historical norms, prompting analyst questions .

Financial Results

Income Statement and Profitability vs Prior Periods

MetricQ3 2023Q4 2023Q1 2024
Net Interest Income ($USD Millions)$41.677 $39.886 $40.082
Noninterest Income ($USD Millions)$10.486 $15.368 $10.901
Noninterest Expense ($USD Millions)$34.735 $35.047 $54.013
Net Income ($USD Millions)$14.022 $9.780 $2.070
Diluted EPS ($USD)$0.88 $0.61 $0.11
Net Interest Margin (%)2.91% 2.78% 2.78%
Efficiency Ratio (%)66.47% 59.48% 105.77%
ROA (Annualized, %)0.92% 0.63% 0.13%
ROE (Annualized, %)12.96% 9.28% 1.83%

Balance Sheet and Segment Composition (Period-End)

MetricMar 31, 2023Dec 31, 2023Mar 31, 2024
Total Assets ($USD Millions)$5,966.992 $6,160.881 $6,298.598
Total Deposits ($USD Millions)$5,141.307 $5,212.912 $5,396.757
Total Loans ($USD Millions)$4,243.332 $4,462.139 $4,442.046
Commercial Business Loans ($USD Millions)$695.110 $735.700 $707.564
Commercial Mortgage Loans ($USD Millions)$1,841.481 $2,005.319 $2,045.056
Residential Real Estate Loans ($USD Millions)$591.846 $649.822 $648.160
Consumer Indirect Loans ($USD Millions)$1,022.202 $948.831 $920.428
Noninterest-Bearing Demand Deposits ($USD Millions)$1,067.011 $1,010.614 $972.801
Savings & Money Market ($USD Millions)$1,701.663 $2,084.444 $2,064.539
Time Deposits ($USD Millions)$1,471.382 $1,404.696 $1,560.586

Credit KPIs

MetricQ3 2023Q4 2023Q1 2024
Net Charge-Offs to Avg Loans (Annualized, %)0.14% 0.38% 0.28%
Allowance for Credit Losses to Total Loans (%)1.12% 1.14% 0.97%
Non-Performing Loans to Total Loans (%)0.21% 0.60% 0.60%
Allowance for Credit Losses to NPLs (%)521% 192% 161%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Interest Margin (NIM)FY 2024285–295 bps 285–295 bps Maintained
Loan GrowthFY 20241–3% 1–3% Maintained
Deposit GrowthFY 20241–3% 1–3% Maintained
Net Charge-OffsFY 202430–40 bps 30–40 bps Maintained
Recurring Noninterest IncomeQuarterly/FY 2024“Relatively flat vs 2023” (ex volatile items) $8.5–$9.0M per quarter; $36.5–$38M FY (ex certain items) Lower reset post insurance sale
Noninterest ExpenseQuarterly/FY 2024“Relatively flat vs 2023” $33–$34M per quarter; $135–$136M FY (ex $19M fraud costs) Lower run-rate post insurance sale
Effective Tax RateFY 202414–16% 13–15% Lower
DividendQ2 2024 Payable$0.30 declared in prior periods $0.30 per common share (payable July 2, 2024) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023, Q4 2023)Current Period (Q1 2024)Trend
NIM trajectoryApproaching bottom; September NIM 2.88%; Q4 full‑year low end possible Stabilized at 2.78% with monthly improvement; March 2.80%; FY NIM 285–295 maintained Improving/stable
Deposit betasCycle‑to‑date 38% (ex time) 45% total in Q4; 46% total; non‑maturity 28%; betas expected to slow in 2024 Moderating
Liquidity/cash flowSecurities cash flow ~$140M annually ~ $1.1B anticipated 12‑month cash flow; “nearly $1.5B” available liquidity Strong runway
BaaS deposits~$77M at Q3 end; onboarding measured ~ $116M; pipeline moderated, focus on select partners Measured growth
Indirect auto creditElevated charge-offs; seasoning effects Delinquencies down >$12M; charge-offs elevated but expected to improve Improving delinquencies
CRE oversightStress testing loans >$1M; DSCR ≥1.0 in most scenarios Continued disciplined underwriting; NPLs stable at 0.60% Cautious/steady
Capital ratios/TCETCE 5.25% at Q3 end TCE 5.72%; insurance sale expected to lift in Q2 Set to improve Q2
Technology/dataInvestments in data efficiency and marketing tech noted in expenses Continued focus on digital banking/technology in spending framework (prior guidance context) Ongoing investment

Management Commentary

  • “Our strong first quarter deposit growth allowed us to reduce short term borrowings and brokered deposits and supported margin stability…Our liquidity position may be the strongest it has ever been, with nearly $1.5 billion in available liquidity…” — CFO W. Jack Plants II .
  • “The $27 million all‑cash transaction represents 4x 2023 insurance revenue…provide at least 40 bps of incremental regulatory capital…positively impacts our TCE ratio by more than 30 bps” — CEO Martin K. Birmingham on the SDN sale .
  • “We expect to deploy proceeds from the sale into our core banking business…to drive higher yielding earning asset growth and support net interest margin expansion through the year.” — Management prepared remarks .
  • “Excluding the impact of expenses related to this fraud event, the company would have reported $0.12 of earnings per diluted share, ROA of 1.14% and an efficiency ratio of approximately 69%.” — CEO commentary .

Q&A Highlights

  • Reserve release rationale: Management comfortable with ~0.97% coverage given improved indirect delinquencies; the qualitative delinquency factor drove the majority of release .
  • NIM path: March NIM 2.80%; expectation that Q1 marks the bottom with inflection next quarter; full‑year 285–295 bps guided, contingent on redeploying cash flows and moderated deposit betas .
  • Indirect auto credit: Elevated charge-offs tied to pandemic‑era vintages; improving current delinquencies expected to translate into better performance .
  • Rate cut sensitivity: Modeled modest benefit in 2024 due to repricing of time deposits/money market campaign; larger expansion in 2025 if Fed cuts materialize .
  • Balance sheet mix: Focus on relationship lending and pricing discipline; continued moderation of indirect auto balances around ~$900M over time (management indicative commentary) .

Estimates Context

  • We attempted to retrieve S&P Global consensus estimates for Q1 2024 EPS and revenue; data was unavailable due to a daily request limit exceeded. As a result, comparisons to Wall Street consensus are omitted, and any estimate-related conclusions should be treated as unavailable for this period [GetEstimates error].
  • Given lower recurring noninterest income post‑insurance sale and lowered noninterest expense run-rate, Street models may need to adjust fee income down and expenses down, with margin expansion as cash flows are redeployed potentially offsetting some EPS pressure .

Key Takeaways for Investors

  • One‑off fraud loss masked otherwise stable core trends (deposit growth, stable NIM); watch for legal recourse/recovery updates as potential upside catalysts .
  • Insurance sale is strategically accretive to capital; expect visible lift in Q2 capital metrics and optionality to redeploy into higher‑yielding assets to support NIM .
  • Liquidity remains robust (~$1.5B available; ~$1.1B 12‑month cash flows), enabling asset mix optimization and margin improvement through 2024 .
  • Indirect auto credit normalization underway; improving delinquencies should translate into lower future charge-offs, though near‑term charge-offs remain elevated vs historical averages .
  • Core deposit growth and measured BaaS strategy are supporting funding stability; betas are moderating, reducing pressure on cost of funds as the year progresses .
  • Expense run-rate reset lower post insurance sale; with recurring fee income lower, focus shifts to margin expansion and disciplined growth to drive operating leverage ex‑fraud .
  • Dividend maintained at $0.30 per share, signaling confidence in capital/liquidity position despite near‑term noise .