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FI

FINANCIAL INSTITUTIONS INC (FISI)·Q2 2024 Earnings Summary

Executive Summary

  • Record net income available to common shareholders of $25.3M ($1.62 diluted EPS) driven by a $13.5M pre-tax gain on the sale of SDN Insurance; core performance showed NIM expansion to 2.87% and stable asset quality .
  • Linked-quarter margin and net interest income improved (NIM +9 bps to 2.87%; NII +$1.1M to $41.2M) while noninterest expense fell sharply due to the absence of the Q1 fraud charge and lower salaries post-SDN sale .
  • Capital strengthened materially: CET1 rose to 10.03% (+60 bps q/q), TCE to 6.41%, and tangible common book value per share increased 9% q/q to $25.17, supported by the SDN transaction .
  • Guidance: Management maintained prior targets for NIM (285–295 bps), loan/deposit growth (1–3%), and net charge-offs (30–40 bps), and lowered the FY effective tax rate range to 11–13% from 13–15% previously .
  • Near-term catalysts: continued redeployment of >$1B expected 12‑month cash flow into higher-yielding assets to support NIM, progress on fraud recoveries, and potential capital stack actions around repricing facilities in 2025 .

What Went Well and What Went Wrong

What Went Well

  • “Record quarterly net income” with “net interest margin expansion” and improved asset quality; CET1 surpassed 10% with tangible book up 9% q/q, reflecting strong execution and the accretive SDN sale .
  • NIM rose 9 bps to 2.87% with asset yields +7 bps and cost of funds −2 bps; NII rose to $41.2M as originations came on at >8% yields versus ~6.65% roll-off .
  • Indirect auto credit metrics improved: net charge-offs fell to 38 bps annualized ($0.844M) vs 128 bps in Q1; management reaffirmed confidence in overall credit performance .

What Went Wrong

  • Deposits declined 4.9% q/q due to seasonality of public deposits and reduced brokered CDs; public deposits fell to 20% of total vs 22% in Q1 .
  • Nonperforming loans remained elevated vs prior year (0.57% of loans vs 0.23% in Q2’23) due to a single commercial relationship placed on nonaccrual in Q4’23 .
  • Ongoing legal/professional costs tied to the Q1 deposit-related fraud event persisted in Q2 (~$371K), with only ~$143K recovery recorded .

Financial Results

MetricQ2 2023Q4 2023Q1 2024Q2 2024
Net Interest Income ($USD Millions)$42.337 $39.886 $40.082 $41.193
Noninterest Income ($USD Millions)$11.466 $15.368 $10.901 $24.014
Net Income ($USD Millions)$14.373 $9.780 $2.070 $25.629
Net Income to Common ($USD Millions)$14.009 $9.415 $1.705 $25.265
Diluted EPS ($USD)$0.91 $0.61 $0.11 $1.62
Net Interest Margin (%)2.99% 2.78% 2.78% 2.87%
Efficiency Ratio (%)62.66% 59.48% 105.77% 50.58%
ROAA (% annualized)0.95% 0.63% 0.13% 1.68%

Segment/Balance Sheet

MetricQ2 2023Q1 2024Q2 2024
Total Loans ($USD Millions)$4,397.809 $4,442.046 $4,461.468
Commercial Business Loans ($USD Millions)$720.372 $707.564 $713.947
Commercial Mortgage Loans ($USD Millions)$1,961.220 $2,045.056 $2,085.870
Residential Real Estate Loans ($USD Millions)$611.199 $648.160 $647.675
Consumer Indirect ($USD Millions)$1,000.982 $920.428 $894.596
Total Deposits ($USD Millions)$5,034.861 $5,396.757 $5,133.321
Public Deposits (% of Total)20% 22% 20%

Credit and Capital KPIs

MetricQ2 2023Q1 2024Q2 2024
NPL / Total Loans (%)0.23% 0.60% 0.57%
NPA / Total Assets (%)0.16% 0.43% 0.41%
Net Charge-offs ($USD Millions)$0.636 $3.121 $1.122
Net Charge-offs / Avg Loans (annualized, %)0.06% 0.28% 0.10%
ACL / Total Loans (%)1.13% 0.97% 0.99%
CET1 Ratio (%)9.10% 9.43% 10.03%
TCE Ratio (%)5.53% 5.72% 6.41%
Tangible Common Book Value/Share ($)$21.79 $23.06 $25.17
Common Book Value/Share ($)$26.53 $27.74 $29.11

Notes

  • Noninterest income in Q2 was boosted by the SDN sale gain ($13.5M), limited partnership income, tax credit investment gains, and higher swap fees; insurance income declined to $4K post-close .
  • Noninterest expense normalized in Q2 ($33.0M) vs Q1 ($54.0M), reflecting the absence of the fraud charge-off and lower salaries after SDN sale .

Guidance Changes

MetricPeriodPrevious Guidance (Q1 call)Current Guidance (Q2 call)Change
Net Interest MarginFY 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
Effective Tax RateFY 202413–15% 11–13% Lowered
Recurring Noninterest IncomeQuarterly$8.5–$9.0M per quarter $8.5–$9.0M per quarter Maintained
Noninterest ExpenseQuarterly$33–$34M per quarter $33–$34M per quarter Maintained
Dividends (Common)Q2 2024$0.30 declared $0.30 dividend announcement Aug 19 (payable Oct 2) Maintained

Additional management color

  • Margin fairly neutral to initial Fed cuts; greater benefits if cuts continue in 2025 given short duration of CDs/public/reciprocal deposits .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2023, Q1 2024)Current Period (Q2 2024)Trend
Net Interest Margin trajectoryQ4: bottoming at 2.78%, guided modest expansion in 2024 ; Q1: stabilized at 2.78%, guided 285–295 bps NIM 2.87% (+9 bps q/q); guidance reiterated Improving
Deposit betas and Fed cutsQ4: slowing betas; neutral to modest benefit with Fed cuts tied to repricing ; Q1: betas expected to slow; margin inflection ahead Neutral to first cuts; potential margin benefit if cuts deepen in 2025 Neutral → Potential tailwind
Indirect auto creditQ4: elevated delinquencies from pandemic vintages; expected elevated through H1’24 ; Q1: delinquencies halved vs YE; reserve release Net charge-offs improved to 38 bps annualized; delinquencies up slightly but −38% vs YE Improving but monitored
Capital/TCE and TBVQ4: TCE 6.00%, TBV $23.69; AOCI pressure ; Q1: TCE 5.72%, TBV $23.06 CET1 10.03%; TCE 6.41%; TBV $25.17; ex‑AOCI TCE 8.27%, TBV $32.44 Strengthening
BaaS deposits/strategyQ4: ~$127M; measured partner onboarding ; Q1: ~$116M; prudent, focused growth BaaS cited among deposit drivers; overall deposits down on seasonality Steady/prudent
Fraud eventQ1: $18.4M pre-tax deposit-related fraud loss; legal costs ~$0.66M; pursuing recoveries Q2: ~$371K legal/pro services; $143K recovery; added defendants; receiver granted Actively managed, residual costs

Management Commentary

  • “Our continued focus on liquidity, capital and earnings led to strong second quarter 2024 outcomes… net interest margin expansion… and meaningful build in our capital ratios” — CEO Martin K. Birmingham .
  • “We reported NIM… 287 basis points… Interest-earning asset yields increased 7 bps, while the overall cost of funds declined 2 bps… originations… net yields above 8%, replacing loans rolling off at ~6.65%” — CFO Jack Plants .
  • “We have $1.3 billion in available liquidity and more than $1.0 billion in cash flow anticipated in the next 12 months” — CFO Jack Plants .
  • “Excluding… the fraud event… and the SDN sale, our core business performed very well. Normalized year‑to‑date ROAA was 1.07%… efficiency ratio 66%” — CEO Birmingham .

Q&A Highlights

  • Margin sensitivity: Fairly neutral to initial Fed cuts; short duration in CDs/public/reciprocal deposits positions margin to benefit if cuts deepen in 2025; guidance assumes no cuts .
  • Fee income run-rate: Post-SDN sale, Q2 noninterest income (ex-gain) is a good proxy for next quarters; recurring quarterly guidance reiterated .
  • Floating-rate exposure: ~38% of total loans are SOFR/prime floating with blended yield approximating ~8% .
  • Provisioning outlook: Expect provisioning below ~$5M/quarter; coverage ~1%, driven by unemployment forecasts, loan growth and charge-offs; indirect delinquency trends stabilized vs YE .
  • Capital stack: Two facilities repricing next year; evaluating reissuance or alternative capital options .

Estimates Context

  • Wall Street consensus EPS and revenue estimates for Q2 2024 via S&P Global were unavailable at the time of this analysis due to access limits; therefore, formal beat/miss vs consensus cannot be provided (values retrieved from S&P Global).
  • Management highlighted the impact of non-GAAP items: adjusted diluted EPS of $0.96 in Q2 and $1.12 in Q1, excluding the SDN gain and fraud-related expenses, indicating underlying core performance trends that may inform estimate revisions .

Key Takeaways for Investors

  • Core NIM expansion and loan/securities cash flow redeployment (> $1B next 12 months) should support margin within 285–295 bps guidance even without Fed cuts; deeper 2025 cuts could be incremental tailwinds .
  • Capital build (CET1 >10%, TCE rising) and TBV growth post-SDN sale strengthen flexibility to pursue growth and capital actions; ex‑AOCI metrics suggest further normalization as the securities portfolio seasons .
  • Credit quality is stable with improving indirect auto charge-offs; watch list remains concentrated in one commercial nonaccrual relationship from Q4’23; provisioning expected to be moderate .
  • Deposit volatility tied to public seasonality and brokered CDs likely to continue; non-maturity beta remains contained (29% in Q2 commentary), with strategy focused on relationship deposits and prudent BaaS growth .
  • Noninterest income/expense run-rate reset post-SDN sale enhances operating leverage visibility; recurring quarterly noninterest income $8.5–$9.0M and noninterest expense $33–$34M .
  • Ongoing legal efforts around the Q1 fraud event could yield recoveries but will include residual professional services costs; not a core operating issue per management .
  • Dividend maintained at $0.30/share; consistent returns alongside improving capital profile support income-oriented holders .