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FI

FINANCIAL INSTITUTIONS INC (FISI)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 2024 EPS was $0.84 vs $1.62 in Q2 (boosted by an insurance-sale gain) and $0.88 in Q3 2023; sequential decline driven by lower noninterest income and higher provision, while core NIM expanded to 2.89% from 2.87% .
  • Net interest income slipped to $40.7M on nonaccrual interest reversal, but deposit growth of $173M enabled paydown of short-term borrowings; NIM expanded 2 bps QoQ as asset yields outpaced cost of funds .
  • Credit quality mixed: annualized NCOs rose to 0.15% (0.10% in Q2), and NPLs/loans increased to 0.93% due to one commercial relationship; management emphasized reserves and idiosyncratic nature of the two large commercial NPLs .
  • Guidance updated: full-year 2024 NIM narrowed to 2.85–2.90% (from 2.85–2.95%), loan growth expected at the low end of 1–3%, and net charge-offs lowered to 20–30 bps (from 30–40 bps). No material one-time costs expected from the orderly wind-down of BaaS in 2025, which management views as immaterial to financials .

What Went Well and What Went Wrong

  • What Went Well

    • NIM expansion and deposit execution: “strong deposit growth, incremental net interest margin expansion, solid expense management,” with NIM at 2.89% and deposit growth supporting reduced borrowings .
    • Capital build and AOCI improvement: CET1 rose to 10.28% (up 25 bps QoQ) and TCE ratio to 6.93%; AOCI improved by $23.7M QoQ; tangible book per share rose 8% QoQ to $27.28 .
    • Expense discipline: Noninterest expense fell to $32.5M (down $0.6M QoQ, $2.2M YoY) with lower FDIC assessment and other items; run-rate discipline continues .

  • What Went Wrong

    • Noninterest income normalized lower after Q2’s insurance gain: fell to $9.4M from $24.0M; swap fees and limited partnership income softened; tax credit line turned to a net loss .
    • Credit metrics: NPLs/loans rose to 0.93% (from 0.57% in Q2) tied to two commercial relationships; provision increased to $3.1M; annualized NCOs moved up to 0.15% .
    • Loans declined sequentially: Total loans fell $58.5M QoQ; competition and borrowers’ use of cash weighed on growth; management expects better demand with future rate cuts .

Financial Results

MetricQ3 2023Q2 2024Q3 2024
Total revenue ($mm)$52.16 (NII $41.68 + Nonint $10.49) $65.21 (NII $41.19 + Nonint $24.01) $50.12 (NII $40.68 + Nonint $9.44)
Net interest income ($mm)$41.68 $41.19 $40.68
Noninterest income ($mm)$10.49 $24.01 $9.44
Provision for credit losses ($mm)$0.97 $2.04 $3.10
Noninterest expense ($mm)$34.74 $33.02 $32.47
Net income to common ($mm)$13.66 $25.27 $13.10
Diluted EPS ($)$0.88 $1.62 $0.84
Net interest margin (%)2.91% 2.87% 2.89%
Efficiency ratio (%)66.47% 50.58% 64.70%
ROAA (annualized, %)0.92% 1.68% 0.89%

Note: Total revenue calculated as Net interest income + Noninterest income; components cited above .

  • Balance Sheet and Mix

    • Loans and Deposits (End of Period)
      MetricQ3 2023Q2 2024Q3 2024
      Total loans ($mm)$4,431.17 $4,461.47 $4,402.99
      Total deposits ($mm)$5,315.97 $5,133.32 $5,306.60
      Public deposits (% of total)20% 20% 22%
    • Loans by Category (End of Period)
      Category ($mm)Q3 2023Q2 2024Q3 2024
      Commercial business$711.54 $713.95 $654.52
      Commercial mortgage$1,985.28 $2,085.87 $2,105.64
      Residential real estate loans$635.21 $647.68 $648.24
      Consumer indirect$982.14 $894.60 $874.65

  • Credit Quality and Capital

    • Credit Metrics
      MetricQ3 2023Q2 2024Q3 2024
      NPLs / Total loans (%)0.21% 0.57% 0.93%
      Annualized NCOs / Avg loans (%)0.14% 0.10% 0.15%
      ACL / Loans (%)1.12% 0.99% 1.01%
    • Capital and Book Value
      MetricQ3 2023Q2 2024Q3 2024
      CET1 (%)9.26% 10.03% 10.28%
      TCE ratio (%)5.25% 6.41% 6.93%
      Common BVPS ($)$25.41 $29.11 $31.22
      Tangible BVPS ($)$20.69 $25.17 $27.28

  • KPIs

    • Courier Capital assets under management: $3.2B as of Sep 30, 2024; YTD AUM +$319M with $44M positive net inflows .
    • Recurring noninterest income run-rate: ~$9.1M in Q3 (ex-limited partnerships, tax credits, security gains/losses, and insurance) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net interest margin (NIM)FY 20242.85%–2.95% 2.85%–2.90% Narrowed (lowered high end)
Loan growthFY 20241%–3% Low end of 1%–3% Tilt to low end
Net charge-offsFY 202430–40 bps of avg loans 20–30 bps Raised outlook (lower losses)
Effective tax rateFY 202411%–13% 11%–13% (unchanged) Maintained
Recurring noninterest incomeQuarterly/FY 2024$8.5–$9.0M/quarter Maintained; Q3 actual ~$9.1M Maintained
Noninterest expenseQuarterly/FY 2024$33–$34M per quarter Maintained Maintained
DividendQuarterly$0.30/share (recent cadence) $0.30 declared; $0.30 payable 1/2/25 Maintained
BaaS2025 timingN/AWind-down targeted for 2025; immaterial impact; no material one-time costs Strategic exit

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1, Q2)Current Period (Q3 2024)Trend
Margin path and rate cutsQ1: NIM bottoming; neutral to first cuts; 2.85–2.95% FY guide . Q2: neutral to first cuts; guide unchanged .NIM 2.89%; narrowed FY NIM to 2.85–2.90%; neutral to first 50 bps of cuts with some faster deposit repricing .Stable to modestly improving; tighter range.
Deposit betas and fundingQ1: total beta 46%, non-maturity 28% . Q2: 48%/29% .Cycle-to-date betas 53% total, 32% non-maturity; continuing repricing actions .Betas trending higher but managed.
Credit qualityQ1: indirect delinquencies improving; reserve release . Q2: improved indirect NCOs; low commercial charge-offs .Higher NPLs due to 2 commercial relationships; NCOs 0.15% annualized; reserves at 1.01% of loans .Stable core credit with idiosyncratic commercial NPLs.
Loan growth and pipelinesQ1: guided 1–3%; tempered by rates . Q2: selectivity; originations ~8% yields .Pipelines rebuilding; expect demand with cuts; 2025 mid-single-digit discussed .Improving outlook into 2025.
Capital/AOCIQ1: CET1 9.43%; TCE ex-AOCI 7.53% . Q2: CET1 >10%; TCE 6.41% (8.27% ex-AOCI) .CET1 10.28%; TCE 6.93% (ex-AOCI 8.38%); AOCI improved QoQ .Strengthening capital; AOCI improving.
BaaS strategyQ1: measured BaaS growth . Q2: minimal discussion.Orderly wind-down to complete in 2025; immaterial financial impact; redeploy talent to core .Strategic exit to focus on core.

Management Commentary

  • CEO: “Our third quarter results were highlighted by strong deposit growth, incremental net interest margin expansion, solid expense management, and continued build in our regulatory and tangible capital ratios.”
  • CEO on BaaS: “…strategic decision to begin to wind-down our Banking-as-a-Service… we intend to redeploy our investments of time and talent… to support the significant opportunities we have in Five Star Bank’s community banking franchise.”
  • CFO: “We reported [NIM] of 289 bps… up 2 bps… NIM was negatively impacted by the commercial relationship placed on nonaccrual… which reduced margin by 3 bps.”
  • CFO on guidance: “We’re narrowing our expected range for full year 2024 NIM to 2.85% to 2.9%… we now expect 2024 annual loan growth to come in at the low end of our guided range of 1% to 3%… [and] full year net charge-offs… 20 to 30 bps.”
  • CEO closing: “The actions we’ve taken… have allowed us to expand capital ratios meaningfully… focused around supporting our core community banking franchise.”

Q&A Highlights

  • Margin sensitivity: Management expects to remain fairly neutral to the first 50 bps of Fed cuts given pricing dynamics; deposit repricing already underway across segments .
  • Loan outlook: Commercial pipelines rebuilding; management aims for mid-single-digit growth in 2025 as rate environment eases .
  • Expenses: Focused on prudent expense management; BaaS team of 14 FTEs to be redeployed, supporting growth without incremental hiring .
  • Betas on the way down: Expect betas to be neutral near term, then converge toward historical patterns with additional cuts .
  • BaaS wind-down costs: “No material one-time costs” expected .

Estimates Context

  • We attempted to retrieve S&P Global consensus for Q3 2024 EPS and revenue, but access was unavailable at the time of analysis (SPGI daily limit exceeded). As a result, we cannot present definitive “vs. consensus” comparisons for this quarter. We will update when S&P Global data becomes accessible.
  • Absent consensus, results should be framed against internal guidance and sequential/YoY trends: NIM expanded 2 bps QoQ; efficiency ratio normalized from Q2’s sale-related boost; credit costs rose modestly while capital strengthened .

Key Takeaways for Investors

  • Core spread resilience: Despite a nonaccrual hit to interest income, FISI delivered sequential NIM expansion; sustained deposit gathering and funding optimization remain tailwinds into Q4. Watch for rate-cut pass-through precision to protect NIM in 2025 .
  • Credit watchlist is idiosyncratic: Higher NPLs stem from two commercial relationships; reserves ticked up to 1.01% of loans and management is “comfortable” with coverage—monitor resolution timelines and any migration to losses .
  • Expense discipline and capital momentum: Operating expense trajectory remains controlled; CET1 at 10.28% and improving AOCI support book value accretion and optionality .
  • Strategic focus on core banking: BaaS wind-down reduces complexity and reallocates talent to core growth, with immaterial financial drag and no expected material one-time costs—positive for risk-adjusted returns .
  • 2024 guide de-risked: Narrowing NIM range and lowering NCOs to 20–30 bps suggests visibility; loan growth at the low end reflects conservatism amid competition and rate dynamics .
  • Dividend maintained: $0.30 per share sustained, underscoring confidence in capital and earnings trajectory .
  • 2025 setup: As pipelines rebuild and rate cuts emerge, management targets improved loan growth; monitor deposit beta behavior downward and the pace of redeployment of BaaS resources to core .