Yahoo Finance Financial Institutions, Inc. (NASDAQ:FISI) Q1 2024 Earnings Call Transcript
Financial Institutions, Inc. (NASDAQ:FISI) Q1 2024 Earnings Call Transcript April 27, 2024
Financial Institutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone, and welcome to the Financial Institutions, Inc. First Quarter 2024 Earnings Call. My name is Harry, and I'll be your operator. [Operator Instructions] I will now hand over to Kate Croft to begin. Please go ahead.
Kate Croft: Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants. He will be joined by additional numbers of the company's financial leadership during a question-and-answer session. Today's 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, uncertainties and other factors. We refer you to yesterday's earnings release and investor presentation as well as historical SEC 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. Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed with an exhibit to Form 8-K or in our Investor Relations presentation available on our IR website, www.fisi-investors.com. Please note that this call includes information that may only be accurate as of today's date, April 26, 2024. I'll now turn the call over to President and CEO, Marty Birmingham.
Martin Birmingham: Thank you, Kate. Good morning, everyone, and thank you for joining us today. Heading into 2024, we knew that the challenging operating environment would persist. In the fourth quarter, you'll recall we took steps to optimize the configuration of our balance sheet and completed a strategic reorganization to enhance the earnings potential of the company while positioning us for sustained incremental performance in the future. Given the fraud event we experienced, we never could have imagined the intensity of the challenges we have faced and vigorously managed in the last several weeks. As previously disclosed, in early March 2024, we discovered fraudulent activity conducted by in-market deposit only Five Star Bank business customer that resulted in $18.4 million deposit-related charge-off in the first quarter.
This has been broken out in our income statements from other expenses. The charge is modestly lower than the $18.9 million potential exposure we originally estimated, reflecting funds recouped in late March. We are actively pursuing all legal recourse available to us to recover additional funds from the customer and minimize this loss. This event certainly had a significant impact on our otherwise solid first quarter 2024 financial results with the associated pretax fraud loss and elevated legal and consulting expenses totaling approximately $19 million. As we recognize this loss in the first quarter, net income available to common shareholders was $1.7 million or $0.11 per diluted share compared to $9.4 million or $0.61 per share in the late fourth quarter and $11.7 million or $0.76 per share in the first quarter of 2023.
We reported an annualized return on average assets of 13 basis points and an efficiency ratio of approximately 106%. 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%. Even as we navigated this matter, we remain focused on strategic actions to enhance liquidity, capital and earnings. On April 1, we announced and closed the sale of the assets of our insurance subsidiary, SDN Insurance Agency to NFP Property & Casualty Services, a leading property and casualty broker and benefits consultant. In addition to having a meaningful contribution to overall net income, the sale occurred at an opportune time when this line of business was generating what we believe was a peak EBITDA margin.
The $27 million all-cash transaction represents 4x 2023 insurance revenue and approximately 10x earnings. This transaction allowed us to capture strong value premium in this business, generating a gain of approximately $11.2 million on an after-tax basis, prior to selling costs, while also eliminating $11.3 million of goodwill and other potential assets. Importantly, the transaction provides at least 40 basis points of incremental regulatory capital that positively impacts our TCE ratio by more than 30 basis points, which will be reflected in the second quarter results. We were pleased to have the opportunity to source capital at a time when it is needed in such an efficient and shareholder-friendly manner. In the 10 years since we acquired SDN and supported revenue diversification and allowed us to expand the capabilities and services we provide our customers, we enhanced our former insurance subsidiary through bolt-on acquisitions in the Buffalo and Rochester markets and helped it grow into a leading insurance agency serving Western New York and clients nationally.
We evaluated potential buyers for this business. NFP's offer was compelling both financially and in terms of its vision for SDN's future and continued collaboration with our Five Star Bank team. Looking forward, NFP will be the bank's insurance partner of choice ensuring our customers have continued access to exceptional insurance counsel, products and services. We expect to deploy proceeds from the sale into our core banking business in the form of high-quality credit disciplined loan origination to drive higher yielding earning asset growth and support net interest margin expansion through the year. We continue to expect that our full year loan growth will be driven by our commercial lending group, which operates across Western and Central New York and our Mid-Atlantic region.
In the first quarter, growth in this portfolio was offset by anticipated declines in our indirect auto segment as we continue to enhance the profitability of this line of business, while benefiting from the spending cash flow it provides. While total loan balances were relatively flat to the end of 2023, down $20 million or 50 basis points, we have solid pipelines and have closed several notable commercial deals so far in the second quarter. Credit quality remained strong and stable in the first quarter with nonperforming loans to total loans of 60 basis points at 12 March 31, 2024, and December 31, 2023. Annualized net charge-offs to average loans were 28 basis points in the current quarter, an improvement of 10 basis points from the fourth quarter.
While we have seen higher charge-off rates in our indirect portfolio in the last few quarters, the trend that continued into the first quarter of 2024, we saw positive trends in overall indirect delinquencies during the quarter. As an example, total delinquencies, including nonaccruals declined by more than $12 million during the first three months of the year to 1.24% at March 31, essentially half of the 2.53% we saw at December 31, 2023. Overall, we remain confident in the health of our loan portfolio and associated asset quality metrics. Deposit growth was a highlight for our first quarter performance with balances up $183.8 million or 3.5% from year-end 2023. While seasonality of public deposits was the main driver of this increase, we experienced growth in nonpublic and reciprocal deposits as well.
Banking as a Service, or BaaS-related deposits were down modestly from the end of 2023 to approximately $116 million reflecting normal fluctuation within end user accounts. We remain energized about the opportunity this line of business presents, while mindful of the challenges others in this phase of experience. As we have stated in the past, our approach to BaaS has been measured, deliberately aligned with our organizational risk appetite statement and focused on select partners serving small and midsized businesses, affinity groups and niche markets. Our risk-adjusted process for evaluating BaaS partners, coupled with a control approach to transitioning them onto our platform has resulted in modest but sustainable growth in this line of business and a reduction in our partnership pipeline.
We deem this prudent, and are currently focused on cultivating strong and lasting, partnership. This concludes my introductory comments. It's now my pleasure to turn the call over to Jack for additional details on results and details of our 2024 guidance.
Jack Plants: Thank you, Marty. Good morning, everyone. Net interest income of $40.1 million for the first quarter was up $196,000 for the fourth quarter of 2023. Interest-earning asset yields increased 11 basis points, in line with overall cost of funds, reflective of the impact of the continued high interest rate environment, the inward yield curve with strong competition in our markets. Margin has stabilized, and we reported NIM on a fully taxable equivalent basis of 278 basis points for both the current and linked quarters. Margin increased incrementally on a monthly basis in the first quarter. Given our $1.1 billion in anticipated cash flow in 2024, we have ample opportunity to redeploy funds into higher-yielding earning assets.
And looking at our total deposit portfolio relative to the magnitude of FOMC rate increases that occurred in 2022 and 2023, we have experienced a cycle-to-date beta of 46%. Excluding the cost of time deposits, the non-maturity deposit portfolio had a beta of 28%. Given FOMC expectations and internal modeling, we expect the trajectory of deposit betas to slow in 2024. Noninterest income totaled $10.9 million in the first quarter, down $4.5 million on a linked-quarter basis. This variance was largely driven by lower company-owned life insurance, or COLI income in the current quarter. As you'll recall, we reported $9.1 million of COLI income in the fourth quarter of which approximately $8 million related to a higher crediting rate on the investment of the premium into a separate account product during that period.
As expected, incremental income associated with cash to undervalue those policies and stable value component has stabilized and is reflected in our first quarter of 2024 results. In the linked fourth quarter, we also reported a $3.6 million loss on investment securities related to the repositioning we completed in October, which, along with seasonally higher insurance income in the quarter, partially offset the COLI income variance between periods. Investment advisory income, largely driven by Courier Capital, our RIA subsidiary serving mass affluent and high net worth individuals and families, institutional clients and 401(k) plan sponsors was down about $87,000 from the linked quarter. As of March 31, 2024, Courier Capital had assets under management of approximately $3 billion.
As Marty noted, increased noninterest expense was primarily attributable to the fraud event we experienced in March 2024, including $18.4 million deposit-related fraud charge-off, approximately $660,000 in related legal and consulting expenses. Excluding these two items, noninterest expense would have been flat with the linked fourth quarter. We recorded a benefit for credit losses this quarter as a decrease in qualitative factors, coupled with an improvement in forecasted loan losses and a decrease in consumer and direct loans resulted in a reserve release. We've provided additional details on Slide 19 of our investor presentation, but I'd like to touch on a couple of the contributing factors here. The primary driver of the improved qualitative factor in our model was the lower level of consumer indirect delinquencies relative to year-end 2023.
This qualitative factor for trends in delinquencies is purely quantitative in nature and corresponds to the range of the delinquencies in the portfolio over a look-back period since 2006. We also saw improved commercial delinquencies and observed favorable trends in our commercial credit review and administration functions. Income tax expense was $356,000 in the quarter representing an effective tax rate of 14.7%. Our accumulated other comprehensive loss was $126.3 million at March 31, 2024, compared to $119.9 million at December 31, 2023. We reported a TCE ratio at March 31 of 5.72% and tangible common book value per share of $23.06. Excluding the AOCI impact, the TCE ratio and tangible common book value per share would have been 7.53% and $30.37 respectively.
We continue to expect these metrics to return to more normalized levels over time given the high credit quality and cash flow nature of our investment portfolio. I would now like to provide an update on our outlook for the remainder of 2024 in key areas. Following our April 1, 2024, insurance transaction, we now expect recurring noninterest income between $8.5 million and $9 million per quarter or $36.5 million to $38 million for the full year. This guidance excludes income related to investment tax credits, limited partnerships, and gains or losses on investment securities and assets, including the SDN sale. We are now projecting noninterest expense of $33 million to $34 million per quarter for the remainder of 2024, again, reflecting the sale of SDN.
This translates to full year noninterest expense of $135 million to $136 million, excluding the $19 million of expense related to the fraud event recognized in the first quarter. We now expect the 2024 effective tax rate to fall in the range of 13% to 15%, including the impact of the fraud event in the first quarter, the SDN sale in the second quarter and the amortization of tax credit investments placed in service in recent years. We will continue to evaluate tax credit opportunities and the positive impact of these investments would have on our effective tax rate. Our previous guidance on loan to deposit growth of between 1% to 3%, net interest margin of between 285 to 295 basis points and full year net charge-offs within our annual historical range of 30 to 40 basis points remain unchanged.
Overall, our company remains in a strong financial position. We continue to be well capitalized to maintain a steady level of regulatory capital during the first quarter despite the challenges we faced, reporting a common equity Tier 1 ratio of 9.43% consistent with year-end 2023. Our liquidity position is among the strongest we've seen, approaching $1.5 billion, and our 12-month anticipated cash flow continues to exceed $1 billion putting us in a strong position to continue to support our customers and communities. That concludes my prepared remarks and updated guidance. I'll now turn the call back to Marty.
Martin Birmingham: Thank you, Jack. As challenging as the first quarter was, I'm very proud of our team for not allowing adversity to distract us from our focus of running the business, delivering on our objectives and executing on longer-term initiatives. The second quarter is off to a strong start with a successful divestiture of our insurance subsidiary, supporting our capital ratios and earnings potential. Our pipelines are healthy, and we remain focused on our core banking business and on nurturing strong customer relationships in order to sustain and grow our deposit base. Credit disciplined loan growth has been and continues to be a fundamental focus of our retail, commercial, credit delivery and risk associates. That concludes our prepared remarks. Operator, please open the call for questions.
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