FINANCIAL INSTITUTIONS INC Q4 FY2024 earnings call

Management Statement and Operational Highlights:

• Securities Repositioning: Sold low-yielding securities and reinvested in higher-yielding ones, impacting pretax loss but expected to boost earnings profile.
• Capital Raise: Successful equity offering, oversubscribed, generating net proceeds of $108.5 million.
• Regulatory Ratios: Common equity Tier 1 ratio up 60 basis points QoQ and 145 basis points YoY; TCE ratio up 147 basis points QoQ and 240 basis points YoY.
• Margin: Expanded to 2.91% in Q4, with further lift expected in 2025 from margin expansion.
• Deposits: Focus on core in-market deposits; BaaS deposits in wind-down phase.
• Loan Growth: Commercial loan growth strong, offset by planned reduction in consumer indirect portfolio.
• Asset Quality: Stable, with net charge-offs relatively consistent; provision for credit losses influenced by loan growth and qualitative factors.

Segment Performance:

• Securities: Sold $653.5 million of low-yielding securities and reinvested in higher-yielding agency wrap securities, resulting in a $100.2 million pretax loss.
• Commercial Loans: Up 3.8% quarter-over-quarter and 4.5% year-over-year, led by commercial mortgage. Full year commercial loan growth was 4.5%.
• Deposits: Total deposits were $5.1 billion at year-end 2024, down $202 million from September 30, 2024; BaaS deposits, less than 2% of total deposits, expected to outflow in H1 2025.
• Asset Quality: Nonperforming loans were $41 million at year-end; provision for credit losses was $6.5 million in Q4 2024; allowance for credit losses on loans to total loans increased 6 basis points to 1.07%.

Guidance:

• Profitability: Target ROAA ≥110 basis points, ROAE ≥11.25%, and efficiency ratio <60% for 2025.
• Margin: Full year 2025 net interest margin expected 345-355 basis points, lifting from Q1 due to securities restructuring.
• Loan Growth: Expected low single-digit growth (1%-3%) in 2025, conservative outlook with pent-up demand waiting on rate cuts.
• Noninterest Income: Projected quarterly noninterest income $9.5M-$10M in 2025.
• Expenses: Noninterest expense ~$35 million quarterly, 5% increase vs 2024, with normalized NIE expense growth ~5%.

Risks:

• Economic uncertainty and policy changes impacting business costs.
• Deposit outflows from BaaS partnerships.
• Uncertainty around timing of economic development projects' impact.
• Seasonal fluctuations in deposits.

Question and Answer: Q: On loan growth outlook, Jack mentioned conservative 1-3% growth due to pent-up demand waiting on rate cuts.

A: Jack Plants stated loan growth projections are conservative due to pent-up demand in construction lending waiting on rate cuts, with activity expected to heat up in H2 2026.

Q: On margin outlook, Jack said Q1 margin in 330 range, driven by roll-on yield, and faster deposit pricing reaction.

A: Jack Plants noted Q1 margin expected in 330 range, driven by roll-on yield of loan portfolio, and faster deposit pricing reaction than originally anticipated.

Q: On reserve build, Jack explained Q4 reserve increase due to loan growth and qualitative factors in indirect and commercial portfolios.

A: Jack Plants said Q4 reserve increase was influenced by loan growth in Q4 and qualitative factors like indirect portfolio delinquency and national commercial real estate portfolio metrics.

Q: On expense cadence, Jack said normalized NIE expense growth ~5%, Q4 normalized to ~$35M.

A: Jack Plants stated year-over-year normalized NIE expense growth expected ~5%, with Q4 NIE normalized to ~$35M after backing out non-recurring pension settlement charge.