FINANCIAL INSTITUTIONS INC Q3 FY2024 earnings call

• Wind-down of Banking as a Service offering: About 2% of bank's total deposits are BaaS related, $103 million on Sept 30, 2024, exit not material to financials, redeploying resources to community banking. - Core community banking: Strong deposit growth, reduced reliance on broker deposits, loan portfolio health, non-performing loans update, Mid-Atlantic portfolio details, residential lending competition, consumer indirect loans trends. - Financial results: Net interest margin, net interest income, non-interest income, non-interest expense, provision for credit losses, tax rate, capital ratios (common equity Tier 1 ratio 10.28% up 85 basis points from year-end 2023).

In the third quarter, total deposit growth was $173.3 million or 3.4% from June 30th 2024. Net interest margin on a fully taxable equivalent basis was 289 basis points for Q3 2024, up 2 basis points from the linked second quarter. Total loans were slightly down from June 30th 2024, with increases in commercial mortgage and stability in residential loans offset by declines in commercial business and consumer indirect loans. Non-performing loans increased due to a $15.5 million commercial relationship being moved to non-accrual, but zero commercial net charge-offs in Q3. Wealth management had $3.2 billion in assets under management as of September 30th, 2024, with year-to-date AUM growth of approximately $319 million or 10%. Revenue contribution details: Deposit growth contributed to overall balance sheet strength, loan portfolio composition affected by various segments.

• NIM: Narrowed full-year 2024 NIM range to 2.85% to 2.9%. - Loan growth: 2024 loan growth expected at low end of 1%-3% range. - Net charge-offs: Expected to fall between 20-30 basis points of average loans, down from original guidance of 30-40 basis points.

• Interest rate changes: Impact on margin and deposit repricing. - Competition: In lending markets affecting loan growth and credit quality. - Credit quality: Issues with specific commercial relationships leading to non-performing loans.

Q: Just wanted to start off with a question on margin. I appreciate the updated guidance here for the fourth quarter. Jack, I just kind of want to get your thoughts, though, if we have a couple more rate cuts in '24, and we have a more steady flow of 25 basis point cuts in '25, can you just give us a little perspective on how you're thinking about the margin kind of given the cash flow expectations and what you're seeing for loan growth?

A: Sure. So, I'll just reconfirm that a little over 30% of our loan portfolio is priced off of SOFR prime. And on the commercial side, that adjusts with -- on the prime side with rate cuts and then SOFR adjusts monthly, on the consumer side, the prime adjustments generally adjust on a monthly basis. And when we provided our margin guidance at the beginning of the year, it was based upon a flat environment. We did some modeling around the impact to NII for rate cuts. And we modeled out that we were fairly neutral for the first 50 basis points of cuts. The expectation on that side was that there was going to be a longer lag for deposit repricing. We've actually seen our competitors be a little bit more aggressive in adjusting their rates on a posted basis. And as such, we've reacted a little bit more faster than we would have anticipated. So, we've already started to price down segments of the consumer, commercial, municipal and reciprocal portfolios. And our expectation is that we continue that with additional rate cuts. So, we'll provide full year guidance on our fourth quarter earnings call for 2025. And my expectation is that we kind of remain in that neutral [indiscernible] in the near term.

Q: Good morning. Its David Mirochnick on from Matt here. Can you guys hear me?

A: We can.

Q: I think I kind of talked about the, betas that you kind of saw on the way up, and I would love to hear your thoughts and kind of expectations around the loan to deposit betas on the way down through 2025, and if you kind of expect those figures to be fairly similar to what they were on the up cycle?

A: Yes. This is Jack. I'll take that question. As I mentioned earlier, when we were doing our modeling at the beginning of the year and considering future rate cuts, we had expected to be a bit slower on the downward repricing at least for the first couple of rate cuts on our deposit betas, so a longer lag than we've experienced previously. What we have seen is that, we've shortened that lag more-than-anticipated. The betas again are in line with what we would have anticipated. So, my perspective in the near-term, the impact to margin, would be neutral. But, as we continue to see the Fed act with additional rate cuts, I see betas catching up, to where they would have been historically, overtime.