FINANCIAL INSTITUTIONS INC Q1 FY2025 earnings call

• The first quarter results illustrate the transformative impact of late 2024 investment securities restructuring on balance sheet and earnings. Net income, net interest margin, and asset quality metrics improved. - Loan growth was driven by commercial and CRE lending, with pipelines in a rebuilding phase. - Consumer lending had mixed trends; indirect balances up QoQ, down YoY; residential lending down due to competition. - Deposits saw growth. - Non-interest income was driven by company-owned life insurance restructuring and investment advisory income. - Expense management was prudent with lower non-interest expense than guided. - New executive hire and board updates were mentioned.

Net income was up more than 12% from the fourth quarter and 17% year-over-year while net interest margin expanded by 44 and 57 basis points, respectively. Non-interest income was $10.4 million. Asset quality metrics were improved with net charge-offs declining. Total loans increased 1.7% during the quarter, driven by both C&I and CRE lending. Indirect balances were up just shy of 1% from December 31st, and down 7% year-over-year. Residential lending was down 1% from both the linked and year ago quarters. Deposits were up 5.3% from year-end 2024, driven by seasonally higher public deposit balances and an increase in broker deposits. We utilized a portion of the proceeds of our public equity offering to call $10 million of fixed to floating sub debt.

• Full year net interest margin expected to be between 345 and 355 basis points. - Non-interest income revised to between $10 million to $10.5 million per quarter or between $40 million to $42 million for full year 2025. - Full year net charge-off expectations of between 25 to 35 basis points of average loans. - Effective tax rate of between 17% to 19% including the impact of the amortization of tax credit investments.

• Uncertain political and macroeconomic environments pose challenges to loan growth visibility. - Volatility in policy change affects economic outlook. - Credit risks related to specific loan relationships, such as the $13.5 million credit exposure with specific reserves updated.

Q: Just on loan growth, you guys were obviously strong loan growth in the first quarter, you mentioned, Marty, driven by commercial. And many banks, I talked to are assuming more of a pickup in the back half of the year as maybe we get more certainty around policy. It seems like you guys are sort of thinking the opposite. So I just wanted to get your thoughts on maybe perhaps that loan growth outlook for the year is quite conservative at this point? Or I guess just how confident are you that loan growth should be front loaded here?

A: So as Jack commented as well, we're comfortable with what we've guided. We have been working with our teams, over the course of last 6 to 8 months to ensure that there's a focus and a consistent activity relative to business development activities across all of our lending areas, particularly focused on commercial of all sizes and types. But Frank, we've been, like everyone, observing what's happened since the election and kind of the very positive feelings that were happening there with -- maybe possibly more business focused, streamlined regulatory environment in general and how the markets reacted to that. Two, how it has evolved to lots of executive orders, tariffs, pressure on inflation, outlook for rates, et cetera. So that's translated into what we've all read about our customers, we canvassed some -- all of them, really, we've asked our lenders to reach out to all of them in this time of uncertainty. And with uncertainty, folks have really started to pause, anticipated investment in their plant equipment, projects, whatever it might be until some of this works its way through.

Q: And the other side of that is the NIM guide in terms of -- I wonder if you could just talk to some levers to get you up into that range that you cite for full year guide. And maybe along with that, if you have the detail around -- see these coming up maturing the sort of the numbers there and what you are expecting you can pick up in average costs as you move through the year on that book?

A: Yeah. Frank, this is Jack. I can take that one. So some of the levers that we have that are driving that continued improvement in margin are the $1.2 billion of cash flow that we have coming off the portfolio on a rolling 12-month basis. If you refer to the investor presentation, there's a slide in there that highlights roll-off yield and roll-on yield on the commercial portfolio for the first quarter we saw roll-on yield coming on about 70 to 80 basis points on average higher than what was coming off the portfolio.

Q: Hey, good morning. Hope you’re doing okay. Just wanted to ask a question about the COLI expected income over the next couple of quarters. Jack, I think you had mentioned that you expect it to be elevated again here in the second quarter and then kind of a more normalized level. So I mean, is this basically going to be like flat from 1Q to 2Q and then drop back down to the $1.5 million range? Or how do we kind of think about the cadence of that?

A: Yeah, there should be a slight increase in 2Q and then flat back beyond that. What we did was we surrendered some of the lower-performing general account and then added premium into existing exposure that we had with our separate account COLI, and that is what drove the significant increase in yields associated with it given the underlying investment divisions that we have in that separate account structure. The general account that we surrendered we haven't -- even though it was deemed surrendered and in good order, we have yet to receive back the cash surrender value on that to the tune of about $73 million, which is still out there yielding low single digits and which we receive that back in June. So that's what's causing the short-term increase in COLI income.

Q: Okay. But when it goes back to -- like when all the dust settles and it goes back to like a normalized rate it's going to be higher than the '24 quarterly levels. Is that correct?

A: Correct.

Q: And then as we think about like provision and kind of outlook for credit, you guys kind of conservatively reiterated the expected net charge-offs for the remainder of the year. And if the loan growth kind of slowing a bit here in the second half potentially, is it fair to kind of assume that the provision kind of takes a step down from where maybe kind of from this quarter's level or similar to this quarter's level?

A: I would suggest that our guided ACL to average loans ratio continue to hover around that 107, 108 basis points for the rest of the year.