Financial Institutions Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2025

Key Takeaways

  • Positive Sentiment: Net income rose 4% to $17.2 M and diluted EPS increased 5% quarter-over-quarter, supported by a 14 bps net interest margin expansion and 5% net interest income growth.
  • Positive Sentiment: The company reaffirmed its full-year 2025 guidance, targeting 13% loan growth, a net interest margin of 345–355 bps, and noninterest income of $40–42 M.
  • Positive Sentiment: Average loans grew 1% sequentially and 2% year-over-year, with commercial loans up 5% and nonperforming commercial loans declining by $7 M.
  • Positive Sentiment: Consumer indirect net charge-off ratio improved to 45 bps from 103 bps and nonperforming loans fell 12%, with yields of 6.6% and new originations above 8%.
  • Negative Sentiment: Total deposits declined about 4% sequentially due to seasonality and the wind-down of banking-as-a-service deposits, though average deposits remained flat year-over-year.
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Earnings Conference Call
Financial Institutions Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 3

Hello everyone, and thank you for joining the Financial Institutions Inc. Second Quarter 2025 earnings call. My name is Lucy, and I'll be coordinating your call today. During the presentation, you can register a question by pressing *1 on your telephone keypad. If you change your mind, please press *2. It is now my pleasure to hand over to your host, Kate Croft, Director of Investor Relations, to begin. Please go ahead.

Speaker 2

Thank you for joining us for today's call. Providing prepared comments will be President and CEO Marty Birmingham and CFO Jack Plants. They will be joined by additional members of the company's leadership team during the 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.

Speaker 2

Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit in Form 8-K or in our latest investor presentation available on our IR website, www.fii-investors.com. Please note that this call includes information that may only be accurate as of today's date, July 25, 2025. I'll now turn the call over to President and CEO Marty Birmingham.

Speaker 4

Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our financial performance for the second quarter of 2025 was marked by growing revenue that supported a 4% increase in net income available to common shareholders to $17.2 million and a 5% increase in diluted earnings per share as compared to the linked quarter. Our results continue to benefit from our prudent balance sheet stewardship, which translated into continued net interest margin expansion, up 14 and 62 basis points from the linked and year-ago quarter, respectively, and net interest income growth up approximately 5% and 19%. Complementing NII growth was durable non-interest income of $10.6 million, up 2.4% from $10.4 million in the first quarter. Second quarter 2024 non-interest income of $24 million included a $13.5 million gain associated with the sale of our former insurance business. Excluding this gain, non-interest income was $10.5 million.

Speaker 4

We continue to deliver from a profitability standpoint, achieving an annualized return on average assets of 113 basis points, up 3 basis points from the first quarter, and an efficiency ratio of just below 60%. At the midpoint of 2025, we remain solidly on track to achieve the targets we laid out at the start of this year and are affirming our full-year 2025 guidance today. Total loans at period end of $4.54 billion were fairly consistent with March 31, as commercial business lending growth was more than offset by a reduction in consumer indirect balances. However, I would note that average loans were up $47.9 million, or 1% from the first quarter, driven by both commercial business and commercial mortgage loans. On a year-over-year basis, total and average loans are each up about 2%.

Speaker 4

Total commercial loans of $2.94 billion were flat with March 31, 2025, and up 5% from June 30, 2024. With respect to commercial business loans, we experienced a 2.4% increase during the quarter, which reflected both new originations and increased line utilization, and balances in this category were up modestly year over year. Commercial mortgage loans were flat with March 31, 2025, and up 6% year over year, driven by growth in our upstate New York markets. Our overall commercial loan portfolio remains healthy. Non-performing commercial loans declined by $7 million from March 31 to June 30 of this year, and while we did report $2.5 million of commercial net charge-offs in the quarter, the higher charge-off this quarter related to one of the two commercial relationships that have made up the majority of our non-performers for some time.

Speaker 4

As we have shared with you, one of these is a commercial relationship made up of multiple credit facilities to a CRE sponsor in our Southern Tier region. In the second quarter, the multi-bank group foreclosed on the related property, and the associated assets were moved into a joint limited liability corporation. Given this, the related assets are no longer reflected in non-performing loans. A $580,000 charge-off was recorded in the second quarter related to this specific loan that was part of the overall credit relationship. We also charged off a portion of another credit facility associated with this relationship for which we had a specific reserve in place, driven by a change in the current appraised value of the underlying real estate serving as collateral.

Speaker 4

As of June 30, our remaining credit exposure to this borrower totaled $7.1 million, and we have a $2.9 million specific reserve associated with the relationship. The remaining mortgage loan and line of credit are secured by property in the Tompkins County, Ithaca area, and we continue to actively manage this situation in pursuit of resolution. Given our existing commercial pipelines and our strong first quarter loan growth, we continue to expect to achieve full-year loan growth of between 1% and 3%. The pipeline is largely supported by commercial lending in our upstate New York markets, where we have seen momentum in our Rochester region in particular. Loan growth has tapered in the Mid-Atlantic region, given high competition from lenders and increased refinance activity for construction loans, which is a testament to the high quality of the sponsors we are working with.

Speaker 4

Looking out further, we believe that we'll see stronger lending opportunities in early 2026, with activity stimulated by the recently passed tax bill and pent-up demand that would be accelerated by potential rate cuts. Residential lending was up modestly from the end of the linked quarter and flat with a year ago, with credit metrics remaining solid and favorable. While national housing inventory is up notably, it continues to be very tight in our upstate New York markets, particularly in Rochester, as we continue to face high competition. Home equity lending remains a bright spot, as homeowners opting to stay in their homes focus on home improvement or debt consolidation. Year-to-date closed home equity loans and lines of credit are up 44% from the comparable period in 2024, while year-to-date application volume is up 19%.

Speaker 4

Consumer indirect balances were down 2.3% from March 31 and 7% year over year to $833.5 million at June 30. Consistent with much of the industry, many of the new car dealers we work with saw a jump in sales in March, as many consumers who were contemplating car purchases opted to do so before auto tariffs went into effect. Reduced consumer demand translated to a slowdown in production through much of the second quarter, coupled with our spread discipline that did not follow dramatic pricing reductions observed from competitors. However, purchase activity experienced a rebound in June that has continued in July, quoting well for third quarter production. Credit metrics for this asset class improved in the second quarter. Our consumer indirect net charge-off ratio was 45 basis points, down from 103 basis points in the first quarter, and non-performing loans fell 12% on a linked quarter basis.

Speaker 4

As a reminder, this is a prime lending operation and one in which we have a demonstrated track record through multiple economic cycles. With a yield of 6.6% in the most recent quarter and newly originated loans coming on at more than 8%, as well as small average loan sizes and short durations supporting steady cash flow, this portfolio provides us with very attractive risk-adjusted returns. Overall, net charge-offs were 36 basis points of average loans in the second quarter and 29 basis points for the first half of 2025, and our full-year expectations of between 25 to 35 basis points are unchanged. Period end total deposits were down about 4% from March 31, 2025, reflective of typical seasonality within our public deposit portfolio, as well as the continued outflow of banking as a service, or BAS deposits.

Speaker 4

As a reminder, public deposits sourced through the more than 300 municipalities that we serve throughout upstate New York peaked in the first and third quarters. Total deposits were relatively flat with June 30, 2024, as an increase in broker deposits offset BAS deposit outflows and a decrease in reciprocal deposits. Average deposits were relatively flat as compared to both the linked and year-ago quarters. As a reminder, we are planning for flat deposits year over year in 2025, given the wind-down of our BAS offering, which had approximately $100 million of associated deposits year-end 2024. At the end of the second quarter, just $7 million of BAS-related deposits remained on our balance sheet. We are in the process of migrating our final live BAS client to its new banking partner and expect that to be completed late in the third quarter.

Speaker 4

It's now my pleasure to turn the call over to Jack for additional commentary on our performance and our outlook for the second half of the year.

Speaker 1

Thank you, Marty. Good morning, everyone. As Marty shared, our full-year 2025 guidance remains unchanged, including net interest margin of between 345 and 355 basis points. The 14 basis points of margin expansion achieved during the quarter was a result of both improved yields on average earning assets to the tune of 8 basis points and our ability to effectively manage deposit costs, which declined 6 basis points from March 31, 2025. Average loan yields were up 6 basis points, and our average investment securities portfolio yield increased by 9 basis points. We actively manage our investment portfolio to balance duration, yield, and risk, which led us to execute a modest restructuring of $60 million in mortgage-backed securities. The restructuring occurred in early June, and the sold portfolio was anchored in bonds that were experiencing increased prepayment speeds. This transaction did not result in a book loss.

Speaker 1

We continue to anticipate incremental margin expansion through the remainder of the year as we focus on reinvesting more than $500 million in expected loan cash flows into higher yielding loans while remaining focused on the management of funding costs. As a reminder, our modeling uses a spot rate forecast as of the most recent quarter end and does not factor in future rate cuts. As we've shared in the past, our balance sheet is fairly neutral for the first 50 basis points of potential cuts, and we expect to see benefit beyond that, largely due to lags in deposit repricing. In the second quarter, non-interest income was $10.6 million, up $200,000 from $10.4 million recorded in the first quarter. Second quarter, company-owned life insurance income was $3 million, up from $2.8 million last quarter.

Speaker 1

As a reminder, in the first quarter, we initiated a quarterly restructuring, and given the late June redemption of the surrendered policy proceeds from the carrier, this contributed to higher levels of quarterly revenue in the first half of the year. We expect our future quarterly run rate to be reduced by approximately $275,000 from recent levels. Investment advisory revenue increased approximately 5% on a linked quarter basis and 4% from the second quarter of 2024. Career capital experienced positive net flows as new business and market-driven gains offset outflows, driving AUM to $3.34 billion at June 30, up $218 million, or 7%, from March 31. We continue to expect non-interest income of between $40 to $42 million for the full year 2025, excluding losses on investment securities, impairment of investment tax credits, and other categories that are difficult to predict, such as limited partnership income.

Speaker 1

Non-interest expense was $35.7 million in the second quarter, compared to $33.7 million in the linked quarter. Our second quarter results were somewhat elevated, in part due to timing and some higher costs that are expected to be non-recurring, including certain benefits and technology-related expenses. As a reminder, first quarter expenses were lower than anticipated, given timing variances related to planned spending and a sizable deposit-related recovery recorded for that period. Second quarter salaries and employee benefit expenses were $1.2 million higher than the first quarter, given planned staffing additions, as well as elevated medical claims in the second quarter, due to an increase in higher cost claimants. We have stop-loss insurance in force as part of our self-insured medical plan, and we expect the insurance to cover some of the higher cost claims in the second half of the year, with overall medical expense expected to moderate.

Speaker 1

As we shared with you when we introduced our guidance in January, non-interest expense this year includes a number of in-process technology enhancement and upgrade initiatives. Among these is an ATM conversion project, which we began in late 2024 and is expected to be completed later this year. This contributed to the $392,000 increase in occupancy and equipment expenses over the first quarter, as did timing, given a change in facilities maintenance service centers. Computer and data processing expenses were also at $392,000, given higher expenses for in-process initiatives and enhancements related to cybersecurity and risk management software to support our pre-monitoring and stress testing process. These increases were partially offset by lower professional services and other expenses as compared to the linked quarter.

Speaker 1

Year to date, our expense run rate is on track with our full-year guide of approximately $140 million, and we remain intently focused on expense management through the coming quarters to support positive operating leverage in 2025. Our provision for credit losses was $2.6 million in the current quarter, compared to $2.9 million in the linked quarter. The lower provision on a linked quarter basis was driven by a combination of factors, including improvement in the forecasted loss rate for pooled loans and a reduction in specific reserves, partly offset by higher net charge-offs. At June 30, 2025, the loan loss reserve coverage ratio was 104 basis points, compared to 108 basis points at March 31, 2025. We continue to remain comfortable at this level, given our ongoing focus on credit discipline.

Speaker 1

The effective tax rate is expected to fall between 17% to 19% for the year, including the impact of the amortization of tax credit investments placed in service in recent years. Our capital position remains strong, with regulatory intangible capital ratios expanding. Our common equity two-to-one ratio increased 46 basis points from March 31 and 81 basis points from June 30, 2024, while our TCE ratio increased 46 and 220 basis points, respectively. As we shared with you in our April investor call, early in the second quarter, we utilized a portion of the proceeds of our public equity offering to call $10 million to fix the floating sub-debt that was issued in 2015 and began repricing quarterly in April. Outstanding subordinated debt for the company currently totals $65 million, including the remaining $30 million tranche from April 2015 and the $35 million tranche issued in October 2020.

Speaker 1

We will continue to evaluate options for these sub-debt facilities moving forward. That concludes my prepared remarks, and I'll now turn the call back to Marty.

Speaker 4

Thanks, Jack. Overall, we are pleased with our second quarter and year-to-date results and look forward to driving sustainable, profitable growth through year-end and into 2026. We believe we are on the right path, squarely focused on the fundamentals of community banking. We have strong retail and commercial banking franchises that are complemented by a growing wealth management business. With a stronger capital position and capacity for growth, a well-situated branch network, and experienced in-market talent, we believe we are well positioned to maximize the strong organic growth opportunities we see in our core upstate New York markets. This strengthens our confidence in our ability to deliver consistent execution to drive value over the long term. I would like to thank you for your attention this morning. Next week, we look forward to engaging with many of you further at the KBW Community Bank Investor Conference in New York.

Speaker 4

That concludes our prepared remarks. Operator, please open the call for questions.

Speaker 3

Thank you. To register a question, please press *1 on your telephone keypad now. If you change your mind, please press *2. When preparing to ask your question, please ensure your device is unmuted locally. The first question is from Damon DelMonte of KBW. Damon, your line is now open. Please go ahead.

Operator

Hey, good morning, everyone. Hope you're all doing well and thanks for taking my question. I just wanted to start off with the outlook for loan growth. Thanks for reaffirming the guidance and what you provided before. It's good to see that things kind of remain on track. Just kind of curious, you know, with the loan growth outlook, you know, Marty, would you say that the trends in the upstate New York markets are providing much more opportunity for you than the Mid-Atlantic area? Obviously, Mid-Atlantic's a lot smaller of your overall portfolio, but just curious if you're seeing pockets of growth across your footprint, which could maybe get you to the higher end of your range for the full year.

Speaker 1

Yeah, we have seen in our recent experience upstate being, having more momentum, more robust opportunities. Damon, the other thing that has impacted our overall growth has been, as I mentioned, the prepayment of construction loans, a fairly meaningful number, actually a year ahead of schedule. While that is challenging for us to drive the balance sheet footings, it definitely reinforces the strong quality of the underlying credits and the sponsors that we are working with and would emphasize that point.

Operator

Gotcha. Okay. That's helpful. Maybe one for Jack. When you were talking, when you kind of given some of the points of guidance, did you say that you thought the provision would be similar to this current quarter's level, or were you referencing net charge-off?

Speaker 1

Provisioning for the quarter was impacted by the performance of our overall loan portfolio, with higher prepayment speeds that came through, as Marty referenced. Given that the CFO is a lifetime loss estimate, having a shorter average life on the portfolio reduces forecasted lifetime losses, which resulted in that lower provisioning level. All else equal, I would expect our coverage ratio to remain in that 104 to 108 basis point range for the rest of the year. That was some commentary on provisioning. As it pertains to charge-offs, despite the higher charge-offs in the second quarter, which were related to the commercial loans that Marty referenced in the call, we're maintaining our full-year guidance of the NCO range.

Operator

Okay. All right. Perfect. Lastly, on the expense front, I think you pointed out a couple of items in the compensation line and occupancy line, which kind of drove things up. If we kind of zero in on that $140 million for the full year, we could probably pull back those two categories a little bit, and that would probably get us on par there. Is that accurate?

Speaker 1

Yeah. We've continued to indicate that our quarterly expense guidance does have some volatility associated with timing. Year to date, our NIE is running around $70 million. Our full-year guidance was for $140 million. That remains intact. The second quarter was driven by some higher medical costs associated with our self-insured policy and some high-cost claimants. We do have stop-loss insurance that we expect to kick in and normalize that volatility for the next two quarters.

Operator

Got it. Okay. That's all that I had for now. Thank you.

Speaker 1

Thanks, Damon.

Speaker 3

We currently have no further questions, so I'd like to hand back to Marty Birmingham for any final and closing remarks.

Speaker 4

Thanks for your help this morning, Operator, and thanks to those that have participated. We look forward to talking to you at the conclusion of our next quarter.

Speaker 3

This concludes today's call. Thank you for joining. You may now disconnect your line.

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