Financial Institutions(FISI) - 2024 Q2 - Quarterly Results

Financial Performance Overview The company achieved strong Q2 2024 results, driven by a significant gain from the insurance subsidiary sale, improved net interest margin, and strengthened capital ratios Second Quarter 2024 Highlights The company reported a significant increase in net income to $25.6 million ($1.62 per diluted share) for Q2 2024, largely driven by a $13.5 million pre-tax gain from the sale of its insurance subsidiary. This contrasts with Q1 2024, which was impacted by a major fraud event. Key operational successes include a 9 basis point linked-quarter expansion in net interest margin to 2.87% and a significant reduction in noninterest expenses Q2 2024 Financial Results vs. Prior Periods | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Net Income | $25.6 million | $2.1 million | $14.4 million | | Net Income Available to Common Shareholders | $25.3 million | $1.7 million | $14.0 million | | Diluted EPS | $1.62 | $0.11 | $0.91 | - Financial results for Q2 2024 were significantly boosted by a $13.5 million pre-tax gain from the April 1, 2024 sale of the assets of SDN Insurance Agency, LLC[16][17] - The linked first quarter (Q1 2024) results were negatively impacted by a deposit-related fraud event, which resulted in an $18.4 million pre-tax loss[16] Q2 2024 Key Operational Metrics | Metric | Q2 2024 | Change from Q1 2024 | | :--- | :--- | :--- | | Net Interest Margin | 2.87% | Up 9 basis points | | Net Interest Income | $41.2 million | Up $1.1 million (2.8%) | | Noninterest Expense | $33.0 million | Down $21.0 million (38.9%) | | Total Loans | $4.46 billion | Up $19.4 million (0.4%) | | Total Deposits | $5.13 billion | Down $263.4 million (4.9%) | Management Commentary CEO Martin K. Birmingham highlighted strong Q2 results, record net income driven by the successful insurance subsidiary sale, and core business performance including margin expansion and capital ratio improvement. CFO W. Jack Plants II emphasized building on margin stability, redeploying cash flows into higher-yielding assets, and maintaining a strong liquidity position of $1.3 billion - The CEO stated that the quarter's strong outcomes were driven by a focus on liquidity, capital, and earnings, highlighted by the successful sale of the insurance subsidiary which generated a significant pre-tax gain of $13.5 million[17] - Management noted meaningful improvement in capital ratios, with the common equity tier 1 (CET1) ratio surpassing 10%, up 60 basis points from March 31, 2024[17][3] - The CFO highlighted the company's strong liquidity, with $1.3 billion in available liquidity as of June 30, 2024, and over $1.0 billion in anticipated cash flow in the next 12 months[3] Sale of Insurance Subsidiary Assets On April 1, 2024, the company closed the sale of its wholly-owned subsidiary, SDN Insurance Agency, LLC, to NFP Property & Casualty Services, Inc. The transaction generated approximately $27.0 million in proceeds and a pre-tax gain of about $13.5 million - The company announced and closed the sale of the assets of its subsidiary SDN Insurance Agency, LLC to NFP Property & Casualty Services, Inc. on April 1, 2024[3] Financial Impact of SDN Sale | Metric | Amount | | :--- | :--- | | Proceeds | ~$27.0 million | | Pre-tax Gain on Sale | ~$13.5 million | Detailed Financial Analysis This section provides a detailed breakdown of the company's financial performance, including net interest income, noninterest income, noninterest expense, and income taxes, highlighting key drivers and period-over-period changes Net Interest Income and Net Interest Margin Net interest income (NII) for Q2 2024 was $41.2 million, an increase of $1.1 million from Q1 2024 but a decrease of $1.1 million from Q2 2023. The net interest margin (NIM) expanded by 9 basis points sequentially to 2.87%, driven by lower funding costs. However, the NIM declined from 2.99% year-over-year due to higher funding costs in the current rate environment NII and NIM Performance | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Net Interest Income | $41.2 million | $40.1 million | $42.3 million | | Net Interest Margin | 2.87% | 2.78% | 2.99% | - The linked-quarter increase in NII and NIM was attributed to lower funding costs, resulting from a reduction in short-term borrowings and brokered deposits late in the first quarter[4] - The year-over-year decrease was primarily caused by higher funding costs amid the high interest rate environment, which was partially offset by an increase in the average yield on interest-earning assets[4] Noninterest Income Noninterest income surged to $24.0 million in Q2 2024, a significant increase from both the linked quarter ($13.1 million increase) and the prior-year quarter ($12.5 million increase). The primary driver was the $13.5 million net gain from the sale of the insurance subsidiary. Other areas like investment advisory and company-owned life insurance income also showed positive contributions Noninterest Income Comparison | Period | Amount | | :--- | :--- | | Q2 2024 | $24.0 million | | Q1 2024 | $10.9 million | | Q2 2023 | $11.5 million | - The primary driver for the substantial increase was a $13.5 million net gain from the sale of the company's insurance subsidiary assets[5] - Investment advisory income increased by $197 thousand from the linked quarter due to market-driven growth in assets under management[5] - Income from company-owned life insurance rose by $407 thousand year-over-year due to a surrender and redeploy strategy executed in late 2023[5] Noninterest Expense Noninterest expense was $33.0 million in Q2 2024, a sharp decrease of $21.0 million (38.9%) from Q1 2024 and a modest decrease of $762 thousand (2.3%) from Q2 2023. The substantial linked-quarter decline was primarily due to the absence of the $18.4 million pre-tax loss from the fraud event recorded in Q1. Lower salaries and benefits from the insurance asset sale also contributed to the reduction Noninterest Expense Comparison | Period | Amount | | :--- | :--- | | Q2 2024 | $33.0 million | | Q1 2024 | $54.0 million | | Q2 2023 | $33.8 million | - The significant linked-quarter decrease was primarily driven by the absence of the Q1 2024 fraud event, which included an $18.4 million pre-tax loss recorded under 'Deposit-related charged-off items'[21] - Salaries and employee benefits decreased by $1.6 million from Q1 2024 and $2.0 million from Q2 2023, due to the insurance asset sale and prior organizational changes[21] Income Taxes Income tax expense was $4.5 million in Q2 2024, with an effective tax rate of 15.0%. This is higher than the $356 thousand expense in Q1 2024, which had lower pre-tax income due to the fraud event. The effective tax rate remains relatively stable and is influenced by tax-exempt income and tax credit investments Income Tax Analysis | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Income Tax Expense | $4.5 million | $356 thousand | $2.4 million | | Effective Tax Rate | 15.0% | 14.7% | 14.4% | - The lower tax expense in Q1 2024 was a direct result of lower pre-tax income caused by the previously disclosed fraud event[22] - The effective tax rate fluctuates quarterly primarily due to the level of pre-tax earnings and the impact of tax-exempt income and tax credit investments[22] Balance Sheet and Credit Quality This section reviews the company's balance sheet composition, capital adequacy, and credit quality metrics, highlighting improvements in capital ratios and stable asset quality Balance Sheet Analysis As of June 30, 2024, total assets stood at $6.13 billion. Total loans increased slightly to $4.46 billion from the prior quarter, driven by growth in commercial mortgages. Total deposits decreased by 4.9% to $5.13 billion from March 31, 2024, primarily due to seasonal outflows of public deposits and a reduction in brokered CDs Key Balance Sheet Items (as of June 30, 2024) | Item | Amount | Change from Mar 31, 2024 | Change from Jun 30, 2023 | | :--- | :--- | :--- | :--- | | Total Assets | $6.13 billion | -$166.8 million | -$9.5 million | | Total Loans | $4.46 billion | +$19.4 million | +$63.7 million | | Total Deposits | $5.13 billion | -$263.4 million | +$98.5 million | - The linked-quarter decrease in deposits was primarily attributed to the seasonality of public deposits, combined with a reduction in brokered CDs[23] - Loan growth was driven by a $40.8 million (2.0%) increase in commercial mortgage loans from the linked quarter, while consumer indirect loans decreased by $25.8 million (2.8%)[23] Capital Management The company significantly strengthened its capital position in Q2 2024, driven by strong net income and the gain from the insurance asset sale. All regulatory capital ratios improved and continued to exceed "well capitalized" requirements, with the Common Equity Tier 1 ratio reaching 10.03%. Tangible common book value per share grew by 9.2% from the linked quarter to $25.17 Regulatory Capital Ratios | Ratio | Jun 30, 2024 | Mar 31, 2024 | Jun 30, 2023 | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 10.03% | 9.43% | 9.10% | | Tier 1 Capital | 10.36% | 9.76% | 9.43% | | Total Risk-Based Capital | 12.65% | 12.04% | 11.77% | | Leverage Ratio | 8.61% | 8.03% | 8.08% | Per Share Capital Metrics | Metric | Jun 30, 2024 | Mar 31, 2024 | Jun 30, 2023 | | :--- | :--- | :--- | :--- | | Common Book Value | $29.11 | $27.74 | $26.53 | | Tangible Common Book Value | $25.17 | $23.06 | $21.79 | - The improvement in regulatory capital ratios during the quarter was primarily driven by the impact of the insurance asset sale that closed on April 1, 2024[23] - The company declared a common stock dividend of $0.30 per common share, consistent with the linked and year-ago quarters[23] Credit Quality Credit quality metrics remained strong in Q2 2024. Non-performing loans as a percentage of total loans improved to 0.57% from 0.60% in the prior quarter. Annualized net charge-offs were low at 0.10% of average loans. The company recorded a provision for credit losses of $2.0 million, reflecting a modest increase in consumer indirect delinquencies Key Credit Quality Metrics | Metric | Jun 30, 2024 | Mar 31, 2024 | Jun 30, 2023 | | :--- | :--- | :--- | :--- | | Non-performing loans / Total loans | 0.57% | 0.60% | 0.23% | | Net charge-offs (annualized) / Avg loans | 0.10% | 0.28% | 0.06% | | Allowance for credit losses / Total loans | 0.99% | 0.97% | 1.13% | - The provision for credit losses was $2.0 million in Q2 2024, compared to a benefit of $5.5 million in Q1 2024 and a provision of $3.2 million in Q2 2023[24] - The year-over-year increase in non-performing loans was primarily driven by a single commercial loan relationship that was placed on nonaccrual status during the fourth quarter of 2023[35] Other Information This section provides details on subsequent events, the upcoming earnings conference call, and important disclosures regarding non-GAAP financial measures and forward-looking statements Subsequent Events & Conference Call The company will continue to evaluate subsequent events until its Form 10-Q is filed. An earnings conference call to discuss the Q2 2024 results is scheduled for July 26, 2024, at 8:30 a.m. Eastern Time - The company is required to evaluate subsequent events through the filing of its Form 10-Q and will adjust preliminary reported amounts if necessary[36] - An earnings conference call and webcast will be hosted on July 26, 2024, at 8:30 a.m. Eastern Time to discuss the financial results[10] Non-GAAP Financial Information and Safe Harbor This report includes non-GAAP financial measures, which management believes are useful for understanding the company's performance. A reconciliation to GAAP measures is provided in an appendix. The report also contains a safe harbor statement, cautioning that forward-looking statements are subject to various risks and uncertainties - The press release contains certain non-GAAP financial measures. A reconciliation of these measures to GAAP is included in Appendix A of the document[38] - The report includes a Safe Harbor Statement, noting that forward-looking statements involve significant risks and uncertainties and are based on certain assumptions that could differ materially from actual results[39]