Financial Institutions(US:FISI)2023-07-28 17:48Financial Data and Key Metrics Changes - Second quarter net income available to common shareholders was $14 million or $0.91 per diluted share, up from $11.7 million or $0.76 per share in the first quarter of 2023, but down from $15.3 million or $0.99 per share in the prior year period [4] - Net interest income of $42.3 million was up $522,000 from the first quarter of 2023, with an overall cost of funds in the quarter at 203 basis points, up 41 basis points from the late first quarter [10][11] - The tangible common equity (TCE) ratio at June 30, 2023, was 5.53%, with a tangible common book value per share of $21.79 [13] Business Line Data and Key Metrics Changes - Total loans were $4.4 billion at June 30, reflecting an increase of $154.5 million or 3.6% from March 31, led by commercial lending, which was up 5.7% during the second quarter [22] - Investment advisory income of $2.8 million was 104,000 lower than the previous quarter, primarily due to lower transaction-based fees [39] - The commercial pipeline, which includes commitments secured but not yet funded, is down considerably from previous quarters, with the overall commercial pipeline at June 30, 2023, less than half of what it was at year-end 2022 [6][30] Market Data and Key Metrics Changes - Public deposits decreased by $106.4 million or 2.1% from March 31, primarily due to normal seasonal outflows [119] - Non-public deposits increased from the linked quarter, indicating a shift from lower-cost demand and savings deposits into higher-cost time deposit accounts [5] - The average portfolio FICO score of the indirect portfolio continues to exceed 700, with new production during the quarter coming on a weighted average coupon of 9.31% [104] Company Strategy and Development Direction - The company is focused on deposit gathering and expanding its reach, launching a new marketing campaign for money market accounts [101] - The merger of two investment managers aims to create more focus on high-net-worth managed accounts and reduce reliance on retail broker-dealer relationships [56] - The company expects full-year loan growth to be concentrated in the first half of the year, adjusting its outlook to low double-digit growth from previous high single-digit expectations [109] Management's Comments on Operating Environment and Future Outlook - Management noted that competition for deposits is strong, similar to the rest of the country, and emphasized the importance of defending the deposit base [101] - The company remains confident in the overall performance and health of its loan portfolio despite a challenging economic environment [9] - Management expects annualized return on assets (ROA) to fall in a range of 85 to 95 basis points for 2023, reflecting margin pressures from higher funding costs [110] Other Important Information - The provision for credit losses on loans was $3.2 million in the second quarter, supporting an allowance for credit losses to total loans ratio of 113 basis points [9] - The company reported a net gain of $489,000 on tax credit investments placed in service during the quarter, contributing to lower income tax expenses [28][29] - The accumulated other comprehensive loss stood at $134.5 million at June 30, 2023, impacting the TCE ratio and tangible common book value per share [13] Q&A Session Summary Question: What is driving the smaller pipeline for loan growth? - Management indicated that the smaller pipeline is a combination of slowing demand from borrowers and a more selective approach to credit quality [16][113] Question: Can you provide insight on the margin outlook and asset repricing? - Management discussed the asset side of the balance sheet and indicated that they expect to see benefits from increases in Fed funds rates, with a focus on managing cash flows [17][114] Question: What is the duration of the securities portfolio and comfort level with AOCI recovery? - The modified duration of the securities portfolio was reported at 5.9%, with management expressing comfort in waiting for recovery while optimizing the balance sheet [73] Question: How are BaaS deposits performing and what are the costs associated? - Management confirmed that they are still expecting $150 million in BaaS deposits by year-end, viewing them as an attractive alternative to high-cost wholesale funding [67][75] Question: What is the contribution of the tax credit business to EPS this quarter? - The benefit from tax credit investments was about $0.08 per share for the quarter, with a focus on community development activities [77]