Thank you for standing by, Ladies and gentlemen. Welcome to the Financial Institutions, Inc. Third Quarter 2024 Earnings Call. My name is Candice, and I will be your event coordinator today. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions]. I would now like to turn the conference call over to Kate Croft, Head of Investor Relations. Please go ahead.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plant. 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. Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to Form 8-K or in our latest investor presentation available on our IR website, www.fisi-investors.com. Please note that, this call includes information that may only be accurate as of today's date, October 25, 2024. I'll now turn the call over to President and CEO, Marty Birmingham.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our third quarter results were highlighted by strong deposit growth, incremental net interest margin expansion, solid expense management and continued build in our regulatory and tangible capital ratios. Third quarter 2024 income available to common shareholders was $13.1 million or $0.84 per diluted share compared to $25.3 million or $1.62 per diluted share in the late quarter, which benefited from a $13.5 million pre-tax gain on the sale of our insurance business. Third quarter return on average assets was 89 basis points, and our efficiency ratio was 65%. Year-to-date, ROAA of 90 basis points and efficiency ratio of 72% were impacted by our previously disclosed fraud event and the sale of our insurance subsidiary. Excluding these items, adjusted ROAA through the first nine months of the year was 100 basis points and efficiency ratio was 65% reflecting the strength of our core business. Before discussing our third quarter results in greater detail, I would like to provide an update on the wind-down of our banking as a service offering announced last month after a careful review undertaken in conjunction with our annual strategic planning process, and considering balance sheet allocation, only about 2% of the bank's total deposits are fast related, and they're primarily associated with four live partnerships. These deposits amounted to $103 million on September 30th, and they averaged $109 million in the third quarter with a cost of 3.84%. Our initial vast partner engagement focused on core funding capabilities, a modest amount of credit extension, and transaction-related fees. As we continue to evaluate the financial results associated with this offering, management determined that the business unit economics were not contributing to the company's franchise value as anticipated. Furthermore, it was evident that an exit…

Thank you, Marty. Good morning, everyone. We reported net interest margin on a fully taxable equivalent basis of 289 basis points for the third quarter of 2024, up 2 basis points from the linked second quarter. NIM was negatively impacted by the commercial relationship placed on non-accrual during the quarter that Marty discussed, which reduced margin by 3 basis points. Net interest income of $40.7 million was down $512,000 from the linked quarter with the majority of that variance attributable to the reversal of interest income for this single commercial relationship. Interest earning asset yields increased 3 basis points, modestly outpacing our overall cost of funds, which increased 2 basis points, while the average yield about interest bearing liabilities increased from the second quarter as a result of growth in higher cost time deposits, we were pleased to see a flowing of disintermediation from non-interest-bearing accounts for average balances of about $1 billion were stable quarter-over-quarter. Average total deposits were down about 2% on a late quarter basis, largely due to the timing of seasonal public deposited flows in addition to a decrease in reciprocal deposits, which offset an increase in average non-public deposits. We continue to be proactive in managing funding costs where we can and further reduced short-term borrowings in the third quarter. Since year on 2023, we've reduced total borrowings in broker deposits by about $307 million or 54%. Looking at our total deposit portfolio relative to the magnitude of FOMC rate increases that occurred in 2022 and 2023 in the recent 50 basis point decrease, we experienced a cycle-to-date beta of 53%, excluding the cost of time deposits. The non-maturity deposit portfolio had a beta of 32%. Year-to-date, NIM of 2.85% is at the low end of the 2.85% to 2.95% range we guided in January.…

Thanks, Jack. Amid a continued challenging operating environment, our company has remained intently focused on liquidity, capital and earnings. The actions we've taken over the course of this year have allowed us to expand capital ratios meaningfully, including a common equity Tier 1 ratio of 10.28% up 85 basis points from 9.43% at year-end 2023. Many of the strategic actions we've taken from the sale of our insurance business to adjustments within our indirect business, to our decision to wind down our Banking as a Service offering have also been focused around supporting our core community banking franchise in our existing footprint. We remain very focused on driving sustainable growth across each of our retail banking, commercial banking and wealth management business lines and by extension, driving value into the company for the benefit of our shareholders, customers, associates and communities. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions]. Our first question comes from Damon DelMonte from KBW.

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?

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.

Okay. That's helpful. And then with regards to the outlook for loan growth, I think Marty, you made a comment that the commercial pipeline seems to be rebuilding right now. So, does that give you better confidence for kind of maybe mid-single-digits growth as we go through 2025?

It does, Damon. Thanks for the question and participating this morning. It certainly does. I also commented last 18 months, we've been focused on liquidity capital earnings and in light of the operating environment, in light of commentary around concerns over credit, et cetera. So, we've been selective during this period and we have been signaling to our lending teams and to our customers of our interest to start to rebuild the pipeline and to build momentum in support of growth in the range you just talked about for 2025.

Got it. Okay. That's great. And then maybe just one more quick one here for Jack on expenses. It came in lower than what we were looking for this quarter and down a little bit from last quarter. I guess, how do you think about when you kind of reset the button and going into '25. Do you think you can kind of maintain a modest like low single-digit type growth outlook here, or do you have any anticipated expenditures that you're aware of, or you can disclose?

We're certainly focused on reinvesting in our core lines of businesses for future growth, Damon. But, our mindset over the past couple of years has been certainly focused on expense management and prudent expense management in that regard. As far as full year expense guidance is concerned for 2025, again, we'll provide that update with the fourth quarter call. But I would point to our exit from VaaS and the fact that there were 14, FTEs associated with supporting that line of business, that are going to be redirected towards our more mature lines of business. In my mind, that's cost avoidance where we would have had to have gone out and hired to support growth in future periods.

Got you. Makes sense. Okay. That's all that I had. I appreciate the color this morning. Have a great one. Thanks.

Thanks, Damon.

Our next question comes from David Mirochnick from Stephens.

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

We can.

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?

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.

Okay. Great. And then just on Slide 23 of the presentation, it looks like in most segments, loans are rolling off at a higher rate than the current rate. I don't think those loans are longer duration and we'd see some yield pickup there. So, I was just wondering if you could provide some commentary around that?

Yes. So that's been the story as far as our ability to expand margin throughout 2024 with that roll-off yield on the loan portfolio are being reinvested at higher rates. And we've been pretty selective as far as our pricing requirements for deals that we've approved this year on the commercial side in order to preserve and expand margin. That philosophy hasn't changed, which is why we've seen a lower level of loan growth maybe than some of our peers as we've been selective in that regard. That story continues, and we continue to be focused on spread maintenance and driving towards expansion on the earning asset side.

And the last one for me is -- I'm sorry if I missed this. Just in terms of the best wind down, do you expect any onetime costs associated with that?

No material one-time costs.

And we currently have no further questions in the queue. I will turn the call back over to Marty Birmingham for closing remarks.

Thanks very much for your help this morning, operator. Thanks to all who have participated in our call. We look forward to reporting on our results with you in January.

Thank you, everyone, for your participation. You may now disconnect from the call. Have a nice day.