Financial Institutions, Inc. (NASDAQ:FISI) reported strong second quarter 2024 results, with record quarterly net income of $25.3 million, or $1.62 per diluted share. This impressive performance was driven by the successful divestiture of the company's insurance subsidiary, SDN Insurance Agency, as well as the underlying strength of FISI's core banking business.

Financial Performance

The company's annual net income for 2023 was $50.3 million, with annual revenue of $331.2 million. Its annual operating cash flow was $11.1 million, while annual free cash flow was -$45.5 million.

In the second quarter of 2024, FISI reported net income available to common shareholders of $25.3 million, or $1.62 per diluted share, compared to $1.7 million, or $0.11 per diluted share, in the first quarter. Year-to-date, the company has achieved a return on average assets of 0.90% and an efficiency ratio of 75%. Excluding the impact of the March 2024 fraud event and the gain on the SDN sale, FISI's core business performance was even stronger, with a normalized year-to-date ROAA of 1.07% and an efficiency ratio of 66%.

Strategic Divestiture

The most significant driver of the company's improved results was the sale of its insurance subsidiary, SDN Insurance Agency, to NFP Property Casualty Services. This strategic transaction generated a pre-tax gain of $13.5 million and eliminated $11.3 million in goodwill and other intangibles, resulting in a meaningful increase in FISI's capital ratios. The company's common equity Tier 1 ratio increased by 60 basis points to 10.03%, while its tangible common equity ratio grew by 69 basis points to 8.27%.

Core Banking Performance

FISI's core banking business also performed well during the quarter. Total loans declined modestly, as commercial loan growth of $47.2 million, or 1.7%, was offset by anticipated runoff in the indirect portfolio. Total deposits decreased 4.9%, primarily due to seasonal outflows in the public deposit portfolio and a reduction in broker CDs.

The company's asset quality metrics remained strong, with zero annualized net charge-offs to average loans in the commercial portfolio for the second quarter. Commercial nonperforming loans totaled $16.1 million at June 30, 2024, down from $16.8 million at March 31. On the consumer side, the credit quality of the residential loan portfolio has been solid and consistent, while the indirect portfolio saw meaningful improvement in the net charge-off ratio, declining from 128 basis points in the first quarter to 38 basis points in the second quarter.

Net Interest Margin and Income

Net interest margin expanded to 2.87% on a fully taxable equivalent basis in the second quarter, up from 2.78% in the first quarter. This improvement was driven by a 7-basis-point increase in interest-earning asset yields and a 2-basis-point decline in the overall cost of funds. FISI expects continued margin expansion in the second half of 2024, as it reinvests cash flows from the loan and securities portfolios into higher-yielding assets.

Noninterest income, excluding the gain on the SDN sale, totaled $10.5 million in the second quarter, down slightly from $10.9 million in the first quarter. This decrease was partially offset by increases in income from limited partnerships, swap fees, and the company's wealth management business.

Noninterest expense, excluding fraud-related costs, declined $2.2 million, or 6.2%, in the second quarter compared to the first quarter, primarily due to lower salaries and employee benefits, occupancy and equipment costs, and professional services expenses.

Outlook

Looking ahead, FISI is maintaining its previous guidance for 2024, including low single-digit loan and deposit growth, net interest margin between 285 to 295 basis points, and full-year net charge-offs within the historical range of 30 to 40 basis points. The company also expects its effective tax rate to fall within a range of 11% to 13% for the full year.

Conclusion

FISI's strong second quarter performance and improved capital position position the company well to capitalize on future opportunities. The company's focus on liquidity, capital, and earnings has driven meaningful progress, and management remains committed to delivering sustained incremental improvement in operating performance in the quarters ahead.