Operator
Hello, everyone, and welcome to the Financial Institutions Inc fourth-quarter and year-end 2024 earnings call. My name is [Chatch], and I'll be coordinating your call today. (Operator Instructions)
I'd now like to hand over to your host, Kate Croft, Director of Investor Relations to begin. Please go ahead.
Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Martin Birmingham; and CFO, Jack Plants. It 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 where 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 measure, the GAAP financial measures were provided in the earnings release found in this 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, January 31, 2025.
I'll now the call over to President and CEO, Martin Birmingham.
Thank you, Kate. Good morning, everyone, and thank you for joining us today.
Our fourth quarter was busy and highly productive highlighted by our successful equity offering and subsequent restructuring of our available for sale investment securities portfolio. We sold $653.5 million of low yielding securities and reinvested the proceeds into higher yielding agency wrapped securities. The result is a balance sheet that we expect to contribute to a much stronger earnings profile moving forward.
Including expanded net interest income, net interest margin, return on average assets and an improved efficiency ratio. We recorded a $100.2 million pre-tax loss associated with the securities repositioning, which resulted in net loss available to common shareholders for the fourth quarter of $66.1 million or $4.02 per diluted share and $26 million and $1.66 per diluted share for 2024. The after-tax impact of the securities loss was about $75 million, and this was fully offset by a portion of the capital we raised.
Market reception was very positive to our common equity offering which was more than four times oversubscribed. And we were pleased to see that the overallotment was executed quickly. And result, we issued $115 million of new capital to many new shareholders and several existing ones through the offering, generating net proceeds of $108.5 million.
We intend to thoughtfully deploy the remaining dry powder in a way that supports shareholder value and may elect to call a portion of our sub debt that is set to reprice this year. We believe our stronger capital position and improved earnings outlook position us well to drive sustainable and profitable growth even as we invest in people, process and technology to support our vision of being a high performing financial institution.
Jack will provide more details on our financial results in 2025 expectations shortly. But I would like to first touch on a few highlights. Regulatory and tangible capital ratios expanded meaningfully, our common equity tier 1 ratio increased 60 basis points from September 30 and 145 basis points for year-end 2023. While our TCE ratio increased 147 and 240 basis points respectively. Accumulated other comprehensive loss was $52.6 million at year end, down from $102 million at September 30, 2024, reflecting the balance sheet restructuring. [Argen] expansion continued, up two basis points from the third quarter to 2.91% in the fourth quarter. Full year NIM of 2.86% was on the low end of our guided range.
Commercial loan growth was strong, up 3.8% during the quarter and 4.5% during the full year 2024. Asset quality results remain relatively stable including annual net charge offs to average loans of 20 basis points, consistent with 2023.
Turning to deposits, we remain committed to core in market deposit gathering with relationship-based accounts and the wind down of our bass offering as deposits were approximately $100 million at year-end 2024 or less than 2% of total deposits. We have one live bass partner and three in the offboarding phase given the progress made in developing migration plans and the partner's success in identifying new banking providers. We expect the majority of these deposits to outflow in the first half of the year.
Deposits totaled $5.1 billion at the end of 2024, finding $202 million from September 30, primarily the typical seasonal reductions in public deposit accounts which should be plenished with normal first quarter tax collection and financing inflows. From the end of 2023, the $108 million decline in total deposits is attributed to reductions in broker deposits and more reciprocal balances.
Overalls were up 1.7% from September 30 and relatively flat with year-end 2023 and solid commercial loan growth during both the quarter and year was partly offset by a planned reduction in our consumer indirect portfolio. As we shared previously, we manage our indirect portfolio based on a blend of demand and spread maintenance. And intentionally allow runoff to outpace originations while we maintain a strong focus on profitability and stable credit mix.
With respect to commercial, growth for both the quarter and year was led by commercial mortgage. As you'll see in our earnings release, we've added additional portfolio, granularity of construction, multifamily, non-owner occupied and owner-occupied commercial mortgage loans. New CRE production of $74.3 million in the fourth quarter was led by multifamily, office, hospitality and land development. We saw notable draws on existing industrial land development as well. From a geographic standpoint, fourth-quarter CRE production was basically an even split between our upstate New York and the Atlantic markets.
Commercial business loans are up about $11 million or 1.7% from September 30, 2024. It's a highly competitive market. We see good opportunities to drive credit discipline, commercial business loan growth in 2025.
There is significant economic development activity taking place across our New York footprint. The Syracuse, Rochester Buffalo Corridor was recognized as a tech hub by the federal government for the region's coordinated focus on semiconductor manufacturing and our branch network is well situated in that geography.
More of the opportunity stemming from these investments will come to fruition in 2026 and beyond. Given that the most significant project is effective to break ground in November, it could start to see some impact later this year.
As the quality metrics were fairly stable in the approximately $41 million of non-performing loans we reported year-end continue to relate to the two separate commercial relationships that we previously discussed. We continue to work closely with all parties involved but do expect that resolution will take time.
Commercial and residential net charge offs were essentially non-existent in 2024. Consumer indirect net charge offs did increase from the third quarter but remained lower than the levels we reported at year-end 2023.
We recorded a provision for credit losses of $6.5 million in the fourth quarter of 2024 compared to $3.1 million in the third quarter. A higher provision for loan losses in the fourth quarter as compared to the third quarter is attributed to a combination of factors, including higher loan growth, as well as increases in net charge offs and qualitative factors.
The higher quality data factors were primarily associated with elevated indirect delinquencies comparing the third and fourth quarters which is somewhat seasonal. As a result, the allowance for credit losses on loans to total loans increased six basis points to 1.07% as compared to September 30. We remain comfortable given the health of our portfolios and commitments to credit discipline lending.
I would like to now turn the call over to Jack for additional commentary on our financial results and 2025 expectations.
Thank you, Marty. Good morning, everyone.
As expected, fourth-quarter and full year 2024 financial results reflect the recent capital raise and the securities restructuring. All the core business continued to perform solidly. Considering the challenges we faced during the last 12 months, the strategic actions we executed on, I'm proud of what our team accomplished. I'd like to start by laying out some of our 2025 expectations and providing a bit more color on how our historical performance, balance sheet composition and local market dynamics inform our expectations around these metrics.
From a profitability standpoint for the full year 2025, we're targeting return on average assets of at least 110 basis points, return on average equity of at least 11.25% and an efficiency ratio below 60%. The balance sheet restructuring we completed in late December will create a meaningful lift in our net interest margins starting in the first quarter. The security so had an average yield of 1.74% and those purchased were 5.26%, resolving in an overall yield on the portfolio of 425 basis points.
Continued lift in margin the remaining quarters of 2025 is expected to come from a combination of low production and mix, as well as downward deposit pricing and largely the maturities and renewals of time deposits. As a result, we expect a full year 2025 net interest margin of between 345 and 355 basis points. Using a spot rate forecast as of year-end, it does not factor in future rate cuts.
And looking at our fourth-quarter 2024 experience, interest earning asset yields decreased 8 basis points. While our overall cost of funds decreased 10 basis points, reflecting the impact of rate cuts in the latter part of 2024. While approximately 40% of our loan portfolio is floating, with the majority price off of prime and silver indices, management was successful in addressing deposit repricing across all higher cost concentrations in retail, commercial and public deposit sectors.
In terms of loan growth, we're expecting low-single digit growth of between one and 3%. We're not discounting the possibility of returning to a healthier mid-single digit total loan growth rate in the future given our fourth-quarter performance and the size of our pipeline.
But we have chosen to be conservative in our estimates for this year. Increased competition, uncertainty about the impact the proposed policy changes from Washington will have on business operating supply and labor costs, as well as the expected timing of some of the chips manufacturing investments.
Let us to take a more conservative approach to our 2025 modeling. Commercial lending is expected to be the driving force of 2025 growth. The portfolio expansion towards the mid-single digit rate with CRE, C&I and business making all contributing.
I would also like to note that we're currently projecting $1.2 billion in total cash flow over the next 12 months from the loan and security portfolios combined, which we will seek to redeploy in the credit discipline lending.
Residential loans and consumer indirect portfolios are expected to remain fairly flat through the year. On the residential side, production is expected to be matched by an anticipated runoff. Competition is very high in this space and while interest rates have come down somewhat, we believe we're still several quarters away from notable refinancing activity.
Consumer indirect balances are expected to end the year relatively flat. Runoff may continue to outpace production in the first quarter of the year, which is typically a bit slower due to the seasonality of loan demand, ut we expect that to shift in the middle of the year.
Deposit balances are expected to remain somewhat flat for the year with vast related deposit outflows partially offsetting anticipated growth in other categories. Our marketing efforts are focused around core, non-public deposit growth. We're prepared to supplement that with short-term borrowings and brokered deposits as needed. So well, the levels we've carried in the past.
We are projecting quarterly non-interest income of nine and $10 million in 2025. Excluding losses on investment securities, impairment on tax credits and other categories that are difficult to predict, such as limited partnership income. Fourth-quarter 2024 non-interest income was impacted by the restructuring as well as discrete events like the sale of our insurance subsidiary which created additional noise and full year results. And looking at what we consider to be recurring non-interest income, it's all for $8.8 million for the quarter compared to $9.1 million in the third quarter and $8.9 million in the year ago period.
Investment advisory revenue is a key contributor of non-interest income for us and primarily comes from career capital. Assets managed by our wealth management subsidiary associated revenues were down on a linked quarter basis.
Due to some organizational changes, we saw the departure of two advisers during the quarter. However, we recently hired a new team and has already brought in business which more than offsets the outflow we experienced.
We expect non-interest expense of approximately $35 million per quarter in 2025. This represents a 5% increase in core annual operating expenses versus 2024. Included in this are expenses for in process initiatives that we believe will support incremental performance. Well from a revenue perspective such as enhancements to our treasury management capability, as well as enhanced efficiency, including service software to facilitate effective change management and prioritize head count. We believe we will be able to effectively manage expenses even as we invest in our people, processes and technology to support our future growth and performance, including a sub 60% efficiency ratio.
I do want to address the elevated fourth-quarter 2024 expenses. The primary driver of this was a $1.3 million pension plan settlement accounting charge that was triggered in the fourth quarter as a result of lump sum withdrawals during the year. We had amended the plan in the four curve of 2023 to remove a lump sum distribution threshold and several terminated vested participants took advantage of the opportunity in 2024. This will ultimately reduce the size and scale of our pension plan going forward. And while we may see settlement charges in future years, they're not expected to be at this level. The computer and data processing expense increase of about $1.3 million related to some of the ongoing initiatives I mentioned which are factored into our 2025 guidance.
FDIC Assessment expense was about a half a million higher than in the third quarter as a result of an increase in the assessment rate given the fourth-quarter securities loss. For this reason, FDIC expense is expected to remain elevated through 2025. So, to a lesser degree than in the recent quarter and this is also reflected in our guidance. The 2025 effective tax rate is expected to be between 17% and 19% including the impact of amortization of tax credit investments placed in service in recent years.
Year budgeting full year net charge offs of between 25 to 35 basis points of average loans. Our experience in each of the last two years has been lower than this. We're being conservative with our outlook at the start of the year.
Overall, our performance targets in 2025 are focused on profitability first and foremost. We're not focused simply on growth; we are focused on profitable growth. We're not just focused on expense management. We are prioritizing investments that support incremental revenue generation and efficiency and how we operate. With the success of the capital raise and restructuring in the recent quarter, we are very well-positioned to execute on those objectives in 2025.
That concludes my prepared remarks. I'll now turn the call back to Martin.
Thank you, Jack.
We've been on a journey to transform this company into a more efficient and profitable institution. Over the past 18 months, we have looked closely at our organizational structure, our business lines and the composition of our balance sheet, taking necessary action to ensure all are contributing to our success in both the near and long terms. We believe we are poised to deliver on our performance goals that will support the long-term value creation objectives that our management team and Board are focused on.
With respect to our Board, earlier this week, we were pleased to announce the appointment of a new director, Angela Panzarella. Panzarella brings extensive business and non-profit leadership experience both globally and in upstate New York, as well as past public company Board experience. As we continue to grow and above as a company, we look forward to benefiting from her perspective and counsel.
That concludes our prepared remarks. Operator, please open the call for question.
Operator
(Operator Instructions)
Damon DelMonte, KBW.
Hey, good morning, everyone. I hope everybody's doing well, and thanks for taking my questions.
Just a quick question loan growth and the outlook. You know, kind of given some of the commentary about the positive trends in the market. The fact that indirect auto is not going to be paying off at the same level as it has been recently. Just wondering the thoughts behind the conservative 1% to 3% growth, kind of feels like it could be more towards the middle single digits. So, just kind of curious as to how you guys are looking at that.
Hey, Damon. This is Jack to answer that question.
So looking at the portfolio as a whole, I think you're spot on on the single-digit range and the commercial portfolio. We do have some pent-up demand that's still on the sidelines for construction lending where there's we're waiting for some additional rate cuts to come to fruition before that activity heats up.
The activity that we're seeing in the Syracuse market, it is more towards the back half of the year, primarily in the fourth quarter of 2026. So, we're just conservative with loan growth estimates at this stage of the game, but we're optimistic that they'll heat up in that half of the year with some great cuts and then some of that activity that we're talking about from economic development in Syracuse region.
Got it. Okay. That's helpful. Thank you.
And then with respect to the margin, I look, I appreciate the guidance for the full year. I think at the time of the offering, we kind of estimated about 38 basis point benefit to the margin. Just given the modest increase here in the fourth quarter, is it fair to assume something in the high 320s for a starting point in the first quarter of '25 and then kind of a march towards a level that gets you to a full year in that 345 to 355?
Yeah, we're actually looking at the first quarter margin, the 330 range, and then expansion beyond that. And that's really driven by the cash flow that's coming off the loan portfolio. If you look at our investor presentation, there's a slide in there that shows roll off yield versus roll on yield and how that contributes to to earning asset improvement over time. That's a contributing factor.
And then in the fourth quarter, we saw our cost of funds declined 10 basis from (inaudible) quarter with the first 75 basis points of cuts to come to fruition. And we were positively surprised by our ability to have a faster reaction to rate cuts across all deposit portfolios than originally anticipated. And there's some additional lag that's coming into play for catch up on deposit pricing in 2025 as well.
Got it. Okay. That's great color. Okay. That's all that I had. I'll step back for now. Thank you.
Operator
[Tyler Cashio Tori] from Stephens.
Hey, good morning. This is [Tyler Cashio Tori]. I'm from Breese.
I just wanted to start off on the reserve build. I know you talked about it a little bit and saw that the reserve increased 6 basis points to 1.07. I was just hoping you could provide some more color on about what drove that and if we should expect to see some continued reserve build. And if so, do you have a targeted level in mind?
This is Jack, I'll take that.
So as we said on the call, the fourth quarter was largely influenced by the loan growth that we observed in the fourth quarter that we had to reserve for. On the qualitative side, a lot of our qualitative factors are influenced by quantitative behavior in the underlying loan portfolio. One of which is the delinquency rate on the indirect portfolio, which increased in the fourth quarter as expected from a seasonal perspective. However, it was lower than what we experienced in the fourth quarter of 2023.
And then on the commercial portfolio, the qualitative drivers are influenced by national portfolio metrics. So when you look at commercial real estate portfolio behavior at a national level, it experiences higher delinquency levels than what we have internally. So, we have to factor that in from a (inaudible) perspective, but we believe the credit quality of that portfolio is a little bit stronger. And we're comfortable with the 107 basis points coverage ratio that we're at right now. So if you think about provision modeling going into 2025, I would focus on our guidance on NCOs and that 25 to 35 basis point range, loan growth that we've projected as well as the coverage ratio maintenance at 107% -- 178.5%.
Okay, great. Thanks. And then just one more for me. Tangible book came in a bit below what we were expecting, what was the period in AOCI?
We saw AOCI pick up another $25 million at the end of the quarter just driven by end of period, increases in the belly of the curve around the five-year point which really impacts the mark on the portfolio. Yeah, the AOCI mark total I think was $50 million.
Okay, great. Thank you. Thank you for answering my questions. That's it for me.
Operator
(Operator Instructions)
Frank Schiraldi, Piper Sandler.
Good morning. I just wanted to ask about the follow up on 2025 guide. Jack, just so you guys talk about the per expense -- quarterly expense of of roughly $35 million per quarter. Just wondering if you can -- following the 4Q where you had some a little bit of noise in terms of non-recurring items. If you could just talk through, maybe, the cadence of expense growth through the year that starting point of 35 and then you feel like you can hold it at those levels or any color there for modeling.
Yeah, I mean, the year-over-the year normalized NIE expense growth is expected to be about 5%. And there was a lot of noise in 2024, so I understand the question. When we look at fourth quarter NIE, if you back out the $1.3 million of pension settlement accounting expense that we had, we were right around a $35 million NIE mark. So, that quarterly guidance is fairly consistent with our fourth-quarter results on a normalized level.
Okay. And then just in terms of the -- your confidence level in getting to that some of those profitability metrics and you mentioned the efficiency ratio of sub 60%. You know, I think it's incremental rate cuts would still help if you get them. And you're pretty conservative on your your long growth expectations. So just curious, maybe talk a little bit about your confidence level there. And then what is the primary risk do you think as you look at 2025 of kind of missing that mark?
So loan growth certainly influences our ability to achieve the efficiency ratio. We've demonstrated a very strong corporate responsibility as it pertains to expense management, but about 80% of our revenue stream is driven by non-interest income. And our margin expansion, as I mentioned earlier, is really influenced by the role on yield of the loan portfolio coming in above what's rolling off. However, I feel that our loan growth projections are conservative, so I'm fairly comfortable with our ability to achieve that sub 60 efficiency ratio.
Okay, great.
Did I answer the question?
Yeah. And then just following up, I mean, I think you you've already answered this. Just clarification on that. Sounds like the 107 the reserve to loan ratio pretty comfortable there. Just curious, if you could talk about what the, I'm sorry if I missed it, what the reserve levels are on the new commercial to just maybe try to get a sense of any variability there going forward as you grow that book as opposed to consumer.
Yeah, they're north of 100 basis points on the commercial portfolio. I don't have that directly in front of me.
Okay. But doesn't sound like you feel like that's going to put a lot more pressure on that or more pressure on the reserve to loan ratio necessarily going forward, but okay.
All right, I appreciate it. Thank you.
Yeah. Thanks, Frank.
Operator
We have no further questions. I'd like to hand back to Martin Birmingham to conclude.
I just want to thank everybody for their participation this morning. We look forward to continuing the conversation with our second-quarter results.
Operator
This concludes today's call. Thank you for joining. You may now disconnect your lines.
