Financial Institutions, Inc.

Hello, everyone, and welcome to the Financial Institutions Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Bruno, and I will be operating your call today. During the presentation, you can register to ask a question by pressing star 1 on your telephone keypad. I will now hand over to your host, Pamela Kennard, Investor Relations Analyst. Pamela, 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. Chief Community Banking Officer Justin Bigum and Director of Financial Planning and Analysis Mike Grover will join us for Q&A. 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, all available on our investor relations website for our 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. Please note that this call includes information that may only be added as of today's date, January 31st, 2023. I'll now turn the call over to President and CEO Marty Birmingham.

Thank you, Pam. Good morning, everyone, and thank you for joining us today. Fourth quarter net income available to common shareholders was $11.7 million, or $0.76 per diluted share, down as compared to the link and prior year quarters. The decline was primarily the result of higher provision for credit losses and lower PPP-related revenue, described in detail in our earnings release. Adjusting for revenue related to PPP loans, restructuring charges, and impact of the third quarter 2022 surrender and redeployment of company-owned life insurance, pre-tax, pre-provision income for the quarter was $20.8 million, $261,000 higher than the linked quarter in 865,000 higher than the prior year period. I believe these are strong results in a challenging operating environment. Organic loan growth was once again a highlight this quarter, with 4.7% increase in total loans from September 30th. All major loan categories contributed to this growth, with increases of 4.8% in commercial business, 7.4% in commercial mortgage, 2.1% in residential real estate, and 2.6% in consumer indirect. As our loan portfolio has grown over the past several years, I have reinforced our commitment to credit discipline and the management of risk. We have continued to invest in credit and risk personnel and develop what we believe is an effective and efficient risk and control environment. A current example is a transition of Randy Phillips to a newly created position of Deputy Chief Credit Officer from his current role of Chief Risk Officer. With 32 years of local commercial credit experience, Randy has the skills and experience to help lead and support the continued evolution of our credit delivery function. The Chief Risk Officer role will be assumed on February 6th by a risk professional who has 34 years of progressive experience in compliance, consumer credit, audit, and operations while working for international, national, and regional banking institutions. He most recently served as Chief Compliance Officer in a $50 billion bank. In 2023, we expect that our loan portfolio performance will be consistent with historic credit outcomes, despite market concerns regarding the economic environment, a potential recession, and the quality of credit. Positive year-end total loan portfolio metrics included non-performing loans to total loans of 25 basis points. Allowance for credit losses on loans to total loans of 112 basis points. And allowance for credit losses on loans to non-performing loans of 445%. In addition, there were zero delinquencies in our large commercial loan portfolio as of December 31st. The ratio of annualized net charge-offs to average loans was 34 basis points in the current quarter, 22 basis points in the third quarter of 2022, and 51 basis points in the fourth quarter of 2021. During the fourth quarter, we did have a $1.2 million charge off of a credit with a previously established specific reserve, which was related to a small commercial loan associated with office space. Our overall loan portfolio is performing quite well, inclusive of this asset class. As I stated in the earnings press release, commercial loan growth was back end weighted in 2022, largely driven by the success of our Mid-Atlantic team. After joining us in February, they worked quickly to develop a pipeline of high-quality opportunities in the Baltimore and Washington, D.C. market. Commercial loans outstanding in the Mid-Atlantic market increased by approximately $75 million in the fourth quarter and totaled $148 million at year-end. Our commercial loan pipeline in the Mid-Atlantic market is holding steady at about $200 million, while the total commercial loan pipeline is about $750 million. I'm very pleased with the progress made to date in this market with new credit and deposit customer relationships established and cross-sale conversations related to insurance and wealth underway. Despite the ongoing pressures of inflation, higher interest rates, and tight housing inventory, our residential loan portfolio grew 2.1% from September 30th. This increase can be primarily attributed to our loan program that provides easier access to homeownership for borrowers with less than 80% of the area median income. We are also seeing positive outcomes from recently added talent and operational efficiencies implemented to enhance our underwriting and application processes. The consumer indirect loan portfolio was $1 billion at year end, up 2.6% or $26 million from the link quarter due to continued strong demand. We are proactively moderating consumer indirect production through pricing and remain laser-focused on credit quality and stringent underwriting standards. Net charge-offs were 57 basis points in the current quarter, down from the linked quarter, and in line with historical trends. I'd like to remind everyone that our indirect business is a prime lending operation with an average portfolio FICO score above 700. This business has delivered consistent results through several economic cycles with annual charge-offs ranging from a low of 14 basis points to a high of 87 basis points between 2008 and 2022. Annual indirect charge-offs were 45 basis points in 2022. A long history of demonstrated outperformance of this portfolio coupled with the exceptional quality of our commercial loan book and unwavering credit standards across all of our lending platforms provide me with the utmost comfort as we enter the 2023 operating environment. This concludes my introductory comments. It's now my pleasure to turn the call over to Jack for additional details on results and our guidance for 2023. Jack?