Financial Institutions, Inc.

Hello everyone and welcome to the Financial Institutions Inc First Quarter 2023 results call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Kate Croft, Director of Investor Relations and External Relations to begin.

Kate, 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 FPC 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 earnings release filed as an exhibit to Form 8K. Please note that this call includes information that may only be accurate as of today's date, April 27th, 2023. 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. First quarter net income available to common shareholders was $11.7 million, or $0.76 per diluted share, consistent with the link quarter and down from the prior year period. when the company reported $14.6 million, or $0.93 per diluted share. The year-over-year decline was primarily the result of higher provisions for credit losses and an increase in expenses compared to the year-ago period, driven in part by investments in talent. Before turning the call over to Jack for more detail on our financial performance and our expectations for the remainder of the year, I would like to provide some insights and context on the health of our balance sheet. Given the recent bank failures, increased volatility, and broad-brush commentary by the financial media, it's appropriate to provide a company-specific update. On the funding side, deposits totaled $5.1 billion at March 31st, up 4.3% from December 31st. As a reminder, we have a substantial public deposit portfolio associated with local municipalities, and balances are typically higher in the first quarter as a result of seasonality associated with inflows from tax payments and state funding. Reciprocal deposits were also up during the quarter as this has become an attractive option, affording our larger customers the benefit of FDIC insurance on accounts greater than $250,000. Given the interest rate environment, We continue to see disintermediation from core transaction type accounts to time deposits in both our non-public and public deposit portfolios, which has impacted margin as non-public time deposit balances increased $89 million on a late quarter basis through both new account acquisition and quarter time deposit disintermediation. Despite this expected remix of deposits, the granularity of our community banking franchise benefits our deposit portfolio. We operate through 49 banking locations across our upstate New York footprint, which have average deposit balances per branch of approximately $79 million, excluding reciprocal and broker deposits. Further, uninsured retail deposits make up approximately 14% of total deposits, when considering the secure nature of our public and reciprocal portfolios, which typically have larger balances. Independent of the balance sheet, our available committed liquidity remains strong at approximately $1.2 billion. Organic loan growth was once again a highlight of our quarterly performance, with a 4.8% increase in total loans from December 31, 2022, which was supported by a strong pipeline at year end 2022, and several large commitments that carried over to the first quarter of 2023. In our investor presentation published yesterday, you'll find more granularity on our commercial portfolio, and in particular, commercial real estate and office space exposure. Commercial growth has been achieved while maintaining our disciplined credit culture. Our experienced in-market lenders have excellent relationships with high quality sponsors within our footprint that have demonstrated consistency in execution and credit performance. Our CRE portfolio consists of assets with outstanding balances of $1.6 billion and committed credit exposure of $2.1 billion at March 31st. There are more than 700 loan facilities associated with this portfolio. among approximately 300 separate lending relationships, resulting in an average loan size of approximately $2.8 million. In considering the rollover risk of the portfolio, 15.5% of exposure is scheduled to mature within the next 12 months, and another 14% will mature within 24 months. We have been careful to scale our underwritten loan amounts to the global financial profile and track record of sponsors. Our analysis indicates approaching maturities are manageable. More than 90% of CRE loans have full or limited personal or corporate recourse, helping mitigate loan rollover risk and reinforcing the alignment of interest between borrowers and five-star banks. The average loan-to-value ratio of the portfolio is 55%. Realizing that at a national level, there is a heightened focus on office CRE, I would like to comment on the stability of our office book, which we believe is of high quality and differentiated from what lenders operating primarily in large urban markets might be experiencing. Office space represents 18% of our CRE exposure and less than 8% of total loan balances at March 31st. About three-quarters of the portfolio is for Class B or medical space, which consists of medical properties located in close proximity to hospitals in densely populated areas. We have very limited exposure to central business districts, with just four loans for properties representing total exposure of $27 million. And we have strong confidence in the quality of the sponsors we're working with on these projects. In fact, two of these loans are with a publicly traded developer who will be leasing space to a publicly traded tenant with an A-plus credit rating for over 20 years, which is longer than the term of our loan. Consistent with our approach for all CRE lending, we have reasonable loan-to-leverage ratios for our office portfolio, including average loan-to-value and origination of 57%. In our annual stress testing of the portfolio, including increasing rates by 250 basis points above current rates and decreasing net operating income by 20%, we achieved debt service coverage ratios of 1 to 1. As supported by strong sponsors and personal recourse on loans, we were being comfortable with the overall quality and mix of the office book, given geographic dispersion, strong credit metrics, and exposure diversification outside of central business districts. Multifamily is our largest concentration, representing 39% of CRE exposures and 15% of loans. Within our multifamily portfolio, about 53% relates to stabilized properties and the remainder are in the construction phase. We are considered a premier construction lender in our market and have been providing construction funds for projects that have identified permanent mortgage takeout options by obtaining long-term non-recourse financing structures. Supporting the diversification of commercial loans is our expanded geographic footprint. Our Mid-Atlantic team, which joined us a little over a year ago, grew commercial loans outstanding by approximately $49 million in the first quarter of 2023 to $197 million at March 31st. In the first quarter this year, we also announced our expansion into the Syracuse New York market with a new commercial loan production office. We have three C&I lenders based at this office and believe this expansion will support the growth of our commercial business portfolio, which was up 4.6% during the first quarter, driven by line draws. The team has been doing an excellent job of engaging with prospective clients so far, and we look forward to their future contributions. Our residential loan portfolio was relatively flat with the end of the length quarter as expected. Among ongoing pressures of inflation, higher interest rates, and tight housing inventory. The consumer indirect loan portfolio was $1 billion and a quarter and also flat with the late quarter. As we noted on our call in January, we are proactively moderating consumer indirect production through pricing and continue to remain focused on credit quality and stringent underwriting standards, which has been and continues to be the foundation to this business activity. Ours is a prime lending operation with average portfolio FICO score of 714. In the first quarter, 60% of consumer indirect fundings were Tier 1, 700 and above, and another 22% were Tier 2, 670 and above. The weighted average coupon on new production was 8.45%. Net charge-offs were 73 basis points in the current quarter, in line with historical trends. Our disciplined approach to credit and risk management continues to support strong asset quality metrics. For the first quarter, we reported 21 basis points of both non-performing loans and annualized net charge-offs to average loans. While we did see a $17.7 million increase during the quarter in criticized and classified loans to $77.7 million, this increase related to two relationships that were downgraded to special mention. one in the CNI portfolio, which is expected to be temporary, as well as one CRE relationship where we are a participant. Provision for credit losses on loans was 4.2 late in the quarter, supporting an allowance for credit losses to total loans ratio of 112 basis points and 540% of non-performing loans at March 31st. Overall, credit remains benign, and we continue to believe our loan portfolio performance will be consistent with historic outcomes. This concludes my introductory comments. It's now my pleasure to turn the call over to Jack for additional details on results and updates to our guidance for 2023.