Financial Institutions, Inc.

Good morning everyone and welcome to today's conference call titled Financial Institutions Inc announces second quarter results. My name is Ellen and I'll be coordinating the call for today. At the end of today's presentation there will be an opportunity to ask a question. If you would like to ask a question please press star followed by one on your telephone keypad to join the question queue. I would now like to turn the call over to Kate Croft, Director of Investor Relations to begin. Kate, please go ahead whenever you're ready.

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 finance and leadership teams 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 related to forward-looking statements. We'll also discuss certain non-gap financial measures intended to supplement and not substitute for comparable gap measures. Reconciliations of these measures to gap financial measures were included in the 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, July 28th, 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 company finished the first half of 2023 in a very solid position. Our second quarter performance was highlighted by incremental loan growth that supported modest net interest income expansion and a continuation of strong and stable credit quality metrics. We also took steps to enhance our wealth management business, merging our two registered investment advisory subsidiaries. Through this merger, Career Capital has additional size and scale to better compete across our footprint for institutional clients, retirement plan sponsors, and high net worth individuals and families. Operating under one brand also streamlines our business development efforts, primarily deepening relationships with existing wealth insurance, and banking clients. Second quarter net income available to common shareholders was $14 million, or $0.91 per diluted share, up from $11.7 million, or $0.76 per share, in the first quarter of 2023 and down from $15.3 million, or $0.99 per share, in the prior year period. In considering the year-over-year decrease in quarterly net income, The company recognized a normalization of loan loss provisioning in the current quarter versus the impact of a large commercial recovery in the second quarter of 2022, in addition to higher quarterly non-interest expenses due to past investments in talent and an increased FDIC insurance assessment. These increased expenses were partially offset by lower taxes in the current quarter which benefited from investment tax credits placed in service. I would note that much of our investment in human capital took place in 2022. We believe that this, coupled with a previously announced organizational restructuring completed in December, has positioned us well for the future, both from an expense standpoint in the near term and in terms of outperformance in our markets in the long term. We have attracted high-quality talent to our organization, including experienced individuals joining from larger players who want to be a part of a growth story with a true community bank. On a late quarter basis, our net income growth was driven by a lower level of provision, higher non-interest income, and lower income tax expense in the current quarter. Jack will provide more color on our income statement and performance relative to the first quarter of 2023 in his remarks. Deposit gathering remains a top focus, and as of June 30, 2023, total deposits were $5 billion, down $106.4 million, or 2.1%, from March 31, primarily due to normal seasonal public deposit outflows. Within our sizable public deposit portfolio, which includes local municipalities and school districts, we see a seasonal decrease in the second quarter based on cash flow requirements of the customers. Similarly, first quarter public deposits are typically higher as a result of inflows from tax payments and state funding during the period. While seasonality is the primary driver of the decline in public deposits, we are seeing a normalization of deposit levels in this space post the stimulus injection recognized during the pandemic. Nonpublic deposits increased from the linked quarter. We continue to see a disintermediation of lower cost demand and savings deposits into higher cost time deposit accounts and similar trends for new account acquisition amid the current interest rate environment. Competition for deposits is strong in our markets, similar to the rest of the country, and we're focused on defending our deposit base and expanding our reach. We launched a new marketing campaign for money market accounts just this week and are beginning to see some of our anticipated banking as a service, or BAS deposits, come on board. We consider BAS deposits to be an alternative to high-cost wholesale funding. Reciprocal deposits also grew 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. Total loans were $4.4 billion at June 30th, reflecting an increase of $154.5 million, or 3.6% from March 31st, led by commercial lending. Overall, our commercial portfolio was up 5.7% during the second quarter. We continue to believe that full-year loan growth will be concentrated in the first half of the year, as we aim to reserve balance sheet capacity for our best customers with full relationships. Commercial mortgage growth, in particular, is expected to slow due to a combination of softer demand, a bit of challenging economic environment, and higher pricing. Our pipelines are more modest than in prior periods, with our overall commercial pipeline at June 30th, 2023, less than half of what it was at year end 2022, and a third of the size it was one year ago. The change is even more notable in the Mid-Atlantic where our pipeline is about 20% of what it was on June 30th, 2022. I'd like to discuss our Mid-Atlantic region in a bit more detail given the continued national media coverage of challenges facing major metros and office space in particular. For context, this team sits in a suburb of Baltimore and primarily serves customers headquartered in and around the Baltimore and greater Washington, D.C. area. The majority of loans are for projects and properties throughout Maryland and Virginia and outside of the central business district of D.C. As a result, our committed credit exposure within D.C. itself is very limited at just $25 million and none of our commitments in the metro D.C. area are for large floor plate buildings. Office space accounts for just over a third of our mid-Atlantic loans and properties within this asset class and region are primarily located in heavy traffic areas near hospitals with a fair amount of medical leasing and high occupancy levels. As many industries and metros grapple with the return to office trends in the workplace, I would note that our commitments relate to much smaller buildings located outside of DC where non-federal workers are returning to the office. The health of our commercial portfolio remains strong, and we reported just two basis points of net charge-offs to average commercial loans during the second quarter. Our residential loan portfolio grew during both the three and 12 months ended, June 30, 2023. Despite the higher interest rate environment and tight housing inventory impacting home sales in our market, primarily due to our partnerships with new home builders. Additionally, internal process enhancements have led to improved cycle times for both mortgages and home equity loans. Consistent with our other loan categories, we've made pricing adjustments to improve margins in this line of business. As expected, consumer indirect loan balances at quarter end were down modestly from both March 31st, 2023 and June 30th, 2022. This is due in part to our efforts to moderate production in this asset class while maintaining our focus on credit quality, as well as lower number of applications given increased cash deals, leasing activity, and aggressive rate offers from manufacturers. The average portfolio FICO score of our indirect portfolio continues to have seen 700, and new production during the quarter came on a weighted average coupon of 9.31%. Our credit team is very experienced in this line of business and actively managing the portfolio to secure recoveries where possible. Accordingly, indirect charge-offs were only 12 basis points for the second quarter, down from both the late and year-ago quarters. Our disciplined approach to credit risk management continues to support strong asset quality metrics overall. For the second quarter, we reported 23 basis points of non-performing loans to total loans, and annualized net charge-offs to average loans of just six basis points. Provision for credit losses on loans was $3.2 million in the second quarter, supporting allowance for credit losses to total loans ratio of 113 basis points and 503% of non-performing loans at June 30th. We remain confident in the overall performance and health of our loan portfolio despite the volatile operating environment. This concludes my introductory comments, and it's now my pleasure to turn the call over to Jack Plants for additional details on results and updates to our guidance for 2023.