FISI - Earnings call transcript Q2 2019 | Financial Institutions, Inc.

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Operator

Good morning, and welcome to the Financial Institutions, Inc.

Second Quarter 2019 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Shelly Doran, Director of Investor Relations. Shelly, please proceed.

Shelly Doran

us call. joining for you for today's Thank Providing Officer, Officer, Martin will be Justin Chief Executive President and Birmingham; prepared comments Bigham. and Chief Financial

you be and due on comments and earnings may to forward-looking risk During to by Planning and Actual statements. safe and forward-looking refer question-and-answer portion results variety a Grover. the differ factors. will Financial a the they the statements filings, Today's our available include Mike prepared discussion relating statements. of and Director of from Chief Q&A Officer, Revenue detailed a will yesterday's Banking uncertainties and are other SEC risks, for historical Analysis, Bill harbor release description and to Kreienberg; factors of We of materially call, which website joined forward-looking

will certain We exhibit release, for GAAP Form and includes Please the provided intended July not measures. to as X-K. to non-GAAP in for date, measures information financial financial call supplement that financial XX, Reconciliations as of comparable note accurate an measures was to only filed is GAAP were today's these discuss XXXX. substitute that this the non-GAAP measures which also earnings

call Marty. over now I'll the turn to

Martin Birmingham

a the our income the This for quarter of highest with XXXX. pre-provision income morning pre-tax history second share. income Thank earnings per the and quarter to was company our this of quarter quarter second company's $XX.X call. strong the $X.XX to you second X.X% $XX.X or than Pre-tax It Shelly. X.X% million, higher net than very morning, much, Good in our higher for quarter participating million XXXX those first row. and welcome was another represents in of pre-provision

summarize execute our the few of executing briefly most a long-term sustained We I'll our continued relevant strategy strategy. to earnings, measures achieve and incremental to to

X.X%, and during X residential the comprised X.X%. quarter. our grew were loans Commercial year residential contrast, the decreased the increased up XX.X% commercial Consumer Consumer loan at strong it portfolio real total experienced Indirect And of down In quarter. relationship-based X.X%., million or critical loan Mortgage from portfolio, ago. quarter business loans X% and estate end, by loans Our $XX portfolios growth in XX.X%

to our business, in lower in indirect maintain pricing continue We discipline of resulting line production.

In we loans, sold indirect generating strategic of took small of advantage addition, $XX gain. a $XXX,XXX a in opportunity a pool million and

quarter XXXX of deposits end Total at $XX period. and public million an end result deposits. municipal million quarter than year by offset to The higher in was million than first the million of $XX decrease a partially due XX, deposits lower increase March from were seasonality the earlier in the $XX nonpublic the $XXX decrease of the deposits

The in a deposits business development June million deposits in increase with the as non-public largely XX, result increase increase combined million efforts. from public $XX of XXXX result a was a $XXX of successful

was margin interest The our the XXXX XX securities the net points basis increased of sheet by investment balance compared increase Our strategy redeploy into X second quarter driven by first to loans. with to XXXX compared points. quarter of basis

to in XX.XX% and of of improved the reflected quarter continue compared quarter. We XX.XX% in our as year-earlier XX.XX% quarter XXXX the manage the by expenses first in efficiency to ratio

is a company December was the in for TCE XXXX. Another our to for since highest points strong our quarter positive outcome the increased the ratio. basis quarter of this XX in TCE TCE increase X.XX%,

for as our current will Justin outlook results over I'll now the as well additional XXXX. who turn provide our details of remainder call on CFO, to Bigham,

Justin Bigham

with of impact interest net and increase linked in The interest the in with Thanks quarter to $XXX,XXX growth comparisons Marty. million, quarter. of interest very I'll was few $XX.X average everyone. a key balances by Net the was loan first accrual Good current quarter. XXXX. on additional begin much, morning, the up commentary providing one margin income day items the driven from by combined

the a asset continued up was in points X.XX%, expansion for improvement our margin quarter. by interest quarter mix. X Net was basis from interest-earning driven linked primarily the Margin

in on yield the points current quarter, average from loans the Our was up basis X.XX% quarter. X first

yield average assets of X.XX%, was an from points The increase interest-earning the X linked quarter. on basis

a Our the quarter, Total growth points. X.X% result funds the up partially commercial end and residential in increased quarter as Consumer compared lending first of as by offset is XXX by Marty referenced. cost of the X increased Indirect, decrease from basis to points basis loans first which to as the in of

the the more quarter, million the $X.X than historical our XX loans remained decade. was level than million, from lower charge-offs first quarter a to $XXX,XXX Net lowest yet quarterly Provision still Net XXXX. up million $X.X quarter, average low total of in $X.X in first charge-offs of was our points basis experience. lower than at

relationship. Nonperforming losses loans was last total the loans of of quarter end, because at X.XX% allowance X the of XXX% points increased losses by basis was loan commercial the one credit Allowance loans end downgrade from for and the XXX% loan million quarter. from to up $X.X in nonperforming first of quarter to quarter, at the compared

previously linked higher Noninterest income card of of sale charges on sale primarily up consumer because loans mortgage up higher of levels in sale described $XXX,XXX combined in $X.X net higher to slightly of small loans $XXX,XXX quarter. activity. indirect the due at compared ATM million gains and to of on quarter loans. $X.X a gain were of with The was the the pool million was debit

as Noninterest line the seasonality $XX.X income the than this due million, of relatively $XXX,XXX first quarter. lower Insurance compared quarter was quarter the the to flat was first business. first expense in to of

was due the higher $XXX,XXX expense to the quarter first favorable the claims in from second benefits primarily employee health in and quarter. payroll down first Salaries incurred and taxes quarter

up and was to the campaign. $XXX,XXX due Advertising timing quarter related branding the linked from to promotions expense bank's

will promotions As vary we quarter-to-quarter. leverage and A call, stated on drove the year-over-year. efficiency expense on advertising the continued timing first focus quarterly operating quarter of

for XXXX. of our provide remainder now the current I'll outlook

continue commercial production. loan high to expect growth total XXXX full loan single-digit portfolio mid- residential the in our and for We driven year of to by

Indirect continue also the XX% to of year-end. total to XX% Consumer loans loan decrease by We to to expect portfolio

For incentive to timing to a the noninterest expense, health with million care and quarter compensation, of range of variability costs. $XX.X reflecting million $XX.X expect we continue per marketing

Several other key for unchanged year XXXX areas remain full as of our outlook well.

million million first loans year-end, million, at of full and The XX, into X middle nonpublic seasonality of deposits. $XXX of the between to a within initiative. range expect We believe XX% to the to were expect in the ending year our $XX XX%. of that tax portfolio within $X by totaled mid-single-digit and continue net the a effective of June We municipal Securities X.XX% into year. to growth efficiency securities rate during the previously converted we will securities range margin an expect ratio loans of the noninterest income, of in in $XXX of provided X.XX%. be redeployment and and mid-single-digit redeploy it an Therefore, be Approximately on between million we deposits, XX% range in months $XXX currently depending million $XXX second XX% half of million to interest to XXXX, growth

and very more in operating turn second to the with last a call back of expect we growth two level experience. profitability, expect In historical the line continue for our healthy to Institutions normalized quarters, half in we the Marty. XXXX, through provision, of I'll core half. first that delivered Regarding provision the Financial now

Martin Birmingham

Justin, thank you very much.

request. and in seeks invest to ways understand support and organization be in we the volunteering. report we be through Five which we offerings. because services, posted product Star Report that published posted on continually the copies communities available Warsaw our communities are supports our shortly many including Our community and recently and our successful. Community to Bank voluntary serve our website, Accordingly, products sponsorships describe financial ability We serve investments on is we FII helping grants, and activities, printed website communities The second efforts, will the upon

the the company. XX our ratio. size few loan issues on size of capital our Over community's and equity Indirect tangible have of peers the of include or focused our Consumer perception than a past the months, XX many investment portfolio, Securities lower to impacting we These portfolio our TCE

growth. the billion June XXXX, a loans XX, our very I for Securities factor quarters. June portfolio or XXXX of at XX.X% driving comprised mentioned call, total when in higher-yielding assets. This redeploying profitability, XX, $XXX for $X.X At a have the Investment of has NIM peak been initiative Securities First, and several Securities Investment million on totaled is of XX.X% compares positive we to had assets. This into earlier as impact total

increasing to volumes loan yield. worked by we've portfolio Indirect rightsize loan Second, reducing and Consumer

total our At of December quarter. a We loan sale Consumer the advantage Indirect from loans the to down XXXX. the also XX.X% took XX% complete comprised of small of June XX, portfolio, at XX, peak opportunity in

tangible earnings has the retention and issuance significantly capital. grown capital Third, through of of prudent

TCE XXX to X.XX% XX, was XX, points X.XX%. June ratio basis by our March up equity X.XX% ratio XXX from this to common period, XXXX. from same At assets our Over on basis X.XX%, increased points

control, leverage capital ratios an to team's resulted We operating grow the positive improved to in these management as expect earnings. expense with as actions, ratio. in retention These approach continue quarter well to disciplined through as the generate we of combined efficiency our

include efficiency details customer employee to opportunities we initiatives significant and improvement providing to enhancing opportunities. this savings and on expense later made program of opportunities forward to experiences. advantage these areas, identify Having this in are deploy or We about take now revenue improve incremental These progress and to year. while look

execution And initiatives, their our strong to supporting conclude want our hard communities reported. I for my and I questions. outcomes we're my the teammates each operator, prepared and just to the our the to [indiscernible] commitment Before ready of other, the work for open have we quarter and remarks, call customers to thank

Operator

begin from of first the [Operator session. question now will question-and-answer Sandler comes instructions] Alex Our O'Neill. We Twerdahl

Alex Twerdahl

year? the think kind you off, was half for in the I you Can -- you Or said full want rate missed the previously that? think the guidance? first margin? repeat that I I the that guidance. And tell -- back you of have year is Justin, can But us just range. Just what for margin that just middle just your guided for of assumptions of you

Justin Bigham

point or year. are, indicating be. we to or basis expect what the assumptions Sure. what little -- in a of of as plus we'll to be range, margin there. course, the would our at by that one That's as a tomorrow bit And in we're be of far decrease our impact essentially modeled the middle full a rates did say on look narrowing minus, here part I guidance we've as

Alex Twerdahl

back quarter, that for X.XX% two around quarters it to the quarter, it's fair the first should I So that assume imply thinking the above right? to year. X.XX% year, been to the assume full that margin in about would be Am of going has X.XX% this X.XX% given the be it's for that

Justin Bigham

You're about thinking right. that

Alex Twerdahl

And Great. expense Okay. the to million unchanged. we're then guide, million, on $XX.X to $XX.X

below were of some maybe as things impact in that quarters of the some little expect two did but towards there's the you half end quarters back the quarters. maybe that now could two be should in know, bit not of first the I back two should those However, the guidance upper that first range timing the we hit a in issues, that of year? kind you

Justin Bigham

increases sort this really of of really by we that see that mentioned medical which cetera, costs. number it's number, see some to of driven expense lower, line start some were to provide start example, how, perspective, relief and peg we it's to why some range. quarter, we'll hard our the And side. peg to that benefits for we're the the -- difficult my on to from et salary medical Alex, -- given in but going of seasonal sort is was some From which of the volatility more taxes, we particular

branding of and -- and campaign. the we've sort then So got volatile advertising

it's difficult quarter. peg within number really just one to So a

quarterly So on that we to stick basis. range provided need just we've to really that a

Martin Birmingham

seasonality in been that examples, expect company I migrate when of deductible fulfilled. think, the those care, are are plans high deductibles able we've the do those though, two We two good are think, kicking health -- to to those I that. Alex, the and

Alexander Twerdahl

terms guys then of that this now kind have on sort the the And of market just portfolio these way? a reintroduction, give do final some some seeing or a Or portfolio loan just me, flat Is in tool this of know, consistent actually is again. with, loans? something you Okay. relative point, be to little you auto quarter. years question growth? the going a help more be in I I ago to sale like think, this a the a what it'll is don't of bit know you're for something just reduce you business, it to the and going for -- Or the would experimented XX part just experimentation to kind it's of keep and you at more other meaningful

Bill Kreienberg

Bill is Kreienberg. this Alex,

This it. hadn't of the wanted right. You're done our underwriting years. and evaluate the We something the would market, for process also test portion and cetera, a our market to credit sale metrics portfolio, a what the just pricing, XX was nine where to appreciation in or market we bear for get get et see portfolio, our for

relationship insurance, so was management, management an and portfolio, strategy, auto able of banking, which as we're our the indirect wealth overall full relationships, said, increase as residential commercial, it part points to of think cross-sell. cash gradually buckets I depository just is the for to strike we've reduce

something successfully continue we're the our we go bank. that completed, and in Indirect as in was to portfolio the of So analyze the of going forward and it we back our it mind just size keep to

Alex Twerdahl

Okay. But reevaluate not every necessarily something forward? things of kind but quarter going as potentially we'll you see

Bill Kreienberg

correct, That's necessarily. Not Alex.

Operator

Our Jaffray. Piper from Matthew Breese of next question comes

Matthew Breese

shift. the about mix thinking Just

$XX noted $XXX way of I of that, and of initial million to puts million shift. bottom shift that through mix half million at the You of looking about you $X $XXX ahead, which the about the mix to go, $XXX million there's think, left a the range to you're million

what this are the the more factors And timeframe, it's path? from so And pursue this given margin benefit limiting aggressively I'm it? curious, down had just the not why positive throughout continuing on

Martin Birmingham

to it that and year. we Matt, that some this Yes, From to It's not necessarily aspects. take that to need of be do point. going and other perspective, monitor we're of lot there's around pause to but considerations to a we We're we realm continue might liquidity out of assess. our more, when going the possibility won't get

portfolio. us As municipal securitize you Securities we know, those have And require those large our with a deposits of municipal sort relationships fairly portfolio. to

also So us a our It puts that us factors to peers. there some are limiting lower. in much line at of assets with going is percentage

point. the prudent to so I to. But go opportunities where sort lower, of of at we're think that's to Should we'll little we we get explore up sort year And think that's certainly overall, level a those. see the bit for this ending

Matthew Breese

been a And has you. margin the expansion because for then of just continuing shift the certainly mix a tailwind --

the to book thinking the about does with and compression that? mix to Fed cut how the a Just fundamentals December, to reaction if Fed a margin? If stop what Is there Fed to the the the margin shift were is the get cutting, is a and of shift the get mix right, in Fed and cut? we initial paused, from react from we cut, were were

Justin Bigham

So to a our neutral to initial cut is reaction Fed relatively slightly favorable.

Matthew Breese

prime What maybe is the on or exposed then that. either further is LIBOR? to step one the that portfolio loan of And just percentage

Justin Bigham

portfolio loan prime our of is exposed. XX% About or LIBOR

Matthew Breese

was of any I this was learn support, collateral in we the you the more Can that workout thoughts idea What did the to on that quarter. then Commercial credit resolution? give about nature of downgraded process are us want credit? And and where

Martin Birmingham

guarantor's issues that bankruptcy, credit customer. been in been Southern one which downgrade to quite precipitated unrelated The project. the by So market. itself a of triggered legacy was tier It time. a books by some our the on was long-term for was had financial It's this

a reserved with We're teams, And for management, plan But options relative the comment our into think, out in recovery. We and to finance risk reorg extent that also immediately rehabilitation we'll that's this of of it loan. really credit. out. a have we've I conjunction the meeting provide We're put work or now. with appropriately lot exploring and working

Matthew Breese

Okay.

a And one but in Okay. it year-over-year, revenue then even insurance a weak my compare the this last quite is it's it's quarter. drop just know when quarter, bit. I I seasonally down

it like secondly, then what that this a decrease significant the new bar be such we expecting what set should What we've at? year-over-year? drove versus how line? running does been $X -- historically of First, -- $X a Is be there more should happened? million business And million out we on is

Justin Bigham

couple insurance line. good So A a comments Matt. question, to the relative

through the variability So this in on the This now had described a quarter, we've customers in a into a XX% couple this XX it profit lot Also of commission onetime project, a construction going lumpy when add due revenue. ago the And comprised particular I'd a agency, quarter, which, overall, only our we've change a say, we've been agency to of is some of a measured our bank-owned of the showed in year which of to out seasonality of transactional take which quarter, calls. little bit inconsistency we kind a entire top against a sharing, decrease. this XXXX, obviously book. total year-over-year.

our the bought with great top synergy cross-sell. down. XX% in lines, comprised of of also XX where we with as a when note our customers So deal our We're lines overdependence, which was seeing 'XX, agency the mortgage we present in terms residential commercial

our in this So is business. good pipeline

We a of quite activity have bit sales happening.

We support wealth commercial working additional with that insurance we're and also and have our teams on business. to the incentives residential

loans, other the agency the VSI, with we a Indirect minutes insurance book, if et cetera. take about few does of our factors, coverage ago what talked provide you for One indirect

year. profitable, for going of it's to thought of headed the things on it of the revenue. very drop as change I'm very insurance portfolio the where we're that to goes ready and agency. in lot with cause goes originate conclude, the the and loans not that So down, direction a we're this good we We've agency's down and of got pleased the does number portion But

Matthew Breese

Okay.

the emphasis results this quarter's on versus ago? So we much year shouldn't put too

Justin Bigham

not. statement. that would agree No. with would I I

Operator

of Group. Joe Our Hovde comes question from next Fenech

Joe Fenech

you moved seem capital, about on the guys, to where capital. you point get level comfort questions certainly with Hey past your have

got re-rank capital the Just Can to further build? capital stack priority management it of the ratio You've us priorities, you're for give share list? there Is sight. changes. growth? thinking Do X% your sense in as TCE capital up options higher organic dividends situation continues how your about us M&A, the you repurchase, as a for move

Martin Birmingham

just to key we and carefully Well, investors, and emphasize listening and that been I of communicating would shareholders has a have this folks yourself, discussion. like been Joe, issue

to our of managed close terms in continue X% which, we've how can build to you're a said, through earnings, I -- the since level of terms how level, we're in the of capital pleased we're right, account and So as was retention we for it us, XXXX. coming record

perspective So will have, as at as for well in a provide and those been is And and always as certainly this have beyond still expand capital-intensive been And The strategic and our that seen, dividend our priority. of growth our we point in has opportunities. priorities business to some as activity, you at shareholder grow know, that, a experience the to that company. loans, a terms continue something important would all which insurance investments, significant share investments our we've we a total of be from wealth that's lowest management capacity enhance buyback you made model time.

Joe Fenech

but looking sale. a equity for Not follow-up auto bank? the some question And it Is or then other was private just loan party? another the that the buyer, just for profile of asking on specifics

Justin Bigham

not the any question. really appreciate to providing relative I information Joe, We're that.

Joe Fenech

demand limiting term, that's thought and part markets. back process the that, like just longer auto the product a over to it's prior the on guys feel in question. your Is in the constraints book? you then Is And

at the You're it, got you've expertise. good

from the reduce to fair around targets Is once you probably sharply we're likely than a assessment? edges point? so stated to And that you get it that prune more rather further your see

Justin Bigham

been well -- very Joe. we've indirect of pleased auto run. business. line is, We're very with It our always It's

We this dealer We that years have the this people been the market. in in know for have know We body. business XX market.

think a this and have still is plan business. offerings for the I line our strategically to core contract, we of us as as core of one So

Martin Birmingham

to lifetime theme it consistent This team, we is that. And on to business, perspective. as sale. this is required listening I forward and appropriately again, from to is available is sheet we've that with of balance feedback. is the go a a management agree infrastructure we absolutely been would forward. able That in look the terms a that were still we continuing option and opportunity to pleased to that, cap working by Joe. manage Joe, stand as us that And to place And successful a in continue all great conduct we very to with a

Operator

back question-and-answer CEO, I now conference to to the [Operator President Marty the like and concludes remarks. over any would Mr. Instructions]. our Birmingham This for session. closing turn

Martin Birmingham

Thanks quarterly call. much. all very our next to look We'll thanks the forward for attending And call.

Operator

now today's This attending Thank you conference has concluded. for presentation.

You now may disconnect.

Financial Institutions (FISI) 2 Aug 192019 Q2 Earnings call transcript