Earnings call transcript Q1 2023

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Operator

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. [Operator Instructions]

I will now hand over to your host, Kate Croft, Director of Investor Relations and External Relations to begin.

Kate Croft

us call. joining for you for today's Thank Providing Birmingham; and will be CEO, Marty President and CFO, prepared comments Jack Plants. Chief Grover, for Bigham; and Community and Director of Justin Banking Financial Analysis, will Q&A. Mike us join Officer, Planning

filings Today's as measures. measures variety with an results forward-looking forward-looking that differ information are to the Actual website measures XXXX. forward-looking supplement release substitute relating this which filed Reconciliations intended were may to uncertainties factors risks, investor April and historical and prepared earnings measures as includes to only We materially and release to detailed a date yesterday's GAAP Harbor our not refer Q&A you discussion of comments of be GAAP on to due include Please provided We'll Investor non-GAAP these statements. risk our also X-K. will note today's the for call in statements accurate may SEC description XX, as financial discuss certain of from well other and exhibit financial a comparable presentation and statements. available Form factors. to of earnings Relations that Safe for

to over call the and turn now CEO, Marty Birmingham. President I'll

Marty Birmingham

and Kate. Good us you, you today. Thank morning, thank everyone, joining for

when in year year-over-year increase driven part expenses provision credit an for the quarter $X.XX period, decline income in quarter period down reported linked talent. investments primarily in company with higher per and common year of available share, the shareholders to diluted to losses per was was the $XX.X First consistent by net diluted the $X.XX $XX.X million share. million the The or from or prior result compared and ago

in the more of insights call the Jack to to on for our balance year, performance financial turning the Before and sheet. provide of the I our some expectations context like health detail on would remainder for our over

by commentary it's to broad bank volatility appropriate update. recent increased values, the Given provide financial a and brush the company-specific media,

up On deposits December the side, XX. funding totaled XX, billion at X.X% from March $X.X

substantial with and inflows portfolio as in associated a we tax of funding. municipalities. with associated the a quarter balances have the deposits as up payments As customers has insurance typically option greater larger also reminder, an And than were benefit public attractive higher seasonality $XXX,XXX. our Reciprocal state first from of affording during on quarter become a are this deposit result local the accounts FDIC

time portfolios, see core basis expected $XX and granularity the of million new accounts disintermediation. benefits acquisition Given non-public remix on interest our to our a balances franchise this environment, impacted both margin deposit linked increased as time to and non-public talent portfolio. of our quarter deposits, continue public deposit both banking quarter the we which deposit transaction-type disintermediation from through deposits has in rate time community Despite deposit

We available which reciprocal sheet, typically remained our secured deposits larger which York uninsured Independent our of approximately public balance have deposits. considering the total nature operate reciprocal portfolios, up through of XX XX% billion. approximately excluding brokered approximately committed of at deposits balances. Upstate make the $X.X and retail our when of million, footprint, branch Further, and strong liquidity New balances deposit had $XX banking per locations across average

while granularity has you'll pipeline credit which that to been once and commitments large XXXX office commercial a find and was quarter presentation our loans in space investor total commercial on growth more published disciplined loan growth exposure. increase December first strong yesterday, of maintaining of our particular, a culture. XXXX. from and the Organic by real performance over achieved our at portfolio, In estate Commercial in was again X.X% end supported year highlight our XXXX, quarterly a with carried XX, several

footprint that consistency our excellent have lenders performance. in in-market and credit execution experienced Our have with sponsors demonstrated within relationships quality high

Our March and CRE billion committed billion exposure credit outstanding of of at consists $X.X of portfolio XX. assets balances $X.X with

more are risk than loan of million. associated resulting with of And portfolio within approximately the XX considering size loan portfolio, mature relationships, facilities the another months will an exposure There $X.X XXX and scheduled this the XX% XX.X% XXX in average among months. within of separate next lending XX mature to approximately rollover is

scale sponsors. global the amounts We track have of our to been careful record profile and to loan financial underwritten

CRE or is indicates mitigate loan XX%. personal analysis maturities The Star More average limited ratio Five corporate are loans of risk that Our interest of full or between rollover and of manageable. recourse, than proxy and helping borrowers the Bank. loan-to-value alignment [ph] XX% have portfolio reinforcing the

that a urban comment to lenders office high is on which our there of like CRE. and total I of we proximity XX. a is level, Office at on space, located in would densely portfolio large for markets XX% less differentiated March national B hospitals believe and at properties our of what the book, Realizing in exposure heightened operate stability quality be areas. office to from of primarily X/X consists experiencing. the focus loan space Class or represents medical populated of close About in which than is medical balances X% of CRE might

have properties we million limited we're projects. with of quality central just have exposure confidence representing business these We and working the total very districts $XX X to exposure strong for on sponsors in with the loans of

tenant these leasing is than are the which A+ of over credit be with for years, space of publicly-traded In a rating term the X a publicly-traded our developer longer XX fact, with will to an loan. loans who

stress ratios increasing rates above current origination loan at XX%. Consistent the for coverage of for loan-to-value In approach our X:X. points of decreasing portfolio, by including XX%, operating and achieved with our testing debt ratios by XXX portfolio, net our office we reasonable of annual all basis leverage lending, we rates service income CRE have average including to

geographic dispersion, sponsors diversification central the strong given districts. on book we overall credit loans, exposure recourse of by business quality comfortable metrics the supported strong of and As mix and office remain and personal outside with

XX% remainder construction the loans. largest XX% relates of phase. CRE properties of XX% and exposures representing our in Multifamily is concentration, portfolio, are multifamily Within and about to stabilized our the

construction are lender a options market funds have and take-out for obtaining structures. mortgage providing construction projects have We been long-term that premier our by non-recourse identified considered permanent in financing

is expanded Supporting commercial geographic the footprint. of our loans diversification

Mid-Atlantic new of team, office. loan New little year, into also us a million our March the joined the Our million which outstanding of In production ago, announced quarter over to XX. year the loans this $XX we quarter commercial expansion York a with first a at $XXX approximately by market commercial first Syracuse, grew in XXXX

doing will their and commercial business draws our the C&I which growth expansion driven excellent prospective of believe have team of has attributions. line to with look so by lenders was We support X the this future based The at clients engaging X.X% job portfolio, during up office far, forward quarter an been and [ph]. this first we

the the loan flat with end, tight with portfolio of fourth as relatively indirect consumer residential was was linked Our interest portfolio quarter rates quarter. $X ongoing housing inflation, Among and end the flat also expected. million the quarter loan linked inventory, of higher pressures at

quality and and and be are call the in remaining noted on been direct has foundation and to to on credit stringent to through moderating consumer business proactively continue standards, we underwriting activity. our continues we this production pricing focused which January, As

the XXX of in portfolio first charge-offs X, Ours above; quarter, score of operation XXX. above. XX another indirect The basis In was FICO consumer average coupon the is a were XX% Net X, average points were Tier prime were lending and with Tier historical and on current new XXX in fundings line with production and weighted trends. XX% quarter, X.XX%.

risk management and quality to approach metrics. Our continues strong asset credit disciplined to support

reported For annualized the average net of basis first to loans. and quarter, XX points both loans we non-performing charge-offs

C&I in and this increase classified increase relationships are loans to CRE a participant. we be temporary the to portfolio, which expected as to as is special that during mention. $XX.X relationship were While related where to million, criticized did in well quarter One downgraded we a one X see million $XX.X the

quarter, $X.X at XXX% on loan basis credit performance total loans and consistent for of loans XX. an loans was with credit we ratio losses and believe historic will allowance million be points remains losses March benign credit to our in XXX non-performing the continue supporting outcomes. for Overall, of Provision portfolio to

now concludes turn for my to results to pleasure updates additional and our comments. It's to Jack the details guidance my call over on introductory This XXXX. for

Jack Plants

of as rate funds in Thank income you, interest million morning, down fourth quarter $XX.X everyone. the was cost environment. most fewer million the recent higher Marty. reflective XXXX, days than current of Net of well as the from $X.X Good of the quarter

to XXX points Our overall fourth cost fourth a was funds XXX points basis XX quarter. the on quarter quarter in points Net for points, margin in basis first up was interest basis fully basis in compared equivalent linked XXXX the the of the taxable quarter. linked XXX basis of

mix higher cost lower by balances on as to funding customers loan our high when fund we to cost a Margin brought wholesale was borrowings than higher front-loaded deposits growth planned. pressured shift shifted second being accounts transaction of said, and additional moderate commercial in deposit in expect the we planned growth remainder the first With year of the that through loan was pace to quarters. growth that with the from

expect that at and through of partially billion the increases the forward. in to year funding moving impact course market deploy including to which a Relative and new and to the loan securities represents beta flow rates occurred from deposits. in to loan our our XX%, of originations so the costs cash cost magnitude cycle-to-date XXXX, $X a We into combined continue XXXX portfolio of offset margin of portfolio, higher time total FOMC rate stabilize far of has experienced deposit our the

the of Excluding a portfolio XX%. the deposits, had cost of time deposit beta non-maturity

management coupled XXXX, in quarter higher non-recurring loans. effect million to increase Non-interest sheet rate basis recorded linked increasing XXXX the our includes by expense X was insurance of of with anticipated. current the driven branches. Non-interest to insurance insurance schedules the that quarter, of $XX.X to quarter, fourth the in due from into balance mortgage insurance XXXX $XX.X income, quarter. initial in X revenue In closure by in assessment commercial the base million we with the charges quarter offset of growth the the quarter, comparison incurred restructuring FDIC points, final related also a went the uniformly businesses, linked in was flat the In consistent FDIC to part linked rule first wealth expense and as level which deposit

of million $XXX.X of investment position tax of recurve expense improvement the to roll-off the to and tax representing quarter XX.X% the million securities. rate other rate the an loss an fourth current the comprehensive in of XX.X% given in effective quarter, saw in tax cumulative $X.X million compared at $X.X of We was our XXXX. effective Income

XXX by As you'll loss tangible raising TCE before position the the FOMC value $X.XX. basis to year share impacted common and just see by in XXXX, points unrealized end relative per book rates, our investor quarter negatively began presentation, interest end

Excluding TCE respectively. the AOCI and tangible per and share been impact, our ratio $XX.XX book would have X.XX% value common

to given continue to We levels return normalized quality high metrics the of portfolio. more over these time our to investment expect

I would update like XXXX provide in key areas. an now our to outlook on for

full total continue our in expect although mid-to-high first loan results. strong growth portfolio given to quarter We the single-digit for XXXX, front-loaded year

to and our Mid-Atlantic categories, continue York growth will We driven any commercial inclusive be loan by from LPOs. expect Central of New that contributions

continue in weighting with mid-single-digit quarter based non-public heavier We plan deposits to time first for in growth actual on experience. a our deposits

an economic on the partially offset as and new average lower new to by accounts a expect impact focused be commercial per the of consumer accounts outcome balance attracting are deposit account environment. and these of We positive

Banking-as-a-Service X goals. or quarters our the generate deposits of contributor expected $XXX in BaaS approximately to a of last non-public growth significant XXXX, are million initiatives deposit to

some Given deposits, deposit a public in we which competitive reciprocal portfolio. of experienced shifted pressures, the to were reduction

be flat a We seasonal of to throughout the on quarterly relatively remainder basis. expect with XXXX balances fluctuations exception of the typical

guidance We XXX lower XXX experienced XX basis NIM cost first pressure full approximately points now previous year funding given the basis of in the expect points, to than quarter.

for Net effective activity XXXX impact of the within the in in rate forecast thereafter. of interest expect to increase XX%, rate Fed including a economist is now that credit for tax XX to remaining fall flat Our May We placed amortization a a be margin to XX% assumes relatively of service forward basis reflects year. in with investments tax curve the the of expected the remainder recent muted rate predictions point range years.

and taking tax further will by impacted effective tax We will to opportunities evaluate be investments. credit continue positively advantage of rate our

back That updated to concludes remarks the now my call I'll and guidance. prepared turn Marty.

Marty Birmingham

New a you, and I despite industrial announced growth off reported a our Overall, the tough believe commercial focus. start in Thank that and quarter first a company to is into Jack. operating in the Central strategic York expansion XXXX. productive strong environment, our We loan enhances lending

risk hire more experience We years asset to we management of grow. continue reinforce operations Pacos culture metrics Chief consumer a forward the Gary as credit talented compliance, and our to progressive Officer. to industry, Gary than and banking look is and Risk his with risk continue XX with quality in and stable the report professional as strong we contributions of

first the confidence our were also cash our we X.X% in potential. Board's announce quarterly strategy During quarter, increase our to underscoring in pleased and a dividend, earnings

be are we challenging pressures, our While XXXX. brought country in navigating can for what on for continue a by we optimistic and funding concerns to and time recessionary industry heightened I achieve

well. historically Our Upstate and stable New York weathered has recessions footprint remains financially

Mid-Atlantic attractive Our team the market. serves D.C. and Baltimore Washington,

of meaningful growth leadership relationships our us and into apart in the local and bank value our company. with believe local from deposit driving setting on will while our larger markets community portfolios, and loan clients consistent decision-making, we support As with building our a players focus

are ahead, margin, on relationship-based and markets to to Banking-as-a-Service, focused managing new throughout expenses introducing we our effectively Looking and beyond. our wealth insurance protecting our approach customers banking, and management

That questions. prepared for concludes remarks. the call please open our Operator,

Operator

Piper question our today Twerdahl Alex And first Instructions] to Sandler. [Operator goes of

Alex Twerdahl

from you next the First heard like of the that the to billion really that I flows was over of $X a Jack, I seems relative size say Is securities It correct? there think portfolio cash number big year. question. portfolio. the

Jack Plants

billion $X portfolio loan and between flow The portfolio. the cash Yes. securities the combined is in

down, the were portfolio of little off about and the about loan we'd we securities a north from then that So million million if $XXX portfolio. $XXX to break estimate

Alex Twerdahl

reinvestment just with is first go the potentially slowing mean, the that that in given I And comments to or cost growth. the higher from that, most down quarter deposits down going portfolio securities hit loan basically your either loan the for guidance expectation on growth of here, Is to borrowings? you in or here paying in your

Jack Plants

loan then in growth securities the likely reinvestment should portfolio Yes, off. first pay borrowings down and taper

Alex Twerdahl

grew just to especially look pipelines gave mean, growth, then to little quarter, the the on relative loan today big keep substantially. the then you how end I Can also year? you pretty going of estate on was real on And a the a And it comment bit commercial color estate standards very do you're willing you some credit real curious at of commercial have changed and was all of internally the for in But and that kind or in of of in just guys issues the look if ongoing helpful. quality what the terms stuff light industry? I'm to

Marty Birmingham

operating to pretty reinforce, been to consistent. a approach So of a Alex, our economy just credit remains growth. underlying with We've terms its tight market in in

are So our disciplined. borrowers

to credit has approach Our disciplined. providing been

serve have sponsors pipeline. portfolio pipeline loan we're we and of the through relatively currently that introducing return in size But teams relative that. in activities with they our to that stand thinking of the loans, as situation bank comfortable segment. a we, to and industry, are with our The with and to been lending premium The our in the our in issues borrowers understanding banking where is a that is what of have markets ensure our And failures, stable. type know appetite on and estate serious continue remains real we being our very current those about said, is strong. to borrowers, but getting role for our the very the in our grow it's customers demand unfortunate We working our though communicative understanding I to the working bank a sufficient with that that and of a very we're the relative critical our liquidity light in

Alex Twerdahl

in more almost now, us $XXX any little market of just million you give Can office Central what's there's in the the D.C. in in not on -- terms District bit can color and or the you down a of there whether D.C.? exposure

Marty Birmingham

office tied hospitals, So That that's that A-rated to my sponsor is buildings publicly-traded to centers, to the activity exposure about comments, Central about we've been we a medical medical District to campuses, publicly-traded cetera. year medical talked loan a last a the related to Business where, has are where related in et in -- the development significant tenant. in talked long-term the to for

Jack Plants

Alex, on I to those with XX% of would leverage from low credit standpoint, at originations loan values add, generally a average just fairly about come origination.

Operator

of question Group. goes Zwick Our to Erik Hovde next

Erik Zwick

Wanted growth look of kind It's guess, or start, loan expected to I half relatively ratio the loan with back point. bit a seeing guess, of to on the I still of growth kind in I average slowdown a decision? more that at as question it, what with the is to market follow-up expectations the in low I'm and something just the curious with, I compared what industry of this guess, leads the year. to better? your deposit your you're -- at so

the mentioned the strong rates margin. new pipeline that loans coming of on to the demand You to be seeing are is additive seem yourself would stable, and then

you leads year good slow all doing that So thought it risk-adjusted continue adding something what you're to will to the if Again, the opportunities? there's curious, throughout because together, kind loan loans balance the in of growth market, or those seems is opportunity if there's like something that just that down?

Jack Plants

this question. take Eric, is Jack. Yes, that I'll

in is very or a time of implemented commercial Marty nice a off commanding spread they a estate than us the Mid-Atlantic region. a what both, locking that's traditionally curve, just we've rate in we it working out the lot of swap level level off side, SOFR. mentioned, either We're above our well higher of the of and our treasuries premium could fixed as are when combination real a a of deals the was of a Loan balance SOFR. It they or back-to-back then Federal deposits priced sheet yield in themselves a Home origination of on better pricing, Borrowers achieve. sponsor higher So spread And Bank. over liquidity do taking on see of rich advantage in pricing that's inversion from the for funding which at of as

and that's that competition smaller a achievable of York from unions So from have play in New bit still competitive to market credit space Upstate in a banks in some the that space. standpoint. started There's even

So at levels current our will that that pricing I pipeline would expect that slow.

Marty Birmingham

the show shown be will react our hasn't we've where do up been that recession plant incremental could at we're projects, investments right it and and point yet, that expect does recession impacted stands, a me, a customers all now, in -- postpone up, great as So excuse a sharing result time, that. of in pipeline we potentially that anticipating, this cetera, equipment, as et accordingly negatively

Erik Zwick

the I you don't remember in the missed maybe you curious what Just forward expect until maybe rate I to prepared and changes following changes? those it of would if comments, made service summarize run you could, charges going quite that deposit the if

Jack Plants

Sure. take This Jack. is I'll that one.

guidance -- fee of item competitors NSF became eliminate throughout So the effective minimis year. the from were that to actions $XX, taken to $XX. to XXXX, we fees some then amount to by overdraft of and return implemented changes de regulatory that and this and increased $X we quarter also our in first we reviewed the relative And

a run expect the to NSF rate first a fees from change from make seasonal quarter. lower speaking, But only standpoint, perspective, the service that's or this deposit charge year. fees we generally are in So

Erik Zwick

for million quarter. update? are over kind it. question I'm on a last the Banking-as-a-Service But wonder curious days just next deposits you think or I the process? you $XXX And two? an just days? process? expect if similar one you've the the of last could initiatives, quarter about you of on you quarters. of chatted But coming three time I provide in know since where of one, just the kind to been, in just the next terms curious next if XX could And on guess, what's you we And What be mentioned total the achieved horizon in It's over XX update curious last kind I I the

Marty Birmingham

our Chief initiatives of leader many these Erik, Administrative in I've Officer us join our the Sean Willett asked and morning. to this company. He's among

Sean, So respond? want do you to

Sean Willett

Sure.

process Banking-as-a-Service, terms to have to relative robust our platform. So a then we are of a that onboarding in pipeline. we of to And continue in we clients number of bringing over clients, out them build

other And a banking platforms. so that's of transition off

to expect million bulk we'd a $XXX over XX the XXX so in significant to days. the of next And come

Operator

And Instructions] to next [Operator our Damon DelMonte KBW. of question goes

Matt Rank

hope Rank This is well. filling doing Matt I in everybody DelMonte. for Damon is

As companies from deposits; want in I Banking-as-a-Service right. to follow-up then just coming a make question, the And from are those quarter? first million and able got in was partnerships curious, onboarded? or I you the sure the coming -- the I were deposits just that are to generate to in is live $XXX pipeline already are that Those currently

Sean Willett

So again, take is Sean. that. this I'll

amount negligible terms and first the was In of the that's testing because really driven of deposits that quarter, integration. we onboarded by our

And it so clients, on really depends or we some have the are transaction-oriented live, right? the that So payments-oriented. clients

XXX the will that of large in I pipeline number next And the the then days. drive had we as income. in flight, onboarding those fee deposit had occur LOIs a well we're of will as those are as in now those over process said, and And that clients. that we opportunities So

Matt Rank

have And have tech you you what or to either certain the you number scale can up Is do significantly platform? that of for limit people? of to kind capacity have there before partnerships a

Sean Willett

service layer, from platform. We've our is a What built done So tech our we've in been that out perspective, no. thoughtful regard. very we've

projected to we is resourcing yes, and As this that get to into we that's when for a point. the But it will action well model we relates put there beyond $XXX have year. we that have that people, million a runway

Matt Rank

one me. then last for And

environment revenues from pull you should here have cut Do any recessionary you Just the expenses, to out? on mentioned back room looms. on expenses

Marty Birmingham

to again, some the were out proactively coming of company way knew the at it, efficiency in by we way time occurred fourth do. we works worked math a environment, that It technology made time. hard to going start do in et economic given take investments in and want what's further. deal of other increase expenses expenses point and we've the over was expenses, bridge our Jack, the happened to saying at that though to the the to is volatility situation ask very to of with this the people rates, interest right we did that as that the the operating failures side last ratio, was in the And the you thoughtful me XX Unfortunately, our we and cetera, taking out bank let or but of and meaningful be Well, knew wrong I'll comment Many quarter, terms thing operating the this headwinds the we we tough our environment way. out we're in. year months. But of to

Jack Plants

Matt, term period time. opportunities Just a to the earnings be expenses enterprise. mean, longer the to cautious on short organization I in for And of benefit summarize, and focused we're simply cut to would I

we'll opportunity that's evaluate that. business inside We And through a we continue and to as throughout of short case back time. do year, a the of understand every achievable earn just to continue to progress period

Operator

I We Marty any have closing hand back will no now comments. for to further questions.

Marty Birmingham

We you. beyond. conversation thank in participating for this this everyone Thank to look quarter forward second build to and continuing to want morning. on I the

Operator

call. today's conclude you This Thank joining. you. now so for much Thank

now may disconnect lines. You your

Financial Institutions (FISI) 27 Apr 232023 Q1 Earnings call transcript