Q1 2023 Financial Institutions Inc. Earnings Call
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Speaker 1: Thank you for your patience, everyone. The Financial Institutions Inc. 1st quarter, 2023 results call will begin in one minute's time. If you would like to ask questions, please press staff, fill it by one on your telephone keypad.
Speaker 1: 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.
Speaker 1: 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.
Speaker 3: Thank you for joining us for today's call. Providing prepared comments will be President and CEO Marty Birmingham and CFO Jeff Plamp. Chief Community Banking Officer Justin Bigum and Director of Financial Planning and Analysis Mike Grober 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 reasons.
Speaker 3: intended to supplement and not substitute for comparable GAAP measures . Reconciliation of these measures to GAAP financial measures will provide an earnings release filed as an exhibit to form a K. Please note that this call includes information that may only be accurate as of today's date, April 27th, 2023.
Speaker 3: I'll now turn the call over to President and CEO Marty Birmingham. Thank you, Kate.
Speaker 4: Good morning everyone and thank you for joining us today. First quarter net income available to common shareholders was $11.7 million or 7.6 cents per diluted share. Consistent with the length quarter and down from the prior year period, when the company reported $14.6 million, the company was able to
Speaker 4: or 93 cents 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, during and in part by investments in talent.
Speaker 4: 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.
Speaker 4: Given the recent bank's values, increased volatility, and broad-brushed commentary by the financial media, it's appropriate to provide a company-specific update.
Speaker 4: On the funding side, deposits totaled $5.1 billion at March 31st, up 4.3% from December 31st.
Speaker 4: As a reminder, we have a substantial public deposit portfolio associated with local medicinalities, and balances are typically higher in the first quarter as a result of seasonality associated with inflows from tax payments and state funding.
Speaker 4: 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.
Speaker 4: In the interest rate environment, we continue to see disintermediation from core transactions type accounts to time deposits in both our non-public and public deposit portfolios, which is impacted margin, as non-public time deposit balances increase $89 million on a link quarter basis.
Speaker 4: through both new account and acquisition in quarter time deposit to center mediation.
Speaker 4: 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.
Speaker 4: which had average deposit balances per branch of approximately 79 million.
Speaker 4: excluding reciprocal and broker deposits.
Speaker 4: 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 livable quality.
Speaker 4: Independent apology are available committed liquidity remains strong at approximately 1.2 day. Yep.
Speaker 4: With a 4.8% increase in total loans from December 31st, 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.
Speaker 4: 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.
Speaker 4: Commercial growth has been achieved while maintaining our disciplined credit culture.
Speaker 4: Our experienced in-market lenders have excellent relationships with high-quality sponsors within our footprint that have demonstrated consistency in execution and credit performance.
Speaker 4: Our CRE portfolio consists of assets with outstanding balances of $1.6 billion and committed credit exposure of $2.1 billion at March 31st.
Speaker 4: There are more than 700 long facilities associated with this portfolio, among approximately 300 separate lending relationships.
Speaker 4: resulting in an average loan size of approximately 2.8 million.
Speaker 4: In considering the rollover risk of the portfolio, 15.5% of exposure is scheduled to mature within the next 12 months.
Speaker 4: and another 14% will mature within 24 months.
Speaker 4: We have been careful to scale our underwritten loan amounts to the global financial profile and track record of sponsors.
Speaker 4: Our analysis indicates approaching whichurities are manageable.
Speaker 4: 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.
Speaker 4: The average loan-to-value ratio of the portfolio is 55%.
Speaker 4: 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. In today's 1909 website and Wow
Speaker 4: Office space represents 18% of our CRE exposure and less than 8% of total loan balances on March 31. 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.
Speaker 4: We have very limited exposure to central business districts, with just four loans for properties representing total exposure of $27 million.
Speaker 4: And we have strong confidence in the quality of the sponsors we're working with on these projects.
Speaker 4: 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.
Speaker 4: Consistent with our approach for all CRA lending, we have reasonable loan to leverage ratios for our office portfolio, including average loan to value at origination of 57%. In our annual stress testing of the portfolio, including increasing rates by 250 basis points above current rates.
Speaker 4: and decreasing net operating income by 20%, we achieve debt service coverage ratios of 1 to 1.
Speaker 4: As supported by strong sponsors and personal recourse on loans, we were being comfortable with the overall quality and mix of the office book, giving geographic dispersion, strong credit metrics, and exposed her diversification outside of central business districts.
Speaker 4: Multi-families are a large concentration, representing 39% of CRD exposures and 15% of loans. Within our multi-family portfolio, about 53% relates to stabilized properties, and the remaining are in the construction phase.
Speaker 4: 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.
Speaker 4: Supporting the diversification of commercial loans is our standard geographic footprint.
Speaker 4: Our Minnland Lannock 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.
Speaker 4: In the first quarter of this year, we also announced our expansion into the Syracuse New York market with a new commercial loan production office.
Speaker 4: 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.
Speaker 4: The team has been doing an excellent job of engaging with prospective clients so far, and we look forward to their future contributions.
Speaker 4: Our residential loan portfolio was relatively flat with the end of the length fourth quarter as expected.
Speaker 4: among ongoing pressures of inflation, higher interest rates, and tight housing inventory.
Speaker 4: The consumer indirect loan portfolio is $1.25 billion and also flat with the late quarter.
Speaker 4: As we noted on our college January , we are proactively moderating consumer and direct production through pricing and continuing to remain focused on credit quality and stringent underwriting standards, which has been and continues to be the foundation to this business activity.
Speaker 4: Ours is a prime lending operation with average portfolio FICO score of 714.
Speaker 4: 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%.
Speaker 4: That charge off for 73 basis points in the current quarter in line with historical trends.
Speaker 4: Our disciplined approach to credit and risk management continues to support strong asset quality metrics.
Speaker 4: For the first quarter, we reported 21 basis points of both non-performing loans and annualized net charge offs to average loans.
Speaker 4: While we did see a $17.7 million increase during the quarter in criticizing classified loans to $77.7 million, this increase related to two relationships that were downgraded to special mention. However, when After the
Speaker 4: one in the CNI portfolio, which is expected to be temporary, as well as one CRE relationship where we are a participant.
Speaker 4: Provision for credit losses on loans was 4.2 lane in the quarter, supporting an allowance for credit losses to total loan ratio of 112 basis points and 540% of nonperforming loans at March 31. We appreciate the opportunity to speak with you today.
Speaker 4: Overall, CratiPremayne's benign, and we continue to believe our lone portfolio performance will be consistent with historic outcomes.
Speaker 4: 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.
Speaker 4: Thank you, Marty. Good morning, everyone. That interest income of $41.8 million was down 1.3 million from the fourth quarter of 2022.
Speaker 4: reflective of fewer days than the most recent quarter, as well as the higher cost of funds in the current rate environment.
Speaker 4: Our overall cost of problems in the quarter was 162 basis points, up 53 basis points in the length for a quarter.
Speaker 4: Then just margin on a fully tacked equivalent basis with 309 basis points for the first quarter of 2023 compared to 323 basis points in the linked fourth quarter.
Speaker 4: Marginal is pressured by a shift in funding mix as our customers shift the balances from lower cost transaction deposit accounts to higher cost high deposits.
Speaker 4: We brought on additional wholesale borrowing to fund loan growth that was higher than planned.
Speaker 4: With that said, we expect the pace of blown growth to moderate through the remainder of the year with planned commercial growth being front loaded in the first and second quarters.
Speaker 4: We continue to expect to deploy cash flow from our loan and securities portfolio.
Speaker 4: which represents a combined $1 billion through the course of the year into new loan originations at market rates to partially offset the impact of higher funding costs and stabilize our margin moving forward.
Speaker 4: Relative to the magnitude of FOMC rate increases that occurred in 2022 and so far in 2023, our total deposit portfolio has experienced a cycle-to-date beta of 27%, including the cost of time deposits.
Speaker 4: Excluding the cost of time deposits, the non-maturity deposit portfolio had a beta of 13%. Non-interest income, which includes revenue from our insurance and wealth management businesses, was $10.9 million in the first quarter, consistent with the linked quarter as anticipated.
Speaker 4: Non-interest expense of 33.7 million was also a flat to the length quarter.
Speaker 4: In the current quarter, we recorded a higher level of FDIC insurance expense due in part to the final rule that went into effect in 2023, increasing the initial base deposit insurance rate schedules uniformly by two basis points.
Speaker 4: Couple of them balance sheet growth driven by commercial mortgage loans.
Speaker 4: In comparison to the LWINS quarter, the increase in FDIC insurance caused that non-recuring, restructuring charges incurred in the 4th quarter of 2022 related to the 2020 closure of five branches.
Speaker 4: Income tax expense was $2.8 million in the quarter, representing an effective tax rate of 18.7% compared to $2.4 million and an effective tax rate of 16.4% in the fourth quarter of 2022. We saw improvement in our opportunity to other comprehensive laws.
Speaker 4: and raising interest rates.
Speaker 4: The unrealized loss position negatively impacted quarter-end TCE by 193 basis points.
Speaker 4: Intangible common book value per share by $7.42.
Speaker 4: Excluding the ALGI impact, our TCE ratio and tangible common book value per share would have been 6.96% and $29.04, respectively. We continue to expect these metrics to return to more normalized levels over time.
Speaker 4: on our outlet for 2023 and here it is.
Speaker 4: from full year 2023.
Speaker 4: of any contributions from our Mid-Atlantic and Central New York LPOs.
Speaker 4: We continue to plan for mid-single digit growth in non-holic deposits.
Speaker 4: with a heavier weighting and time deposits based on our first quarter actual experience.
Speaker 4: We are focused on attracting new consumer and commercial deposit accounts and expect the positive impact of these new accounts to be partially offset by a lower average balance per account as an outcome of the economic environment. Banking as a Service, or BAS, initiatives are expected to generate approximately $150,000
Speaker 4: into the reciprocal deposit portfolio.
Speaker 4: We expect balances to be relatively flat throughout the remainder of 2023, with the exception of typical seasonal fluctuations on a quarterly basis.
Speaker 4: We now expect a full year minimum of 305 to 315 basis points.
Speaker 4: approximately 25 basis points lower than previous guidance given the funding cost pressure experienced in the first quarter.
Speaker 4: Our forecast assumes a forward rate curve that reflects economists' predictions for a 25 basis point rate increase in May, with Fed activity remaining muted thereafter.
Speaker 4: The interest margin is expected to be relatively flat for the remainder of the year.
Speaker 4: We now expect the 2023 effective tax rate to fall within a range of 18 to 19 percent.
Speaker 4: including the impact of the amortization of tax credit investments placed on service in recent years.
Speaker 4: We will continue to evaluate tax credit opportunities, and our effective tax rate will be positively impacted by taking advantage of further investments.
Speaker 4: That concludes my prepared remarks and updated guidance. I'll now turn the call back to Marty. Thank you, Jeff.
Speaker 4: Overall, despite a tough operating environment, I believe our company is off to a productive start in 2023.
Speaker 4: We reported strong loan growth in the first quarter and announced a strategic expansion into central New York that enhances our commercial and industrial lending focus. We continue to report strong and stable asset quality metrics and reinforce our risk management culture with the hire of Gary Pecos as chief risk officer.
Gary is a talented risk professional with more than 30 years of progressive compliance, consumer credit, audit, and operations experience in the banking industry. And we look forward to his contributions as we continue to grow.
During the first quarter we also were pleased to announce a 3.4% increase in our quarterly cash dividend, underscoring our board's confidence in our strategy and our expertise potential.
While we are navigating a challenging time for our industry and country, brought on by recessionary concerns and heightened funding pressures, I can see it to be optimistic for what we can achieve in 2023. Our upstate New York foot for every major financial stable enhances historically whether recession is well.
Our middle-aner team serves the attractive Washington, D.C. and Baltimore markets. As a community bank with local leadership and local decision-making, we believe our consistent focus on building meaningful relationships with our clients will support growth of our loan and deposit portfolios while setting us apart from larger players in our markets.
and driving value into the company. Looking ahead, we are focused on protecting our margin, effectively managing expenses, and introducing our relationship-based approach to banking, banking as a service, wealth management, and insurance to new customers.
throughout our markets and beyond. That concludes our prepared remarks. Operator, please open the call for questions.
Of course, if you would like to ask a question please press star followed by 1 on your telephone keypad. If you choose to withdraw your question please press star followed by 2.
When preparing to ask a question, please ensure your phone is unmuted locally. And our first question today goes to Alex Twaddle of Pipe Sanla. Alex, please go ahead and line his open. Hey, good morning, guys. Good morning, guys. Alex, good morning, Alex. First question, Jack, I think I heard you say that there was a billion dollars of cash flows from the securities portfolio over the next year. Is that correct? It seems like a really big number relative to the side of the portfolio.
Yeah, the billion dollars in cash flow is combined between the securities portfolio and the loan portfolio. So, if we were to break that down, we'd estimate about a little north of 150 million from the securities portfolio and then about 900 million off the loan portfolio.
Okay, and the expectation for that, you know, just given your comments on loan growth potentially slowing down from here, I mean, you basically hit your guidance in the first quarter here with the loan growth, is that most of that is going to go to either reinvestment in the securities portfolio or paying down higher costing deposits or borrowings? Yeah, likely first to pay down borrowings and then reinvestment.
color you gave on commercial real estate and the credit quality and all that kind of stuff was very helpful. But I'm just curious if standards have changed internally for you guys in terms of what you're willing to look at or do in light of some of the ongoing issues in industry.
So, Alex, just to reinforce, our approach to credit remains consistent. We've been operating in a market with a pretty tight underlying economy in terms of its growth. So, our borrowers are disciplined, our approach to providing credit has been disciplined.
We have been thinking about though in light of the current issues in the industry, working with our teams to ensure that we're getting a sufficient return on our loans, introducing a liquidity premium relative to our real estate lending.
But we, as I said, are very comfortable with our sponsors and the activities that we have currently with our loan portfolio and those in the pipeline. The pipeline remains relatively stable. The demand for our type of banking is strong. And it's unfortunate that we're working through a very serious situation relative to the bank failures, but the role of a bank of our size in the markets that we serve is critical. And our borrowers and customers know that. Yeah, that's a helpful color. Can you, in terms of the almost $200 million in the DC market, talk about the
rated long-term tenant.
Yeah, I would just add, Alex, from a credit standpoint, those originations generally come with fairly low leverage at loan to value of about 45% of origination.
Okay, great. Thanks for taking my questions. Thanks, Alex. Thank you. Our next question goes to Eric Zwick of Hove Group. Eric, please go ahead.
I guess the question with the growth expected to kind of slow down and the back half of the year. I'm curious what kind of what you're seeing that leads that is something in the market or your decision. I guess as I look at it, your loan to deposit ratio is still relatively low compared to industry averages at this point.
those together, what leads to the thought that loan growth will slow down? Again, is that something that you're doing or something in the market? Because it seems like there's opportunity to continue adding loans throughout the year if there's good risk-adjusted opportunities.
Yeah, Eric, this is Jack. I'll take that question. As Marty mentioned on the commercial real estate side, we've implemented a liquidity premium in our pricing, which is commanding either a higher level of deposits at time of origination from a sponsor or a higher level of spread, or a combination of both. That's working out very well for us in the mid-Atlantic region.
We're pricing a lot of deals off of SOFR. Borrowers are taking advantage of the inversion in the yield curve, locking in fixed rate funding to themselves when they do a back-to-back swap with us that's better than what they could traditionally achieve if it was just priced off of Treasuries or the Federal Home Loan Bank. And then we see it on our balance sheet as a nice, rich spread over…
So that's achievable in that space from a competitive standpoint. There's still a bit of competition in the upstate New York market from some smaller banks and even credit unions have started to play in that space. So I would expect that at our current pricing levels that pipeline will slow.
does show up, we do expect that our customers will react accordingly and potentially postpone projects, incremental investments in plant equipment, etc. as a result of that.
That's helpful. I appreciate the additional color there. I'm just curious if you could, I don't know if I missed it in the prepared comments, summarize maybe the changes you made to deposit service charges and what you would maybe expect the run rate of that item to look like going forward following those changes.
Sure, this is Jack. I'll take that one. So we throughout 2022, we reviewed NSF fees relative to regulatory guidance and some actions that were taken by our competitors and implemented changes to eliminate the return to item fees of $40 and then we also increased the de minimis overdraft amount from $5 to $50.
Okay, thank you. One last one, I think I asked a similar question last quarter, but just curious in terms of the Banking as a Service initiative, I wonder if you can provide an update. It's been 90 days since the last time we chatted about it. I'm just curious where you are in the process. I know you mentioned you expect $150 million in deposits to be coming on over the next time.
3 quarters, but just curious if you kind of update on the total process, you know, what you've achieved over the next 90 days and then more from the horizon for the next quarter or 2. Eric, I've asked John will it to join us this morning. He's our chief administrative officer and the leader of these initiatives among many in our company. So, Sean, do you want to respond? Sure. Eric, good morning so relative to.
banking as a service we continue to build out a robust pipeline and then in terms of onboarding clients we have a number of clients that we are in process of bringing them over to our platform. So that's a transition off of other banking platforms. And so we expect a significant bulk of the 150 million that come over in the next 90 to 120 days.
Thanks everyone for taking my questions this morning.
Excellent. Thanks everyone for taking my questions this morning. Thank you.
Thank you and as a reminder if you would like to ask a question please press star followed by one on your telephone keypad. And our next question goes to Damon Delmont of KBW. Damon please go ahead your line is open. Hi this is Matt Rank filling in for Damon Delmonte hope everybody's doing well. As a follow-up to the banking as a service question I was just curious were you able to generate deposits in the first quarter and then I just want to make sure I got the 100 million right. Those are coming in deposits those are coming from companies currently in the pipeline or is that from partnerships that are live and already on boarded.
Yeah, so again, this is Sean. I'll take that. In terms of the first quarter, the amount of deposits that we onboarded was negligible because that's really driven by our testing and integration. And so the clients that we have live, it really depends on the clients, right? So some are transaction oriented or payments oriented. So those will drive fee income.
capacity do you have for that platform? Is there a certain limit to the number of partnerships you can have before you have to significantly scale up either tech or people?
So from a tech perspective, no. What we've done is we've built out our service layer, our platform. We've been very thoughtful in that regard. As it relates to people, yes, there is a runway and we have a resourcing model that we will put into action when we get to that point, but
that's well beyond the 150 million that we have projected for this year. Okay, great. Thank you for the color. And then last one for me, just on expenses, you mentioned the recessionary environment looms. Do you have any room to cut expenses should revenues pull back from here on out? Well, let me start by saying that, you know, in the fourth quarter, we've had a lot of
interest rates, etc. You know our expenses efficiency ratio that the way the math works out is going the wrong way. Many of the investments we've made in people and technology though occurred over the last year to 18 months and we want to be very thoughtful in terms of taking expenses out at this point.
in the enterprise, and I would be cautious to cut expenses to simply benefit earnings in a short period of time. We continue to evaluate every opportunity through a business case to understand and earn back that's achievable inside of a short period of time. And as we progress throughout the year, we'll continue to do just that.
Okay, great. Thank you for the time. I'll step back.
Okay great, thank you for the time. I'll step back. Thanks Matt.
Thank you. We have no further questions. I will now hand back to Marty for any closing comments. I want to thank everyone for participating this morning. We look forward to continue to build on this conversation in the second quarter and beyond. Thank you.
Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.