Financial Institutions Inc (FISI) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Financial Institutions third quarter earnings release conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer question. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Friday October 21st, 2005. I would now like to turn the conference over to Debbie Pawlowski, Investor Relations for Financial Institutions.

Good morning, everyone, and thank you for joining us. Presenting on our teleconference today, we have Peter Humphrey, Chairman, President, and CEO of Financial Institutions and Ron Miller, Chief Financial Officer. Also joining us is Matt Murtha, Senior Vice President responsible for Marketing and Corporate and Investor Communications.

Pete and Ron will discuss the third quarter results and then we will open for questions. As you are aware we may make some forward-looking statements during the formal presentation as well as during the Q&A and these statements apply to future events and are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. The factors are outlined in press release as well as in the documents filed by the Company with the SEC.

You should have the press release available to you and if not, you can find it on the website at FIIwarsaw.com. With that, let me turn it over to Pete to start the discussion.

Thank you, Debbie, and thank you, everyone, for joining us today.

We’ve made many aggressive changes in 2005, the completion of our problem loan sales being the most significant factor this quarter. I will be discussing the financial impact of the second phase of the loan sale and its impact on our financial performance later in this call. Suffice it to say though that as a result of the loan sale we have significantly improved our asset quality by eliminating a large portion of nonperforming and criticized loans resulting in a measurably improved risk profile.

A major part of our past problems has been related to personnel skills and experience at our subsidiary banks. We have been through a few evolutions as problems -- at our problem banks trying to address these issues and over the past year, our staffing focus has been to improve credit quality, address our problem loan portfolio and change the cultures of our subsidiary banks.

We believe that, in large part, this has been achieved. We can now move our focus toward reducing costs and better managing our markets.

Loan originations have slowed over the last year and a half as we've been implementing broad change throughout our organization. We have brought on new experienced commercial lenders but they, too, must be trained on our credit quality processes and become familiar with our loan relationships.

It takes a combination of the right people and the right products to succeed in this arena, balanced with high standards of underwriting. As to our cost structure, we have indicated that we would expect as much as 3 million in cost savings from our centralization and consolidation activities over the next 12 months. We don't expect that to occur immediately; but we do anticipate that we should be able to eliminate anywhere from 2 to 4 million in costs in 2006, including professional service fees associated with regulatory issues, loan portfolio analyses, consolidation, and our loan sales efforts.

At the end of the quarter, our loan portfolio was about a 50-50 mix in commercial and retail. We anticipate that we could see some additional commercial shrinkage slightly as retail grows somewhat but not too dramatically off the even split line as we have today.

As to the allowance for loan losses, our current coverage ratio has improved and is obviously more comparable to our peers than where we have been. As I mentioned last quarter we filed applications with the New York State Banking Department and the Federal Reserve Bank of New York to request approval to merge three of our four subsidiary banks into our other subsidiary -- our state-chartered first-tier bank.

We plan to rename the resulting entity to personify the strength of our combined organization. The application review process continues and we will keep you posted of those results.

The management team has been prepared to make the necessary adjustments post-consolidation.

Marty Birmingham, currently President of National Bank of Geneva will become our Commercial Banking Executive. As many of you may know Marty was formally a regional executive at Rochester for Bank of America. John Witkkowski, who recently joined us as President of Wyoming County Bank will lead our retail banking efforts. John recently served as the Senior Vice President in national sales in the retail client development group at B of A. They'll report to Jim Rudgers who will continue on as our Chief of Community Banking. To strengthen governance and oversight our corporate Board will also be the Board for the bank.

In our last conversation I mentioned that one of our key components to success has always been our retail and business services and that moving forward, we intend to improve our focus on our vision of providing high-quality, responsive banking services to our customers throughout our service area. As a result of this focus, we discontinued operations of the Burke Group in June of 2005 and subsequently announced the sale in September of 2005. A small gain on the sale was realized during this quarter.

Our current and future products and services development will be focused on the retail market and businesses within our large franchise area.

Matt Murtha, who is here with us, is a strong believer in in-depth analytical market research. We believe that this could provide us a leading-edge in product development and in implementation. There is market share to be gained through the advantages of our large branch network, our friendly service, our strength in management team, our advanced realm (ph) of available services and our significant reach throughout the territory.

Yet, as we've recognized, there is still much change to be implemented and some acceptance and healing to occur in our marketplace. We are sincerely looking forward to moving onto these and other new challenges and opportunities.

Now let me turn it over to Ron to review the financials in more detail. Ron.

Thanks, Pete, and good morning to everyone. As noted in our earnings release net income for the quarter was $9 million or $0.76 per share, representing a positive swing from last year's third quarter's net income of 5.1 million or $0.42 per share. The increase in earnings was primarily due to the results of our previously announced loan sale.

During the third quarter, we completed the disposition of nearly all of the loans we had identified for sale and recorded a net gain of $9.2 million on those transactions. At the end of the quarter, we had only 1.7 million in commercial-related loans remaining and held for sale. That compares to the 131 million that we held at June 30th.

The risk profile of our loan portfolio post-loan sale has improved in several ways other than from the obvious reduction in problem loans. As Pete mentioned, we now have a more balanced portfolio with about 47% commercial-related loans and 53% retail loans. Commercial-related loans had previously been as high as 64% of our loans.

Nearly all of our loans are to customers within our market area and if real estate is the collateral it, too, was within our market area.

There were several large agricultural loans that were settled or sold in the loan sale process. Our agricultural portfolio now represents 8% of our total loans and the dairy segment of agriculture, 4% of total loans. That mix had previously been as high as 19% in agricultural and 10% in dairy of total loans.

From a customer risk perspective, we also had fewer large loan relationships. At the end of the quarter, we had only four commercial-related relationships in excess of $5 million. And our total outstanding commercial-related loans represented by relationships in excess of $1 million was $162 million or only 16% of our total loan portfolio.

Prior to our loan sale, loan relationships in excess of $1 million were $281 million. That is up $119 million higher level than it currently is.

Capital. Our capital has remained strong and was further enhanced by the quarter's earnings and the redeployment of funds from the loan sale into investment assets. At quarter end our leverage ratio was 7.52% and our total risk-based capital ratio was 14.42%.

Net interest income for the third quarter declined by $2.9 million to 16.3 million and our net interest margin for the quarter was 3.59%. That compares with 3.98% for the third quarter of last year. Our funding costs have increased with the rise in general market interest rates. And as discussed in the release, earning asset yields have not kept pace as there has been a shift in mix from generally higher yielding loans to lower yielding investment assets. This has occurred through both the slowing in new loan originations and the sale of loans.

For the current quarter, there was $63 million on average in loans held for sale status that did not earn any interest during the quarter. And with the receipt now of nearly all proceeds from the sale we will have been redeployed in earning assets for the fourth quarter.

Overall, our loan deposit ratio is 57% at September 30th which compares to 69% at the end of last year.

Our noninterest income for the third quarter included the $9.2 million gain on sale of the commercial-related loans. The remaining categories of our noninterest income were relatively flat year over year. Our noninterest expense for the third quarter increased to 16.3 million or by 5.77% (ph) when compared with the third quarter of last year but is down 200,000 from the second quarter of this year.

Higher salary and benefit costs together with professional fees and services associated with consolidation activities and regulatory matters are the primary reasons for the increase over last year. Also included professional fees for the third quarter is approximately $300,000 for an engagement that we do not expect any additional significant costs for going forward.

As Pete has mentioned, we expect our costs to reduce as our legal counsel needs are reduced, as we eliminate redundant activities in our ongoing centralization process, and with regulatory approval we complete the merger of our banks and gain the full benefits from that initiative.

Also as Pete has mentioned, we sold our Burke Group subsidiary during the third quarter and realized a small gain of 88,000 from the sale, which was about equal to the operating loss of the subsidiary for the quarter up until the date of disposition. Those results are shown in our financial statements under Discontinued Operations. Pete.

Thanks, Ron. Operator, can we now open the call for questions please?

(OPERATOR INSTRUCTIONS)

Damon Del Monte with KBW.

I was wondering if you could comment a little bit on your margin expectations given that you are going to be looking to increase your loan portfolio again?

Let me tee this one off, Ron. This is Peter Humphrey. The margin is one of those fluid issues that will, in large part, be impacted on the outstandings in the loan portfolio. And we are at a crossroads if you will in completing our problem loan sales, but with some remaining credit remediation efforts underway to continue to reduce our criticized, classified, and our nonperforming loans even further. So there could be some reduction in the outstandings in the commercial portfolio as a result of that.

Now on the flip side, we are more active in the marketplace and will become even more active in the marketplace both in the retail side and the commercial side, as we have indicated, to try to maintain that 50-50 mix.

How successful we are in the market with those initiatives is yet to be determined. So as you can imagine, the difference in yield between the investment portfolio and the incremental growth in the loan portfolio will have a direct bearing on our ability to improve those margins further.

Have you looked into into 2006, what the impact of option expensing will be?

We have not concluded yet on that. The implementation obviously is January 1st the first quarter. There is some initiative that we are undergoing here in the fourth quarter to quantify that. I would suspect it is not a material event as we've looked at it to this point.

(OPERATOR INSTRUCTIONS) I'm showing no further questions at this time. Please continue with the presentation.

Thank you. In closing, I would like to reiterate that our strategy is to maintain our focus on serving our large retail and business markets throughout our over 10,000 square mile territory. With a very solid capital structure, strong management team, a broad reach and strategically located physical presence throughout our operating region and a plan to reduce costs, we believe we can produce quality sustained earnings growth for our shareholders going forward.

We appreciate your time today and thank you for your interest in Financial Institutions. Have a great day.

Ladies and gentlemen, this concludes the Financial Institutions third quarter earnings release conference call. If you would like to listen to a replay of this conference call please dial 303-590-3000 and use pass code 11041573. You may now disconnect and thank you for using AT&T Teleconferencing.