Financial Institutions Inc (FISI) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Financial Institutions Fourth Quarter and Fiscal Year End 2005 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 session. If anyone needs assistance at anytime during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Friday, January 27, 2006.

I would now like to turn the conference over to Deborah Pawlowski, Investor Relations of Financial Institution. Please go ahead, ma’am.

Thank you very much, Rob, and good morning everyone and thank you for joining us today. On our conference call this morning I have with me here Peter Humphrey, President and CEO of Financial Institutions and Ron Miller, Chief Financial Officer. Also with us is Mat Murtha, Senior Vice President responsible for marketing and corporate and investor communications. Pete and Ron will discuss the fourth quarter results and what they are seeing for 2006 and then we’ll open it up 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 which 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 the press release as well as in documents filed by the Company with the Securities and Exchange Commission. You should have the press release available to you. If not, you can find it on the website at FIIWARSAW.com.

With that, let me turn it over to Pete to start the discussions.

Thank you, Debbie. And thank you everyone for joining us today. I’m pleased to say that we accomplished what we set out to do this past year. I would like to take a few moments here to reflect on this past year as well as provide some insight into our future direction. Later in the call, Ron Miller will be reviewing our fourth quarter and year-end financial results.

As an organization we set a number of aggressive goals for the year that were the essential stepping stones to our future success. One of the biggest hurdles we needed to tackle was the impact a number of problem loans were having on our overall asset quality and regulatory standing.

Due to the strengthening of our credit administration we rectified the problem in the second and third quarters of the year culminating in our problem loan sale. As a result, our ratio of nonperforming loans is now down to 1.93% compared with 4.40% at the end of 2004. The resulting asset base is now on solid ground and our risk profile has significantly improved as a result.

We have also worked hard to implement tighter lending and credit controls to ensure our asset base remains on solid ground and we now look towards future growth. In order to create an internal structure that supports the balance between risk and opportunity, we have made some dramatic changes to our organization this past year; the biggest of which is the consolidation of our four subsidiary banks to form the state chartered, Five Star Bank.

We will reap the benefits of this streamlined organization in the coming years including a consistent credit and sales culture as well as the expected elimination of over $3 million in redundant costs.

A number of well respected industry veterans also joined us this year and their knowledge, experience and contributions will be vital in steering us towards our bright future.

Mr. Kailbourne, as we know as “Erkie,” the retired Chairman and CEO of Fleet National Banks, New York, was elected to our Board of Directors in December and I am pleased to report was named Chairman of our Board this week. The selection of an outside director as chairman and the separation of the role from that of chief executive officer is one action among several that the Board has taken over the last two years as part of its plan to strengthen corporate governance.

Importantly, this structure is recognized as the best practice in corporate governance by institutional investors and shareholders. I am most pleased to have a man of Erkie’s talent and experience accept the role of Chairman and look forward to working closely with him.

The separation of duties also permits me to spend more time on the execution of our strategic plan and allows me to focus on our markets and enhancing shareholder value.

This past year, Mr. George Hagi, joined us as Executive Vice President and Chief Risk Officer and brings over two decades of risk management and bank examiner experience to our organization.

Also joining our team this year was Mr. John Wizkowski with over 12 years in the financial services industry and is our head of retail banking. Along with that is Mr. Martin Birmingham as head of commercial banking and he has extensive commercial banking experience in upstate New York. I believe it is a testament of the faith in our strategic direction that we have been able to attract such talented leaders to our organization.

Now that the strengthened foundation is in place, 2006 will be the time to focus on the future growth of our bank. We have always prided ourselves on our unfailing service-oriented approach to community banking and with the unification under one name, we are committed to offering our customers the highest quality of products and services. We intend to look for new opportunities to expand our market share within our current foot print through a careful and disciplined rebuilding of a balanced loan portfolio while remaining responsive to our existing customer needs.

The coming year will not be without its challenges, however. In addition to ensuring the successful consolidation of our subsidiary banks on financial, organizational and brand levels, we are faced with less than ideal economic conditions particularly within our operating area as well as a flat yield curve and a higher cost of funds.

We expect most of our financial gain this coming year will be through tight cost controls rather than revenue gains. We continue to have some residual weak loans to contend with but with tighter tracking mechanisms in place it is our intention to monitor them closely and steadily manage them down.

I will now turn the call over to Ron who will cover the specifics of our financial performance this quarter as well as year-end results. Ron?

Thanks, Peter. And good morning everyone. Let me first start out with a quick recap of our bottom-line net income numbers. As noted in our press earnings release, income from continued operations for the fourth quarter of 2005 was $2.8 million or $0.22 per share. This compares with a loss of $640,000 or $0.09 per share in the fourth quarter of last year.

For the full year 2005, income from continuing operations was $4.6 million or $0.28 per share, down from $12.9 million or $1.02 per share in 2004.

During 2005, the Company discontinued the operations of and sold our Burke Group subsidiary. A loss from this discontinued operation was $2.4 million in 2005 and results in full-year Company net income of $2.2 million or $0.06 per share.

There were four major events that had significant impact on 2005 results. Let me take a few minutes to review each of those and their impact on full year 2005 as well as the fourth quarter financial results.

First our problem loan sale. During 2005, the Company sold approximately $176 million in problem loans. Loan charge-offs recorded during the second quarter related to this action were $37 million. During the third and fourth quarters of 2005, the loans that had been transferred to hold for sale in the second quarter were settled or sold. The Company realized a net gain of $9.2 million in the third quarter and an additional $157,000 in the fourth quarter from the final settlement of the loans.

Second, the consolidation of our subsidiary banks. As Peter reported, we completed the restructure of our organization with a consolidation of our former four banks into Five Star Bank on December 5, 2005. We incurred, during 2005, restructuring charges associated with this activity of $1.36 million. Of that amount, $354,000 was in severance costs and $214,000 of those severance costs were incurred and reported in the fourth quarter of 2005.

The remaining restructuring costs of $1 million were related to systems conversions, branding campaign activities, disposal of fixed assets and legal expenses with $948,000 of that number included in the fourth quarter financial results.

Third, resolution of our regulatory and asset quality issues. During 2005 the Company incurred significant legal, consulting and other professional fee costs associated with the administration of and resolution to our regulatory governance and asset quality issues.

While the quantification of some of these expenses into an exact match with the issues I just described is somewhat subjective, the Company estimates that approximately $1.8 million was incurred, of which $178,000 was in the fourth quarter.

And the fourth item as mentioned in my opening comments, the Company also completed during the third quarter of 2005 the sale of our subsidiary, the Burke Group, Inc. The full year 2005 impact of discontinued operations from the subsidiary was $2.4 million.

Moving to asset quality – from an asset quality and allowance for loan loss perspective, 2005 showed a reduction in our nonperforming assets to $19.7 million from $55.2 million the previous year-end.

Our total provision for loan losses for 2005 was $28.5 million which was obviously heavily related to our loan sale. For the fourth quarter of 2005, our provision for loan losses was $1.4 million. Ending allowance for the year was just over $20 million with an allowance to loans ratio of 2.04%.

As Peter mentioned, we continue to have some residual weak loans to contend with that we anticipate steadily managing down; but our overall asset base is now on solid ground and our risk profile has significantly improved.

Switching to the Company’s revenue stream – our net interest income for 2005 declined $7.9 million. A major factor in this decline was a $260 million decline in total loans. The result of the loan sale, other problem loans exiting through non-sale means and the implementation of tighter lending and credit controls.

The funds from this reduction were redeployed into investment assets that generally yield less than loans as well as used to reduce some higher cost liabilities. The impact of net interest margin was a 25 basis point reduction with 2005 net interest margin averaging 3.65%.

The Company’s fourth quarter net interest margin was 3.55% with continued challenges of lower spread opportunities associated with a flatter-yield curve and highly competitive marketplace for loan, assets and deposits.

Non-interest income for the fourth quarter declined $180,000 or 4% to $4.9 million from $5.1 million in the same quarter last year. The slight decline can be attributed to mortgage banking activities as a slowing of mortgage volume has resulted from rising interest rates.

Turning to the Company’s overhead – non-interest expense for the fourth quarter was $16.2 million. As stated earlier, approximately $1.1 million in restructuring charges were incurred in the fourth quarter. The Company also incurred $1.4 million in FDIC deposit insurance costs for the full year of 2005. Those costs are assessed on a risk basis and with the completion of the consolidation of our banks into the state chartered Five Star Bank, we expect that our improved regulatory risk profile will result in our 2006 FDIC deposit insurance costs being reduced by $1.1 million.

Our internal reorganization and consolidation has also led to a reduction in 26 average full time equipment positions from the third quarter of 2005 to the fourth quarter.

Our salary and benefit costs for the fourth quarter of 2005 of $7.9 million are down $1 million from the fourth quarter of 2004 and $900,000 from the third quarter of 2005.

In addition to the favorable effect on salary and benefit costs in the fourth quarter from the reduction in staffing levels, the Company also reversed in the fourth quarter $600,000 in bonus incentive accruals due to the full year 2005 financial results.

In summary, as Peter stated in our earnings press release we anticipate 2006 to be a challenging year for growing our revenue, for redeploying our earning asset base into loans. Rebuilding a solid loan portfolio will take some time in our highly competitive and somewhat economically soft marketplace.

We believe that our earning potential for 2006 will primarily result from the savings we gain from our consolidation and our on-going efforts to improve operational efficiencies. I’ll now turn the program back to Peter.

Thank you, Ron. And, Operator, can we now open the call to questions, please?

[Operator instructions] Our first question comes from Jared Shaw with KBW. Please go ahead.

Good morning, Peter and Ron.

Good morning.

Good morning.

Ron, I think I missed a few of the things when you first started talking about the one-time things this quarter. Could you just go through those again, please? The non-recurring?

Sure. Basically in the fourth quarter of 2005, in relation to salaries and benefits as you would compare them either to same quarter last year, we are down $1 million and we’re down $900,000 relative to third quarter. One of the items of benefit we’re grating at in the fourth quarter relative to either comparison is the reversal of $600,000 in bonus and incentive accruals that had been accrued throughout 2005 and was reversed due to the results of our entire 2005 net income.

In terms of our restructuring costs, there’s approximately again $1.1 million that is in the fourth quarter, $200,000 of it is severance costs. Approximately, I didn’t mention the specifics on this, but it’s about $400,000 relating to our advertising branding campaign; approximately $200,000 related to system conversion costs; $100,000 in professional fees; and about $200,000 in disposal of fixed assets--

And all of those will be--

The other item I alluded to was our FDIC insurance premium costs of $1.1 million for the entire year 2005 which is about $275,000 a quarter and would have been the amount recorded in each quarter of 2005. We expect not to have that additional cost in 2006.

Okay. And then all the increased advertising, the systems conversion, the professional fees, all those should also be gone for 2006?

They are all the restructuring charges that were recorded in the fourth quarter and we anticipate no further restructuring charges related to the activities of the fourth quarter.

Okay. And just looking at the tax rate, it was a lot lower than we were looking for there. What would be a good tax rate to use as we look into the beginning of the year?

Well, in general our effective tax rate without indication of ongoing exempting of securities would be 39.875%. Certainly a significant percentage of our investment portfolio is in tax-exempt income and I would expect our effective tax rate to move back to the levels that we previously had prior to the pre-tax earnings consequences of the higher provisions that we had in 2005.

So that would be like the 28 to 30 range?

I think that would be reasonable.

Okay. And then could you just comment briefly on the margin and how you are positioned right now with the yield curve and assuming a few more rate increases?

Well, I think as we model our interest rate risk in the Company, we have for some time remained in a relatively balanced position. That certainly gives us opportunity on the asset side as rates go up and also on the liability costs will follow as well. And as you are aware, the industry is keenly aware, we do make money off the slope in the curve and there’s less opportunity to do that; and as I said earlier, we - and I think others - are all faced with some challenges particularly on the deposit side of taking into account the previous market rates that have occurred that have been a little slower to pass this way through the higher funding costs.

Great. Thanks very much.

Thank you. Our next question comes from David Darst with FTN Midwest. Please go ahead.

Good morning.

Good morning.

Good morning.

Can you comment on your funding strategy? You’ve got some borrowing both short-term and long-term and I wonder if you’ll be using securities cash-flow to pay those off?

Well, we have made some significant reductions in our borrowings. Our actual federal home loan board state borrowings are down $17 million year-over-year; but part of our drop in our deposits is in the composition of broker cd’s which certainly have some characteristics of borrowings. They have been declined by $38 million on a year-over-year basis.

We have been taking, as I alluded to earlier, a significant amount of cash that emanated off the sale of the loan portfolio - as well as the ongoing net reductions of the loan portfolio that have occurred - have been done to reduce some of the higher-cost liabilities, I think, as you’re suggesting and in our case that was the broker cd’s and some FHLD advances. We’ve also actively managed some of our deposits that might be described as hotter money. We’ve actively managed some of those off our balance sheet as well.

I think there is not been intent to otherwise manage down in any manner other than through the maturity of our short-term borrowings next year.

Okay. Could you give us an idea of maybe what the remaining brokered cd’s are and then also what the amount of short-term borrowings that mature this year are?

I know there’s $31 million in broker cd’s remaining on our books. I’m not certain of the amount-- I don’t think it’s a significant amount that matures throughout the year, David.

Okay.

I’m sorry. The short-term borrowings, I guess, all matures within one year.

Okay. So that leaves you with maybe $60 to $75 million that will probably come off the books?

I wouldn’t say with certainty that we wouldn’t reprice all short-term borrowings. I mean, we look at obviously our opportunity cost of funding and all of the other things associated with that decision. But, obviously, if we have excess cash and can’t deploy it and it’s more profitable to reduce the liabilities; that what we would be doing.

Okay. And could you give us your current securities yield for the quarter?

I don’t have that with me, David. Probably would be in the K --

Okay. How about mortgage production and the outlook for the originations and sales for the year?

Well, I think we’re in good company from the standpoint, nationally housing starts are soft, are off; somewhat rising longer-term rates have slowed to a real trickle; the refinancing activity-- so you put all that together. We do not anticipate a real robust mortgage market next year; however, that is a key line of business for us and that goes into our comment that we don’t expect ’06 to be a real revenue growth year. But we remain committed to that line of product; but when you factor in interest rates, the national and regional housing market, we don’t anticipate a real robust market in ’06.

Okay. And then could you comment on what you’re expecting from a provision expense standpoint?

Well, the only thing I guess I would-- since we really don’t give specific guidance, David, is to kind of go back to some of the comments we suggested earlier that we continue to have some residual weak loans that to contend with it we anticipate steadily managing down and that all of our overall asset base is now on some pretty solid ground and, obviously, our risk profile has significantly improved.

Okay. How about your charge-offs this quarter? Were those new items or were those things that you had prior to, say, June?

I think our reported charge-offs were approximately $2 million and the fact that we provided $1.4 million in the quarter is support for and not only support for but suggests the fact that we had some specific allocations associated with some of those charge-offs from previous quarters.

Okay. Great. Thanks for your time.

Ladies and gentlemen, if there are any additional questions, please press the star following by the one on your telephone key pad. As a reminder, if you are using speaker equipment, please lift the handset before pressing the numbers.

And right now it looks like we have no further questions in queue. I’d like to turn the conference back to management for any concluding comments. Please go ahead.

Thank you. Just as a wrap-up I think it’s fair to say that Financial Institutions is a much stronger organization today than it was just one year ago. We accomplished several meaningful strategic objectives. While no one is totally pleased and satisfied with the financial results, I can assure you that we feel much more confident today than we did a year ago in our future prospects.

Our plan is simple, we will focus on core community banking and we will do it well. Our path is defined and we will keep progressing with a steady pace and determined focus. We appreciate your time this morning and thank you for your interest in Financial Institutions. Have a nice day.

Ladies and gentlemen, that does conclude the Financial Institutions Fourth Quarter and Fiscal Year 2005 Earnings Release Conference Call. If you would like to listen to a replay of today’s conference you may dial 303-590-3000 using pass code 11051203#. Thank you, again, for your participation and you may now disconnect.