Financial Institutions Inc (FISI) 2006 Q1 法說會逐字稿

Good day, Ladies and Gentlemen. Thank you for standing by. Welcome to the Financial Institutions Incorporated's first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Ms. Deborah Pawlowski, Investor Relations for Financial Institution, Incorporated. Please go ahead, ma'am.

Thank you very much. Good morning, everyone, and thank you for joining us today. On our conference call this morning I have with me Peter Humphrey, President and CEO of Financial Institutions, and Ron Miller, Chief Financial Officer. Pete and Ron will discuss the first quarter results and provide an outlook as to what the remainder of 2006 may look like, as well as their long-term strategy. Following their discussion, 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. These 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 discussion.

Thank you, Debbie, and thank you, everyone, for joining us today. I'm pleased to report a 63% earnings improvement from the first quarter of last year, and a 30% earnings improvement over the fourth quarter of last year. These results are a direct reflection of the many actions we have taken over the past 12 to 18 months to improve our asset quality, resolve our regulatory issues, streamline our organizational structure, and put the Company on a focused community-bank track. A key element to these solid results is a significant improvement in the quality of our loan portfolio. While non-performing loans have remained relatively flat from the last quarter, criticized and classified loans and overall delinquencies have meaningfully improved. In addition, we have also achieved reductions to non-interest expense, as planned. Total revenue for the quarter, however, was weak, due to the lack of quality loan growth. While the first quarter is normally a seasonally slow quarter from a lending standpoint, competitive pressures have been fierce, suggesting that some banks have been lowering credit standards to gain volume, which is somewhat typical at this latter stage in the credit cycle.

Let me emphasize, however, that we are committed to building a balanced, high quality loan portfolio while remaining focused on appropriate credit underwriting disciplines, which will take time to achieve. We have implemented many initiatives, which will support the growth of the loan portfolio which includes: An enhanced lending team. We have added several seasoned loan officers who have joined us from larger banking institutions, who are energized to enhance existing customer relationships and attract new ones. Although we will remain true to our high credit standards, these lenders recognize our competitive position in our region, and can also offer more flexibility and responsiveness than larger institutions; a new compensation program, which is linked to customer service, retention, and new business development, resulting in more accountability for achieving results; a comprehensive marketing campaign that combines building our new brand across our 10,000 square mile franchise area, with the economics gained from a single brand. Focused indirect auto, residential mortgage and home equity loan campaigns are also currently running. Due to a relatively short sales cycle, we anticipate positive near-term results from these campaigns. Executive and senior officer outreach -- my executive officers and I have personally been reaching out to existing and prospective clients, enhancing existing and building new relationships. We believe that this high-level commitment to being personally active in the market sets us apart from our competition and exemplifies our community banking focus and brand.

As we move through 2006, we see balance sheet, loan and revenue growth as our key challenges. We believe that we've built an organization that is better positioned than ever to turn these challenges into opportunities. Through our reorganization efforts, we have built a scalable organization that can better manage risk and effectively grow the Company. Our business development efforts are beginning to gain traction, which we believe will result in incremental revenue falling to the bottom line over the next several quarters.

With that, let me turn it over to 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 earnings release, net income from the first quarter of 2006 was $3.7 million or $0.30 per share. This compares with $2.3 million or $0.17 per share in the first quarter of last year. When looking at last year, it is important to remember that the Company discontinued the operations of and sold our Burke Group subsidiary. Accordingly, our first quarter 2005 net income is inclusive of a $96,000 loss from this discontinued operation. As noted in our press release, the primary drivers of the improvement in net income were a reduced provision for loan losses and secondly, a $1.1 million reduction in non-interest expense in this year’s first quarter, when compared with the same quarter of last year.

Peter has noted the improved credit quality of our loan portfolio. The first quarter of 2006 showed a reduction in our non-performing assets to $19.5 million from $63.6 million at the end of last year's first quarter, largely the result of our 2005 loan sale. We have also had reductions in our criticized and classified loans since year-end. That loan charge-offs were only $190,000 or an annualized eight basis points this first quarter, down from $2.9 million in the first quarter of last year. As a result of enhanced asset quality, the first quarter 2006 provision for loan losses was $250,000 compared with $3.7 million in the 2005 first quarter. Our allowance for loan losses at March 31, 2006, was just over $20 million and represented 2.10% of total loans.

Moving to non-interest expense and the $1.1 million reduction from the first quarter of last year. We have had a drop of $293,000 in FDIC insurance costs in the first quarter of 2006 compared with last year, which is consistent with our previously discussed annual savings in this expense item of $1.1 million. Also benefiting the quarter’s comparison to last year is a decline in legal and professional fees of $378,000, also consistent with our expectations and reflective of our improved asset quality and regulatory profile. In addition, the first quarter of 2005 includes $476,000 in personnel separation costs, which has contributed to the year-over-year decline. Our compensation costs were down only slightly from the first quarter of last year, but are down $500,000 from our peek, which occurred in the second quarter of 2005. Other bank consolidation savings include directors fees, which are down -- which are $121,000 lower in the first quarter of this year compared with 2005. In general, we have realized the expected savings from our bank charter consolidation, and have benefited from reduced costs associated with asset quality issues and our previous regulatory matters.

In terms of the Company's revenue stream, our net interest income for the first quarter was down $2.9 million from the first quarter 2005. This decline results from a $171 million reduction in our average earning asset base, coupled with a 26 basis point drop in net interest margin. The drop also reflects a shift in the mix of our earning assets from higher yielding loan assets into lower yielding investment assets, coupled with a relatively flat yield curve and intense pricing competition for loans and deposits. Our first quarter 2006 net interest margin of 3.64%, however, is up 11 basis points from the fourth quarter of 2005, which is partially attributed to recent increases in the prime interest rate. Our non-interest income for the first quarter was $5 million, up about $49,000 from a year ago, with lower mortgage banking and financial service revenues being offset by increased deposit product-related fees.

In summary, as Peter has discussed, our challenge for the balance of the year is in growing our revenue, largely to redeploying our earning asset base into loans. Rebuilding a balanced quality loan portfolio will take some time in our highly competitive and somewhat economically-soft marketplace. We expect to continue to benefit from the already realized savings from our bank consolidation, as well as our improving asset quality and our ongoing efforts to improve operational efficiencies. I'll now turn the program back to Peter.

Thank you, Ron. Before I turn it over to questions, I'd like to paint a longer term picture for you. The markets in which we operate provide a great deal of opportunity for us to gain market share. In many places, the larger, more rigid banks that we believe are less interested in the small to medium-sized businesses that we serve so well still own a large market share. Our objective is to take a larger part of that market. Within our footprint of roughly 10,000 square miles, we can measurably grow FI, and we continue to evaluate the opportunities for both de novo and acquisition growth. We won't move in that direction, however, in the near term, until we have some operating time under our belt as a single bank.

And now, Phil, can we now open the call to questions?

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question comes from Jared Shaw with KBW.

Hi, good morning, Peter and Ron.

Morning.

Morning.

Just a few questions for you, the first for Ron. It looks like the tax rate was a lot lower this quarter. Is this particular to the quarter or have the changes caused a lower tax rate that we should expect?

I think the tax rate is representative of -- for the quarter is representative. There's nothing unusual in this quarter's taxes.

So looking at like a 24% rate for the year is a good number?

Consistent with the first quarter results, yes.

Okay. And then in terms of the asset quality in the provision, you know, obviously the asset quality is much better and a huge improvement from where it was. Do you think that you'd have anymore sales of the non-performing assets, or the base that you have now, is that something that you feel you can work out and we should expect to see just improvement organically, as opposed to sales from here?

Yes. We think we have a very strong workout program in place, and we should be able to work that out organically. And we do not have any planned sales scheduled, at this time.

Okay, and then, in terms of the current non-performers, could you perhaps provide a breakout of how those -- what types of categories of loans those are in? In terms of percentage?

We will have that in our Q. I don't have that in front of me at this point, Jared.

Let's see. And then in terms of the expenses -- so at this point with the salaries and benefits line this quarter, is that also a good level to use, sort of assume going forward? Or is there some one quarter in particular items built into that?

I think that at this point, we pretty much have flowed through our expected headcount savings from our consolidation activities and the quarter is a fairly representative quarter. I should note it does include $180,000 in stock-option expense under 123[R], which actually, on an after-tax basis equates to $0.01 a share.

Okay. And then just finally with the -- go back on the asset quality, the provision level here then, is that a good level considering what the portfolio looks like?

I think the comment I would add to that is, again, our loan loss methodology, as you're aware, and our loss methodology is driven off of historical loss factors and the level of criticized and the classified loans, so to the extent that those items are changing, I think that that would obviously have an effect on our allowance level.

Great. Thank you very much.

Our next question will come from David Darst with FTN.

Good morning.

Good morning, David.

Could you give us some more granular details about -- regarding the loan portfolio and what the various segments did from year-end regarding commercial, residential?

We have had some declines in our overall portfolio since year-end, particularly on the commercial side of the house. And on the consumer side of the house, a small decline, which is not atypical from our first quarter in this marketplace. The residential mortgage marketplace remains soft, but we think we have some good opportunities here. We've kicked off a loan sale campaign here in the second quarter on the consumer side, and we've been working, particularly, on our indirect loan portfolio and managing some new dealer relationships there, and expect to get some activity in that direction, as well as on the commercial front, seeing a lot of increased calling efforts from -- as Peter had mentioned earlier, some of the initiatives we've taken on that front.

Okay.

David this is Peter. As we've stated, our objective is to build a balanced, high-quality loan portfolio, which will take some time. So really, roughly a 50/50 balance, if you will -- you know, plus or minus, five or ten basis points between commercial and retail. And then, you know, breaking up those segments into other kind of balanced components, whether it be in the retail side or the commercial side. So this is really a real focused effort from an overall balance sheet risk management perspective, so that we don't have over-concentrations in any one segment. And we think our marketplace will afford us that opportunity, again, over time. And we think we've set up our organization, whether it be from a systems, staffing, marketing standpoint, to achieve those goals.

Okay. What about on the deposit side as far as -- are you continuing to allow the higher cost time deposits to run off the low market pricing at this time?

We have a very high-level investment portfolio, as you are aware of, and we have, obviously, some opportunity to redeploy that cash, as we grow our loan portfolio. So we're going to continue to remain relatively -- competitively priced, but not aggressively priced in the deposit arena.

What we think the majority of, let's say the hot money, we have been successful in running off, so we view our deposit basis as pretty representative of, you know, where we're at. And as Ron mentioned now, you know, kind of the blocking and tackling, going out into the marketplace, retaining existing relationships, including deposit relationships, and looking to grow additional good core deposit relationships.

Okay. So would you say that you feel better regarding the balance sheet being more stable on the loan and deposit side today than you did at year-end?

Absolutely.

Okay. I think that does it. Thank you.

You're welcome.

Our next question will come from [Chris Buenavita] with Oz Capital.

Good morning.

Good morning.

A couple of questions. First, you mentioned earlier that there have been reductions in criticized and classified loans versus year-end. Can you give us some kind of magnitude of the reduction there?

In total our special mention and substandard loans have declined $9 million since year-end.

Down $9 million. To what amount now? Where do they stand?

I don't have the absolute number in front of me here.

Okay. Secondly, the compensation expense -- and I know this was asked earlier -- it was a sequential -- sequentially, it was up almost $1 million. What was the -- and I know part of it was the stock-options expense, but what was the rest?

The fourth quarter of 2005 contained a considerable reversal of bonus and incentive accruals, as we came in with our last year results. There were not going to be pay outs, and there was a considerable amount of money reversed in the fourth quarter of last year.

Okay. And then, when I look at it, if criticized and classified assets are down, non-performers are flat, and I assume most of those are from the prior issues that the Company had. The reserve to loans is at about 2.1%, the loan book is fairly stable. Why -- I guess why would you -- why the need to provision?

Well again, our allowance methodology, as we outlined in the K and I think is probably pretty consistent with most banking institutions, we do a very analytic process that deals with our historical loss factors, as well as the levels of our criticized and classified assets, and as well as the specific allocations associated with the impaired loans and, basically, we come up with our allocated allowance and that kind of drives the level of provisioning. And that process resulted in the provision that we recorded for the quarter.

Okay, alright. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] And we do have a follow-up question from Jared Shaw.

Hi, thanks. Just a quick follow-up. What percentage of the loan portfolio is tied to prime or is floating?

I would say -- again I don't have the absolute number in front of me, but our commercial portfolio is very highly prime sensitive. Probably in excess of 75%.

And from an overall interest rate risk management standpoint, and we do a lot of active modeling, we feel that we're really fairly neutral at this point, which is really where we want to be at this point in the rate cycle.

So even if we saw another move or two by the fed, you feel the net margin could be relatively stable here?

Yes. There continues to be, certainly, deposit and funding cost pressures out there, and you know, coupled with some prime -- if there are some prime increases, that should attempt to alleviate some of that pressure.

Okay, great. Thank you.

Yes.

[OPERATOR INSTRUCTIONS] It does appear there are no further questions. Mr. Humphrey, I'll turn the conference back over to you to conclude.

Thank you. Just to wrap up, I'll repeat what I said before. Financial Institutions is a much stronger organization today than it was just one year ago. Our plan is quite 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 a determined focus. We've created an organization that can readily accommodate larger volume, and we have incentivized our team in a very balanced and disciplined manner to develop new business and to retain our current customer base through excellent service. We appreciate your time this morning, and thank you for your interest in Financial Institutions. Have a great day!

Thank you. That does conclude today's teleconference and thank you all for your participation. At this time, everyone may disconnect.