Good morning and welcome to the Financial Institutions, Inc. First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Shelly Doran, Vice President of Investor Relations. Ma’am, please go ahead.

Thank you for joining us for today's call. Providing prepared comments will be President and Chief Executive Officer, Marty Birmingham; and Chief Financial Officer, Justin Bigham. They will be joined by Chief Banking and Revenue Officer, Bill Kreienberg; and Director of Financial Planning and Analysis, Mike Grover, for the question-and-answer portion of the call. 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 risks, uncertainties and other factors. We refer you to yesterday's earnings release and historical SEC filings, available on our website for our safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We will also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these non-GAAP financial measures to GAAP financial measures were provided in the earnings release, which was filed as an exhibit to a Form 8-K. Please note that this call includes information that is accurate only as of today's date, May 1, 2020. I'll now turn the call over to Marty.

Thank you, Shelly, good morning and welcome to our first quarter call. Before we turn to a discussion of results, we want to acknowledge that these are incredibly challenging times for everyone and our thoughts remain with those most impacted by COVID-19. In early March, we invoked our business continuity plan in response to the unfolding crisis. Our guiding principles through this period of uncertainty had been the safety and health of our associates, serving our customers to the highest standards and doing our part to slow the spread of the virus, so that the most vulnerable can get the care they need. To protect the health and safety of our associates performing many of the company's most critical processes, by mid-March, we created a less dense work environment with resiliency through the use of alternative locations and the implementation of work from home for as many associates as possible. We also closed most branch lobbies and implemented non-essential business travel and visitor restrictions that reduced or eliminated in person meetings. On March 20th, New York State enacted pause its stay in place order. On March 27th, the order was expanded and it was mandated that 100% of the workforce must stay home excluding essential services. While we are exempt from the order, we have taken great steps to protect our workforce and approximately 65% of associates have been working from home or remotely since mid-March. We very quickly transitioned from a business as usual operations to our new standard of working together from multiple locations across our footprint. I am so proud of our organization's collective resiliency and acclamation to so many changes. Despite all the challenges, our associates continue to work every day, ready to serve our customers and improve our communities. Across our organization, they are making…

Thanks, Marty. Good morning everyone. Net income was $1.1 million for the quarter, or $0.05 per diluted share. The significant drop in earnings was caused by a higher provision for credit losses of $13.9 million as compared to an exceptionally low provision in the first quarter of 2019 of $1.2 million. The increase in the first quarter provision primarily reflects deterioration in the economic environment due to COVID-19. The after-tax impact of the higher provision was $0.59 per share. We adopted CECL on January 1st. So before I address the provision expense for the first quarter, let me take a minute to reconcile our CECL related adjustments. The designated loss driver for our CECL model is the national unemployment forecast, which was decidedly different on January 1st than it was on March 31st. For our day one adjustment, we saw an increase to the allowance for credit losses for loans of $9.6 million, and established a reserve for unfunded commitments of $2.1 million for a total adjustment to our allowance for credit losses of $11.7 million. This adjustment was recorded through retained earnings with an after-tax impact of $8.7 million. Our day two adjustment incorporated an unemployment forecast that showed significant deterioration, driving $6.9 million of provision through the income statement. Remaining provision expense for the quarter was primarily related to charge-offs, which I will cover in a moment. The coverage ratio at quarter end was 1.34%, 39 basis points higher than it was at December 31, 2019. Charge-offs in the quarter was $10.1 million, $8.4 million higher than the first quarter of 2019, primarily due to the partial charge-off of a single C&I loan. This credit has been on our books for more than five years. This was a business that had been in operation for more than 75…

Thank you, Justin. Well, we have been incredibly busy operating in our new temporary normal, addressing a multitude of issues related to COVID, we have also continued to advance several important projects including our digital banking platform and enterprise standardization project. Five Star Bank digital banking will completely replace our existing digital platform for consumer and commercial customers and significantly improve the user experience across all devices. COVID-19 is driving even faster changes in the way customers are learning to interact with us and our digital upgrade will empower them. It is a critically positive development that we believe will position us well in the future as consumer and commercial customers increased their reliance on digital solutions. We were concerned about launching our new digital offerings in the middle of a crisis. So we reached out to several customers and asked if they want us to go ahead with the launch or wait due to the current environment. Most respondents indicated that they wanted us to move ahead. This combined with our determination of the benefits offered by the new platform would greatly benefit customers during this time when they need to be able to interact with us digitally more than ever prompted us to move forward. The transition of customers to the new platform will be completed in multiple waves over the course of the next few weeks. We launched the first wave last week and moved 17,000 customers. The process was not without issues, but we saw outstanding teamwork and willingness to help from individuals across the organization to assist with the process and calls from customers. Our vendor advised that results after day four compared favorably to other institutions and we've received numerous customer testimonials about positive experiences. We're proud of these huge wins and look forward…

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Alex Twerdahl from Piper Sandler. Please go ahead with your question.

Hey, good morning.

Good morning, Alex.

Hey, Alex.

First off, just it sounded to me, Justin, in your prepared remarks with respect to CECL that the – really the big driver of CECL for you guys is national unemployment versus things like GDP decline and things like that. I was just wondering if you could kind of share with us what the inputs are to that model right now. What you kind of assuming unemployment goes to, et cetera? So we can kind of get a better sense for how you're putting it all together.

Sure, Alex, happy to do that. Yes, so our portfolio is – the primary driver of our CECL calculation is national unemployment as I stated and as you pointed out. We used our Q2 unemployment figure of approximately 11% and then it scales down from there for future quarters and we used a Bloomberg weighted average at quarter end to do that estimate.

Okay. And then talk a little bit more about this specific net charge-off. You gave some good details on the type of business and what they're going on. But it sounds to me like the main driver of them becoming a charge-off or that loan becoming a charge-off this quarter was the fact that the business decided to cease operations before the end of the quarter. Can you just talk a little bit and get us a little more comfortable with the remaining kind of “high-risk exposure” that you define here is 12%. Are there any other of those loans that would be on a watch list as similar type of a situation where if they ceased operations, it could result in something similar in the second quarter?

Sure, Alex. It's Marty speaking. The credit we talked about as you know watching our performance over the last five or six years, generally we have had credits experienced issues with their industry or the life cycle of their business, et cetera. And obviously, we've tried to be very thoughtful and transparent with this specific credit that we've talked about in our disclosures. Otherwise, we have supplemental investor materials and our earnings presentation that we've also posted with our earnings press release. And on Slide 17, we talked about the information you're referencing. And we have analyzed the situation in terms of what we know today of industries having sensitivity in construction and retail, lodging, restaurants and food and entertainment recreation, auto related, et cetera. So those were good credits when we underwrote them. They're good strong management teams. It's consistent with our historic performance, but in the COVID environment where the economy is shutdown, these are the industries and the exposures that we are looking at even more carefully. And depending upon how long the situation goes on for will impact and influence what happens with these credits. But we remain optimistic with our exposures as we've identified. But we've tried to be, again, transparent with how we're thinking about this, those industries and the resulting exposure, but we'll know more as this COVID crisis continues to evolve. We haven't – the other comment I'll make is that we haven't had any similar deterioration with our commercial customers to date.

Okay. And then when I look at the earnings release, one thing that kind of jumped out me is the savings accounts, the money market accounts, the rates actually increased in the first quarter. Is that because of the brokered deposits that you guys put on? Or is there something else going on there?

So, Alex, I can take that question. So as you probably also noticed, our CD portfolio is also starting to run down. So some of what we're seeing is our CD customers. We do have some of the CD customers that are rolling off electing to take advantage of an intro rate on our money market. So I would say that's the primary driver of what you're seeing in the rate on the money market there is the intro that the folks are electing to take advantage of as they rotate out of CDs.

Okay. And then, if I remember correctly, you guys are fairly close to liability sensitive, if not a little liability sensitive. So I understand you're not giving guidance on the margin. But would it be fair to assume that those liabilities are going to reprice fairly quickly over the next couple of months just given what the fed has done with rates and potentially faster than – then assets will come down? And therefore, we can get a little bit of margin expansion over the next couple of quarters or at least margin flat?

Geez, Alex, that is a tough question for us to predict. I mean, so much is driven by not only overall rates, but also the level of change and the dramatic reduction in rates everything new that we're booking. And everything that's variable on the asset side is repricing down a lot more than it would typically reprice down if the fed only moved 25 or 50 basis points. And as I'm sure you know as rates come down, you're spread almost automatically – if they go to zero, your spread almost automatically compresses. It's impossible to get as much out of the liabilities as comes out of your asset book because the asset rates so much higher. So, as we said we're not really guiding right now, but I'm not sure I would – I'm not sure I would assume an expansion of the margin in this environment.

Understood. Thank you for taking my questions.

And then the other variable, Alex, too, is the PPP loans, really difficult to know how much we have and how much it's going to be on the books. Those are coming on at 1%. So those are also going to impact the margin.

Great. Thank you for taking my questions.

You’re welcome.

Thanks, Alex.

[Operator Instructions] Our next question comes from Damon DelMonte from KBW. Please go ahead with your question.

Good morning everyone. I hope everybody is doing well during these challenging times. First question, just to kind of follow up on Justin's last comment on the PPP participation. I think you guys noted you did around $200 million in loans in the first round and you’re active here in the second round. On that first $200 million of loans, what's the average fee that you expect to realize from those loans?

So the fees range from 1% to 5% based on the size of the loans. We've done loans as low as $35,000 and up to $10 million. I think our average was around $350,000. So at this point, I think, Justin, we for planning purposes have kind of plugged an average of 2.5%. But Justin, I would ask you to comment further.

Damon, yes, Marty's – Marty is accurate. And we're obviously monitoring this very closely, but I think 2.5% is probably a reasonable assumption of where we're averaging right now. And again with the second round occurring, we don't know what the average size yet is at that second round, so that could change that variable as well.

Okay.

I mean just to confirm, we did 3,100 – in terms of the range it was $3,100 to $10 million. Our median loan size was $84,000 and 81% of the loans that we did were under $350,000. So we'll see how all that math works out.

Okay. That 2.5% is a good ballpark figure, just from a modeling standpoint. So, thank you. And then with regards to loan modifications, can you give us an update as to either the number of loans and the dollar amounts or maybe a breakout between commercial consumer or residential mortgages?

Marty, I can take that if you'd like. Well, go ahead.

Okay, go ahead Justin.

So what we've seen so far is residential mortgage or residential, I guess, I should say forbearance is a little north of 5%, 5.5% or so. Consumer, which is primarily our indirect auto book, is about 6% of their report; this is relative to their own portfolios. Large commercial about 6.5% and small business about 7% - between 7% and 7.5%.

Got it. Okay. That's great. Thank you. And then I guess the last question was with regards to that slide, first of all, the Slide #17 with the higher risk asset classes, that's very helpful. Thank you for that. Just wondering if you could maybe just dig a little bit deeper on that. And are there any notable size loans, particularly in the hotel, motel and lodging or in the restaurant size? Like what's the average size for that, those loan buckets?

So, we have previously talked on these calls that we've tried to maintain discipline relative to concentrations and exposures. And I think that still holds true here relative to how we have organized the information on Page 17 in terms of the granularity of the portfolios that are represented here. Justin, if you have additional comments I would ask you to jump in.

No, I don't really have additional comments there. I mean, Damon, we're not given the size of our organization. Our average loan sizes are not typically as large as the credit that we spoke about earlier in our prepared remarks. So I wouldn't anticipate or I wouldn't make an assumption that we have a whole lot of those in our portfolio. I don't have the current sizes with me at this time. We could certainly follow up with you if necessary. But the thing that I will point out is that our hotels and motels are probably somewhere in the ballpark of 5% or so, which is a pretty small portion of the overall portfolio.

Got it. Okay. That's helpful. That's all that I had. Thanks and stay well everybody.

You too. Thank you.

Thanks.

[Operator Instructions] And we do have an additional question. This comes from Kevin Parks from Parks Capital. Please go ahead with your questions.

Hey everyone. How are you doing?

Hey, Kevin. Good morning.

So sticking with Slide 17, the last bullet point, the net revolver draws, are those draws within those kind of high impact categories? Are those on a portfolio wide basis?

Those are on a portfolio wide basis.

Got it. And I guess kind of maybe shifting gears a little bit, it wasn't really mentioned expressly in the press release or in general comments. What point does you guys kind of as a management team or board start thinking about the dividend policy?

Well, we talked about the dividend with our board consistently every quarter and ramping up to declaring a dividend, have a very thoughtful process in terms of our capital, capital allocation strategy, et cetera, looking at our capital plans and the demand on capital. The dividend has always been an important part of our shareholder experience. So given where we are with our capital levels today and what we know today we remain comfortable with the dividend as it currently stands.

Great. Thanks everyone.

And ladies and gentlemen, at this point it's showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thank you, Jamie, and thanks to all who have joined us this morning on this call. We appreciate the opportunity to discuss our results with you and we look forward to building on the conversation as the year unfolds. And hopefully as we continue to move forward in a positive way with the management of the COVID healthcare crisis and getting on with its impact on the economy, our industry, our company and the future. So we'll look forward to talking to at the end of the second quarter. Thank you, Jamie that concludes our call.

Ladies and gentlemen, at this time, we conclude today's presentation. We thank you for joining. You may now disconnect your lines.