Financial Institutions, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. The company is a New York-based financial holding company operating Five Star Bank and fee-based businesses including Courier Capital. It exited the Pennsylvania auto lending market effective January 1, 2024.
Financial performance
| Metric | Q1 2024 | Q1 2023 or prior date |
|---|---|---|
| Net interest income | $40.1 million | $41.8 million |
| Net interest margin, tax-equivalent | 2.78% | 3.09% |
| Noninterest income | $10.9 million | $10.9 million |
| Noninterest expense | $54.0 million | $33.7 million |
| Net income | $2.1 million | $12.1 million |
| Net income available to common shareholders; diluted EPS | $1.7 million; $0.11 | $11.7 million; $0.76 |
| Net interest margin; return on average assets | 2.78%; 0.13% | 3.09%; 0.84% |
| Operating cash flow | $12.3 million | $6.6 million |
Net interest income fell despite higher average earning-asset yields and loan growth: higher deposit funding costs, including public-deposit seasonality and repricing, weighed on margin. The reported net loss benefit for credit losses was $5.5 million, versus a $4.2 million provision in Q1 2023. Net charge-offs rose to $3.1 million, or 0.28% of average loans annualized, from $2.1 million, or 0.21%.
Financial position, liquidity and capital
- Assets and loans: Total assets were $6.30 billion, up from $6.16 billion at year-end. Gross loans were $4.44 billion, down $20.1 million; net loans were $4.40 billion. Commercial real estate represented about 41% of total loans.
- Deposits and borrowings: Deposits increased $183.8 million to $5.40 billion. Total borrowings were $257.6 million, down from $309.5 million; this comprises $133.0 million short-term and $124.6 million long-term borrowings.
- Cash and funding capacity: Cash and cash equivalents were $237.0 million, up $112.6 million from year-end. Management reported approximately $1.43 billion of additional collateralized wholesale borrowing capacity, alongside available unsecured lines and other liquidity sources.
- Capital: Shareholders’ equity was $445.7 million, down from $454.8 million, primarily reflecting quarterly earnings and a $6.3 million other comprehensive loss. Company CET1 and total risk-based capital ratios were 9.43% and 12.04%, respectively; the Bank’s ratios were 10.79% and 11.63%. Management said capital remained above applicable well-capitalized thresholds.
- Securities: Available-for-sale securities had a $160.8 million gross unrealized loss at quarter-end, predominantly attributed to market interest rates rather than credit deterioration. The company reported no credit-loss allowance on those securities.
Material changes and unusual items
- Fraud loss: A business customer’s fraudulent deposit transactions caused an $18.4 million pretax loss, recorded in deposit-related charged-off items. Related legal and consulting expenses were approximately $0.6–$0.66 million. The company is pursuing recovery but cannot assure additional funds will be recovered. Total deposit-related charged-off expense was $19.2 million.
- Profitability impact: The fraud event was the principal reason noninterest expense increased sharply and the efficiency ratio rose to 105.77%, from 63.68% a year earlier.
- SDN sale: On April 1, 2024, after quarter-end, the company completed the sale of SDN Insurance Agency assets for approximately $27 million, with an estimated $11.2 million after-tax gain before selling costs. This gain is a subsequent event, not Q1 operating income.
- Asset quality: Nonperforming loans were $26.7 million, or 0.60% of loans, essentially unchanged from year-end. The allowance for credit losses on loans fell to $43.1 million from $51.1 million; allowance coverage was 0.97% of total loans.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or margin guidance. Management describes a focus on core Upstate New York banking, disciplined growth, digital capabilities and selective acquisition opportunities. Management said liquidity indicators remained in compliance and funding sources were ample, while noting that interest-rate movements can materially affect margins, deposit costs, asset values and credit performance.
Key disclosed risks include deposit competition and withdrawals, interest-rate and liquidity exposure, commercial real estate and consumer credit losses, fraud and cybersecurity, regulatory and operating costs, and the company’s geographic and lending concentrations. Approximately 35% of deposits were uninsured at March 31, 2024. A consumer class action concerning notices sent after vehicle repossessions remains unresolved; the company has not accrued a liability because it cannot determine whether a loss is probable or reasonably estimate its amount. The filing states there were no material changes to the risk factors in the 2023 Form 10-K.
Important facts for investors to verify
- Whether the company recovers any of the $18.4 million fraud loss, and whether investigation or remediation reveals additional costs or control issues.
- Whether deposit costs and mix continue to pressure net interest margin, particularly as time deposits mature and public deposits fluctuate seasonally.
- Developments in consumer class-action litigation, potential exposure and insurance coverage.
- Credit trends, especially consumer indirect charge-offs, commercial real estate exposures and the adequacy of the reduced loan-loss allowance.
- How the SDN sale proceeds and after-tax gain affect capital, future fee income and reported results after closing.
- Unrealized securities losses, uninsured-deposit levels and the availability of disclosed contingent borrowing capacity under stressed conditions.