Financial Institutions, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial Institutions, Inc. is a New York financial holding company whose businesses include Five Star Bank, an insurance agency and wealth-management services. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $41.7 | $43.1 | $125.8 | $124.2 |
| Provision for credit losses | $1.0 | $4.3 | $8.4 | $7.2 |
| Noninterest income | $10.5 | $12.7 | $32.9 | $35.3 |
| Noninterest expense | $34.7 | $32.8 | $102.2 | $95.8 |
| Net income | $14.0 | $13.9 | $40.5 | $44.5 |
| Diluted EPS | $0.88 | $0.88 | $2.55 | $2.80 |
- Q3 return on average assets was 0.92% and return on average common equity was 13.15%, versus 0.98% and 12.72%, respectively, a year earlier. Q3 net interest margin was 2.91%, down from 3.28%; the nine-month margin was 2.99%, versus 3.19%.
- Q3 interest income rose $24.0 million year over year, but interest expense rose $25.4 million, principally as deposit and borrowing costs repriced higher. Average loans grew $591.4 million year over year and loan yield increased to 6.15% from 4.62%.
- Q3 noninterest income fell mainly because the prior-year quarter included a $2.0 million gain from surrendering and redeploying company-owned life insurance. Q3 2023 noninterest expense increased on technology investment, FDIC assessments and other costs. The efficiency ratio rose to 66.47% from 58.78%.
- Nine-month net income declined despite slightly higher net interest income, reflecting lower noninterest income, higher expenses and increased credit-loss provision.
Financial position, funding and credit
- At September 30, total assets were $6.14 billion, up from $5.80 billion at December 31, 2022. Net loans were $4.38 billion, up from $4.01 billion; commercial loans were 60.9% of the portfolio, including commercial mortgages of $1.99 billion.
- Deposits totaled $5.32 billion, up $386.5 million from year-end. Savings and money-market and time deposits increased, while noninterest-bearing demand deposits declined. Uninsured deposits were $1.82 billion; approximately $1.09 billion of uninsured deposits were collateralized by government-backed securities.
- Borrowings totaled $194.5 million: $70.0 million short-term and $124.5 million long-term. Cash and due from banks was $192.1 million. Management reported approximately $1.19 billion of additional collateralized wholesale borrowing capacity, plus $165.0 million of available unsecured federal-funds lines.
- For the first nine months, operating cash flow was $58.6 million, investing cash outflow was $283.1 million and financing cash inflow was $286.2 million. Net loan originations used $385.0 million; deposit growth provided $386.5 million.
- The allowance for loan losses was $49.6 million, or 1.12% of total loans, versus $45.4 million and 1.14% at year-end. Nine-month net charge-offs were $4.3 million, or 0.13% of average loans, compared with $1.9 million and 0.07% in 2022. Nonperforming assets were $9.7 million, 0.16% of assets; accruing substandard loans were $38.3 million.
- Company regulatory capital ratios at September 30 were 9.26% CET1, 9.58% Tier 1 and 11.91% total risk-based capital. The filing states the Company and Bank remained above applicable well-capitalized thresholds.
Material changes, outlook and risks
- Available-for-sale securities had a net unrealized loss of approximately $207 million at September 30, versus $173 million at year-end; securities-related accumulated other comprehensive loss increased during the nine-month period. Management attributed unrealized losses primarily to higher market interest rates, not credit deterioration, and said it did not expect to need to sell the securities before recovery.
- Management reported that rising rates increased asset yields but deposit and funding costs rose sharply, compressing margins. Its static 12-month rate simulation estimated net interest income up 1.50% under a +100-basis-point shock and down 2.35% under a -100-basis-point shock. These are model scenarios, not forecasts.
- Management provided no specific earnings or financial guidance in the supplied filing text. It said liquidity indicators remained in compliance and funding sources were ample, while noting deposit flows and funding concentrations were being monitored.
- Principal disclosed risks include interest-rate and liquidity risk, deposit competition and withdrawals, credit deterioration—particularly in commercial real estate and consumer/indirect lending—economic and financial-market conditions, regulatory scrutiny of Banking-as-a-Service, cybersecurity, and cannabis-banking legal uncertainty.
- A consumer class action concerning notices sent after vehicle repossessions remains pending; approximately 5,200 New York and 300 Pennsylvania consumers are in the certified classes. The matter is stayed pending an appeal. No liability was accrued because the Company could not determine whether loss was probable or reasonably estimate the amount; an adverse outcome or insufficient insurance coverage could materially affect results.
- Unusual comparisons include the prior-year insurance-policy surrender gain and related tax expense, and a $586,000 gain in the first half of 2022 from selling an indirect-loan portfolio. The company also reported $55,000 of Q3 restructuring recoveries, rather than a charge.
Most important facts for investors to verify
- Deposit pricing, mix, uninsured balances and reliance on reciprocal and brokered deposits; confirm how funding costs affect net interest margin.
- Commercial real-estate exposures, criticized/substandard loan trends, indirect-auto charge-offs and adequacy of the allowance.
- Liquidity capacity under stress and the market-value sensitivity of the securities portfolio, including the substantial unrealized loss position.
- Capital ratios and any limits on dividends or capital distributions; common dividends declared were $0.30 per share in Q3.
- Developments in the repossession-notice litigation, including potential exposure and insurance coverage.
- Whether technology, FDIC assessment and other expense increases translate into sustained operating costs; review subsequent filings for updated guidance and results.