Financial Institutions, Inc. — FY2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, not a standalone fourth quarter. Financial Institutions, Inc. is a New York-based financial holding company, primarily operating Five Star Bank in Western and Central New York, alongside insurance and wealth-management businesses. Banking-as-a-Service is also part of its strategy.
Financial performance and position
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Net interest income | $165.7 million | $167.4 million |
| Net interest margin, fully tax-equivalent | 2.94% | 3.20% |
| Noninterest income | $48.2 million | $46.3 million |
| Net income | $50.3 million | $56.6 million |
| Net income available to common shareholders | $48.8 million; diluted EPS $3.15 | $55.1 million; diluted EPS $3.56 |
| Return on average assets / equity | 0.83% / 11.86% | 1.01% / 12.81% |
| Total assets | $6.16 billion | $5.80 billion |
| Total loans / net loans | $4.46 billion / $4.41 billion | $4.05 billion / $4.01 billion |
| Total deposits | $5.21 billion | $4.93 billion |
| Total borrowings | $309.5 million | $279.2 million |
| Shareholders’ equity | $454.8 million | $405.6 million |
| Cash and cash equivalents | $124.4 million | $130.5 million |
- Net cash provided by operating activities was $10.9 million, versus $133.6 million in 2022. Investing activities used $310.1 million, principally reflecting $420.2 million of net loan originations; financing activities provided $293.2 million, including deposit growth.
- Net charge-offs were $8.5 million, or 0.20% of average loans, compared with $5.2 million, or 0.14%. The allowance for loan credit losses was $51.1 million, or 1.14% of loans.
- Nonperforming loans rose to $26.7 million, or 0.60% of loans, from $10.2 million, or 0.25%. A $13.6 million commercial relationship placed on nonaccrual in Q4 was the main driver.
- Available-for-sale securities had $150.3 million of net unrealized losses at year-end; management attributed these primarily to higher interest rates, not credit concerns. The portfolio’s fair value was $887.7 million.
- Regulatory capital ratios for the Company were 8.18% Tier 1 leverage, 9.43% CET1, 9.76% Tier 1, and 12.13% total risk-based capital. The Company and Bank were reported as well-capitalized.
Material changes versus the prior comparable period
- Net income fell $6.3 million, with management citing funding-cost increases in the prolonged higher-rate environment. Net interest margin contracted 26 basis points even as average interest-earning assets grew 8% and average loan yields increased.
- Interest expense rose to $120.4 million from $28.7 million, primarily as deposits repriced higher. Average interest-bearing deposit cost increased to 2.63% from 0.61%.
- Loans grew 10%, led by commercial mortgages, which increased 19% to $2.01 billion. Consumer indirect loans declined 7% to $948.8 million. Securities declined as portfolio cash flows were used to fund lending.
- Deposits increased 6%; noninterest-bearing demand deposits declined, while savings and money-market and time deposits grew. Uninsured deposits rose to $1.82 billion, or 35% of deposits, from $1.29 billion, or 26%.
- Noninterest expense increased 6% to $137.2 million, including higher technology costs, FDIC assessments, employee costs, and other expenses. The efficiency ratio rose to 62.96% from 60.39%.
- Shareholders’ equity increased $49.2 million, mainly from earnings and a reduction in accumulated unrealized securities losses. Common dividends declared were $1.20 per share, up from $1.16.
Outlook, commentary, risks, and unusual items
- No formal earnings or financial guidance is provided. Management said income from the 2023 company-owned life-insurance surrender and redeployment is expected to stabilize in future periods. Its rate-sensitivity model estimated 12-month net interest income would increase 1.28% under an instantaneous +100-basis-point parallel rate shock; this is a model scenario, not a forecast.
- In 2023, the Company recognized approximately $8 million of additional company-owned life-insurance income from a surrender and redeployment strategy, partly offset by $5.4 million of related incremental taxes. It also recorded a $3.6 million loss from selling about $54 million of lower-yielding mortgage-backed securities and reinvesting the proceeds.
- Subsequent event: The Bank disclosed suspected fraudulent deposit transactions by an in-market business customer in early March 2024. The estimated exposure could be up to $18.9 million, or $14.1 million after tax; the ultimate loss may be lower depending on recovery efforts. This event occurred after year-end.
- A consumer class action concerning notices sent after vehicle repossessions remains unresolved. The court affirmed jurisdiction and standing for the New York claims in February 2024 and remanded the case for further proceedings. No liability was accrued because loss was not considered probable or reasonably estimable.
- Key ongoing risks include deposit competition and potential withdrawals, interest-rate and securities-value sensitivity, commercial real-estate and other credit exposure, geographic concentration, fraud, BaaS oversight, cybersecurity, and legal and regulatory developments. Non-owner-occupied commercial real estate was 285% of total risk-based capital at year-end.
- Effective January 1, 2024, the Company exited the Pennsylvania automobile-lending market. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective controls.
Important facts for investors to verify
- Updates on the March 2024 fraud investigation, actual loss, insurance coverage, and recoveries versus the disclosed potential exposure.
- Deposit retention, pricing, uninsured-deposit composition, reciprocal-deposit reliance, and funding needs as deposits reprice or mature.
- Commercial real-estate and other criticized/nonperforming loan trends, the $13.6 million relationship, charge-offs, and allowance adequacy.
- Available-for-sale securities’ unrealized losses, liquidity and collateral use, and whether management can hold securities through recovery without forced sales.
- Progress and potential financial consequences of the repossession-notice class action, including insurance coverage and any required reserve.
- Whether margin, operating costs, and earnings remain pressured, and whether modeled rate sensitivity aligns with realized results.