Financial Institutions, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 9, 2023. The filing primarily reports full-year and year-end results, not standalone fourth-quarter results. Financial amounts below are in U.S. dollars.
Business context
Financial Institutions, Inc. (Nasdaq: FISI) is a New York financial holding company centered on Five Star Bank, serving consumer, commercial and municipal customers mainly in Western and Central New York. It also operates insurance and wealth-management businesses and oversees BaaS and fintech relationships. At year-end, consolidated assets were $5.80 billion; the Bank represented 99.3% of consolidated assets.
Financial performance and condition
| Metric | 2022 | 2021 / change |
|---|---|---|
| Net income | $56.6 million | $77.7 million; down $21.1 million |
| Net income available to common shareholders | $55.1 million; diluted EPS $3.56 | $76.2 million; diluted EPS $4.78 |
| Net interest income, GAAP | $167.4 million | $154.7 million |
| Net interest margin, fully taxable equivalent | 3.20% | 3.14% |
| Noninterest income | $46.3 million | $46.9 million |
| Noninterest expense | $129.4 million | $112.8 million |
| Provision for credit losses | $13.3 million expense | $8.3 million benefit |
| Return on average assets / equity | 1.01% / 12.81% | 1.46% / 16.01% |
| Efficiency ratio | 60.39% | 55.76% |
Revenue growth in net interest income reflected higher average earning assets and rising rates, partly offset by higher funding costs. Deposit interest expense increased $14.9 million; total interest expense increased $16.3 million. Net income fell primarily as the prior-year credit-loss benefit reversed to an expense and operating costs rose.
Balance sheet and funding: Total loans were $4.05 billion, up 10%; commercial mortgage loans rose 19% to $1.68 billion. Deposits were $4.93 billion, up 2%, with growth primarily from brokered deposits. Borrowings totaled $279.2 million versus $103.9 million, including $205.0 million of short-term FHLB borrowings and $74.2 million of subordinated notes. Cash and cash equivalents were $130.5 million.
Cash flow: Operating activities provided $133.6 million; investing activities used $325.2 million, including $376.3 million of net loan originations; financing activities provided $242.9 million. Cash and cash equivalents increased $51.4 million during the year.
Credit and capital: Net charge-offs were $5.2 million, or 0.14% of average loans, versus $5.8 million, or 0.16%. Nonperforming loans were $10.2 million, 0.25% of total loans, down from $12.2 million and 0.33%. The loan allowance was $45.4 million, or 1.12% of loans. The Company’s CET1 and total risk-based capital ratios were 9.42% and 12.13%; the Bank’s were 10.77% and 11.60%. Both were above applicable well-capitalized thresholds.
Equity and securities: Shareholders’ equity declined to $405.6 million from $505.1 million. Accumulated other comprehensive loss widened to $137.5 million, primarily reflecting unrealized losses on available-for-sale securities. Those securities had a $172.7 million net unrealized loss at year-end; management attributed the decline mainly to higher interest rates, reported no credit-loss allowance on them, and said it did not intend or expect to be required to sell them before recovery. Common book value per share fell to $25.31 from $30.98; tangible common book value per share fell to $20.53 from $26.26.
Material changes and unusual items
- Net income decreased 27% from 2021. The 2021 credit-loss benefit became a $13.3 million provision in 2022, reflecting loan growth and economic uncertainty; the year also included a $2.0 million commercial-loan recovery.
- Noninterest expense rose 15%, including higher salaries and benefits (+$8.7 million), technology costs (+$3.5 million) and restructuring charges ($1.6 million). The efficiency ratio worsened.
- Noninterest income was broadly flat. A $2.0 million enhancement from surrendering and redeploying $25.5 million of company-owned life insurance contributed to higher life-insurance income and was accompanied by approximately $2.0 million of incremental tax expense.
- Dividend declarations increased to $1.16 per common share from $1.08. Shareholders’ equity was also affected by $15.3 million of common-stock repurchases and the substantial securities-related AOCI loss.
- Uninsured deposits were reported at $1.29 billion. Non-maturity deposits were $3.65 billion; reciprocal deposits were $696.1 million and brokered deposits $347.2 million at year-end.
Outlook, risks and contingencies
Management provided no quantified earnings or balance-sheet guidance in the supplied filing text. Its stated priorities include organic loan and core-deposit growth, digital investment, expanding BaaS and fintech relationships, and disciplined acquisitions. A Baltimore-area commercial loan office opened in February 2022; a Syracuse office opened in January 2023. The Company planned to transition CHIL activities and assets to the Bank and dissolve CHIL after operational matters are completed.
Key disclosed risks include sensitivity to interest rates and deposit pricing; regional concentration; commercial real estate, commercial business and indirect auto credit exposure; deposit outflows and reliance on wholesale funding; unrealized securities losses; inflation and economic uncertainty; cybersecurity and third-party service providers; and regulatory, legal and acquisition risks. Management’s year-end interest-rate model estimated a 0.17% increase in 12-month net interest income for a parallel 100-basis-point rate rise, but cautioned that results depend on assumptions and are not forecasts.
A certified class action involving vehicle repossession notices covers approximately 5,200 New York and 300 Pennsylvania consumers. The case was stayed pending an interlocutory appeal; the Company had not accrued a liability because it could not determine whether loss was probable or reasonably estimate it. The FDIC increased assessment rates effective January 1, 2023. The 10-K reports unqualified audit opinions and effective internal control over financial reporting.
Most important facts for investors to verify
- How quickly deposit pricing and funding costs respond to rates, and whether brokered deposits or short-term borrowings continue to grow.
- The size, duration and liquidity implications of securities unrealized losses, including the assumptions behind management’s expectation of recovery without sale.
- Credit trends in the expanding commercial mortgage and indirect auto portfolios, and the adequacy of the allowance under changing economic conditions.
- Developments, potential exposure and insurance coverage in the repossession class action; no loss amount is currently estimated in the filing.
- Whether earnings can absorb higher operating costs and FDIC assessments while sustaining dividends, capital levels and planned growth.