Financial Institutions, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Financial Institutions, Inc. is a New York-based financial holding company whose subsidiaries provide banking, insurance, and wealth-management services, primarily in Western and Central New York. Unless noted, financial figures below are in millions of dollars.
Financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Net interest income | $37.9 | $33.1 in Q1 2020 |
| Noninterest income | $13.0 | $9.9 in Q1 2020 |
| Net income | $20.7; diluted EPS $1.27 | $1.1; diluted EPS $0.05 in Q1 2020 |
| Net interest margin, tax-equivalent | 3.29% | 3.31% in Q1 2020 |
| Efficiency ratio | 52.51% | 64.26% in Q1 2020 |
| Total assets | $5,329.1 | $4,912.3 at Dec. 31, 2020 |
| Loans, net | $3,604.6 | $3,542.7 at Dec. 31, 2020 |
| Deposits | $4,716.0 | $4,278.4 at Dec. 31, 2020 |
| Borrowings | $73.7 long-term; no short-term borrowings | $78.9 total at Dec. 31, 2020 |
| Shareholders’ equity | $466.3 | $468.4 at Dec. 31, 2020 |
Operating cash flow was $20.3; investing cash flow was negative $191.2 and financing cash flow was positive $421.8. Cash and cash equivalents ended the quarter at $344.8, up from $93.9 at year-end, driven chiefly by deposit growth, including seasonal public deposits. Management also disclosed substantial contingent and secured funding capacity.
Regulatory capital ratios at March 31 included a 10.22% common equity tier 1 ratio and a 13.53% total risk-based capital ratio for the Company. Management stated the Company and Bank remained well-capitalized.
Material changes versus comparable periods
- Net income rose substantially year over year, chiefly reflecting a $2.0 credit-loss provision benefit in Q1 2021 versus a $13.9 provision expense in Q1 2020. Management attributed the 2021 benefit to an improved unemployment forecast and qualitative credit factors; Q1 2020 reflected CECL adoption and pandemic-related economic deterioration.
- Tax-equivalent net interest income increased $4.7 to $38.0. PPP fee amortization, including accelerated recognition on forgiven loans, and higher average loans and securities supported the increase. Lower asset yields partly offset those effects; the net interest margin eased two basis points.
- Noninterest income increased $3.0, reflecting higher derivative income, mortgage-sale gains, investment advisory income, and limited-partnership income. Deposit service charges declined.
- Noninterest expense decreased $0.9, mainly due to lower salaries and occupancy costs following branch streamlining; technology and FDIC assessment costs increased.
- Loans grew $59.2 from year-end and deposits grew $437.6. The deposit increase was partly seasonal. The allowance for loan losses declined to $49.8 from $52.4; the allowance-to-loans ratio was 1.36%.
- Other comprehensive loss was $12.7, largely from a decline in unrealized gains on available-for-sale securities as market interest rates rose. Accumulated other comprehensive income moved from positive $2.1 at year-end to a loss of $10.6.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management’s interest-rate simulation estimated that a parallel 100-basis-point increase would raise 12-month net interest income by 3.39%, while a 100-basis-point decrease would reduce it by 1.69%. These are model scenarios, not forecasts, and depend on assumptions about repricing and customer behavior.
- Credit and COVID-19: Approximately $89.1 of previously modified loans remained on payment deferral at March 31. The Company reported $262.1 of PPP loans and facilitated approximately $96 of new second-round PPP loans during the quarter. Net charge-offs were $0.9, or 0.10% of average loans on an annualized basis, versus $10.1 and 1.27% in Q1 2020. Nonperforming assets were $12.7; potential problem loans included $20.4 of accruing substandard loans.
- Liquidity and funding: Management reported liquidity ratios and early-warning indicators within policy limits. Deposit levels, particularly public and reciprocal deposits, are seasonal and may fluctuate. The filing reports $267.8 of immediate FHLB capacity, $558.6 of FRB secured borrowing capacity, and $130.0 of unsecured federal-funds lines. The parent’s unused $20.0 revolving line matured in May 2021.
- Market and operational risks: Management cited pandemic and economic uncertainty, credit losses, geographic and commercial real-estate concentration, interest-rate exposure, competition, regulation, cybersecurity and third-party systems, and the transition from LIBOR. At quarter-end, $89.1 of loans remained under COVID-related deferrals; the filing cautions that actual credit outcomes may differ from estimates.
- Legal contingency: A putative class action alleges that vehicle-repossession notices did not comply with New York and Pennsylvania law. The Company disputes the claims. Mediation was expected in May 2021 and a class-certification hearing was scheduled for June 14, 2021. An adverse outcome or uninsured costs could materially affect results and financial condition.
- Other items: SDN acquired the assets of Landmark Group on February 1, 2021; the acquisition was described as immaterial to consolidated results. The Company repurchased 238,439 shares under its program at an average $24.30 per share. Prior branch closures were expected to produce annual expense savings of approximately $2.7; no restructuring charges were recorded in Q1 2021.
Important facts for investors to verify
- Reconcile liquidity disclosure: the cash flow statement and balance sheet report quarter-end cash of $344.8, while the MD&A text states $334.8 in one passage.
- Assess the sustainability of earnings, particularly the impact of credit-reserve releases, PPP fee recognition, derivative income, and mortgage-sale gains.
- Track credit quality as pandemic-related deferrals end, including commercial real-estate exposures, criticized loans, and allowance adequacy.
- Monitor interest-rate sensitivity and the effect of rate changes on securities’ fair values and accumulated other comprehensive income.
- Follow developments and potential insurance coverage in the vehicle-repossession class action.
- Confirm the status of the parent’s revolving credit line, which was scheduled to mature in May 2021.