Financial Institutions, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a stand-alone fourth-quarter earnings filing. Financial figures below are consolidated unless noted.
Business context
Financial Institutions, Inc. (Nasdaq: FISI) is a New York-based financial holding company. Its principal business is Five Star Bank, serving consumer, commercial and municipal customers in Western and Central New York. Other businesses provide insurance, wealth management and fintech services. The company reported $5.52 billion in assets and $4.83 billion in deposits at year-end.
Financial results and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $77.7 million | $38.3 million |
| Net income available to common shareholders | $76.2 million | $36.9 million |
| Diluted earnings per share | $4.78 | $2.30 |
| Net interest income, GAAP | $154.7 million | $139.0 million |
| Noninterest income | $46.9 million | $43.2 million |
| Noninterest expense | $112.8 million | $109.3 million |
| Net interest margin, fully tax-equivalent | 3.14% | 3.22% |
| Efficiency ratio | 55.76% | 60.22% |
| Return on average assets / equity | 1.46% / 16.01% | 0.82% / 8.49% |
Interest expense declined to $12.5 million from $22.3 million, while interest income rose to $167.2 million from $161.3 million. The credit-loss provision was an $8.3 million benefit in 2021, versus a $27.2 million expense in 2020. The effective tax rate increased to 20.1% from 16.2%.
Balance sheet, cash flow and capital
- Assets and loans: Total assets were $5.52 billion, up 12%. Total loans were $3.68 billion, up 2%; net loans were $3.64 billion. Commercial mortgages rose 13% to $1.41 billion and consumer indirect loans rose 14% to $958.0 million. Commercial business loans fell 20% to $638.3 million, principally as PPP loans were forgiven or repaid.
- Deposits and funding: Deposits increased 13% to $4.83 billion. Year-end borrowings were $103.9 million, including $30.0 million of short-term FHLB borrowings and $73.9 million of subordinated notes. Uninsured deposits totaled $1.29 billion. Reciprocal deposits were $771.4 million; brokered deposits were $254.7 million.
- Liquidity and cash flows: Cash and cash equivalents were $79.1 million, down from $93.9 million. The cash flow statement reports operating cash flow of $73.0 million, investing cash outflow of $633.4 million and financing cash inflow of $545.7 million. Elsewhere, MD&A gives different operating and investing cash-flow figures; see investor verification items below. The company also disclosed substantial available borrowing capacity and unencumbered securities.
- Equity and regulatory capital: Shareholders’ equity was $505.1 million, versus $468.4 million. Company CET1 and total risk-based capital ratios were 10.28% and 13.12%; the Bank’s were 11.68% and 12.38%. Both were described as well-capitalized. Common book value per share was $30.98; tangible common book value per share was $26.26.
- Credit quality: Nonperforming loans were $12.2 million, or 0.33% of loans, compared with $9.5 million, or 0.26%, a year earlier. Nonperforming assets totaled $12.2 million, down from $12.5 million. The allowance for loan losses declined to $39.7 million, or 1.08% of loans, from $52.4 million, or 1.46%. Net charge-offs fell to $5.8 million, or 0.16% of average loans, from $13.8 million, or 0.40%.
Material changes versus 2020
- Net income more than doubled, reflecting stronger net interest income, lower funding costs and the swing from a large credit-loss provision to a benefit. The 2020 result had included elevated CECL and pandemic-related reserves.
- Average interest-earning assets increased 14%, while the fully tax-equivalent net interest margin declined 8 basis points to 3.14%. Asset growth and lower interest expense supported net interest income; lower asset yields and a less favorable funding mix weighed on margin.
- Investment securities increased substantially: year-end securities were about $1.39 billion at amortized cost, versus $879.6 million in 2020. The available-for-sale portfolio’s net unrealized position shifted from a $20.4 million gain to a $6.3 million loss, largely attributed to higher market interest rates.
- Shareholders’ equity growth was partly offset by a $15.3 million after-tax other comprehensive loss, primarily reflecting securities valuation changes, and by share repurchases. The company repurchased about 340,700 shares during 2021.
- Noninterest income grew 9%, including increases in investment advisory and insurance income. Noninterest expense rose 3%, with technology spending a notable contributor. Two insurance-related acquisitions were completed in 2021.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management described continued investment in digital banking, community banking, deposit growth, diversified lending and disciplined acquisitions as strategic priorities.
- Management’s rate-shock model estimated a 0.37% increase in 12-month net interest income under an instantaneous +100-basis-point scenario and a 2.63% decrease under a -100-basis-point scenario. These are model estimates, not forecasts; results depend on assumptions about repricing, deposit behavior and other factors.
- Key risks include regional economic and real-estate concentration, commercial credit exposure, indirect auto lending and collateral depreciation, deposit withdrawals and funding costs, interest-rate changes, cyber and third-party technology risks, regulatory obligations, and ongoing COVID-19 effects. The company also identified inflation and the war in Ukraine as sources of economic uncertainty.
- A consumer class action concerns notices sent after vehicle repossessions. In September 2021, the court certified classes of approximately 5,200 New York and 300 Pennsylvania consumers. The company had not accrued a liability because it could not determine that a loss was probable or reasonably estimate an amount. Plaintiffs sought partial summary judgment in February 2022; the company planned to oppose. The filing describes the potential exposure as uncertain.
- 2021 included a $3.8 million partial charge-off on a commercial mortgage loan and a $3.8 million partial charge-off in the related commercial mortgage portfolio discussion. The company also reported branch restructuring, with $111,000 of 2021 charges and expected annual savings of about $2.7 million from the broader closures.
- Auditors issued unqualified opinions on the financial statements and internal controls. The allowance for credit losses on pooled loans was identified as a critical audit matter because it relies on forecasts and significant management judgment.
Most important facts for investors to verify
- Reconcile cash-flow disclosures: the cash flow statement reports $73.0 million of operating cash flow and $633.4 million of investing outflow, while MD&A separately states $59.4 million and $619.8 million, respectively. The filing text does not explain these differences clearly.
- Track the class-action litigation, including rulings, any loss estimate or accrual, and insurance coverage as proceedings advance.
- Assess whether credit-loss reserve releases remain supportable as loan growth, commercial property conditions and economic forecasts change; review the new commercial mortgage deterioration and indirect-auto performance.
- Monitor net interest margin, deposit pricing and retention, uninsured and reciprocal deposit levels, and the effect of higher rates on securities values and earnings.
- Review the company’s capital and liquidity after dividends, repurchases, acquisition activity and the scheduled transition of subordinated-note rates from fixed to floating.