Financial Institutions, Inc. — Q3 2021 Form 10-Q
Business context and period. The New York-based financial holding company provides banking, insurance and wealth-management services, primarily in Western and Central New York. This unaudited report covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $38.3 | $35.5 | $113.9 | $102.8 |
| Noninterest income | $12.1 | $12.2 | $35.2 | $31.8 |
| Net income | $17.2 | $12.3 | $58.1 | $24.5 |
| Diluted earnings per common share | $1.05 | $0.74 | $3.58 | $1.46 |
| Net interest margin, taxable-equivalent | 3.07% | 3.22% | 3.14% | 3.25% |
| Noninterest expense | $29.2 | $28.5 | $82.9 | $82.7 |
- Earnings and drivers: Q3 net income rose about 40% year over year; nine-month net income more than doubled. The major year-over-year earnings driver was lower credit-loss expense: the company recorded a $0.5 million benefit in Q3 and a $7.1 million benefit for nine months, versus provisions of $4.0 million and $21.7 million, respectively, in 2020. Management attributed reserve releases to an improved unemployment forecast, favorable qualitative trends and low net charge-offs.
- Interest and operating trends: Nine-month taxable-equivalent net interest income increased $10.9 million, aided by lower deposit costs, asset growth and PPP fee amortization. The margin nevertheless contracted, reflecting lower asset yields and a smaller contribution from noninterest-bearing funds. Q3 noninterest income was nearly flat; lower derivative income and mortgage-sale gains offset growth in insurance, advisory and partnership income. Nine-month efficiency ratio improved to 55.41% from 61.79%.
- Assets, loans and credit: Total assets were $5,623.2 million, up from $4,912.3 million at year-end. Net loans were $3,608.5 million versus $3,542.7 million; total deposits were $4,975.0 million versus $4,278.4 million. The allowance for loan losses was $45.4 million, or 1.24% of loans, down from $52.4 million. Nonperforming loans were $6.7 million, or 0.18% of loans, and nonperforming assets were $6.7 million, or 0.12% of assets.
- Cash flow and liquidity: For nine months, operating cash flow was $39.5 million, investing cash flow was negative $516.4 million and financing cash flow was positive $671.5 million. Cash and cash equivalents ended at $288.4 million, up $194.5 million from year-end. Deposit growth funded securities purchases and increased cash. Management reported ample liquidity sources, including $206.1 million of immediate FHLB capacity, $601.8 million of FRB discount-window capacity and additional available borrowing lines.
- Debt and capital: Short-term borrowings were zero at quarter-end; long-term borrowings were $73.8 million, principally subordinated notes. Company regulatory capital ratios included CET1 of 10.24%, Tier 1 leverage of 8.36% and total risk-based capital of 13.25%; management characterized capital as well-capitalized. Shareholders’ equity was $494.0 million.
- Other items: Common dividends declared were $0.27 per share for Q3, versus $0.26 a year earlier. The company acquired two insurance-related businesses in 2021. The filing reports an after-tax reduction in accumulated other comprehensive income, primarily reflecting lower unrealized gains on available-for-sale securities; the available-for-sale portfolio’s net unrealized position moved from a $20.4 million gain at year-end to a $1.0 million loss at September 30.
Outlook, risks and contingencies
The filing provides no specific earnings or full-year financial guidance. Management’s interest-rate simulation estimated that a 100-basis-point increase would raise net interest income by 1.43% over 12 months, while a 100-basis-point decline would reduce it by 1.90%; these are model estimates, not forecasts. Management highlighted COVID-19 and regional economic conditions, credit quality, interest-rate and liquidity exposure, deposit competition, regulatory requirements, cybersecurity, and the LIBOR transition as risks. About 2% of commercial loan and mortgage customers, 1% of residential real-estate borrowers and less than 1% of indirect-loan customers still had active payment deferrals at quarter-end.
A consumer class action concerning notices sent after vehicle repossessions received class certification on September 30, 2021, covering an estimated 5,200 New York and 300 Pennsylvania consumers. The company is challenging the ruling and has not accrued a liability because it cannot determine whether loss is probable or reasonably estimate potential damages. The filing warns that legal costs, settlements or judgments could materially affect results. Branch closures completed under the prior restructuring were expected to produce approximately $2.7 million in annual savings; no restructuring charges were recorded in 2021 through September.
Key facts for investors to verify
- How much of the substantial earnings increase is attributable to reserve releases and PPP-related fee income, and how sustainable are those contributors?
- Whether deposit growth, including public and reciprocal deposits, remains stable and supports margins as excess liquidity is deployed.
- Trends in loan growth and credit quality, including active deferrals, criticized commercial real-estate exposures and allowance adequacy.
- Potential exposure, insurance coverage and case developments in the certified vehicle-repossession class action.
- Interest-rate risk and the effects of falling security values on accumulated other comprehensive income and regulatory capital.