Financial Institutions, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2020, with balance-sheet comparisons to December 31, 2019 and year-over-year results compared with Q1 2019. The New York-based financial holding company operates Five Star Bank, an insurance agency and wealth-management businesses, with its banking footprint primarily in Western and Central New York. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $4,471.8 | $4,384.2 at Dec. 31, 2019 |
| Total loans, gross | $3,237.2 | $3,221.0 at Dec. 31, 2019 |
| Total deposits | $3,787.2 | $3,555.7 at Dec. 31, 2019 |
| Net interest income | $33.1 | $31.8 in Q1 2019 |
| Net interest margin, tax-equivalent | 3.31% | 3.24% in Q1 2019 |
| Provision for credit losses | $13.9 | $1.2 in Q1 2019 |
| Noninterest income / expense | $10.0 / $27.7 | $9.1 / $25.2 in Q1 2019 |
| Net income | $1.1; $0.05 diluted EPS | $11.5; $0.70 diluted EPS in Q1 2019 |
| Cash and cash equivalents | $152.2 | $112.9 at Dec. 31, 2019 |
| Total borrowings | $148.8, including $109.5 short-term and $39.3 long-term | $314.8 at Dec. 31, 2019 |
- Q1 cash flow: $4.3 provided by operations, $26.1 used in investing and $60.9 provided by financing; cash increased $39.2. Financing inflows included deposit growth, partly offset by lower short-term borrowings and dividends.
- Shareholders’ equity was $439.4 at quarter-end. Regulatory capital ratios were 10.05% CET1 and 12.54% total risk-based capital; the company reported that it remained well-capitalized.
- Net charge-offs were $10.1, or 1.27% of average loans on an annualized basis, versus $1.8, or 0.23%, in Q1 2019. Nonperforming loans were $12.4, or 0.38% of loans, and nonperforming assets were $13.1.
Material changes versus the prior comparable period
- Net income fell 90% year over year, primarily reflecting the much larger credit-loss provision. Management attributed the provision increase to adoption of CECL, COVID-19-related economic assumptions and higher net charge-offs.
- A commercial hospitality-related loan was downgraded; $8.2 was charged off against an $11.9 loan. Management identified this as the principal driver of higher net charge-offs and increased nonperforming loans.
- Net interest income increased $1.3 on a tax-equivalent basis. Average loans rose $123.4 year over year, while average securities fell $107.0; lower funding costs also supported results. The net interest margin increased seven basis points.
- Noninterest income increased $0.8, including higher derivative income and a securities gain. Noninterest expense rose $2.6, notably from salaries, professional services and technology spending. The efficiency ratio increased to 64.31% from 60.99%.
- Deposits increased $231.5 from year-end, while short-term borrowings declined $166.0. Accumulated other comprehensive loss narrowed substantially, mainly due to gains on available-for-sale securities.
Outlook, commentary, risks and unusual items
- COVID-19 and credit risk: Management said the pandemic had negatively affected its markets and warned that prolonged disruption could weaken borrowers, collateral values and loan quality. Commercial real estate, small and midsize businesses, consumer borrowers and municipal bond issuers were identified as areas of exposure.
- CECL adoption: Effective January 1, 2020, CECL adoption increased loan credit reserves by $9.6 and established a $2.1 reserve for unfunded commitments, partly offset by deferred tax assets. The net retained-earnings reduction was $8.7 after tax. The Q1 provision for unfunded commitments was $0.5.
- Customer relief and PPP: The bank described fee waivers, payment-relief options and other customer assistance. As of April 23, it had helped more than 600 customers obtain over $200 in PPP loans; payment deferrals had been granted to approximately 7% of commercial loan and mortgage customers, 6% of residential real estate borrowers and 6% of indirect-loan customers.
- Liquidity: Management reported that liquidity ratios and early-warning indicators remained within policy limits. It cited approximately $912 of additional secured wholesale borrowing capacity, $145 of unsecured federal funds lines, $131.9 of unencumbered liquid securities and an undrawn $20 parent-company credit line due to mature in May 2020. These are reported capacities, not cash on hand.
- Interest-rate sensitivity: The company’s model estimated that a parallel 100-basis-point increase would reduce one-year net interest income by 1.04%; a 100-basis-point decrease would reduce it by 0.37%. Management cautioned that results depend on assumptions and are not forecasts. The Federal Reserve’s rate cuts and an extended low-rate environment were cited as risks to earnings and margin.
- Other items: Management performed a first-quarter goodwill impairment assessment and concluded impairment was not more likely than not; no goodwill impairment was recorded. The filing provides no earnings or financial guidance. Forward-looking results remain subject to substantial uncertainty, including pandemic duration, credit losses, deposit behavior, market volatility and regulatory developments.
Important facts for investors to verify
- Track subsequent credit-loss provisions, reserve assumptions and charge-offs, particularly the hospitality-related exposure and commercial real estate portfolio.
- Verify the performance and repayment terms of COVID-related deferrals and PPP loans, including the timing of any SBA reimbursements.
- Monitor deposit composition, liquidity capacity, borrowing usage and the maturity or renewal of the parent-company credit line.
- Review capital ratios, regulatory requirements, dividend capacity and any effects of the CECL transition provisions.
- Compare actual net interest margin and earnings with management’s interest-rate sensitivity estimates, while noting the filing provides no formal guidance.