Financial Institutions, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company is a New York-based financial holding company operating Five Star Bank, an insurance agency and wealth-management businesses, primarily serving Western and Central New York. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $41.6 | $37.7 | $81.2 | $75.6 |
| Provision (benefit) for credit losses | $0.6 | $(4.6) | $2.9 | $(6.6) |
| Noninterest income | $11.4 | $10.2 | $22.7 | $23.1 |
| Noninterest expense | $32.9 | $26.9 | $63.0 | $53.7 |
| Net income | $15.6 | $20.2 | $30.6 | $40.9 |
| Diluted EPS | $0.99 | $1.25 | $1.93 | $2.52 |
| Tax-equivalent net interest margin | 3.19% | 3.06% | 3.15% | 3.17% |
- Q2 net income fell 22.5%; diluted EPS declined 20.8%. Return on average assets was 1.12% versus 1.52%, and return on average common equity was 14.64% versus 17.34%.
- At June 30, total assets were $5.57 billion, loans net of allowance were $3.72 billion, deposits were $4.82 billion, and shareholders’ equity was $425.8 million. From December 31, 2021, assets rose 0.9%, net loans rose 2.2%, deposits declined 0.1%, and equity fell 15.7%.
- Cash and cash equivalents were $109.7 million. For the first half, operating cash flow was $81.8 million, investing cash flow was $(98.9) million, and financing cash flow was $47.7 million.
- Total borrowings were $183.1 million, up from $103.9 million at year-end, including $109.0 million of short-term FHLB borrowings and $74.1 million of subordinated notes. The company reported $354 million of immediate FHLB capacity, about $602.7 million of FRB discount-window capacity, and $130 million available under unsecured federal funds lines.
- Company regulatory capital ratios were 9.91% CET1, 10.29% Tier 1, and 12.75% total risk-based capital. The Bank’s corresponding ratios were 11.47%, 11.47%, and 12.28%. Both were above stated “well-capitalized” thresholds.
Changes and management commentary
- Q2 net interest income increased $3.9 million year over year, supported by higher average securities and loan balances and 2022 rate increases. The tax-equivalent margin rose 13 basis points for the quarter, although the first-half margin edged down two basis points.
- Credit-loss expense replaced the prior-year reserve benefit. Management cited economic uncertainty from higher rates and geopolitical conditions, partly offset by low net charge-offs and a $2.0 million recovery on a previously impaired commercial loan. Nonperforming loans declined to $6.5 million, or 0.17% of total loans, from $12.2 million, or 0.33%, at year-end.
- Expense growth weighed on earnings: Q2 noninterest expense increased $5.9 million, including a $1.3 million real-estate valuation adjustment for five branches closed in 2020. Management also cited personnel investment, wage pressures, technology initiatives, inflation, outsourcing and a return to more normal travel and training activity. First-half efficiency ratio increased to 60.51% from 54.22%.
- Noninterest income was mixed. Q2 derivative income improved year over year, while first-half income from loan sales fell to $0.7 million from $1.9 million. Insurance income increased, including contributions from prior acquisitions.
- Loans increased $84.6 million from year-end, led by consumer indirect lending. Deposits were broadly stable, but the mix shifted: time deposits and brokered deposits increased, while savings/money-market, public and reciprocal deposits declined. Uninsured deposits totaled $1.24 billion.
- Available-for-sale securities had a $126.3 million net unrealized loss at June 30, versus $6.3 million at year-end, mainly due to rising market rates. First-half other comprehensive loss was $86.5 million, contributing to the decline in equity. Management said it did not intend to sell the securities and did not recognize a credit-loss allowance because it attributed the losses to rates rather than credit quality.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management describes a static interest-rate model under which 12-month net interest income declines 0.71% for a +100-basis-point shock, 1.46% for +200 basis points, and 2.19% for +300 basis points; a -100-basis-point shock produces a 1.36% decline. Management notes that the model excludes balance-sheet growth and that asset repricing over longer periods could improve results.
- Principal disclosed risks include interest-rate and liquidity exposure, inflation and economic uncertainty, credit losses, geographic and commercial-real-estate concentration, consumer/indirect lending, competition, cybersecurity, regulatory matters, and LIBOR transition. COVID-related deferrals had fallen to $4.0 million; less than 1% of loan customers had active deferrals.
- A consumer class action concerns notices issued after vehicle repossessions. Four classes were certified, covering approximately 5,200 New York and 300 Pennsylvania consumers. The company disputes the claims, has not accrued a liability because probability and loss amount could not be determined, and warns that an adverse outcome could materially affect results and may exceed insurance coverage.
- Commitments to extend credit were $1.12 billion and standby letters of credit were $15.8 million. These are contingent funding exposures, not necessarily expected drawdowns.
- The Board authorized a new repurchase program for up to 766,447 shares. No shares had been repurchased under that program through June 30; the quarter’s 11,275-share purchase disclosure reflects shares surrendered for employee tax withholding.
Investor facts to verify
- Track whether higher rates improve net interest income after deposit costs and wholesale funding reprice; compare actual performance with management’s rate-shock model.
- Monitor the securities portfolio’s unrealized losses, AOCI, equity and liquidity, including whether any securities sales become necessary.
- Assess credit trends in consumer indirect and commercial real-estate portfolios, allowance adequacy, delinquencies and the effect of the one-time $2.0 million recovery.
- Follow expense growth, technology spending, restructuring items and progress toward stabilizing the efficiency ratio.
- Review uninsured and reciprocal deposit trends, borrowing use and capacity, capital ratios, and developments in the repossession-notice litigation.