Financial Institutions, Inc. (NASDAQ:FISI) is a diversified financial services company headquartered in Warsaw, New York, offering banking, wealth management, and other financial products and services through its subsidiaries, Five Star Bank and Courier Capital, LLC. With a history dating back to 1931, the company has demonstrated remarkable resilience in the face of various economic and industry challenges, continuously adapting its strategies to meet the evolving needs of its customers and communities.
Business Overview and History Financial Institutions, Inc. was founded in 1931 as a New York State-chartered bank, initially serving the banking needs of the local community. Over the decades, the company has expanded its footprint and diversified its offerings, while maintaining its community bank philosophy. In 2001, the company reorganized as a financial holding company, allowing it to broaden its scope and better serve its customers’ financial requirements.
Today, Financial Institutions, Inc. operates primarily through its flagship subsidiary, Five Star Bank, which provides a comprehensive suite of banking products and services to individuals, municipalities, and businesses in Western and Central New York, as well as the Mid-Atlantic region. The bank’s service offerings include commercial and consumer lending, deposit-taking, wealth management, and various ancillary services. Additionally, the company’s Courier Capital, LLC subsidiary provides customized investment management, investment consulting, and retirement planning services to a diverse clientele.
The company has strategically expanded its presence in recent years. In 2021, Financial Institutions opened a new commercial loan production office in Syracuse, New York, further extending its reach in the region. The company also has a commercial loan production office in Ellicott City, Maryland, demonstrating its commitment to growth in the Mid-Atlantic market.
Financial Institutions has actively managed its capital structure and shareholder value. In 2020, the company issued $35 million in subordinated notes, using the proceeds for general corporate purposes, organic growth, and to support regulatory capital ratios at Five Star Bank. The company has also engaged in share repurchase programs, buying back 105,000 shares of its common stock in 2020, followed by 296,000 shares in 2021, and an additional 500,000 shares in 2022.
Despite facing challenges, including a $1.6 million charge related to restructuring and merger and acquisition activities in 2022, Financial Institutions has demonstrated financial resilience. The company reported net income of $77.7 million in 2021, a significant increase from $38.3 million in 2020. In 2022, the company achieved net income of $56.6 million, showcasing its ability to navigate a dynamic operating environment.
Financial Performance and Ratios Financial Institutions, Inc. has demonstrated solid financial performance over the years, despite navigating various challenges. As of the latest reported quarter (Q3 2024), the company reported net income of $13.5 million, or $0.84 per diluted share, compared to $14.0 million, or $0.88 per diluted share, in the same period of the prior year. The company’s return on average assets (ROAA) for the third quarter of 2024 was 0.89%, while its return on average equity (ROAE) stood at 11.18%.
The company’s net interest margin, a key metric for banks, was 2.89% in the third quarter of 2024, compared to 2.91% in the same period of the previous year. The slight decrease was primarily due to higher funding costs in the current high-interest rate environment, partially offset by an increase in the average yield on interest-earning assets.
Financial Institutions, Inc. maintained a strong capital position, with a Common Equity Tier 1 (CET1) ratio of 10.28% and a Total Risk-Based Capital ratio of 12.95% as of September 30, 2024. These ratios exceed the well-capitalized thresholds set by regulatory authorities, providing the company with ample flexibility to support its growth and navigate any potential challenges.
For the most recent fiscal year (2023), Financial Institutions reported revenue of $212.18 million, net income of $50.26 million, operating cash flow (OCF) of $10.89 million, and free cash flow (FCF) of $7.90 million. In the most recent quarter (Q3 2024), the company reported revenue of $86.74 million, net income of $13.47 million, OCF of $2.15 million, and FCF of -$0.30 million. Year-over-year, revenue increased by 2.4%, while net income decreased by 3.9%, OCF decreased by 76.3%, and FCF decreased by over 100%. The decrease in net income was primarily due to higher funding costs in the current high interest rate environment, while the decreases in OCF and FCF were driven by changes in working capital.
Liquidity and Solvency The company’s liquidity and solvency metrics remain robust. As of September 30, 2024, the company reported cash and cash equivalents of $249.6 million, up from $124.4 million at the end of 2023. The company’s current ratio, a measure of short-term liquidity, stood at 1.10, indicating the company’s ability to meet its short-term obligations. The quick ratio, which excludes inventory from current assets, was also 1.10.
The company’s debt-to-equity ratio, a key solvency metric, was 0.36 as of September 30, 2024, demonstrating a conservative capital structure and the company’s ability to manage its debt levels. Additionally, the company’s interest coverage ratio, which measures its capacity to service its debt, was 0.45 for the third quarter of 2024.
Financial Institutions, Inc. maintains strong liquidity resources, with $284.70 million in immediate credit capacity with the Federal Home Loan Bank (FHLB) and $878.60 million in secured borrowing capacity at the Federal Reserve Bank (FRB) discount window as of September 30, 2024.
Operational Highlights and Challenges During the third quarter of 2024, Financial Institutions, Inc. announced its intention to begin an orderly wind-down of its Banking-as-a-Service (BaaS) offerings, following a strategic review. This decision reflects the company’s focus on its core community banking franchise and aligns with its long-term growth objectives. As of September 30, 2024, the BaaS business represented approximately 2% of the company’s total deposits and under 1% of its loan portfolio.
The company also reported a slight decrease in total loans from the previous quarter, primarily due to a decline in commercial business and consumer indirect loans. This was partially offset by increases in commercial mortgage and stability in residential loans and lines. Management cited intense competition for commercial borrowers and the higher interest rate environment as contributing factors to the loan portfolio dynamics.
Financial Institutions, Inc. experienced an increase in non-performing loans during the third quarter, primarily related to two separate commercial real estate relationships in its Upstate New York market. The company is actively working with all parties involved to resolve these issues and believes it has appropriately reserved for the potential losses.
Despite these challenges, the company remained focused on disciplined credit underwriting and proactive expense management. The company’s efficiency ratio for the third quarter of 2024 was 64.7%, a slight improvement from the 66.5% reported in the same period of the prior year.
In March 2024, Financial Institutions experienced an $18.2 million pre-tax loss related to fraudulent deposit activity by a business customer. The company is pursuing legal recourse to recover funds. On April 1, 2024, the company sold the assets of its insurance subsidiary, SDN Insurance Agency, LLC, generating a $13.7 million pre-tax gain.
Business Segments and Product Portfolio Financial Institutions, Inc. operates through two primary business segments: Banking and All Other. The Banking segment, which includes all of the company’s retail and commercial banking operations, is the primary driver of revenue, accounting for approximately 81% of consolidated net interest income and 47% of consolidated noninterest income in the third quarter of 2024.
The commercial loan portfolio is the largest component of Financial Institutions’ loan book, comprising 62.7% of total loans as of September 30, 2024. This includes commercial business loans (14.9% of total loans) and commercial mortgages (47.8% of total loans), which are further broken down into construction, multifamily, non-owner occupied, and owner-occupied categories. The commercial loan portfolio has seen steady growth, increasing 5% from December 31, 2023 to September 30, 2024, driven by increases in commercial mortgage balances.
The consumer loan portfolio makes up the remaining 37.3% of the loan book, consisting of residential real estate loans and lines of credit (16.4% of total loans) and consumer indirect loans, primarily auto loans (19.9% of total loans). Consumer indirect loans decreased 7.8% from year-end 2023 as the company exited the Pennsylvania auto market to focus on its core Upstate New York market.
The All Other segment includes the activities of the company’s wealth management subsidiary, Courier Capital, as well as holding company operations. This segment contributed approximately 19% of consolidated net interest income and 53% of consolidated noninterest income in Q3 2024. The decrease in the segment’s share of noninterest income was primarily attributable to the sale of the insurance operations in April 2024.
Geographic Markets Financial Institutions, Inc. operates primarily in New York and Maryland, with its core market being Upstate New York. The company has commercial loan production offices in Ellicott City, Maryland and Syracuse, New York in addition to its branch network in New York. In 2024, the company exited the Pennsylvania auto market to focus on its core Upstate New York market, demonstrating its commitment to its primary geographic area.
Guidance and Outlook For the full year 2024, Financial Institutions, Inc. has narrowed its expected net interest margin range to 2.85% to 2.90%, down from the previous guidance of 2.85% to 2.95%. The company now expects annual loan growth to be at the low end of its previously guided range of 1% to 3%.
Additionally, the company has revised its guidance for net charge-offs, now expecting them to fall within a range of 20 basis points to 30 basis points of average loans, down from the previously communicated range of 30 basis points to 40 basis points.
The company’s effective tax rate for 2024 is expected to be within the 11% to 13% range, in line with its previous guidance.
Conclusion Financial Institutions, Inc. has demonstrated its ability to navigate various challenges, including the recent deposit-related fraud event and the ongoing wind-down of its BaaS offerings. The company’s focus on its core community banking franchise, disciplined credit underwriting, and proactive expense management have enabled it to maintain solid financial performance and a strong capital position.
As the company continues to adapt to the evolving market conditions, its experienced management team, diversified business model, and commitment to serving its local communities position it well to capitalize on future growth opportunities and create long-term value for its shareholders. The company’s strategic decisions, such as exiting the Pennsylvania auto market and selling its insurance subsidiary, reflect its focus on optimizing its operations and concentrating on its core strengths in the Upstate New York market.
While facing headwinds from the high interest rate environment and increased competition, Financial Institutions, Inc. has demonstrated resilience and adaptability. The company’s strong liquidity position, conservative capital structure, and focused geographic strategy provide a solid foundation for navigating future challenges and pursuing growth opportunities in its primary markets.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.