Financial Institutions(FISI) - 2021 Q4 - Annual Report

PART I Business Financial Institutions, Inc, a New York-based holding company, provides banking, insurance, and wealth management services with a community-focused strategy Company Overview at Year-End 2021 | Metric | Value (USD) | | :--- | :--- | | Consolidated Total Assets | $5.52 billion | | Deposits | $4.83 billion | | Shareholders' Equity | $505.1 million | - The company operates through five direct wholly-owned subsidiaries: Five Star Bank (FSB), SDN Insurance Agency (SDN), Courier Capital, HNP Capital, and Corn Hill Innovation Labs (CHIL), with the Bank representing 99.3% of consolidated assets[10] - The business strategy is centered on a community bank philosophy, focusing on the individualized needs of customers in its local service area to differentiate from larger competitors[17][18] - The acquisition strategy focuses on increasing market share within existing markets and expanding insurance and wealth management lines of business through targeted acquisitions[19] - The company's lending activities are diverse, including commercial business loans, commercial mortgages, residential mortgages, and consumer loans, with a significant portion in indirect auto loans[37] - The company and its subsidiaries are subject to extensive regulation by the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the New York State Department of Financial Services (NY DFS)[54][56][60] Risk Factors The company faces significant risks from the COVID-19 pandemic, credit concentration in New York, legal proceedings, technology, and interest rate fluctuations - The COVID-19 pandemic has introduced significant economic volatility, affecting credit quality, revenue, and asset values, with key exposures in retail (14% of commercial loans) and hotel/lodging (4%)[68][70] - A substantial portion of operations are concentrated in Western and Central New York, making the company's results highly dependent on the regional economy[77] - Commercial business and mortgage loans, totaling $2.05 billion or 56% of total loans, expose the company to greater credit risk compared to residential or consumer loans[78] - The company is a defendant in a class-action lawsuit alleging non-compliance with the Uniform Commercial Code, where an unfavorable outcome could materially affect business[87] - As of December 31, 2021, the company had $67.1 million of goodwill, which is subject to impairment risk from adverse changes in the business climate or stock price declines[98] - The company relies on third-party vendors for key business infrastructure, which exposes it to operational risks from these vendors[110] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - None[128] Properties The company owns its headquarters and operates through 48 branch offices, of which 31 are owned and 17 are leased, across New York - The company operates 48 branch offices, with 31 owned and 17 leased[130] - A new 28,500 square foot administrative office is scheduled to commence its lease in Amherst, New York in July 2022, which will consolidate other leased facilities[130] Legal Proceedings The company is defending a class-action lawsuit concerning vehicle repossession notices, with an uncertain outcome and no accrued liability - The company is party to a class-action lawsuit filed in 2017 regarding vehicle repossession notices[132] - On September 30, 2021, the court certified four classes of consumers, comprising approximately 5,200 members in New York and 300 in Pennsylvania[132] - The company has not accrued a contingent liability for this matter, stating it is unable to conclude if a liability is probable or reasonably estimate a potential loss[132] Mine Safety Disclosures This item is not applicable to the company - Not applicable[133] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (FISI) trades on Nasdaq, with an active share repurchase program and a history of underperforming key market indices - The company's common stock is traded on the Nasdaq Global Select Market under the ticker symbol "FISI"[135] Q4 2021 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2021 | 7,356 | $31.31 | | Nov 2021 | 19,400 | $31.00 | | Dec 2021 | 77,164 | $31.58 | | Total Q4 | 103,920 | $31.45 | - As of December 31, 2021, 461,191 shares remained available for repurchase under the 2020 Repurchase Program[135] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong 2021 net income growth driven by a credit loss provision reversal, alongside analysis of loan portfolios and capital adequacy Executive Overview Net income more than doubled in 2021 to $77.7 million, driven by a significant benefit for credit losses amid an improved economic forecast 2021 vs. 2020 Financial Performance | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income | $77.7 million | $38.3 million | | Diluted EPS | $4.78 | $2.30 | | Return on Average Assets | 1.46% | 0.82% | | Return on Average Equity | 16.01% | 8.49% | | (Benefit) Provision for Credit Losses | ($8.3 million) | $27.2 million | - Total loans increased by $84.3 million (2%) to $3.68 billion, driven by a 14% increase in consumer indirect loans and a 13% increase in commercial mortgage loans[144] - Total deposits grew by $548.7 million (13%) to $4.83 billion, with growth across all deposit categories[144] Results of Operations Net interest income grew on higher earning assets, noninterest income rose from advisory and insurance fees, and expenses increased due to technology investments - Net interest income on a taxable equivalent basis increased 11% to $155.4 million in 2021, while the net interest margin declined slightly to 3.14%[141][159] - The provision for credit losses was a benefit of $8.3 million in 2021, compared to a provision of $27.2 million in 2020, reflecting improved economic forecasts[169] - Noninterest income increased by $3.7 million (9%) to $46.9 million, driven by growth in investment advisory income, income from limited partnerships, and insurance income[141][172] - Noninterest expense increased by $3.5 million (3%) to $112.8 million, mainly due to higher costs from technology investments and a rise in salaries and benefits[144][175] Analysis of Financial Condition Total assets grew 12% to $5.52 billion, fueled by securities portfolio growth and a 13% increase in deposits, while credit quality improved Loan Portfolio Composition (December 31, 2021) | Loan Category | Amount (USD) | % of Total | | :--- | :--- | :--- | | Commercial Mortgage | $1.41 billion | 38.4% | | Consumer Indirect | $958.0 million | 26.0% | | Commercial Business | $638.3 million | 17.3% | | Residential Real Estate | $577.3 million | 15.7% | | Other | $93.0 million | 2.6% | | Total Loans | $3.68 billion | 100.0% | - The allowance for credit losses on loans decreased to $39.7 million at year-end 2021, with the ratio of allowance to total loans falling to 1.08% from 1.46% a year prior[196] - Non-performing loans increased to $12.2 million (0.33% of total loans) from $9.5 million (0.26% of total loans) at year-end 2020[202] - Total deposits increased by $548.7 million (13%) to $4.83 billion, with growth in non-public, public, and reciprocal deposits[206] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation models showing a slightly asset-sensitive balance sheet Net Interest Income (NII) Sensitivity Analysis (as of Dec 31, 2021) | Rate Shock Scenario | Estimated Change in NII (USD) | % Change | | :--- | :--- | :--- | | -100 bp | ($3,875,000) | (2.63)% | | +100 bp | $548,000 | 0.37% | | +200 bp | $1,346,000 | 0.91% | | +300 bp | $2,035,000 | 1.38% | Economic Value of Equity (EVE) Sensitivity Analysis (as of Dec 31, 2021) | Rate Shock Scenario | EVE (USD) | Change from Pre-Shock (USD) | % Change | | :--- | :--- | :--- | :--- | | Pre-Shock | $775,697,000 | - | - | | -100 bp | $746,770,000 | ($28,927,000) | (3.73)% | | +100 bp | $782,438,000 | $6,741,000 | 0.87% | | +200 bp | $786,362,000 | $10,665,000 | 1.37% | Financial Statements and Supplementary Data This section contains the consolidated financial statements, which received an unqualified opinion from the independent auditor, RSM US LLP - The independent registered public accounting firm, RSM US LLP, issued an unqualified opinion on the consolidated financial statements[268] - RSM US LLP also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[277] - The auditor identified the Allowance for Credit Losses for pooled loans as a Critical Audit Matter, highlighting the significant judgment required by management[271] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None[565] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal controls over financial reporting were effective as of year-end 2021 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[566] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2021[567] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2021[568] PART III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2022 Annual Meeting of Shareholders Proxy Statement - This section incorporates information by reference from the registrant's definitive proxy statement for the 2022 Annual Meeting of Shareholders[571] Executive Compensation Details on executive and director compensation are incorporated by reference from the company's 2022 Proxy Statement - This section incorporates information by reference from the registrant's definitive proxy statement for the 2022 Annual Meeting of Shareholders[572] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2022 Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Shareholders | 191,310 | N/A | 815,769 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - This section incorporates information by reference from the registrant's definitive proxy statement for the 2022 Annual Meeting of Shareholders[575] Principal Accounting Fees and Services Information on fees paid to the principal accountant is incorporated by reference from the 2022 Proxy Statement - This section incorporates information by reference from the registrant's definitive proxy statement for the 2022 Annual Meeting of Shareholders[575][576] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed with or incorporated by reference into the Annual Report - This section provides an index of all exhibits filed as part of the 10-K report, including governance documents, debt indentures, and executive agreements[579] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[581]