Financial Institutions Earnings: Steady as She Goes

Financial Institutions (NASDAQ: FISI), a bank holding company that primarily operates as Five Star Bank, reported that net income to common shareholders grew 4% year over year, helped by a growing portfolio of commercial and car loans.

By the numbers


Q1 2017

Q1 2016

Year-Over-Year Growth

Total loans

$2.4 billion

$2.1 billion


Total deposits

$3.1 billion

$3.0 billion


Net income to common shareholders

$7.6 million

$7.3 million


Diluted EPS




Tangible book value per share




Data source: Financial Institutions.

What happened this quarter?

The simple community bank derives the bulk of its revenue and profits from taking deposits and making loans. That makes for few surprising or particularly exciting earnings reports, but there are a number of items and trends that shareholders should know about:

  • Loan growth continues. Net loans grew 14% year over year (2.7% compared to the sequential quarter) in what is typically a seasonally slower period. Commercial business loans and consumer indirect loans (car loans) were primary drivers, as loans grew 7.4% and 4.5%, respectively, quarter over quarter.
  • Credit quality is generally pristine. The company reported that non-performing loans tallied to just 0.33% of total loans, compared to 0.41% in the year-ago period. Net charge-offs increased to 0.45% of total loans on an annualized basis, up from 0.36% during the first quarter of 2016, driven by higher charge-offs in its consumer car loan portfolio.
  • Net interest margin, or the difference between what it earns on its assets and pays on its liabilities, was roughly flat at 3.23%, down just 4 basis points from the year-ago period. Importantly, Financial Institutions' balance sheet growth came primarily from loans, rather than lower-yielding securities. A continued shift in its asset mix toward loans would bolster net interest margin and profits. Note that its loans yielded roughly 4.3% in the first quarter, on average, compared to an average yield of roughly 2.5% from securities.
  • Continued efforts to drive non-interest income with insurance and investment advisory businesses showed mixed results in the first quarter. Insurance income declined 14% year over year, due to the "loss of legacy [Scott Danahy Naylon] accounts" in its insurance business. Advisory income grew 12% compared to same period a year ago. In all, non-interest income was roughly unchanged from the prior-year period after backing out some one-time items and particularly volatile sources of income (gain on sale and bank-owned life insurance, for example).

Image source: Getty Images.

What management had to say

In the company's press release, Financial Institutions CFO Kevin B. Klotzbach said, "We generated solid loan and deposit growth, controlled expenses and maintained a stable net interest margin in the quarter. Our total loan portfolio increased 2.7% from year-end and 13.6% from March 31, 2016. This growth was funded primarily by deposits."

Looking ahead

Financial Institution's primary earnings drivers are consumer car loans to prime borrowers and commercial real estate loans, which make up roughly 33% and 28% of its loan portfolio, respectively.Investors may want to pay more attention to performance in these two categories going forward.

Retailers are shuttering stores and declaring bankruptcy at an elevated pace. For now, at least, credit metrics in its commercial mortgage portfolio show no imminent danger of higher loan losses, and net charge-offs were actually negative in the first quarter, but it is something to keep an eye on.

Similarly, reports across the country reflect rising auto loan delinquencies and declining resale values. Financial Institutions' net charge-offs in consumer indirect loans rose to an annualized level of 0.93% of loans in the first quarter of 2017, up from 0.79% a year ago. While there isn't any reason to panic, investors should be cognizant of developments in commercial real estate and car loans, which make up a proportionally large share of the company's loan portfolio.

Having largely cemented itself as the leader in rural areas situated roughly halfway between Lake Ontario and the Pennsylvania-New York border, future growth will have to come by seizing share of markets further north, particularly more densely populated areas like Buffalo and Rochester.Over the last few years, the company has opened new Five Star Bank branches in both markets, and hired lending teams from competitors to build out its business.

Can Financial Institutions' Five Star Bank compete head-to-head with larger competitors by establishing de novo branches in new markets? Only time will tell.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Financial Institutions. The Motley Fool has a disclosure policy.