Financial Institutions Narrowly Misses on Earnings but Banks on Favorable Trends

Financial Institutions' second-quarter earnings narrowly missed consensus expectations as the bank reported earnings of $0.44 per share vs. the consensus estimate of $0.45.

Those who were expecting Financial Institutions to dial up its risk this quarter may be disappointed. Notably, it grew its securities holdings by 16% quarter over quarter to $1.09 billion, while loans grew only 4% to $2.01 billion. Loans and investments securities grew 6% and 27% year over year, respectively.

The accumulation of securities put a damper on its asset yields. The company reported earning 3.58% on its interest-earning assets, down from 3.69% last quarter due primarily to a proportional increase in investments securities relative to loans.

But risk aversion does pay off somewhere, and that's in its credit metrics.The bank reported that its provisions for loan losses fell 27% from the year-ago period. Nonperforming loans (NPLs) clocked in at a minuscule 0.53% of total loans during the quarter, and its allowances now cover its NPLs 2.57 times over. Charge-offs tallied to a mere 0.20% of average loans on an annualized basis.

The company recorded yet another year of strong deposit growth, with deposits rising 8% over last year.

Growing without lendingIn its press release, Financial Institutions highlighted efforts to diversify its business with noninterest income from fees and insurance sources. Noninterest income grew to $6.5 million in the second quarter, a 15% increase over last year, primarily as a result of an acquisition of a small insurance broker. The press release notes that it now calls insurance a "core" business within the bank, generating 20% of noninterest income when adjusted for seasonality.

Insurance income is fairly lumpy. The company points out that it earns so-called contingent commissions from its insurance operations, which vary based on the profitability and volume of business it places with insurance carriers.

A seasonal lull and some timing issues led to a 34% contraction in its insurance income compared to the seasonally strong first quarter. But one might reasonably conclude that there is substantial room to drive insurance income by cross-selling services to its existing banking customers.

All in all, the second quarter was just another quarter for this sleepy Warsaw, New York banking franchise. But if you, like many, think the best bank is a boring bank, then Financial Institution's second-quarter results were certainly something to get excited about.

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