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Five Star Bank parent Financial Institutions' (FISI 0.21%) slow-and-steady approach to commercial banking allowed it to deposit $7.2 million in net income in the second quarter of 2016, an increase of 9% year over year.

By the numbers

More than five hours away from Wall Street by car, this Warsaw, New York-based bank is a simple deposit gatherer and loan maker, resulting in few surprises from quarter to quarter.


Q2 2016

Q2 2015

Net income

$7.151 million ($0.47 per share)

$6.585 million ($0.44 per share)

Total deposits

$2.86 billion (8% growth YOY)

$2.66 billion

Tangible book value per share

$15.73 (12% growth YOY)


YOY = year over year. Data source: Company Investor Relations.

What happened this quarter?

  • A drawn-out activist campaign against the bank may have finally come to an end. The bank-holding company prominently noted in its earnings release that its slate of nominees to the board of directors won out over nominees by activist investor Clover Partners. The proxy contest cost the company roughly $1.7 million in proxy-related expenses in the second quarter, resulting in a 227% jump in professional fees year over year.

  • Loan growth was impressive, as total loans rose to $2.2 billion, a 10% increase over the year-ago period, and a 5% increase over the sequential quarter. Commercial business loans were the star, increasing 19% over the second quarter of 2015. 

  • The bank's net interest margin remains stable at 3.23%, down just one basis point year over year. 

  • Credit quality is excellent. Net charge-offs came in at a mere 0.19% of total average loans, down from 0.20% a year ago, and 0.36% sequentially. The company maintains large reserves against future loan losses, reporting that its ratio of allowance for loan losses to non-performing loans stood at 435% at the end of the second quarter.

  • While the bank's loan book would benefit from a steeper yield curve, falling interest rates resulted in about $1.4 million in gains on its securities portfolio, a significant (albeit non-recurring) boost to earnings in the second quarter.

What management had to say

In a press release, Financial Institutions' chief executive officer, Martin K. Birmingham, said, "Financial Institutions delivered very solid results in the quarter, with all of our major businesses performing well, despite the distraction and expense of the successfully concluded proxy contest defense." 

Birmingham later added that the company's "branch expansion initiatives are moving forward with the opening of another Rochester branch later in the year and we continue to assess opportunities in Rochester and Buffalo, resulting from local market disruption," referring to KeyCorp's (KEY -0.63%) acquisition of First Niagara (NASDAQ: FNFG), which will result in the consolidation of over 100 branches when the merger is completed.

In markets where Five Star Bank, KeyCorp, and First Niagara compete directly, Five Star Bank has just 4.4% deposit market share compared to 22.7% for its larger competitors. 

Looking forward

Financial Institutions' second-quarter results offered just about everything a bank investor could ask for: excellent credit quality, conservative allowances against non-performing loans, and year-over-year loan and deposit growth teetering on double digits.

Going forward, all eyes will be on the rural bank's opportunities to capture market share in Buffalo and Rochester, New York, two larger markets that its executives have long eyed as key expansion areas.