Financial Institutions (NASDAQ:FISI), the holding company for Five Star Bank, logged another quarter of high single-digit growth in deposits and loans -- exactly what investors have come to expect from this very simple New York bank.

By the numbers
Five Star Bank is a traditional consumer and commercial bank. It's not the kind of bank that will have huge ups and downs from quarter to quarter, given it doesn't have a trading unit or participate in cyclical businesses like securities underwriting like the biggest banks on Wall Street. 

Some key metrics show the changes in the business compared to the year-ago period.


4Q 2015

4Q 2014

Net Income to Common Shareholders

$6.3 million ($0.44 per share)

$7.6 million ($0.54 per share)

Tangible Book Value

$14.77 per share

$13.71 per share

Total Deposits

$2.73 billion (up 11% YoY)

$2.45 billion

What happened this quarter?
Some more context can help put this quarter's results in perspective:

  • Net income declined year over year due to a favorable tax credit in the fourth quarter of 2014. Pre-tax income, however, grew from $8 million last year to $8.8 million in the fourth quarter of 2015.
  • Financial Institutions' growth remains on track. Deposits jumped 11% year over year, while loans grew 9% from the year-ago period.
  • Securities make up a beefy proportion (33%) of the bank's interest-earning assets. Loans made up 66% of interest-earning assets in the fourth quarter. Swapping lower-yielding securities for higher-yielding loans remains a key earnings driver for the future. Loans yielded 4.22% vs. 2.47% for investment securities in the fourth quarter.
  • Credit quality remains excellent. Non-performing loans to total loans clocked in at a microscopic 0.41%. Thanks to low-risk securities, non-performing assets make up only 0.25% of total assets. Its allowance for loan losses is 3.21 times its non-performing loans.
  • The company's returns on common equity are satisfactory. Financial Institutions earned just under 10% on common equity in 2015, even as its risk-based capital ratio stands at a very healthy 13.35%.

Management commentary
The company's President and CEO, Martin Birmingham, pointed to the company's expansion efforts as a sign of its success in attracting deposits in new markets with de novo branching. "Our CityGate Financial Solution Center has received an outstanding reception. By year-end the office had already exceeded $10 million in deposits," he said. The company opened that branch in November.

Kevin Klotzbach, the Financial Institutions' CFO said that the company's deposit and loan growth "has allowed us to successfully offset the margin pressure facing the entire industry." In other words, as margins deterioriate, Financial Institutions is making it up on volume. Net interest margin decreased 30 basis points from the year-ago period.

Looking forward
Financial Institutions low-risk balance sheet, substantial allowances for losses, and excellent credit quality show few signs to worry that this bank will underperform because of its balance sheet. All eyes should be on its ability to maintain high single-digit deposit growth and attract customers in places like Rochester, where Financial Institutions has less than 6% market share. So far, so good. 

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