Financial Institutions, the parent of Five Star Bank, said fourth-quarter profits rose 3.4 percent as expenses fell and the company didn't set aside money for loan losses.
The Warsaw-based bank reported earnings of $3 million, or 23 cents per share, up from $2.9 million, or 22 cents, a year ago.
Meanwhile, investors and analysts told company management on a conference call Thursday that the bank has too much capital and too little growth, and needs to either increase dividends and buybacks, or look at options that could include a sale.
"The quarter was weaker than we were expecting. Revenue growth continues to be harder to come by," said Jared Shaw, analyst at Keefe Bruyette & Woods, in an interview after the conference call. "It's going to be important for them to find good ways to grow earnings. If you can't get the rate of return that your shareholders expect, than a sale needs to be explored."
Company officials did not respond directly to calls for a sale. "Our board is always evaluating the best use of our capital which maximizes shareholder value," said spokesman Matt Murtha. "The stock buyback program is in place, and if we feel that's the best alternative to deploy our capital, that's what we'll do."
Revenues fell 8.6 percent to $19.1 million, more than a decline in expenses. Total loans and deposits also shrank, so the bank had fewer assets to earn money on. But the company did not record any provision for credit losses, versus a provision of $1.4 million in the final three months of 2005.
Officials cited the "improved risk profile" of the reduced loan portfolio, and the low level of write-offs, in justifying that step. Total bad loans fell by $2.2 million from a year ago, to $15.8 million, while the bank wrote off $600,000 in the quarter, versus $2 million a year ago.
Yet, bad loans rose by $3 million from the third quarter, mostly due to a single dairy farm that ran into cash flow problems because of lower milk prices. And despite the 2005 sale of $175 million in problem loans, the bank still has about three times the level of bad loans at most banks today. The reserve to cover them is not as large, proportionately, and it fell slightly to $17 million in the quarter.
Shares closed down $1.59 Thursday at $21.53 in trading on the Nasdaq exchange.
"The turnaround is taking much longer than investors had hoped for," said bank analyst David Darst of FTN Midwest Research in Nashville, who has a "sell" rating on the bank.
President and Chief Executive Peter G. Humphrey conceded the "lack of revenue growth," but called the results "solid." He cited the challenge that all banks face now -- with lending profit margins tight because of interest rates -- and said that's likely to continue.
But he said the bank has offset that by restructuring operations, cutting costs and improving loan quality, and now must focus on consumer and business loan growth.
Net interest income from taking deposits and making loans fell 10.6 percent to $14.3 million because of a 7 percent drop in earning assets, including loans, and the narrower profit margin.
Deposits fell 5.8 percent to $1.6 billion, as the company actively sought to reduce higher-cost certificates of deposit.
Fee income fell 2 percent to $4.8 million. Expenses fell 6 percent to $15.2 million, including $256,000 in one-time advertising, brand development and marketing programs, plus $168,000 for writing down the value of foreclosed real estate.