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Financial Institutions' profit slips Five Star Bank's parent reported growth in loans, reduced expenses

The parent of Five Star Bank said Friday that it's returning to a growth mode after several years of retrenching and retaining customers, but it still said first-quarter profits fell 2.7 percent from a year ago because of difficulty growing revenues.

Warsaw-based Financial Institutions reported profits of $3.6 million, or 29 cents per share, down from $3.7 million, or 30 cents per share, a year ago. However, that's 20 percent higher than the $3 million it earned in the fourth quarter.

Like many banks, the company blamed a sharply narrower profit margin on lending, caused by competition for deposits, a shift toward higher-cost certificates of deposit, and a reversal in interest-rate trends.

That disappointment overcame the bank's first real growth in commercial loans in several quarters, and a significant reduction in operating expenses, as the company's consolidation of four banks into one a year ago and its ongoing efforts to work-out bad loans paid off.

"We are pleased to report a solid first quarter where we are beginning to see the results of our efforts over the last year," said CEO Peter Humphrey.

Analysts also were positive. "Definitely seemed like some good trends coming out this quarter," Jared Shaw of Keefe Bruyette & Woods told management on a conference call with Wall Street analysts.

Financial Institutions underwent big changes recently, after being hammered by rising bad debt that brought a regulatory crackdown. The company sold bad loans, revamped operations, policies and procedures, instituted tighter underwriting, and hired new executives.

In December 2005, it merged its four banks into one, Five Star, introducing a new name to its market and forcing it to launch an advertising campaign to promote the brand. In the meantime, it has focused on retaining its customers, strengthening its commercial lending business, and developing a sales culture to restart growth. And it developed an indirect auto lending business, building ties to 140 new car dealers in 14 counties.

That led to a 3 percent, or $12.1 million, rise in commercial loans in the last three months, or 12 percent "annualized" if that pace were maintained across four quarters. Indirect loans, 88 percent of which are auto, rose 22 percent from a year ago, to $107.7 million, with 65 percent of them used car loans and the rest new cars.

And expenses fell 9 percent to $13.9 million because the bank had fewer costs related to bad loans, spent $286,000 less on product advertising and $441,000 less on brand marketing, and ran more efficiently after the consolidation of administrative and operating functions. The bank has 27 fewer employees than a year ago.

"The results speak for themselves," Humphrey said. "We are working very hard to move this company forward."

Total assets fell nearly 1 percent to $1.96 billion. Total deposits fell slightly to $1.67 billion. Both were up from the end of 2006.

Net interest income from taking deposits and making loans fell 9.8 percent to $13.96 million, as average earning assets for the quarter fell $53.3 million from a year ago and the net interest margin fell by more than a quarter of a percentage point.

For the second straight quarter, the bank did not set aside any money to cover loan losses, as credit quality improved and the bank wrote off just $134,000 as uncollectible. It also recovered $558,000 from loans that had previously been charged off. However, Humphrey said bad loans "still remain too high" at $17 million, though that's less than 2 percent of all loans and is lower than before.

The company's shares rose 9 cents to $19.34.


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