First Niagara Financial Group’s fourth-quarter profits jumped by 31 percent, but analysts were expecting that. What they weren’t expecting was rising expenses taking a bite out of the Buffalo bank’s earnings during the current quarter.
That surprise warning on First Niagara’s profits Friday sent the bank’s stock tumbling, chopping its price by 12 percent in the biggest daily loss in the last five years. The stock closed at $9.08 Friday, down $1.26.
Behind the tumbling stock price was a warning by First Niagara executives that they expect its operating earnings during the current quarter to fall short of analyst forecasts, partly because of rising expenses as the bank steps up its investment in new technology and other initiatives aimed at boosting the bank’s long-term profitability.
Those higher expenses will keep its operating earnings at between 72 and 75 cents per share, which is less than the 79 cents analysts were expecting. Expenses related to First Niagara’s ongoing cost-saving efforts, including the shutdown of 10 branches and the elimination of 170 jobs, will shave another 2 cents off its profits.
Gary Crosby, First Niagara’s president and chief executive officer, said First Niagara continues to be focused on expanding its business within its existing markets and making its banking operations more profitable after focusing on rapid growth through mergers and acquisitions under previous CEO John R. Koelmel.
“Our focus will remain on organic customer growth and retention,” he said. “Being bigger is not a priority. There is no next M&A deal. We need to accelerate our evolution from our thrift roots to a more robust commercial banking mode.”
The bank, which has consolidated more than 60 branches since 2011, expects to close 10 others during the first quarter.
“We have a solid core, but where we are today is just not good enough,” Crosby said, adding that First Niagara’s fee income is less than it should be for a bank of its size, and so are its commercial deposits.
First Niagara also plans to spend $200 million to $250 million over the next three to four years on investments that will help the bank generate “sustainable, high-quality earnings” in the future, with much of that spending being directed toward technology improvements.
The bank, for instance, said more than 140,000 of its customers now are using the mobile banking app it introduced a year ago. First Niagara said it expects to add capabilities – now available from many other banks – that will allow consumers to deposit checks through their mobile device by the end of March.
“In 2013, we did take a relatively short-term approach, and we were very selective and, arguably, almost stingy in terms of the investments that we were making,” he said. “I think that was a very necessary approach for us in 2013.”
“But what this is coming down to, not just for us but for any financial institution, is pay now, or pay a lot more later,” Crosby said. “This investment strategy has to be undertaken at some point, and the sooner we do it, the better. Otherwise you risk falling further behind.”
The disappointment over the first-quarter forecast overshadowed a solid performance by the bank during the fourth quarter, when First Niagara’s earnings matched analyst forecasts as its loan portfolio grew and its operating expenses shrunk.
First Niagara said it earned $70.1 million, or 20 cents per share, during the final three months of last year, up from $53.6 million, or 15 cents per share, a year ago, when the bank absorbed more than $15 million in restructuring charges.
The fourth-quarter earnings were in line with analyst forecasts.
During the quarter, First Niagara’s loan portfolio grew solidly, with its total portfolio expanding by 9 percent, led by its commercial lending and indirect auto businesses, along with rising balances on its customers’ home equity loans. Commercial loans were up 7 percent from the end of September, while consumer loans grew by 12 percent.
The bank’s basic business of making loans and taking in deposits also strengthened slightly, with net interest margin inching up to 3.41 percent from 3.4 percent at the end of September and significantly stronger than 3.22 percent a year ago. Fee income dipped 2 percent, mainly because of a seasonal drop in insurance commissions. First Niagara’s average core deposits also grew by 3 percent from the third quarter, fueled by higher customer balances.
“Any way you look at it, it was a very strong quarter,” said Crosby, who was named the bank’s permanent president and CEO in December, after serving in that post in an interim capacity since last spring. “It’s a very good foundation.”