Five Star Bank parent Financial Institutions (NASDAQ:FISI) posted an excellent first quarter, growing loans and deposits at a double-digit pace over the year-ago period. Net income benefited from a sizable, non-recurring benefit from company-owned life insurance.

By the numbers
Five Star is very much a conventional community bank, with few complex operations -- the bank's profitability hinges on its ability to attract cheap deposits and make good loans.


1Q 2016

1Q 2015

Net income to common shareholders

$7.3 million ($0.50 per share)

$6.4 million ($0.46 per share)

Tangible book value per share

$15.18 per share

$14.18 per share

Total deposits

$2.96 billion

$2.70 billion

What happened this quarter?
There are a few things that happened that are worth discussing in further detail:

  • Income from bank owned life insurance jumped due a $911,000 death benefit received in the first quarter. Company-owned life insurance thus provided about $1.4 million in non-interest income, up from an ordinary run rate of about $500,000.

  • Net interest income rose to a record $24.7 million in the quarter, driven largely by growth in the loan portfolio and a sequential increase in net interest margin (NIM). The bank reported NIM of 3.27%, up 1 basis point sequentially, and down 16 basis points from the year-ago period. This marks the second quarter in a row in which its net interest margin has increased, albeit at a snail's pace measurable in basis points.

  • Insurance and investment advisory income grew meaningfully. Insurance income grew $436,000 for the quarter, while investment advisory income jumped $601,000. The company attributed the growth in insurance income to seasonal income from its Scott Danahy Naylon brokerage. The increase in investment advisory came from its acquisition of Courier Capital during the quarter.

  • Credit quality remains excellent. The bank reported total non-performing assets of 0.25% of total assets. Allowances remain healthy at 1.3% of total loans vs. the current non-performing loan ratio of 0.41%.

Management commentary
Company president and Chief Executive Officer Martin Birmingham noted that the company may have benefited from a less competitive environment in the first quarter. "Deposits increased 8% from the fourth quarter of 2015 of this year, which we believe partially reflects the retrenchment of larger competitors operating in the regions in which we operate," he said.

"The January 2016 acquisition of Courier Capital, our wealth management platform, coupled with 4% growth in insurance revenues through our Scott Danahy Naylon insurance subsidiary, contributed to the growth of our noninterest income," he added. Notably, noninterest income grew to 34% of total revenue, up from 31% of total revenue in the year-ago period.

Looking forward
With excellent credit metrics and healthy deposit growth, Financial Institutions' core business of basic community banking appears sound. Investors should continue to watch to see if a recent trend in rising net interest margins can continue to drive an easy, and organic, increase in income going forward.

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