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Five Star parent sees Amherst insurance agency spawning growth

FAIRPORT – Five Star Bank’s parent company sees an Amherst-based insurance agency it bought as a ticket to growth.

Warsaw-based Financial Institutions Inc. acquired Scott Danahy Naylon last year for $16.9 million in cash and stock, and turned it into a subsidiary. Bank officials welcomed the increase in fee income, but they see even more potential arising from the deal.

“There are really a large number of smaller agencies that are operating in our footprint where there is no management succession [plan],” said Martin K. Birmingham, Financial Institutions’ president and chief executive officer, after Wednesday’s annual meeting. “We think we offer a viable alternative for their owners to join our SDN team and platform. We are very much interested in that.”

Kevin B. Klotzbach, chief financial officer, said the bank is exploring possible deals, noting there are about 500 such “mom-and-pop” insurance agencies in Five Star’s footprint.

But it’s not only about acquisition. Birmingham said SDN is also expected to grow on its own, and by tapping into crossover opportunities with Five Star’s commercial lending relationships. About 80 percent of SDN’s revenue stems from commercial, property and casualty insurance, which ties into Five Star’s push to expand its commercial lending in Buffalo. Plus, Five Star’s commercial loan officers in Buffalo work out of SDN’s offices.

Richard J. Harrison, Financial Institutions’ chief financial officer, said SDN was considered a “platform agency” at the time of the deal, meaning it had revenues of at least $5 million, a management team, and was a good platform for adding smaller agencies to. “We have very high hopes for the growth rate of the insurance business and for the opportunities it’s going to have all through our footprint.”

The bank is racking up more non-interest income, thanks in part to the SDN deal: $7.2 million in the first quarter of this year, compared to $6 million a year ago, before the SDN deal. The bank’s net interest income from making loans and taking deposits changed little over the same period – underscoring the value of finding alternative sources of income.

William H. Scott Jr., SDN’s executive vice president, said the deal has benefited both the insurance agency and the bank, with each introducing potential new customers to the other. “They’ve been very tough on us in terms of the growth projections for this year,” Scott said of Financial Institutions’ leadership team. “I don’t plan on letting (them) down. We are extremely excited about what’s going on.”

Financial Institutions officials say they are determined to make greater inroads into the Buffalo and Rochester markets – Birmingham calls them “shining cities on a hill.” But Five Star Bank has only three branches in Erie County, and the bank’s deposit market share in Erie County is minuscule compared M&T Bank and First Niagara Financial Group.

Klotzbach noted that Five Star’s combined deposit market share in Buffalo and Rochester is less than 2 percent. Those two markets have about $30 billion in combined deposits. “If we could go from less than 2 percent to, say, 2 to 3 percent, it would significantly move our dial and the (banks) we probably took the deposits from might not even notice, quite frankly,” he said.

Birmingham said Five Star is also interested in building up its branch presence in the Buffalo area. But for now, he said, its focus is on opening a branch in Rochester. That project should break ground by the end of this month and is expected to be completed by late November.