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Loan-loss provision, fraud cut profits at Five Star Bank parent

The parent of Five Star Bank said Thursday that fourth-quarter profits fell 5.5 percent, as the company nearly doubled what it set aside for loan losses and incurred $1 million in losses from debit card fraud.

Warsaw-based Financial Institutions reported net income of $5.1 million, or 38 cents per share, down from $5.4 million, or 42 cents per share, a year earlier. Wall Street had expected 39 cents.

Total revenues from both lending and fees rose, but they were swamped by the $2 million loan-loss provision and the fraud losses. Still, the company said it added business and commercial real estate loans, as well as indirect auto loans, during the quarter, while keeping its profit margin relatively high and losses down.

"In general, we thought that the quarterly results were very strong," said Alexander Twerdahl, bank analyst at Sandler O'Neill & Partners LP in New York. "It seems that commercial loan demand has also resurfaced in upstate New York."

For the full year, profits rose 48 percent to $21.3 million, or $1.61 per share, from $14.4 million, or 99 cents per share, in 2009.

"I am very pleased with our 2010 results, as our back-to-basics banking approach is truly paying off," said Peter G. Humphrey, president and CEO. "We continue to be active lenders in our marketplace, which is driving our revenue growth, while maintaining solid asset quality."

Net interest income from taking deposits and making loans increased by 4 percent to $20.1 million, the 11th straight quarterly rise, as funding costs fell and total loans grew 7 percent.

Average earning assets rose 5 percent, mostly in investment securities, as well as indirect auto loans and commercial real estate loans. The profit margin on lending fell slightly.

Total loans rose 7 percent to $1.349 billion, while deposits rose 8 percent to $1.883 billion. Bad debts dropped by 14 percent to $8.9 million, while loan losses ticked up 9 percent to $1.2 million. But the bank provided $2 million for losses, up 82 percent from $1.1 million a year ago.

Fee and other income rose 1.8 percent to $5.3 million.

Expenses rose 8 percent to $16.4 million, including the$1 million fraud charge related to a data security breach through tampered merchant terminals at the grocery store chain Aldi. The bank "took appropriate action to limit its exposure to the fraudulent activity" and doesn't expect more losses, it said.