Financial Institutions (NASDAQ:FISI), the parent company of Five Star Bank, reported solid third-quarter results investors have come to expect from this low-risk bank.

Financial Institutions' results by the numbers

Metric

Q3 2015

Q3 2014

Net Income

$8 million, or $0.56 per share (up 17% YoY)

$6.8 million, or $0.48 per share

Tangible Book Value

$14.81 per share (up 9% YoY)

$13.59 per share

Total Deposits

$2.75 billion (up 8% YoY)

$2.54 billion

What happened this quarter?
Financial Institutions had several favorable trends underlying its earnings growth:

  • Provisions for loan losses, or how much Financial Institutions puts away to cover future loan losses, fell by 63% compared to the third quarter of 2014. Conservative by nature, Financial Institutions currently has an allowance for loan and lease losses equal to 311% of its non-performing loans.
  • The bank's credit metrics remain excellent. Non-performing loans to total loans came in at 0.42%, a slight decline from 0.43% last year. Its outsize securities holdings kept its non-performing assets to total assets ratio at a minuscule 0.26% this quarter. Annualized net charge-offs were a paltry 0.35% of its average loans during the quarter.
  • Falling bond yields resulted in unrealized gains of $5.3 million on its securities book, helping to drive its tangible book value higher.
  • Net interest income grew to $24.1 million from $23.3 million "despite continued net interest margin pressure." In other words, though margins are shrinking, its asset growth is more than making up for it. Its net interest margin was 3.2% in the third quarter, down from 3.46% in the third quarter of 2014.
  • Financial Institutions grew its loan book by 7% year over year, helped by a 17% increase in commercial mortgage loans and an 8% increase in commercial business loans.
  • Insurance income, though volatile, grew sequentially and year over year. These fee-based businesses help keep the lights on in downturns and add to the upside when credit performance is strong, as it is now.

Management commentary
Financial Institutions remains optimistic about its ability to grow organically by opening new branches and taking share in established markets. In the press release, the president and CEO Martin Birmingham highlighted the company's efforts to grow: "We have focused our marketing efforts on expanding our presence in Rochester and Buffalo while continuing to provide value to our long-standing customer base in the markets where we have historically operated."

Birmingham added, "We are excited about our growth prospects as we expand in the Rochester area with the November opening of our City Gate branch."

As of June 30, Financial Institution's Five Star Bank controlled 0.34% and 5.8% of deposits in the Buffalo, New York and Rochester, New York metropolitan statistical areas, respectively. Recently, First Niagara (NASDAQ:FNFG), the second-largest bank in Buffalo and fifth-largest in Rochester by deposits, put itself up for sale, which may offer opportunities for Financial Institutions to pick off some of its customers.

Looking forward
Financial Institutions may be better named as the "bank of few surprises." The company's focus on growing deposits and making sound loans continues to pay off, though shrinking net interest margins are weighing on its earnings power. A rate increase would be very good for Financial Institutions' bottom line, but its third-quarter results stand as evidence that it certainly doesn't need higher rates to grow earnings.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Financial Institutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.