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DATE
Friday, Oct. 30, 2026
CALL PARTICIPANTS
- Director of Investor Relations - Kate Croft
- President and Chief Executive Officer - Martin K. Birmingham
- Chief Financial Officer and Treasurer - William Jack Plants II
TAKEAWAYS
- Net Income Available to Common Shareholders -- $19.6 million, or $0.99 per diluted share, representing a 5.7% decrease from the linked quarter and remaining flat year over year.
- Total Loans -- $4.86 billion at period end, reflecting 2.2% growth from the end of the second quarter and 5.8% growth versus last year, driven by robust commercial lending.
- Net Interest Income -- $54.3 million, a quarterly record supported by a 4.8% increase versus the third quarter of 2025.
- Net Interest Margin -- 3.70%, remaining stable from the linked quarter and increasing 5 basis points versus last year due to lower interest-bearing liability costs.
- Total Deposits -- $5.47 billion, up 3.3% from June 30, 2026, and 2.2% versus last year, led by seasonal peaks in public deposits.
- Commercial Loans -- $3.31 billion, growing 3% from the end of the second quarter and more than 10% versus last year, primarily driven by commercial real estate and construction activity.
- Investment Advisory Income -- $3.3 million, increasing 10.6% year over year as assets under management at Courier Capital reached $4 billion.
- Efficiency Ratio -- 56.84% for the quarter, compared to 55.33% in the linked quarter, reflecting higher salaries and employee benefits expenses.
- Common Stock Repurchases -- 185,833 shares, bought at an average price of $40.92 per share during the third quarter.
- Common Equity Tier 1 Ratio -- 11.36%, compared to 11.44% at the end of the second quarter.
- Tangible Common Equity Ratio -- 8.40%, a decrease from 9.02% at June 30, 2026, driven by unrealized losses in the available-for-sale securities portfolio and stock repurchases.
- Provision for Credit Losses -- $3.9 million, compared to $3.1 million in the linked quarter, reflecting loan growth and fluctuations in unfunded commitments.
- Net Charge-Off Ratio -- 33 basis points annualized, an increase from 11 basis points in the second quarter.
- Return on Average Assets -- 1.26% for the quarter, down from 1.35% in the linked quarter and 1.32% in the prior year period.
- Return on Average Equity -- 12.32%, compared to 13.31% in both the linked and year-ago quarters.
- Noninterest Expense -- $36.8 million, up 3% from the second quarter, primarily due to a $489,000 increase in health insurance benefit expense.
- Full-Year Guidance: Net Charge-Offs -- Approximately 30 basis points, representing the midpoint of the company's previous range of 25 to 35 basis points.
- Full-Year Guidance: Effective Tax Rate -- 16.5% to 17.0%, narrowed from the previous range of 16.5% to 17.5%.
- Full-Year Guidance: Swap Fees -- $750,000 to $1.2 million, reduced from the previous range of $1 million to $2 million due to lower commercial swap activity.
- Investment Advisory Growth Target -- Low-double-digit growth versus 2025, an upward revision from the previous mid-single-digit target.
- HELOC Applications -- Up 30% year over year during the third quarter, with management reporting sustained demand throughout October.
- COLI Income -- $2.9 million for the quarter, with management expecting total 2026 income to exceed $11 million.
- Salaries and Benefits Expense -- $19.7 million, a 3% increase from the second quarter driven by self-insured medical plan costs.
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RISKS
- Birmingham stated, "While competition remains intense and has created spread pressure, the quality of our existing commercial pipeline underpins our confidence in the opportunities ahead," acknowledging pricing challenges in the commercial lending market.
- Birmingham warned that typical seasonality is expected to impact both volume and credit metrics in the consumer indirect line of business toward the end of the year.
SUMMARY
Financial Institutions, Inc. (NASDAQ:FISI) reported third quarter results featuring record net interest income and loan expansion led by the commercial sector. Management maintained core earnings guidance while adjusting specific ranges for net charge-offs and noninterest income based on year-to-date performance. The company continues to prioritize capital management through common stock repurchases and maintains regulatory capital ratios above thresholds considered well capitalized. Strategy remains focused on relationship-driven banking in Upstate New York and growing fee-based income via its wealth management subsidiary, Courier Capital.
- CFO Plants reported a target for net interest margin to wrap up the year at approximately 3.75%, following a monthly margin of 3.72% in September.
- The company is targeting positive operating leverage of 200 to 300 basis points for the 2027 fiscal year with an efficiency ratio approaching 55%.
- Management is transitioning public deposit collateralization into a reciprocal deposit portfolio to relieve collateral requirements in the investment securities portfolio.
- CFO Plants noted that 43% of the loan book floats relative to prime and other benchmark rates, providing immediate repricing benefits from interest rate hikes.
- The commercial lending pipeline remains approximately the same size as it was at the beginning of the year, despite active originations offsetting cash flow from existing loans.
- Noninterest expense included $325,000 in one-time items related to write-downs on other real estate owned and a legal settlement for an employment matter.
INDUSTRY GLOSSARY
- ACL: Allowance for Credit Losses; a reserve established to cover estimated credit losses in a loan portfolio.
- AOCI: Accumulated Other Comprehensive Income (Loss); a component of shareholders' equity that includes unrealized gains and losses on certain investments.
- CET1 Ratio: Common Equity Tier 1 ratio; a key regulatory measure of a bank's core equity capital compared to its total risk-weighted assets.
- COLI: Company Owned Life Insurance; life insurance policies held by a company on its employees, where the company is the beneficiary.
- HELOC: Home Equity Line of Credit; a revolving line of credit secured by the equity in a borrower's home.
- Reciprocal Deposit Portfolio: A network that allows banks to place customer funds into other banks to ensure full FDIC insurance while receiving a reciprocal amount of deposits.
- Swap Fees: Income generated from interest rate derivative transactions executed for commercial customers.
- TCE Ratio: Tangible Common Equity ratio; a measure of a bank's physical capital as a percentage of its tangible assets.
Full Conference Call Transcript
Operator: Greetings, and welcome to the Financial Institutions Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kate Croft, Director of Investor Relations for the company. Ms. Croft, you may begin.
Kate Croft: Thank you for joining us for today's call. Providing prepared comments will be present CEO, Martin K. Birmingham and CFO, William Jack Plants. You will be joined by additional members of the company's leadership team during the question-and-answer session. Today's prepared comments and Q and A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties and other factors. We refer you to yesterday's earnings release and investor presentation as well as historical SEC filings, which are available on our Investor Relations website for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking.
We will also discuss certain non GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Non GAAP to GAAP reconciliations can be found in the earnings release filed as an exhibit to Form 8-K or in our latest investor presentation available on our IR website www.fisiinvestors.com. Please note that this call includes information that may only be accurate as of today's date, October 30, 2026. I will now turn the call over to President and CEO, Martin K. Birmingham.
Martin K. Birmingham: Thank you, Kate. Good morning, everyone, and thank you for joining us today. In the third quarter, our team delivered healthy balance sheet growth, while maintaining solid profitability. Virtual lending strength drove loan growth of more than 2% from the end of the second quarter and nearly 6% year-over-year. Net interest margin of 3.70% was stable relative to the linked quarter and up 5 basis points from the third quarter of 2025. This supported stronger net interest income generation, which reached a new quarterly high of $54.3 million. Investment advisory income, the company's leading contributor of non-interest income increased about 2% and more than 10% from the linked and year-ago quarters, respectively.
Our efficiency ratio remained below 57% for the quarter, reflecting our strong focus on sustained profitability. Our strong capital position allowed us to repurchase more than 185 thousand shares of common stock during the quarter. This performance came together to support net income available to common shareholders of $19.6 million or $0.99 per diluted share. This was lighter than the linked quarter, our year to date performance has been very strong and supportive of the targets we established at the start of the year. To that end, our core earnings guidance is unchanged, though we did tighten some ranges based on year to date results.
We are affirming our guidance for full year loan and deposit growth net interest margin, returns on average assets and equity and efficiency ratio. On the credit side, we now expect an annual net charge off ratio of about 30 basis points. At the midpoint of the previous range of 25 to 35 basis points. In addition, the high end of our tax rate guidance has been lowered and we have made some refinements to non-interest income. Jack will walk through these during his discussion of the income statement in a few minutes. Before that, I would like to provide some commentary on third quarter balance sheet trends. Commercial lending continues to lead overall loan growth.
Total commercial loans increased 3% from June 30, 2026, more than 10% from September 30, 2025. Growth in the quarter was driven by commercial real estate lending, including strong construction mortgage activity in Upstate New York and increased activity in our Mid Atlantic market. Commercial and industrial loans also increased, as originations more than offset lower line utilization as compared to the second quarter. We continue to see compelling commercial lending opportunities across Buffalo, Rochester, Syracuse regions. While competition remains intense and has created spread pressure, the quality of our existing commercial pipeline underpins our confidence in the opportunities ahead. We believe that the pipeline positions us well for the remainder of the year and heading into 2027.
Third quarter credit activity included the transfer of a foreclosed property to other real estate owned. Which reflected the final exposure to a previously disclosed commercial business relationship that had been in workout. Turning to consumer lending. Our on balance sheet residential portfolio was up modestly during the quarter and up just over 2% year-over-year. Sold and serviced residential mortgages were up more than 2% and approximately 7% from the linked year-ago quarters, respectively. As our model is weighted toward a held for sale approach in support of fee income. Home equity lines of credit had been a bright spot with third quarter applications up 30% year-over-year, and we have seen sustained demand throughout October.
Consumer indirect loans increased about 1% from the second quarter of 2026 and were down 7% year-over-year. We originate these loans through a network of more than 360 new car dealers across New York State, and maintain discipline on spreads and prime credit mix. That supports solid credit metrics as compared to national trends. Our third quarter delinquency ratio which is inclusive of loans 30 and 60 days past due, and those on nonaccrual, is more than 100 basis points lower than the recent national average for loans just 30 and 60 days past due. As we approach the end of the year, we expect typical seasonality to impact both volume and credit metrics this line of business.
Investment securities were up 4.5% from the second quarter and a little more than 2% from the year-ago quarter. The linked quarter increase was primarily due to public deposit seasonality and we expect the portfolio to come back down in the fourth quarter. Period end total deposits of $5.47 billion were up more than 3% from June 30, 2026, and 2% from September 30, 2025. Linked quarter growth was led by public deposits, which peak in the first and third quarters of each year but deposit growth was broad based with all categories contributing. On a year-over-year basis, public deposits were down modestly partially offsetting growth in all other categories.
We continue to focus on shifting some public deposits to our reciprocal portfolio, which helps to relieve collateral requirements in the securities portfolio. The retention and acquisition of core nonpublic deposits remain high priorities. And we continue to target low single digit deposit growth for the full year. It is now my pleasure to turn the call over to Jack for additional details on our results and guidance.
William Jack Plants: Thank you, Martin, and good morning, everyone. Our third quarter results underscore the strength of our core businesses. Disciplined balance sheet management, and continued focus on profitability. Loan growth drove an increase in average earning assets, while effective balance sheet management supported a stable net interest margin of 3.70 basis points. Net interest income increased 2% from the prior quarter to $54.3 million investment portfolio yield of 4.46% was consistent with the linked quarter and the average loan yield picked up 1 basis point to 6.08%. The cost of average interest bearing liabilities increased 6 basis points to 2.67% for the third quarter.
We expect that the latest Fed rate hike in September will have a positive impact on our margin in the fourth quarter. As earning assets reprice and we actively manage our funding costs. Noninterest income of $10.5 million was down 4.5% from the linked quarter. The. Key driver of this variance was lower commercial back to back swap activity in the third quarter. Following a very strong second quarter. We now expect swap fees for the year to come in between $750 thousand and $1.2 million. Down from the previous guidance of $1 million to $2 million.
We also recorded a loss of $274 thousand limited partnership income in the third quarter, compared with a loss of $140 thousand in the second quarter. As a reminder, revenue associated with these partnerships, which are primarily small business investment companies, fluctuates given the performance of underlying investments. Investment advisory revenue growth was again a highlight up about 2% quarter-over-quarter and nearly 11% year-over-year,. Leading us to increase our full year guide from mid-single-digit growth to low-double-digit growth versus 2025. Our wealth management subsidiary, Courier Capital, is the primary driver of this revenue stream. with $4 billion in assets under management as of September 30, this continues to be an important component of our diversified fee income.
Year to date, new business activity has been strong, reflecting investments we have made in attracting top talent. Company owned life insurance revenue of $2.9 million was up 2% from the linked quarter, COLI income is now expected to exceed $11 million for 2026. We reported quarterly non-interest expense of $36.8 million up about 3% from the linked quarter. Salaries and benefits expense of $19.7 million was up 3% from the second quarter as expected, driven by costs related to our self insured medical plan, typically increase as we approach year end. As a reminder, we model higher benefits expense in our guidance based on our 2025 experience.
Professional services expense of $1.5 million was $212 thousand or 17% higher than the linked quarter. Primarily driven by the timing of typical external audit related expenses. There were also a couple of onetime items included in other non-interest expense that together totaled about $325 thousand. This included write downs associated with other real estate owned, and a legal settlement to resolve an employment related matter. Prudent expense management remains a top priority while we maintain positive operating leverage, we remain on track to limit full-year non-interest expense growth to low single digits and to achieve an efficiency ratio below 57%. We reported an effective tax rate of 16.9% in the third quarter, compared to 17.3% in the second quarter.
We tightened our annual tax guidance to between 16.5% to 17%. Down from between 16.5% to 17.5%. Annualized net charge offs to average loans were 33 basis points in the third quarter, compared to 11 basis points in the linked quarter. As Martin mentioned, we now expect this ratio to be approximately 30 basis points for full year 2026. Our allowance for credit losses were fairly stable, down 1 basis point to 99 basis points of total loans as of September 30, 2026. We remain comfortable with the allowance and associated coverage ratio given our strong asset quality. Overall, our third quarter results underscore our ability to translate disciplined execution into growth. With commercial lending leading the way.
Our full year profitability targets remain intact, outlined by a return on average assets of at least 130 basis points and a return on average equity of at least 12.5%. Despite the impact of AOCI on the securities portfolio, our balance sheet remains a source of strength. With a TCE ratio of 8.4% and a CET1 ratio of 11.36%. This provides us with flexibility to pursue growth while returning capital to shareholders. Together, these measures underpin our capital allocation priorities. Supporting organic loan growth, investing thoughtfully in our business, and returning value to our shareholders. That concludes my remarks. I will now turn the call back to Martin.
Martin K. Birmingham: Thanks, Jack. Overall, our year to date performance has been strong, and we are well positioned to maintain momentum through the fourth quarter. Our team remains focused on credit disciplined loan growth, core non public deposit growth, prudent expense management, and disciplined execution against our strategy. Our focus on these priorities remains centered on delivering profitable growth and creating long term value for our shareholders. That concludes our prepared remarks, operator. Please open the call for questions.
Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1. You may press 2 if you would like to remove your question from the queue. Again, that is 1 to ask a question and 2 to withdraw. 1 moment, please, while we poll for questions. The first question is from Damon DelMonte from KBW. Please go ahead.
Damon DelMonte: Hope you are all doing well today. Thanks for taking my questions. First question, just, probably for Jack here on the margin. I think you had said that you should probably see a little benefit to the margin from the rate increase that we saw in September. Just wondering if you could kind of walk us through some of the thoughts behind that outlook. And then also, if we do get another rate hike here in December, how you think the margin would be responding as we go into 2027?
William Jack Plants: Yes. Thanks, Damon. So as you may recall, about 43% of our loan book floats off of prime and so forth, and then we have got about 13% of the remaining book that is adjustable from a 5-year point of the curve on in. We have seen some immediate repricing from that rate hike in the back half of September. It has a little bit of a muted impact on monthly margin just given the timing of the adjustment for the quarter. But as we wrapped up September our monthly margin was about 3.72%. And if we look to the rest of the year, I think we are targeting this wrapping up around 3.75.
So the earning asset side of the portfolio continues to benefit for the rest of the year. If there is a hike in December, the impact would be fairly muted on the quarterly margin.
Damon DelMonte: Got it. And would you expect those dynamics to continue as we go into 2027? Given the additional rate hike?
William Jack Plants: So, okay.
Damon DelMonte: Great. And then I guess just on loan growth, solid quarter. I think you guys had kind of messaged earlier in the year that you thought the growth would be more in the back half of the year. And I think we saw a good second quarter and now a good third quarter. Just kind of, I know you have kind of reiterated the mid single digits for the year, but anything that is kind of standing out here in the fourth quarter that really gives you confidence for another, another solid quarter?
Martin K. Birmingham: This is Martin, Damon. Thanks for the questions this morning. Our pipelines continue to be pretty solid. And consistent with where they have been in the year-over-year periods going back to 2025, 2026, and the outlook for 2027. So that is across the board in CRE. And C and I as well as generally up state for the most part. But even our mid Atlantic loan team is showing growth in their opportunities that they are looking at. But specifically, how that translates to the outlook, Jack, how would you--?
William Jack Plants: I would say that we have been actively replenishing our pipelines across all, and they remain strong. From a sizing perspective, the pipeline is around the same size as it was when we entered the year. So our commercial lending folks have been really active in replacing the cash flow that comes off and generating new clients to backfill. So I am optimistic about our ability to generate loan growth on the commercial side through year end.
Damon DelMonte: Okay. Great. Appreciate that color. And then 1 just-- 1 more quick 1 for me. Jack, I noticed, like, the average securities were down linked quarter. Just curious, should we expect there to be a kind of a build back up? Or do you think it is gonna be kind of run-rating at a lower level now?
William Jack Plants: There will be a seasonal build back up for collateral to secure public deposits come in at the end of September and the first part of October. Those purchases are largely on short term T bills. We have been actively working with our public depositors to try to transition their collateralization needs into our reciprocal deposit portfolio to relieve some of the need to use investment securities.
Damon DelMonte: Got it. Okay. that is helpful. that is all that I had. Thank you very much.
Operator: Thank you. The next question is from Manuel Navas from Piper Sandler. Please go ahead.
Manuel Navas: Hey, good morning. Could you go into a little more detail on your strong deposit flows? Like how much was seasonality in public funds versus maybe some commercial wins? And just discuss the future deposit the deposit initiative that you are leaning into most?
William Jack Plants: Yeah. This is Jack. I will take that 1. Good morning, Manuel. So to remove some of the seasonality, I would look at the year-to-date performance, and we have really had strong performance across the commercial platform. For the first 9 months of the year. That momentum has really been driven by the investment that we have made and have continued to make in our treasury management platform. So typically, we will lead with a loan origination and then bring the deposit, profile from that customer along, and we are really seeing some solid wins.
Martin K. Birmingham: Manuel, the other thing I just would add is that primacy is a fundamental strategic focus across all of our business activities. Primacy of relationship on a consumer basis, small business, commercial. So all of our sales teams are aligned, and they are incented to try to maximize the opportunity and balance utilization of our balance sheet in terms of loans with deposits that come with that. So we feel good about the progress we have made reinforcing alignment, and the outcomes are starting to follow that.
Manuel Navas: Appreciate that. As you kind of think about where you are ending the year, with that NIM in 375, I think that should be really helpful. But what are of some of the puts and takes to potentially targeting positive operating leverage next year? Is that first a goal? And what are some of the puts and takes for that?
William Jack Plants: Yes, this is Jack. I will take that 1. We are in the middle phases of building out our 2027 plan. But our target right now is positive operating leverage of 200 to 300 basis points and an efficiency ratio that is approaching 55%. I appreciate that.
Manuel Navas: What would be the biggest ways you could potentially outperform it?
William Jack Plants: It really comes from some sort of accelerated loan growth, but we are really disciplined in where we are pricing. So right now, that is where our target is. We will be able to share more details when we come out with our fourth quarter earnings and our guidance for full-year 2027.
Martin K. Birmingham: So it is Okay. We have our eye on we have our eye on loan growth. And disciplined pricing and ensuring we have adequate spreads. The other thing related to deposits, like every bank of all sizes, to the extent we can continue to drive our cost of funds down that would be an accelerator. Of performance and operating leverage.
Manuel Navas: Hi. The buyback was nice this quarter. You just talk a little bit about where it fits in your capital deployment? Are you going to keep this pace? How does it fit in versus organic growth? How does it fit in versus conversations on M&A?
Martin K. Birmingham: I think that is exactly it. It really depends. it is been a really nice opportunity for us. I think since we initiated our program, we have purchased a total of 686 thousand shares. The earn back in the early part of the program was a year or less. And most recently, about 3 years or less. So long as we are undervalued, we know the risk of execution, and it is a very straightforward capital decision for the company. But of course, we are on a path driving growth, so we are balancing all those issues. Appreciate that. Appreciate the commentary.
Operator: There are no further questions at this time. I would like to turn the floor back over to Mr. Birmingham for closing comments.
Martin K. Birmingham: Thank you very much for joining us. We look forward to continuing to keep you updated on our progress in our next call.
Operator: This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.
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