Financial Institutions (NASDAQ:FISI) released first-quarter financial results and hosted an earnings call on Friday. Read the complete transcript below.

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View the webcast at https://events.q4inc.com/attendee/208517337

Summary

Financial Institutions Inc reported a net income of $20.6 million, or $1.04 per diluted share, showing improvement from previous quarters.

The company completed the refinancing of $65 million in legacy sub debt and repurchased over 163,000 shares, with a total of 500,000 shares repurchased since December.

A 3.2% increase in the quarterly cash dividend to $0.32 per share was approved, reflecting confidence in long-term strategy.

Total loans decreased slightly from the previous quarter but increased by 1.6% year over year, with plans for loan growth in the second half of the year.

The company reported a net interest margin (NIM) expansion and has adjusted full-year NIM guidance to the upper 360s.

Non-interest income was slightly down due to reduced swap fee activity, while wealth management and insurance revenues remained stable.

The efficiency ratio improved, and the company expects a full-year ratio approaching 57% due to disciplined expense management.

Deposit growth was impacted by the wind-down of the banking as a service segment, but core deposits remain a focus.

Management expressed confidence in achieving a full-year loan growth target of 5%, driven by commercial loan demand in New York markets.

Full Transcript

Josh (Moderator)

Hello and welcome to the Financial Institutions Incorporated first quarter 2026 earnings call. My name is Josh and I will be the moderator for today's call. All lines will be muted during the presentation portions of the call with an opportunity for questions and answers at the end. If you would like to ask a question please press STAR followed by one on your telephone keypad and to remove that question please press STAR followed by two. At this time I'd like to introduce your host Marty Birmingham may proceed.

Kate

Marty Birmingham, thank you for joining us. For today's call, providing prepared comments will be President and CEO Marty Birmingham and CFO Jack Plant. 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 the previous day's earnings release and investor presentation as well as historical SEC filings which are available on our investor relations website for our safe harbor description and a detailed discussion of the risk factors relating to forward looking statements. 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 with an exhibit to form 8K or in our latest investor presentation available on our IR website www.fisi-investors.com. please note this call includes information that may only be accurate as of today's date April 24, 2026. I will now turn the call over to President and CEO Marty Birmingham.

Marty Birmingham (President and CEO)

Thank you Kate Good morning, everyone and thank you for joining us today. Our first quarter results underscore the strength of our community banking franchise, reflecting disciplined execution by our team and a continued focus on sustainable profitability. We delivered net income available to common shareholders of 20.6 million or $1.04 per diluted share, representing improvement from both the linked and year ago quarters. The first quarter operating results also supported meaningful improvement on key measures of profitability over both the length and year ago quarters including return on average assets of 1.37%, return on average tangible common equity exceeding 15% and an efficiency ratio of 57%. Our management team and board took strategic actions during the quarter that reflect our commitment to prudent capital deployment and long term shareholder value creation. In January we completed the refinancing of 65 million of legacy sub debt issuances. In addition, we repurchased a little over 163,000 shares bringing the total repurchase since December to approximately 500,000 shares, or half the 5% authorization approved under the current buyback program. In February, our Board also approved a 3.2% increase in our quarterly cash dividend to $0.32 per common share. Tangible book value per share increased 1.1% to $28.15 this quarter, and strong earnings more than offset the impact of our share repurchase activity and some downward pressure in AOCI driven by interest rate volatility. Our capital actions underscore our Board's confidence in our strategy and long term outlook while reaffirming our commitment to disciplined capital management and long term shareholder value. From a balance sheet perspective, total loans were down modestly on a linked quarter basis and up 1.6% year over year. Commercial loans are relatively flat on a late quarter basis with business loans up 1% and mortgage down modestly. Compared to the first quarter 2025, both categories were up about 5%. On our January call we indicated that our expectation for first quarter commercial growth would be modest given the magnitude of loans that were closed in late 2025 and higher payoffs we anticipated to take place in the first quarter. Given geopolitical and economic uncertainty in the first quarter, we did see some of our commercial customers taking a cautious approach by tightening their balance sheets and paying down debt with cash reserves, which impacted both sides of our balance sheet in the form of lower loans and deposits. Asset Line activity in the fourth quarter 2025, we originated approximately $270 million in commercial loans with roughly 135 million rolling off in the first quarter 2026 originations were 147 million with 158 million in payoffs and paid out. Based on the size and health of the pipelines we have today, we expect to see loan growth rebound through the second half of the year and continue to expect full year loan growth of 5% driven by commercial in our upstate New York markets, we are seeing demand pick up on the C and I side, particularly in Rochester and Buffalo. In Syracuse, excitement on the ground is palpable following the Micron groundbreaking earlier this year. With a seasoned local lender joining our team recently, we believe we are well positioned to support the growth that will take place in central New York. In our Mid Atlantic portfolio where we have a small team of CRE lenders, we have experienced higher refinancing activity for construction loans, which is a testament to the high quality of sponsors and the liquidity of this portfolio. Turning to consumer loans on balance sheet, residential grew modestly up about 1% from the end of the link in year ago, quarters sold and service residential mortgages of 298 million were up 1.5% during the quarter and more than 6% year over year. As we shift more production to our off balance sheet service portfolio supporting fee income in the upstate New York metros of Rochester and Buffalo, the housing market remains hotter with home values projected to climb another 4% or more in 2026. Both mortgage and home equity applications are up 10% year over year and we are enthused about our opportunity as we enter the busier spring and summer home buying season. Consumer indirect loans were down 2.4% from the end of the fourth quarter and around 8% from the first quarter of 2025 to 788 million. As we have shared previously, we have been comfortable allowing runoff to outpace originations given our focus on profitable spreads and favorable credit mix. Originations in the first two months of the quarter were lighter than we planned, but March was very solid. With April pacing well, we feel well positioned to capitalize on the seasonal uptick in foot traffic and car buying activity that occurs in the summer months in our footprint. Credit remains stable in this line of business given the prime lending nature of our operation. We lend through a network of more than360 new auto dealers across New York State and the portfolio has an average loan size of approximately 20,000 and a weighted average FICO score exceeding 700. Period end total deposits were 5.34 billion, up 2.5% from December 31 and down about 1% from March 31 of 2025. We off boarded the remaining 7 million of BAS related deposits in the first quarter, marking the completion of our banking as a service wind down. This was the main driver of the year over year decline in total deposits and non public deposits as we took bas deposits to zero at the end of last month from approximately 55 million at March 31, 2025. Growth of reciprocal public deposits year over year has also allowed us to reduce our use of brokered wholesale deposits. A reciprocal deposit base is differentiated, one anchored in deep and often long tenured commercial and municipal relationships. More than 20% of these customers and 30% of the balances have had a relationship with Five Star for more than a decade. relationship with Five Star for more than a decade and the average relationship tenure across the portfolio is five years. Our reciprocal product offering helps us retain important customer relationships while reducing traditional collateralization requirements on public and institutional funds and providing us valuable liquidity, including during the 2023 banking crisis. Our public deposit base is well established through hundreds of local municipalities, school districts and other governmental entities. Balances reflect seasonality associated with tax collection and and state aid and as a result this funding segment peaks in the first and third quarters and remains well managed. Our team remains highly focused on the retention and acquisition of core non public deposits. We continue to target low single digit deposit growth for the full year even as we allowed some higher priced single product CDs to roll off at maturity in the first quarter benefiting the margin. It's now my pleasure to turn the call over to Jack for more details on our results including some favorable updates to our guidance.

Jack Plant (Chief Financial Officer)

Thank you. Good morning everyone. Our business lines came together to achieve profitable financial performance in the first quarter highlighted by Net Interest Margin (NIM) expansion, durability of key non interest income categories and disciplined expense management. Starting with net interest margin, the 5 basis point increase on a linked quarter basis was driven by lower interest bearing liability costs. Cost of funds decreased 15 basis points from the linked quarter with higher rate CDs matured alongside overall downward deposit repricing and as a reminder, fourth quarter margin was impacted by the level of sub debt we were carrying in December ahead of the mid January call of 65 million of past issuances. The 367 basis point Net Interest Margin (NIM) we reported for the first quarter was stronger than we anticipated due to favorable deposit pricing. While we continue to see competitive pressure on deposit pricing, we are strategically emphasizing our primary customer relationships including those with maturing time deposits which may modestly impact our cost of funds. We still anticipate modest incremental Net Interest Margin (NIM) expansion for the rest of the year and now expect to achieve full year net interest margin in the upper 360s. As a reminder, our guidance is based on a spot rate forecast which does not factor in potential future rate cuts. Investment securities yields remained stable at 4.48% quarter over quarter while average loan yields decreased 13 basis points as compared to the fourth quarter, primarily reflecting the timing of the December rate cut. As a reminder, approximately 40% of our loan portfolio is tied to variable rates with a repricing frequency of one month or less. Non interest income was 10.7 million for the quarter compared to 11.9 million in the fourth quarter. The primary driver of the variance was lighter commercial back to back swap activity given the rate environment and origination activity. As a result, associated swap fee income was 239,000 as compared to 1.1 million in Q4. However, our loan pipelines are supportive of higher originations for the remainder of the year which will positively impact swap activity and Non interest income investment advisory income of 3.1 million was consistent with the fourth quarter of 2025. This revenue is largely derived from Courier Capital, LLC, our wealth management subsidiary serving mass affluent and high net worth clients, businesses, institutions and foundations. New business was solid during the quarter offset by market driven outflows that led to a modest decline in AUM from year end 2025. With assets under management of nearly 3.6 billion, Courier Capital, LLC remains one of the largest RIAs in our region. Company owned life insurance revenue of 2.8 million was consistent with the linked quarter. Limited partnership income of 244,000 was about half the level recorded in the fourth quarter of 2025. Associated revenue fluctuates quarter to quarter given the performance of underlying investments. A net loss on other assets of 481,000 was recognized in the first quarter of 2026 compared to a net loss of 225,000 in the fourth quarter of 2025. The first quarter loss relates to the write down of two branch locations, one which we are preparing to consolidate in the second quarter and another that has been held for sale from previous branch optimization. These declines were partially offset by 1.8 million of other non interest income which was up about 340,000 from the linked quarter reflecting insurance proceeds related to a past deposit related charge off. We reported quarterly non interest expense of 35.6 million down from 36.7 million in the fourth quarter. Salaries and Benefits expense the primary driver of nie was down 722,000 to 3.7% reflecting lower incentive compensation and lower medical expenses. We do expect to see annual medical expenses to be in line with our self funded plan experienced in 2025 and that's reflected in our full year guidance. Professional Service expenses were down 366,000 or about 20% from the linked quarter reflecting the lower level of interest rate swap transactions along with lower other professional and consulting fees. Occupancy and equipment expenses declined 239,000 or around 6% due in part to seasonal snow plowing expense, the impact of the fourth quarter. These reductions were partially offset by higher computer and data processing expenses which were up 277,000 or 4.7% from Q4. The increase was primarily due to the reversal of prior accruals associated with the termination of a vendor relationship in the first quarter. This will be largely offset by the elimination of associated recurring costs moving forward. Prudent expense management remains a top priority reflecting our commitment to maintaining the positive operating leverage we have achieved given our favorable first quarter results we now expect to deliver a full year efficiency ratio approaching 57%. We reported an effective tax rate of 15.5% in the first quarter driven by appreciation in our stock price that positively impacted the tax deduction associated with long term stock based compensation that vests annually in the first quarter. The 2026 effective tax rate is now expected to be at the lower end of our guided range of between 16 and a half to 17.5% including the impact of the amortization of tax credit investments placed in service in recent years. Looking at credit costs, net charge offs were 44 basis points of average loans compared to 21 basis points in the linked quarter. First quarter charge offs included a portion of a previously disclosed commercial business relationship placed on non accrual status in 2023. It was fully reserved for in a prior year through a specific reserve in our allowance process. We expect to remain within our previously disclosed full year charge off guidance of 25 to 35 basis points. Our allowance for credit losses was 97 basis points of total loans this quarter, down slightly from year end 2025. The decline reflects lower loss rates and reduced qualitative factors which are driven by improving seasonal trends and indirect delinquencies and favorable performance in our commercial loan pools. We did increase the qualitative factor tied to the economic environment to reflect ongoing geopolitical and macroeconomic uncertainty. Overall, the ACL remains at the lower end of our historical range and we remain comfortable with the allowance given our strong asset quality. That concludes my prepared remarks and I'll now turn the call back to Marty.

Marty Birmingham (President and CEO)

Thanks Jack. Our first quarter results reflect strong underlying profitability, disciplined balance sheet management and a capital position that provides flexibility as we continue to invest in our business while returning capital to shareholders. While the broader economic environment remains dynamic, we are seeing positive momentum in our lending and wealth management pipelines. Our profitable results also support the positive revisions to our NIM Efficiency ratio and tax guidance that Jack shared. Supported by a dedicated team and filling a unique space in our region's banking industry, we believe we are well positioned to achieve our targets for full year 2026 and create long term value for our shareholders. Thank you for your attention this morning and your continued support and interest in our company. That concludes our prepared remarks. Operator, can you please open the call for questions?

Operator

Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press STAR followed by one on your telephone keypad. To remove that question, please press star followed by two. If you are using the speakerphone, please pick up the handset before using the keypad. Once again, if you'd like to ask a question, please press star followed by one. The first question comes from line of Daymond Del Monte with kbw. You may proceed.

Daymond Del Monte (Equity Analyst)

Hey, good morning guys. Hope everybody's doing well today. First question just on the margin. Appreciate the updated guidance there. And Jack, hopefully you could just kind of talk about some of the dynamics that give you confidence that you're able to maintain this upper 3.60% level for the remainder of the year.

Jack Plant (Chief Financial Officer)

Yeah, thanks Damon. So the margin came in above, a little bit above our expectations for the quarter. That was primarily driven by benefit that we recognized through cost of funds. Our cost of interest bearing liabilities continue to drift downward through January, February and into March. You know, frankly the cost of interest bearing liabilities ended March at 2.49%, which about 9 basis points lower than January. The January print we do see some pressure coming through from a competitive standpoint on deposits in our market. So I do believe that we are approaching the bottom from a cost of funds perspective. But given where our loan pipeline stands and the spreads that we're recognizing on originations, I think we're going to start to see some lift on the earning asset side which is going to provide us that margin stability through the rest of the year. Got it. Okay. And can you just remind us on the asset side you have a lot of back book repricing to happen this year? We have from a cash flow perspective we have about a billion dollars on a rolling 12 month basis of cash flow that comes off the loan portfolio. But just from an overall yield standpoint we are seeing on the commercial portfolios incremental improvement in new origination yields versus what's running off and that's driving some of that earning asset yield benefit that we're seeing. We did have some compression that occurred on our floating rate portfolio to start the year and that was driven by the December rate cut that we had. So about 40% of our portfolio is variable. But given our rate forecast for the year and expectations, we believe that can be tempered.

Daymond Del Monte (Equity Analyst)

Got it. Okay, great. And then I guess maybe a quick question on capital management. Good to see you guys are active with the buyback. You know Marty, just kind of wondering what your thoughts are as you kind of look out in the landscape of growth expectations and managing capital and still having around half year buyback left. You know, do you think you guys are still on the trail to continue with the buyback?

Marty Birmingham (President and CEO)

We still have capacities, you know, I indicated and you know, we have a couple of governors that we're thinking about. Number one is our CET1 ratio of 11% and really a floor of 11%. And as well before that is ensuring we've got capacity to support growth. And you know, we talked about our confidence in terms of being a back half of the year experience for us in terms of driving our balance sheet growth. And our pipelines are healthy and they are demonstrating vibrancy relative to all the loans that flow through at the end of the year. So I would say those are the factors what we have done. We're thrilled with Damon because the earn back is at around a year. So that's been a very good use of capital.

Daymond Del Monte (Equity Analyst)

Got it. Great. Appreciate that color. That's all that I have for now. I'll step back. Thank you.

Marty Birmingham (President and CEO)

Thanks David.

Operator

Thank you. The next question comes from the line of Manuel Naves with Piper Sandler. You may proceed.

Eknu Najar

Hey, good morning, this is Eknu Najar. On behalf of Manuel, I wanted to ask a question about the loan growth. How do you guys plan to rebound to maintain the 5% guide? And could you provide some more insight on the pipelines?

Marty Birmingham (President and CEO)

Sure. So today the pipeline currently stands at almost a billion dollars, approximately 950 million. That's up from 650 ish at year end and it's up historically by other, you know, prior year period measurements. So we, that's, you know, commercial's been a lumpy business historically in terms of how it flows through to the balance sheet opportunities to ultimately the balance sheet. So we're, we're very comfortable that where we stand today and the growth of the pipeline where it is that that ultimately will translate to opportunities for growth in the balance sheet. Our CI pipeline activities are basically two times where we've been historically. So that's a good leading indicator. And our CRE opportunities currently stand at around 600, little over 600 million. So we are monitoring that closely. We have a very aggressive internal process in terms discipline process I should say, relative to monitoring opportunities and processing them. And we keep a very close eye on term sheets that have been vetted by our credit folks and been issued and those that are seeking approval internally that the customer is accepted where we've issued commitments and where commitments have been accepted by the customer. So it's obviously a timing issue, but we're comfortable that it will ultimately flow through the balance sheet.

Jack Plant (Chief Financial Officer)

The other, the other component there is, you know, we've been a very successful construction lender, and we have construction commitments that are planned to Draw down over the remainder of the year for projects that are in flight and those are not represented in the billion dollar loan pipeline that Marty mentioned. So we're very confident in our ability to achieve that 5% target.

Eknu Najar

Thank you, that's helpful. I also wanted to ask, are you seeing pricing get tougher on loans or deposits? How is the competition in that regard?

Jack Plant (Chief Financial Officer)

Yeah, this is Jack. So as I mentioned earlier, we are seeing the market being quite competitive on deposit rates, particularly higher rate CDs and money market accounts. Our focus is more on relationship based pricing, which is why we allowed some of those IRA single-account CD products to roll our customers to roll off during the quarter, which is where we saw some of our deposit balances declined on the retail side. But as we are out there in our commercial pipelines, we've seen success with deposit growth that supports loan originations. And as Marty mentioned, the C and I pipeline being 2x where it's been historically, that's the portfolio that's a bit more deposit rich on the commercial side which so provide some balance sheet funding. Those originations trickle through on the pricing on the commercial side, it's as competitive as it has been. But spreads that we've observed have been within our tolerances and aligned with what we've budgeted for the year. So we're comfortable there.

Eknu Najar

Thank you very much, guys.

Jack Plant (Chief Financial Officer)

Thank you. Thank you.

Operator

That concludes today's question and answer session. I would now like to pass the call back to Marty for any closing remarks.

Marty Birmingham (President and CEO)

Thank you very much, operator for your assistance and thanks to everyone who joined us. We look forward to updating you on our second quarter in July.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.