Financial Institutions Inc 2026 Q3 Earnings Call

Thank you for joining us for today's call. Providing prepared comments will be President and CEO Marty Birmingham and CFO Jack Plants. We will be joined by additional members of the company's leadership team during the question-and-answer session. Today's prepared comments and Q&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 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 as an exhibit to Form 8-K or in our latest investor presentation available on our IR website, www.fisi-investors.com. Please note that this call includes information that may only be accurate as of today's date, October 30th, 2026. I will now turn the call over to President and CEO Marty 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. Commercial 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 3.7% was stable relative to the linked quarter and up five 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 185,000 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. While 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, and 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, and 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 and year-ago quarters respectively, as our models weighted toward a held-for-sale approach in support of fee income. Home equity lines of credit have 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 non-accrual, 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 for 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 non-public deposits remain high priorities, and we continue to target low single-digit deposit growth for the full year.

Now, my pleasure to turn the call over to Jack for additional details on our results and guidance.

Thank you, Marty, 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 370 basis points. Net interest income increased 2% from the prior quarter to $54.3 million. The investment portfolio yield of 4.46% was consistent with the linked quarter, and the average loan yield picked up one basis point to 6.08%. The cost of average interest-bearing liabilities increased six 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. Non-interest income of $10.5 million was down 4.5% from the linked quarter.

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 $750,000 and $1.2 million, down from the previous guidance of $1 million to $2 million. We also recorded a loss of $274,000 for limited partnership income in the third quarter, compared with a loss of $140,000 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 the mid-single-digit growth below 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 30th, 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 that typically increase as we approach year-end. As a reminder, we modeled higher benefits expense in our guidance based on our 2025 experience.

Professional services expense of $1.5 million was $212,000 or 17% higher than the linked quarter, primarily driven by the timing of typical external audit-related expenses. There were also a couple of one-time items included in other non-interest expense that together totaled about $325,000. 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, and we remain on track to limit full-year non-interest expense growth to the 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 have tightened our annual tax guidance to between 16.5% and 17%, down from between 16.5% and 17.5%.