FISI Q3 2026 Earnings Call: Record Net Interest Income and Commercial Loan Growth

Key Takeaways

• Financial Institutions, Inc. (NASDAQ: FISI) reported Q3 2026 net income available to common shareholders of $19.6 million, or $0.99 per diluted share.
• Net interest income reached a quarterly record of $54.3 million, up 2% sequentially, while net interest margin held at 3.70% and increased 5 basis points year over year.
• Total loans grew more than 2% from Q2 and nearly 6% year over year. Commercial loans rose 3% sequentially and more than 10% year over year.
• Investment advisory revenue increased approximately 2% quarter over quarter and nearly 11% year over year, supported by Courier Capital’s $4 billion in assets under management.
• Annualized net charge-offs increased to 33 basis points from 11 basis points in Q2. Management now expects the full-year 2026 ratio to be approximately 30 basis points.
• Management maintained its core earnings guidance and profitability targets, including return on average assets of at least 1.30%, return on average equity of at least 12.5%, and an efficiency ratio below 57%.

Key Financial Data

Business and Operating Performance

Commercial lending remained the main growth driver. Commercial real estate activity benefited from construction mortgage demand in Upstate New York and increased activity in the Mid-Atlantic market. Commercial and industrial loans also expanded as originations more than offset lower line utilization.

Management said commercial pipelines remained solid across Buffalo, Rochester, Syracuse and the Mid-Atlantic market. The pipeline was approximately the same size as at the beginning of 2026, reflecting continued replenishment as existing balances paid down.

The on-balance-sheet residential mortgage portfolio increased modestly from Q2 and just over 2% year over year. Sold and serviced residential mortgages rose more than 2% sequentially and approximately 7% year over year. Home equity line applications increased 30% year over year, with demand continuing through October.

Consumer indirect loans rose approximately 1% sequentially but declined 7% year over year. FISI originates these loans through more than 360 new-car dealers across New York State and said it continues to prioritize pricing discipline and prime credit quality.

Investment advisory revenue remained the strongest contributor to noninterest income. Courier Capital had $4 billion in assets under management as of September 30, 2026, supported by new business activity and hiring investments.

Deposit growth was broad-based, although public deposit seasonality was the largest sequential driver. Management continues to shift some public deposits into reciprocal deposit products to reduce securities collateral requirements. Treasury management investments also supported commercial deposit wins.

FISI repurchased more than 185,000 common shares during the quarter. Since launching the program, the company has repurchased approximately 686,000 shares.

Management Guidance

• Management maintained full-year loan and deposit growth guidance and continues to target low-single-digit deposit growth.
• The company expects Q4 margin support from the September Federal Reserve rate increase as earning assets reprice. Management is targeting a monthly net interest margin of approximately 3.75% by December, versus 3.72% in September.
• Full-year 2026 net charge-offs are expected to be approximately 30 basis points.
• Investment advisory revenue is now expected to grow at a low-double-digit rate versus 2025, upgraded from prior mid-single-digit growth guidance.
• Full-year swap fee guidance was reduced to $750,000-$1.2 million from $1 million-$2 million.
• Company-owned life insurance revenue is expected to exceed $11 million in 2026.
• Full-year noninterest expense growth is expected to remain in the low single digits, with an efficiency ratio below 57%.
• The effective tax rate is expected to be 16.5%-17.0%, narrowed from 16.5%-17.5%.
• Profitability targets remain return on average assets of at least 1.30% and return on average equity of at least 12.5%.
• For 2027 planning, management is targeting 200-300 basis points of positive operating leverage and an efficiency ratio approaching 55%. More detailed guidance is expected with Q4 results.

Risks and Areas to Watch

Annualized net charge-offs rose materially during the quarter, partly reflecting the final exposure to a previously disclosed commercial relationship under workout. A foreclosed property tied to that relationship was transferred to other real estate owned.

Commercial lending competition remains intense and is pressuring spreads. Management emphasized that future growth will depend on maintaining disciplined pricing and adequate returns.

Funding costs increased during Q3, with the cost of average interest-bearing liabilities rising 6 basis points to 2.67%. Management identified lower funding costs as a potential driver of stronger operating leverage.

Noninterest income was affected by lower commercial back-to-back swap activity and a $274,000 limited partnership loss. Management noted that partnership income can fluctuate with the performance of underlying investments.

Public deposits and related securities purchases remain seasonal. Management expects the investment portfolio to decline in Q4 after the Q3 increase associated with public deposit collateral requirements.

Analyst Q&A Highlights

On margin sensitivity, management said approximately 43% of the loan portfolio floats with prime and SOFR, while another 13% is adjustable from the five-year portion of the curve onward. The September rate increase began benefiting asset yields late in the quarter, but its Q3 impact was limited by timing.

On loan growth, management said commercial pipelines remain strong and are being actively replenished. Accelerated loan growth could support better-than-targeted 2027 operating leverage, although the company stressed that it would not compromise pricing discipline.

On deposits, management attributed underlying growth to investments in treasury management and a strategy of pairing commercial loan originations with customer deposits. Relationship primacy across consumer, small-business and commercial banking remains a strategic priority.

On capital allocation, management said share repurchases remain attractive while the stock is considered undervalued, but capital deployment must be balanced against organic growth and other strategic opportunities.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Greetings, and welcome to the Financial Institutions Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 President and CEO, Marty Birmingham; and CFO, Jack Plants. He 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 30, 2026.

I will now turn the call over to President and CEO, Marty Birmingham.

Martin 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 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 noninterest 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've made some refinements to noninterest income. Jack will walk through these during his discussion of the income statement in a few minutes.

Before that, I'd 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 model is 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've 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 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 nonpublic 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.

Jack Plants

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 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. 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 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've 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 noninterest 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 noninterest 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 noninterest 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've tightened our annual tax guidance to between 16.5% and 17%, down from between 16.5% and 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 Marty 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 from 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'll now turn the call back to Marty.

Martin 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 nonpublic 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

[Operator Instructions] The first question is from Damon DelMonte from KBW.

Question-and-Answer Session

Damon Del Monte

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, kind of how you think the margin would be responding as we go into 2027?

Jack Plants

Yes. Thanks, Damon. So as you may recall, about 43% of our loan book floats off of prime and SOFR. And then we've got about 13% of the remaining book that is adjustable from a 5-year point of the curve on end. We've 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 as we look to the rest of the year, I think we're targeting December wrapping up around 3.75%. So the earning asset side of the portfolio continues to benefit for the rest of the year. If there's a hike in December, the impact would be fairly muted on the quarterly margin.

Damon Del Monte

Got it. And would you expect those dynamics to continue as we go into '27, given the additional rate hike?

Jack Plants

No.

Damon Del Monte

Okay. 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've kind of reiterated the mid-single digits for the year, but anything that's kind of standing out here in the fourth quarter that really gives you confidence for another solid quarter?

Martin Birmingham

I just -- it's Marty, Damon. Thanks for the questions this morning. Our pipelines continue to be pretty solid and consistent with where they've been in the year-over-year periods going back to '25, '26 and the outlook for '27. So that's across the board in CRE and C&I as well as generally upstate for the most part. But even our Mid-Atlantic loan team is showing growth in their opportunities that they're looking at. But specifically, how that translates to the outlook, Jack, how would you?

Jack Plants

Yes, I would say that we've been actively replenishing our pipelines across all portfolios, 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'm optimistic about our ability to generate loan growth on the commercial side through year-end.

Damon Del Monte

Okay. Great. Appreciate that color. And then just one more quick one for me. Jack, I noticed like the average securities were down linked quarter. Just curious, should we expect there to be kind of a build back up? Or do you think it's going to be kind of run-rating at a lower level now?

Jack Plants

There will be a seasonal build back up for collateral to secure public deposits that come in at the end of September and into the first part of October. Those purchases are largely on short-term T-bills. We've 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.

Operator

The next question is from Manuel Navas from Piper Sandler.

Manuel Navas

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 kind of future -- discuss the deposit initiatives that you're leaning into most.

Jack Plants

Yes. This is Jack. I'll take that one, Manuel. So to remove some of the seasonality, I look at the year-to-date performance, and we've 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 made and have continued to make in our treasury management platform. So typically, we'll lead with a loan origination and then bring the deposit profile from that customer along, and we're really seeing some solid wins.

Martin 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've made, reinforcing alignment, and the outcomes are starting to follow that.

Manuel Navas

Appreciate that. As you kind of think about where you're ending the year with that NIM and 3.75%, I think that should be really helpful. But is that -- what are kind of some of the puts and takes to potentially targeting positive operating leverage next year? And is that first a goal? And is that -- what are some of the puts and takes for that?

Jack Plants

Yes. This is Jack. I'll take that one. We're in the probably 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's approaching 55%.

Manuel Navas

I appreciate that. What would be the biggest ways you could potentially outperform it?

Jack Plants

It would really come from some sort of accelerated loan growth, but we're really disciplined in where we're pricing. So right now, that's where our target is. We'll be able to share more details when we come out with our fourth quarter earnings and our guidance for full year 2027.

Martin Birmingham

So 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

The buyback was nice this quarter. Can 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 Birmingham

Yes. I think that's exactly it. It kind of really depends. It's really been a really nice opportunity for us. I think since we initiated our program, we purchased a total of 686,000 shares. The earnback in the early part of the program was a year or less and most recently, about 3 years or less. So as long as we're undervalued, we know the risk of execution, and it's a very straightforward capital decision for the company. But of course, we are on a path and driving growth. So we're balancing all those issues.

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 Birmingham

Thank you very much for joining us. We look forward to continuing to keep you updated on our progress on our next call.

Operator

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.