Financial Institutions NASDAQ: FISI reported improved profitability in the first quarter of 2026, citing net interest margin expansion, disciplined expense management, and continued capital returns to shareholders.
President and CEO Marty Birmingham said the company delivered net income available to common shareholders of $20.6 million, or $1.04 per diluted share, representing improvement versus both the linked quarter and the year-ago period. Birmingham also highlighted profitability metrics that improved over both comparisons, including return on average assets of 137 basis points, return on average tangible common equity exceeding 15%, and an efficiency ratio of 57%.
Capital actions and tangible book value
Management emphasized several capital-related moves during the quarter. Birmingham said the company completed the refinancing of $65 million of legacy subordinated debt issuances in January. The company also repurchased “a little over 163,000 shares” in the first quarter, bringing total repurchases since December to about 500,000 shares, or roughly half of the company’s 5% authorization under its current buyback program.
In February, the board approved a 3.2% increase in the quarterly cash dividend to $0.32 per share. Birmingham added that tangible book value per share increased 1.1% to $28.15, with “strong earnings more than offset” the impact of repurchases and “some downward pressure in AOCI driven by interest rate volatility.”
During the Q&A, Birmingham said the company continues to evaluate repurchases through the lens of capital and growth needs, noting a focus on maintaining a common equity tier 1 ratio floor of 11% and ensuring capacity to support expected balance sheet growth later in the year. He added that the company was “thrilled” with the repurchases executed so far, citing an earnback period of “around a year.”
Loan trends and outlook
On the balance sheet, Birmingham said total loans were down modestly versus the linked quarter and up 1.6% year-over-year. Commercial loans were “relatively flat” sequentially, with business loans up 1% and mortgage down modestly; both business and mortgage categories were up about 5% compared to the first quarter of 2025.
Birmingham attributed first-quarter commercial softness partly to elevated payoffs after a strong fourth quarter of 2025, as well as customer caution amid “geopolitical and economic uncertainty” that led some borrowers to pay down debt using cash reserves. He said the company originated roughly $270 million of commercial loans in the fourth quarter of 2025, with about $135 million rolling off, while first-quarter 2026 originations were $147 million with $158 million in payoffs and payouts.
Looking ahead, Birmingham said the company expects loan growth to rebound in the second half of the year and reiterated expectations for full-year loan growth of 5%, “driven by commercial.” He cited pickup in C&I demand in Rochester and Buffalo and said there is heightened activity in Syracuse following Micron’s groundbreaking earlier in the year. He also said the company has seen higher refinancing activity for construction loans in its Mid-Atlantic CRE portfolio, which he characterized as a reflection of “the high quality of the sponsors and the liquidity of this portfolio.”
In response to a Piper Sandler question about maintaining the 5% loan growth guide, Birmingham said the current pipeline stands at nearly $1 billion (about $950 million), up from roughly $650 million at year-end. He added that C&I pipeline activity is “basically two times” historical levels, while the CRE opportunity pipeline is a little over $600 million. CFO W. Jack Plants II added that the company also has construction commitments expected to draw down over the remainder of the year that are not included in the nearly $1 billion pipeline figure, and said management is “very confident” in achieving the 5% target.
Deposits and funding mix
Period-end deposits totaled $5.34 billion, up 2.5% from Dec. 31 and down about 1% from March 31, 2025. Birmingham said the company off-boarded the remaining $7 million of banking-as-a-service-related deposits during the quarter, completing the BaaS wind-down. He said BaaS balances went to zero at the end of March from approximately $55 million a year earlier.
Birmingham said growth in reciprocal public deposits helped reduce brokered wholesale deposits. He described the reciprocal deposit base as anchored in long-tenured commercial and municipal relationships, noting that more than 20% of customers and 30% of balances have been with Five Star for more than a decade, and that average tenure across the portfolio is five years.
Management said it continues to focus on core nonpublic deposits and still targets low single-digit deposit growth for the full year, even as it allowed some higher-priced single-product CDs to roll off at maturity in the first quarter, which benefited margin.
Margin expansion, fee income, and expense discipline
Plants said first-quarter performance was highlighted by net interest margin expansion, “durability of key non-interest income categories,” and disciplined expenses. Net interest margin increased 5 basis points sequentially to 3.67%, driven by lower interest-bearing liability costs. Plants said cost of funds decreased 15 basis points from the linked quarter as higher-rate CDs matured and deposit pricing repriced downward. He added that the first-quarter margin was “stronger than we anticipated due to favorable deposit pricing.”
While noting competitive pressure on deposit pricing, Plants said the company is emphasizing primary customer relationships and still anticipates modest incremental NIM expansion through the rest of the year. He said the company now expects full-year net interest margin in the “upper 360s,” based on a spot rate forecast that does not assume future rate cuts. He also noted that investment securities yields were stable at 4.48% quarter-over-quarter, while average loan yields declined 13 basis points versus the fourth quarter, primarily reflecting the timing of a December rate cut. Plants said about 40% of the loan portfolio is tied to variable rates with repricing frequencies of one month or less.
During Q&A, Plants said the cost of interest-bearing liabilities continued to drift lower through the quarter, and he suggested the company may be approaching the bottom on funding costs. He also pointed to the loan pipeline and origination spreads as factors supporting margin stability through the rest of the year. On repricing, Plants said roughly $1 billion of cash flow rolls off the loan portfolio over a rolling 12-month period and that new commercial origination yields are incrementally higher than runoff yields.
Non-interest income was $10.7 million, down from $11.9 million in the fourth quarter, primarily due to lower commercial back-to-back swap activity. Swap fee income was $239,000 versus $1.1 million in the prior quarter. Plants said pipelines support higher originations for the remainder of the year, which “should positively impact swap activity and non-interest income.”
Plants said investment advisory income was $3.1 million, consistent with the fourth quarter, and noted that assets under management at Courier Capital were nearly $3.6 billion, though AUM declined modestly from year-end due to market-driven outflows. Company-owned life insurance revenue was $2.8 million, also consistent with the linked quarter. Limited partnership income totaled $244,000, about half the prior-quarter level, which Plants attributed to underlying investment performance variability.
The company recorded a net loss on other assets of $481,000, compared with a net loss of $225,000 in the fourth quarter, which Plants said related to the write-down of two branch locations—one being prepared for consolidation in the second quarter and another held for sale from a previous optimization. Those impacts were partially offset by $1.8 million of other non-interest income, up about $340,000 sequentially, reflecting insurance proceeds related to a past deposit-related charge-off.
Non-interest expense totaled $35.6 million, down from $36.7 million in the fourth quarter. Plants said salaries and benefits fell $722,000, or 3.7%, due to lower incentive compensation and lower medical expenses, while professional services declined $366,000, reflecting fewer swap transactions and lower other consulting costs. Occupancy and equipment expense also declined, partly due to seasonal snowplowing costs in the fourth quarter. These reductions were partly offset by higher computer and data processing expense, which Plants said rose due to the reversal of prior vendor-termination accruals; he said recurring costs associated with that relationship will be eliminated going forward.
Based on first-quarter results, Plants said the company now expects to deliver a full-year efficiency ratio “approaching 57%.” He also said the effective tax rate was 15.5% in the first quarter, driven by stock-price appreciation that benefited the tax deduction tied to long-term stock-based compensation that vests annually in the first quarter. Plants said 2026’s effective tax rate is now expected to be at the low end of the company’s 16.5% to 17.5% guided range.
Credit costs and allowance
On credit, Plants said net charge-offs were 44 basis points of average loans versus 21 basis points in the linked quarter. He said first-quarter charge-offs included a portion of a previously disclosed commercial business relationship that was placed on non-accrual status in 2023 and “fully reserved for in a prior year through a specific reserve” in the allowance process. Plants said the company still expects to remain within its full-year charge-off guidance of 25 to 35 basis points.
The allowance for credit losses was 97 basis points of total loans, down slightly from year-end 2025. Plants attributed the decline to lower loss rates and reduced qualitative factors tied to improving indirect delinquency seasonality and favorable commercial loan pool performance, while noting that the company increased the qualitative factor tied to the economic environment due to geopolitical and macroeconomic uncertainty.
In closing remarks, Birmingham said the first-quarter results reflected “strong underlying profitability,” disciplined balance sheet management, and a flexible capital position, while acknowledging a “dynamic” broader economic environment. The company said it plans to provide its next update with second-quarter results in July.
About Financial Institutions NASDAQ: FISI
Financial Institutions, Inc NASDAQ: FISI is a non-diversified, closed-end management investment company that seeks to provide tax-advantaged income to shareholders. The company invests primarily in investment-grade municipal obligations issued by states, municipalities and government agencies across the United States. By focusing on high-credit-quality bonds, Financial Institutions aims to deliver current income that is exempt from federal income tax.
In constructing its portfolio, the company may also utilize money market instruments and repurchase agreements to manage liquidity and facilitate efficient settlement.
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