Financial Institutions NASDAQ: FISI reported higher second-quarter earnings, loan growth and net interest margin, while raising several full-year profitability targets as commercial lending momentum strengthened across its core Upstate New York markets.
Net income available to common shareholders totaled $20.8 million, up 1% from the first quarter and 21% from the prior-year quarter. Diluted earnings per share were $1.04, unchanged from the first quarter and up from $0.85 a year earlier. Tangible book value per share rose 2% sequentially and more than 10% year over year to $28.72.
President and CEO Marty Birmingham said the quarter reflected “diversified revenue, well-managed expenses, and sustained earnings and profitability.” The company’s quarterly efficiency ratio improved to nearly 55%, supported by revenue growth and flat non-interest expenses.
Commercial lending supports loan growth
Total loans increased 2.7% from the end of the first quarter and 4.8% from a year earlier. Commercial loans rose 4.3% sequentially and 9.1% year over year, led by commercial and industrial lending, with contributions from commercial real estate and business banking.
Birmingham said activity in the Syracuse market has increased among industrial suppliers and contractors following the groundbreaking earlier this year for Micron’s semiconductor campus. He said Financial Institutions sees opportunities tied to the company’s planned $100 billion investment as the region supports further development and population growth.
The company also said it has added six commercial lending professionals during the past eight to 10 months, with those employees beginning to build pipelines. Birmingham said its Baltimore loan production office remained stable at approximately $400 million in outstanding loans, though the business experienced earlier-than-expected payoffs and paydowns.
Residential mortgage lending also gained momentum. On-balance-sheet residential loans increased 1.5% from the prior quarter and 2.2% from the prior year. Sold and serviced residential mortgages reached $302 million, rising 1.4% sequentially and more than 7% year over year as the company shifted more production toward its off-balance-sheet servicing portfolio.
Consumer indirect loans, however, declined 2.1% from the first quarter and 7.5% from a year earlier. Management attributed the decline to its emphasis on spreads and prime-credit borrowers, which has allowed runoff to exceed originations. The indirect portfolio’s second-quarter net charge-off ratio improved to 59 basis points, aided by recoveries.
Despite stronger commercial activity, Financial Institutions maintained its target for full-year loan growth of 5%. Chief Financial Officer Jack Plants II said commercial production is offsetting greater-than-anticipated runoff in the indirect portfolio, where the company is not pursuing lower credit tiers.
Margin guidance rises as funding costs decline
Net interest income increased to $53.4 million in the second quarter, helped by loan growth and an additional day in the quarter. Net interest margin expanded 3 basis points from the first quarter and 21 basis points from the year-ago period.
Average loan yields were 6.07% in both the first and second quarters, while investment securities yields declined 2 basis points sequentially to 4.46%. Plants said lower interest-bearing liability costs drove the margin improvement and that, absent Federal Reserve activity, deposit rates appear to have reached a low point.
The company raised its full-year net interest margin forecast to approximately 370 basis points from previous guidance in the upper 360-basis-point range. Plants said the bank is relatively insensitive to a 25-basis-point move in either direction, based on its interest-rate risk modeling.
Period-end deposits were $5.3 billion, down 0.7% from March 31 but up 2.8% from June 30, 2025. The linked-quarter decline reflected seasonal movements in public deposits tied to tax collections and state aid. Management continues to target low-single-digit deposit growth for the full year and described the market for certificates of deposit as competitive.
Fee income and wealth assets increase
Non-interest income rose 2.6% from the first quarter to $11 million. Investment advisory revenue increased 7.4% to $3.3 million, as assets under management at wealth subsidiary Courier Capital reached $4 billion, up 13% during the quarter and 19% year over year.
Plants said asset growth reflected positive net flows, market gains and investments in talent. Courier Capital also continued to develop relationships in Florida after opening a smaller office in late 2025 to serve seasonal residents and retirees.
Banking services fee income and service charges increased $596,000, or 17%, from the prior quarter. Swap fee income more than doubled as back-to-back swap volume increased alongside lending activity, while loan servicing income rose nearly 45% due to the company’s off-balance-sheet residential mortgage strategy.
Company-owned life insurance revenue increased 4% sequentially to $2.9 million. Based on first-half results, Financial Institutions now expects at least $11 million of company-owned life insurance income for the full year, compared with prior guidance of $10.5 million.
Capital builds and profitability outlook improves
Non-interest expense was $35.6 million, consistent with both the first quarter and the year-ago quarter. Salaries and benefits rose 3% sequentially, reflecting annual merit increases and an additional business day, while computer and data processing costs declined 11.3% following first-quarter vendor contract termination costs.
Credit costs also improved. Net charge-offs totaled 11 basis points of average loans, compared with 44 basis points in the first quarter. The allowance for credit losses increased 3 basis points to 1% of total loans.
Capital ratios continued to rise, with the common equity Tier 1 ratio reaching 11.44%, up 7 basis points sequentially and 60 basis points year over year. The tangible common equity ratio was 9.02%, up 13 basis points from the first quarter and 41 basis points from a year earlier.
Management raised its full-year return on average assets target to at least 1.3% from 1.22% and increased its return on average equity target to at least 12.5% from 11.9%. It also expects a full-year efficiency ratio below 57%.
When asked about share repurchases, Plants said management continues to view buybacks as an efficient use of capital, citing the company’s valuation relative to its profitability metrics and peer group.
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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