Financial Institutions Q3 Earnings Call Highlights

Key Points

• Third-quarter results were solid: Net income available to common shareholders was $19.6 million, or $0.99 per diluted share, while record net interest income reached $54.3 million. Net interest margin held at 3.70%, supported by loan growth and stable funding costs.
• Commercial lending drove balance-sheet expansion: Total loans grew nearly 6% year over year, led by commercial loans up more than 10%. Deposits also increased to $5.47 billion, with broad-based growth across customer categories.
• Full-year profitability targets were maintained, though guidance was adjusted: The company lowered its swap-fee outlook, raised investment-advisory revenue expectations, and increased projected full-year net charge-offs to approximately 30 basis points. Management continues to target at least 1.30% return on assets and 12.5% return on equity.

Financial Institutions NASDAQ: FISI reported third-quarter results marked by commercial loan growth, stable net interest margin and increased net interest income, while management maintained its full-year profitability targets and refined selected guidance assumptions.

Net income available to common shareholders was $19.6 million, or $0.99 per diluted share, President and CEO Marty Birmingham said. The company generated record quarterly net interest income of $54.3 million, supported by loan growth and a net interest margin of 3.70%, which was unchanged from the prior quarter and 5 basis points higher than a year earlier.

Commercial Lending Drives Balance-Sheet Growth

Total loans increased by more than 2% from the end of the second quarter and nearly 6% from a year earlier, with commercial lending leading the expansion. Commercial loans rose 3% sequentially and more than 10% year over year.

Birmingham said growth was driven by commercial real estate lending, including construction mortgage activity in Upstate New York and increased activity in the company’s Mid-Atlantic market. Commercial and industrial lending also grew as originations offset lower line utilization.

Management said it continues to see opportunities in Buffalo, Rochester and Syracuse, although competition has created pressure on lending spreads. Birmingham said the commercial pipeline remains supportive of growth through the rest of the year and into 2027.

Consumer lending trends were mixed. The on-balance-sheet residential portfolio increased modestly from the second quarter and rose just over 2% year over year. Sold and serviced residential mortgages rose more than 2% sequentially and about 7% from a year earlier, as the company emphasized a held-for-sale mortgage model intended to support fee income.

Home-equity line applications increased 30% year over year during the third quarter, and Birmingham said demand continued through October. Consumer indirect loans increased about 1% from the second quarter but declined 7% from a year earlier. The company said it maintained underwriting discipline through its network of more than 360 new-car dealers in New York State.

Deposits Rise, Securities Reflect Public-Fund Seasonality

Period-end deposits totaled $5.47 billion, rising more than 3% from June 30 and 2% from a year earlier. Public deposits contributed to the sequential increase, but management said growth was broad-based across all deposit categories.

Chief Financial Officer Jack Plants said year-to-date deposit performance has been strong across the commercial platform, aided by the company’s investments in treasury-management capabilities. He said the company commonly leads with loan originations and then brings in associated customer deposits.

Investment securities increased 4.5% sequentially and slightly more than 2% year over year, primarily because of public-deposit seasonality. The company expects the portfolio to decline during the fourth quarter. Plants said securities purchases to support public-deposit collateral requirements were largely short-term Treasury bills, while the company works to move some public deposits into reciprocal deposit programs.

Margin Outlook and Fee-Income Trends

Plants said the September Federal Reserve rate increase should benefit fourth-quarter margin as earning assets reprice and the company manages funding costs. About 43% of the loan portfolio is tied to prime and SOFR, while another 13% adjusts from points five years and longer on the yield curve, he said.

The company’s monthly net interest margin was about 3.72% at the end of September, and management is targeting a margin of roughly 3.75% by December. Plants said a potential December rate increase would have a muted impact on quarterly margin.

Third-quarter non-interest income totaled $10.5 million, down 4.5% from the prior quarter. The decline reflected lower commercial back-to-back swap activity after a strong second quarter, as well as a $274,000 loss on limited partnership income.

Management lowered its full-year swap-fee outlook to $750,000 to $1.2 million from a prior range of $1 million to $2 million. However, investment advisory revenue increased about 2% sequentially and nearly 11% year over year. The company raised its full-year outlook for that revenue stream to growth in the high single digits, from previous guidance for mid-single-digit growth. Courier Capital, its wealth-management subsidiary, had $4 billion in assets under management as of Sept. 30.

Expense, Credit and Capital Priorities

Non-interest expense was $36.8 million, up about 3% from the second quarter. Salaries and benefits rose to $19.7 million, reflecting seasonal increases in costs under the company’s self-insured medical plan. Professional-services expense also increased, primarily because of audit-related timing.

Other non-interest expense included roughly $325,000 of one-time items, including write-downs tied to other real estate owned and a legal settlement related to an employment matter. Management continues to target low-single-digit full-year expense growth and an efficiency ratio below 57%.

Annualized net charge-offs were 33 basis points of average loans in the third quarter, compared with 11 basis points in the preceding quarter. The company now expects full-year net charge-offs of approximately 30 basis points, the midpoint of its prior 25-to-35-basis-point range. Its allowance for credit losses stood at 99 basis points of total loans, down 1 basis point from the prior quarter.

The company maintained its full-year targets for return on average assets of at least 1.30% and return on average equity of at least 12.5%. It also tightened annual effective tax-rate guidance to 16.5% to 17%, compared with its earlier range of 16.5% to 17.5%.

Financial Institutions repurchased more than 185,000 common shares during the quarter. Birmingham said the company has repurchased 686,000 shares since initiating its program, while balancing buybacks against organic growth and other capital-allocation priorities. The company reported a tangible common equity ratio of 8.4% and a CET1 ratio of 11.36%.

Looking ahead, Plants said management is developing its 2027 plan with a current target for 200 to 300 basis points of positive operating leverage and an efficiency ratio approaching 55%. He said faster loan growth could provide an upside opportunity, though the company remains focused on disciplined pricing and maintaining adequate spreads.

About Financial Institutions (NASDAQ:FISI)

Financial Institutions, Inc NASDAQ: FISI is a diversified financial services company headquartered in Warsaw, New York. Through its principal banking subsidiary, Five Star Bank, the company provides community banking services to individuals, families, businesses and public-sector organizations.

Five Star Bank offers deposit accounts, residential and commercial real estate lending, consumer loans, business financing, cash-management services and other traditional banking products. The company also provides wealth management, investment advisory and retirement-plan administration services through specialized subsidiaries, including Courier Capital and Benefit Plan Administrative Services.

Financial Institutions serves customers primarily across communities in upstate New York, with related financial services available in additional markets.

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