Financial Institutions - Q4 2025

Transcript

Operator (participant)

Hello, everyone, and thank you for joining the Financial Institutions, Inc. fourth quarter and year-end 2025 earnings call. My name is Lucy, and I'll be coordinating your call today. During the presentation, you can register a question by pressing Star followed by 1 on your telephone keypad. If you change your mind, please press Star followed by 2. It is now my pleasure to hand over to your host, Kate Croft, Director of Investor Relations, to begin. Please go ahead.

Kate W. Croft (Director of Investor Relations)

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham, and CFO, Jack Plants. They'll 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 our 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 in 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, January 30, 2026. I will now turn the call over to President and CEO, Marty Birmingham.

Martin K. Birmingham (President and CEO)

Thank you, Kate. Good morning, everyone, and thank you for joining us today. The fourth quarter rounded out what was a very strong year for our company, marked by consistent execution and profitable organic growth across our enterprise. We delivered net income available to common shareholders of $19.6 million or $0.96 per diluted share for the fourth quarter, and $73.4 million, or $3.61 per diluted share for the full year. Return on average assets was 120 basis points for the year, while return on average equity was 12.38%. Both measures exceeded our annual guides, supported by growing net interest income of $200 million and durable non-interest income of $45 million. Our efficiency ratio for the year was 58%.

We are incredibly proud of these results and excited about the coming year and opportunities ahead. That sentiment is shared by our board, which approved a more than 3% increase to our quarterly dividend and new share repurchase plan in 2025, providing authorization to buy back up to 5% of common shares. These actions reinforce our board and management team's confidence in our strategy and our disciplined approach to long-term value creation. In the fourth quarter, our capital actions included the repurchase of 1.7% of outstanding shares, totaling nearly 11 million, and the successful completion of an $80 million sub debt offering. Sub debt notes have a 5-year fixed rate of 6.5%, which is favorable to the 2015 and 2020 issuances that were subsequently redeemed earlier this month.

2025 notes received a BBB- rating from Kroll with stable outlook, reflective of our improved profitability and capital position. Strength of the company's credit rating and favorable coupon on our recent debt issuance are clear testaments to our commitment to achieving higher financial performance. We delivered solid loan growth, with total loans increasing 1.5% in the fourth quarter and 4% year-over-year to $4.66 billion. This growth was reflective of strong competitive positioning and demand in commercial lending across our Upstate New York markets. Commercial business loans were down modestly on a linked-quarter basis and up 11% year-over-year. Commercial mortgage loans were up about 4% from the end of the linked quarter and 6.5% year-over-year, led by healthy activity in our Rochester region.

We remain highly confident in the durability and growth potential of our Upstate New York markets. This includes Syracuse, where Micron Technology's long-anticipated $100 billion investment officially broke ground earlier this month. The build-out and operation of an entire semiconductor supply chain is expected to bring thousands of jobs and drive significant economic expansion. While the results will take years to fully materialize, we were excited to see the shovel in the ground and anticipate more meaningful lending activity beginning this year as infrastructure, housing, and healthcare expand to support a larger anticipated population. Residential lending grew modestly, up 1% during both the 3 and 12 months ended December 31, 2025. Originations were led by Buffalo and Rochester, where the housing market remains tight and prices have continued to increase. That said, inventories are starting to loosen in our overall geography.

Application volumes were up year-over-year. We are beginning to see increased refinance activity. New producers who joined in the back half of 2025 continue to build their clientele and pipelines, supporting our expectations for stronger residential production in 2026. Consumer indirect loans were down 3.7% during the fourth quarter and 4.5% for the year to $807 million. We manage this portfolio based on business unit profitability targets and have been comfortable allowing runoff to outpace originations, given current market conditions. As we maintain a strong focus on profitable spreads and favorable credit mix, we expect consumer indirect loans to drift down modestly in 2026.

As a reminder, we are an indirect lender for individual vehicle purchases through a network of more than 350 new auto dealers across New York State. The portfolio has an average loan size of approximately $20,000 and a weighted average FICO score exceeding 700. Year-end total deposits were $5.21 billion, down 2.8% from September 30, driven by seasonal public deposit outflows and lower broker deposits. Deposits were up 2% year-over-year, despite the ongoing wind down of our banking-as-a-service line of business. As a reminder, we announced plans to exit BaaS in September 2024, and since then have worked closely with our fintech partners to onboard their customers and $100 million of associated deposit balances.

We had approximately $7 million of these deposits on the balance sheet at year-end and continue to expect they will roll off in the first quarter to a new banking provider. While we did leverage broker deposits throughout the year as planned to help offset the outflow of the BaaS deposits, strong growth in our reciprocal deposit business allowed us to reduce broker deposits in the fourth quarter. Our reciprocal deposit base is a differentiated one, anchored in deep and often long-tenured commercial and municipal relationships. More than 20% of these customers and 30% of the balances have had a relationship with Five Star Bank more than a decade, and the average relationship tenure across the portfolio is five years.

Through the reciprocal product offering, we were able to meet the deposit needs of individual, municipal, and commercial customers requiring collateralization above the $250,000 FDIC insurance limit for full insurance coverage. This allows us to keep important customer relationships in-house while reducing traditional collateralization requirements on public and institutional funds. As we head into 2026, deposit retention and acquisition remain a top priority, hence just continuing top-line momentum we generated. It's now my pleasure to turn the call over to Jack for additional details on our performance and a look at our 2026 guidance.

W. Jack Plants II (CFO)

Thank you, and good morning, everyone. As Marty shared, we are very proud of our 2025 results and committed to pushing higher in 2026 as we continue to unlock more potential from our commercial banking, consumer banking, and wealth management offerings. Our full year 2025 return on assets exceeded initial expectations, reflecting the sustained momentum and our ability to raise the bar on operating results. We anticipate higher performance for full year 2026, with a targeted return on average assets of at least 122 basis points, return on average equity exceeding 11.9%, and an efficiency ratio of below 58%. We also expect margin expansion in 2026 as we continue to shift our earning asset mix and actively manage funding costs.

NIM is expected to incrementally build through the year, supporting a full year target in the mid-3.60s%. As a reminder, this is based on a spot rate forecast as of year-end, which does not factor in potential future rate cuts. Looking at our 2025 results, margin was 3.62% for the fourth quarter and 3.53% for the full year. As expected, quarterly NIM was down 3 basis points from the linked period, due in part to FOMC activity, given the timing of deposit and variable rate loan repricing. However, the primary driver of the compression was the impact of the December sub debt offering, which, coupled with the mid-January call of our pre-existing sub debt issuances, contributed about 2 basis points of the decline.

Average loan yields decreased 9 basis points as compared to the third quarter, primarily reflecting the timing of the October rate cut. As a reminder, approximately 40% of our loan portfolio is tied to variable rates, with a repricing frequency of one month or less. Cost of funds decreased 4 basis points from the linked quarter, as higher rate CDs matured alongside overall downward deposit repricing. Year-over-year, our quarterly margin expanded by 71 basis points, reflecting the transformative securities restructuring we completed in the fourth quarter of 2024, in addition to high quality loan growth, supporting an improved earning asset mix and effective management of funding costs. For 2026, we are targeting annual loan growth of about 5%, driven by commercial.

Given the number of loans that closed in the fourth quarter, coupled with larger anticipated payoffs and pay downs that we've seen in recent years, we expect commercial growth to be lighter in Q1 and build through the year. Deposits remain a top priority for us amid a highly competitive landscape. We are guiding to a low single-digit deposit growth year-over-year and remain focused on growing lower cost core deposits, including demand, Now, and savings, across both our consumer and commercial lines of business. Turning to fee revenues, non-interest income was $11.9 million for the quarter, $45 million for the year, supported in part by several unique factors. This included higher than typical company-owned life insurance COLI income in 2025.

The year prior, non-interest income reflected the $100 million net loss associated with the investment securities restructuring and the $13.7 million gain on our insurance subsidiary sale. COLI revenue was $2.8 million in the fourth quarter, a 2.1% decrease from the linked period, and $11.4 million for the year, compared to $5.5 million in 2024. The year-over-year increase was due in part to higher revenue in the first half of 2025-... Following the surrender and redeploy strategy we executed last January, the carrier's late June redemption of the surrendered policy proceeds. We originally expected third and fourth quarter income to each be approximately $275,000 less than the level reported in the second quarter. However, results exceeded expectations given the performance of the underlying policies.

Accordingly, we expect COLI income to normalize in 2026 to approximately $10.5 million on a full year basis. Full year investment advisory income of $11.7 million was an increase of $1 million, or over 9% from 2024. Courier Capital experienced positive net flows, as new business and market-driven gains offset outflows, pushing AUM to $3.6 billion at year-end, up $500.4 million, or 16% from one year prior. Courier Capital is one of the largest RIAs in our region, providing customized investment management, retirement planning, and consulting services for mass affluent and high-net-worth individuals and families, businesses, institutions and foundations. We look forward to continuing to nurture its growth and are targeting a low to mid-single digit increase in investment advisory income in 2026, which is partly dependent on market conditions.

Commercial back-to-back swap activity was again strong in the quarter, with associated fee income of $1.1 million, up $463,000, more than 31% from the third quarter. Full year 2025 swap fee income of $2.5 million was up $1.8 million from the prior year. We expect swap fees to moderate to a range between $1 million and $2 million, which is more in line with the 2022 and 2023 levels experienced. We reported quarterly non-interest expense of $36.7 million, compared to $35.9 million in the third quarter of 2025.

Full year expense was $142 million, compared to $178.9 million in 2024, when results were impacted by the previously disclosed fraud event and auto lending settlement. The year-over-year increase in salaries and benefits expense was driven in part by higher claims activity in our self-funded medical plan, as we've discussed throughout much of 2025. We expect the higher claims trend to continue into 2026, and the higher run rate is reflected in our 2026 expense guidance. Higher occupancy and equipment expense also contributed to the variance, and primarily reflects the ATM conversion and upgrade project that we completed in 2025. Prudent expense management remains a top priority, reflecting our commitment to maintaining the positive operating leverage we've achieved.

We are targeting low single-digit non-interest expense growth in 2026, primarily driven by a mid-single-digit increase in salaries and benefits, reflecting the full impact of investments made in talent during the year and annual merit-based increases. The 2026 effective tax rate is expected to be between 16.5% and 17.5%, including the impact of the amortization of tax credit investments placed in service in recent years. This is down from the 18% we reported in 2025, primarily due to the taxable COLI surrender and redeploy transaction executed during the year. We're budgeting full-year net charge-offs of 25-35 basis points of average loans. While our experience in recent years has been lower than this, including the 24 basis points we reported in 2025, we are being conservative with our outlook at this time.

As a reminder, we finished 2025 with an ACL total loans ratio of 102 basis points, a coverage ratio that is aligned with our credit risk framework. That concludes my guidance for 2026. I'll now turn the call back to Marty.

Martin K. Birmingham (President and CEO)

Thanks, Jack. We're proud of the progress our team has made and confident in our ability to execute on our strategic plan. As we look ahead, we are focused on organic credit discipline growth centered on deep relationships, prudent management of expenses, balancing people and technology investments with a firm commitment to positive operating leverage, and continuing to build a strong capital position that supports our efforts to deliver meaningful long-term value to shareholders. As a small cap financial holding company, primarily serving Upstate New York, we believe our size, scale, and market position create distinctive advantages, both competitively and as an investment opportunity. Having simplified our business and strengthened our balance sheet over the last 24 months, we are intently focused on driving sustainable growth through our community bank and wealth management firm.

With more than $6 billion in assets on our balance sheet and another $3.6 billion under advisement, our size and scale are differentiators. Our deep roots and long history, going back more than 200 years in some of our legacy markets, are complemented by exciting growth opportunities in the metros of Buffalo, Rochester, and Syracuse, and supplemented by the high returns of our Mid-Atlantic team. We look forward to delivering organic growth in support of profitability and high-quality earnings that we believe support a higher multiple. I'd like to thank you for your attention this morning. That concludes our prepared remarks. Operator, please open the call for questions.

Operator (participant)

Thank you. To ask a question, please press Star followed by one on your telephone keypad now. If you change your mind, please press Star followed by two.... When preparing to ask your question, please ensure your device is unmuted locally. The first question comes from Damon DelMonte from KBW. Your line is now open. Please go ahead.

Damon DelMonte (Managing Director and Senior Equity Research Analyst)

Hey, good morning, everyone. Hope you're all doing well today. Thanks for taking my questions. First question, just wanted to start off on the margin. Jack, I appreciate the guidance here. Just kind of curious as far as, like, your expected cadence of the margin over the course of the year. I mean, is there a little bit of step down from where we ended 25 before we kind of grind up higher over the course of the year? Or are there other variables in play?

W. Jack Plants II (CFO)

Thanks, Damon. So when we ended the year, December margin was at about 3.56, and that was impacted partially by the sub debt raise that we did mid-month, and then the retirement of the $65 million of the two outstanding facilities didn't occur until mid-January. So margin was impacted by about 6 basis points on a monthly basis because of that. You know, after that retirement that occurred in the middle of January, we can see margins start to expand, you know, incrementally on a monthly basis throughout the year.

Damon DelMonte (Managing Director and Senior Equity Research Analyst)

Got it. Okay. That's helpful. Thank you. And then, I guess, staying on the margin topic. You know, I know your guidance doesn't contemplate any rate cuts, but if we do have a 25 basis point cut, can you just remind us how you expect the margin to respond in the near term?

W. Jack Plants II (CFO)

Yeah, I think we've demonstrated the ability to reprice deposits pretty aggressively. So as you saw in December, there was a modest amount of margin compression. Absent the sub debt repricing, margin would have been largely - or sorry, the sub debt issuance, margin would have been largely flat in the fourth quarter. So I think that our guidance holds up if we saw 25 basis points of rate adjustment.

Damon DelMonte (Managing Director and Senior Equity Research Analyst)

Got it. Okay. And then with regards to the outlook for loan growth, I think, Marty, in your prepared comments, you, you indicated that the indirect auto portfolio will likely trend lower this quarter and the growth would be driven on the commercial side. I guess first, what's the, is it an intentional runoff on the indirect auto? And then secondly, you know, do you feel better about your C&I prospects or your CRE prospects for the growth? Thanks.

Martin K. Birmingham (President and CEO)

So we have been being very intentional with the management of the outstandings of our indirect portfolio, Damon. So, yes, that's where how we're planning to drive, you know, our footings in that portfolio in terms of what Jack talked about and our outlook for it. And relative to commercial, we've had a very strong year in 2025. We had a very strong fourth quarter with closings. Our pipeline has consistently been around, for the company, around $700 million-ish for the last several years, and we see good opportunity geographically in upstate New York, and we see it kind of being equal weighted relative to C&I and CRE.

I think we've seen an increase in confidence of, in our borrowers of all types and sizes, small business, CRE, and C&I, starting in the early first quarter of 2025 and really continuing at this point. So I think as Jack commented, it's gonna be a little bit lumpy and, our timing will probably be towards the back half of the year in terms of the materialization of loan production and commercial.

W. Jack Plants II (CFO)

Yeah, just, just to add a little color on the equal weighting there. That'd be on a percentage basis, Damon. So, you know, CRE having a larger portfolio, we'd anticipate, you know, some more balance sheet growth in the CRE portfolio versus C&I, but both are continued drivers of growth, as is the small business lending unit.

Damon DelMonte (Managing Director and Senior Equity Research Analyst)

Got it. Okay, great. And then if I could just sneak one more in. Nice to see some share buyback during the quarter. Just curious, you know, on your thoughts, going forward into 2026. It seems like the shares are probably still attractive at these levels, but just curious on your thoughts.

Martin K. Birmingham (President and CEO)

So I think we're very pleased with how we were able to execute in the fourth quarter. I think it's fundamental, you know, as we think about it, one of our constraints is our Common Equity Tier 1 at 11%, and, you know, we were able to buy back 337,000 shares. I think the earn back was a year or less, and, it remains attractive capital allocation option for us. We did, as we shared, roll over our sub debt and we borrowed an incremental $15 million, so that could provide some opportunity for us. But, as I say, we want to be judicious relative to our constraint, capital relative to CET1.

Damon DelMonte (Managing Director and Senior Equity Research Analyst)

Great. Thank you very much for answering my questions.

Martin K. Birmingham (President and CEO)

Thanks, Damon.

Operator (participant)

Thank you. As a reminder to ask a question, please press Star followed by one on your telephone keypad now. The next question comes from Manuel Navas, from Piper Sandler. Your line is now open. Please go ahead.

Manuel Navas (Managing Director and Senior Equity Research Analyst)

Hey, good morning. Just wanted to... I appreciate the ROA improvement target. I just wanted to hear a little bit about potential areas for upside or downside on the ROA.

W. Jack Plants II (CFO)

Yeah, Manuel, this is Jack. I guess one of the areas that could push on ROA is, you know, accelerated pace of asset originations. But I think we're, you know, pretty prudent in our model as far as where we're focusing our growth. We have pretty strong pricing constraints out there. While we remain competitive, we do prioritize profitability over growth, but fairly comfortable with the ROA guidance, ROA guidance that we put out.

Manuel Navas (Managing Director and Senior Equity Research Analyst)

That's great. With the going back to the pace of buybacks for a moment, if growth is a little bit more back half of the year, does that mean you might have a little bit more buybacks in the first half of the year? Is that a reasonable assumption? How does that work with your progression of growth across the year?

W. Jack Plants II (CFO)

Yeah, as Marty mentioned, we raised $15 million of additional liquidity through the December sub debt offering and deployed a portion of that throughout December. There's still some liquidity available from that issuance. On the Common Equity Tier 1 side, the low mark for us is 11%. That's basically where my threshold is, where I don't wanna break below. We ended the year at 11.1%, and we're projected to add another 40-50 basis points of CET1. So we have capacity to continue to execute on that additional liquidity.

Manuel Navas (Managing Director and Senior Equity Research Analyst)

Okay. And then, with the deposit targets, there's a little bit seasonality in the first quarter. Just kind of, how do the deposit pipelines appear so far? Can you talk in greater depth about any of the initiatives that you have to kind of generate that low single digits for the year? And then I'll step back into the queue.

W. Jack Plants II (CFO)

Yeah, this is Jack. I can take that one again. So, as we mentioned in the call, we're focused on, mainly on core deposit acquisition, so that's DDA savings, NOW accounts. We're really projecting our money market and time deposits to remain flattish throughout the rest of the year. So that growth in those core deposits is kind of comes along with the inflow of loans and spread throughout the year. So I wouldn't expect much volatility outside of the seasonal flows we have from public deposits. And then as far as initiatives are concerned, you know, in the past year or so, we've spoke about the success of our treasury management offering on the commercial side, and commercial deposit growth was a success for 2025. We expect to continue that momentum in 2026.

Typically, the deposit relationships follow the extension of credit.

Martin K. Birmingham (President and CEO)

I think we've put a lot of effort into positioning our sales force, commercial, retail, those dealing with our relationship businesses, understanding the importance of deposits and getting our incentives reset this year so that we can reward strong performance there. So, we feel good about our preparation as we turn the calendar to 2026 to really pursue this aspect of what can positively influence our NIM.

Manuel Navas (Managing Director and Senior Equity Research Analyst)

Thank you. Thank you for the commentary.

Operator (participant)

Thank you. We have no further questions at this point, so I'd like to hand back to Marty for any final remarks.

Martin K. Birmingham (President and CEO)

Thank you very much, operator, for your help this morning. Thanks so much for all who have participated. We look forward to continuing to update you on our performance after the conclusion of the first quarter.

Operator (participant)

This concludes today's call. Thank you all for joining. You may now disconnect your lines.