Financial Institutions, Inc. Aktie

Good morning, and welcome to the Financial Institutions, Inc. 2026 Annual Meeting of Shareholders. Please note, this meeting is being recorded.

At this time, I would like to introduce Susan Holliday, Chair of Board of Director of Financial Institutions and Five Star Bank. Chair Holliday, you may begin.

Thank you. Good morning, everyone. On behalf of the company's Board, management and associates, I welcome you to today's Shareholder Meeting. We've again elected to hold this meeting virtually to allow us to be more inclusive and to reach a greater number of shareholders without impacting their ability to participate in the meeting. As Board Chair, I will lead the business portion of today's meeting.

After voting results are reported and the business portion of the meeting has ended your Director and President and CEO, Marty Birmingham, will provide a company update. Validated shareholders may ask up to 3 questions by typing them in the question box to the right of your screen and then clicking the Submit button. Please submit your questions now to ensure that we have adequate time to receive them and respond. We will address questions regarding the meeting proposals prior to the close of voting and other recognized questions following the company update.

Shareholders may also comment on any of the meeting proposals through the meeting web portal after they are presented. We will read applicable comments prior to the close of voting. We will do our best to provide a response to as many relevant questions as possible and address any unanswered questions shortly after the meeting. Please provide contact information with your question and submission to ensure that we can reach you.

It is now 10:02 a.m, Eastern Day Life Time on May 20, 2026, and this meeting is officially called to order.

I'd now like to introduce the other members of the Board, all of whom are in attendance today: Marty Birmingham, Don Boswell, Dawn Burlew, Andrew Dorn, Bob Glaser; Bruce Harting, Bob Latella, Angela Panzarella, Bob Schrader, Kim VanGelder, and Mark Zupan. We are also joined by Director Nominees, Dave Bovenzi, and Steve Finch. All members of the company's executive management committee are also in attendance.

In addition to Marty, present with us today are Chief Legal Officer and Corporate Secretary, Sam Burruano; Chief Financial Officer and Treasurer, Jack Plants; Chief Human Resources Officer, Laurie Collins; Chief Marketing Officer, Blake Jones; Chief Consumer Banking Officer, Eric Marks; Chief Risk Officer, Gary Pacos; and Chief Commercial Banking Officer, Kevin Quinn. Samuel Burruano will act as Secretary of the meeting, and he will now lead us through the formalities.

Thank you, Madam Chair. The company has appointed Equiniti to act as an Independent Inspector of Election. Equiniti representative, Barry Rosenthal, is with us today. He has taken the oath of Inspector of Election. Mr. Rosenthal and John Sproull, one of our audit partners from the company's external auditor, RSM US LLP will be available during the question-and-answer session to respond to questions. Also with us today is Attorney Ben Azoff, our external SEC counsel from the law firm of Luse Gorman.

If you experience technical difficulties during the meeting, please refer to the application help link available at the top right of your screen.

As established by the Board of Directors and as stated in the Notice of the Annual Meeting, only shareholders of record as of the close of business on March 23, 2026, may vote at this meeting. We have received an affidavit of mailing from Equiniti certifying that notice of the meeting was duly given. A copy of the affidavit with certified shareholder list and documents mailed to shareholders will be filed with the official records of the company and included with the record of this Annual Meeting.

We are conducting the meeting in accordance with our bylaws and the meeting rules of conduct. Meeting rules and the agenda are available on the meeting portal, along with our 2025 annual report and 2026 proxy statement. As of the record date, there were 19,684,776 shares of common stock outstanding and entitled to vote. The Inspector of Election informed us that there are represented in person or by proxy, shares of common stock representing 17,722,271 votes or approximately 89.9%. Therefore, a quorum is present for the transaction of business and this meeting is properly convened.

The polls on all proposals are now open and will remain open until we announce that they have been closed. Shares represented by proxy have already been voted per the shareholder's respective instructions.

I'll now present the matters to be voted upon. Please note that we will give shareholders an opportunity to comment on the proposals after all have been presented. We are conducting today's Annual Meeting for the following purposes: one, to elect 5 directors to serve until the 2029 Annual Meeting; two, to approve on an advisory basis, the compensation of our named executive officers, otherwise referred to as a say-on-pay proposal; three, to ratify the appointment of RSM US LLP as our independent registered public accounting firm for 2026.

Details regarding all proposals were provided in the proxy statement. If any shareholder would like to make a comment or present a question regarding any of the proposals, please submit it through the meeting portal at this time.

Seeing no comments, I invite shareholders who have not already done so to vote their shares by clicking on the voting button on the meeting portal and following the provided instructions. Shareholders who have submitted their proxies or previously voted and do not want to change their vote need to take no further action.

We will pause for a moment.

[Voting]

Now that everyone has had the opportunity to vote, I declare the polls for Financial Institutions, Inc. Annual Shareholder Meeting closed.

I'll now turn to Sam for voting results.

Thank you, Madam Chair. We have been informed by the Inspector of Election that the preliminary vote report shows that the 5 nominees for election to the Board have been duly elected for the respective terms set forth in the proposals. The say-on-pay proposal has been approved by advisory vote and the appointment of RSM US LLP as the company's independent registered public accounting firm has been ratified. Final voting results will be reported in a Form 8-K to be filed within 4 business days.

Thank you, Sam. This concludes the business portion of the meeting. We thank you for your participation and your support. Let me now turn the meeting over to Marty Birmingham, our President and CEO.

Thank you, Susan, and thank you to our valued shareholders, associates, business partners and others who have joined us this morning. My remarks today may include forward-looking statements. Please refer to our annual report on Form 10-K and other historical SEC filings for our safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements.

As I shared with you in my annual letter to shareholders, in 2025, your company delivered strong financial results that reflect disciplined execution and profitable growth across our enterprise. These results, which included net income available to common shareholders of $73.4 million or $3.61 per diluted share were bolstered by a stronger earning asset profile coming out of 2024 and momentum from solid performance across each of our core business lines throughout 2025. Continued execution and sustainable profitability contributed to the strong financial results we shared with you in April, which underscore the strength of our community banking franchise.

We reported net income available to common shareholders of $20.6 million or $1.04 per diluted share in the first quarter of 2026. Our first quarter operating results also supported meaningful improvement on key measures of profitability over both the linked and year ago quarters, including return on average assets of 137 basis points, return on average tangible common equity exceeding 15% and an efficiency ratio of 57%. We also reported a net interest margin of 3.67%, up 5 basis points from the linked fourth quarter and 32 basis points from the year ago first quarter.

Our management team and Board took strategic actions during the quarter that reflected our commitment to prudent capital deployment and long-term shareholder value creation. This included refinancing of legacy sub debt issuances and continued active share repurchases. Since the current buyback program was approved by our Board in September 2025, we have repurchased a total of approximately 500,000 shares or half the approved 5% authorization. During the first quarter, our Board also approved a 3.2% increase in our quarterly cash dividend to $0.32 per common share.

Our profitable first quarter results supported positive revisions to our annual net interest margin, efficiency ratio and tax guidance. In addition, healthy pipelines headed into the second quarter gave us confidence in reaffirming our balance sheet growth targets, including 5% loan growth and low single-digit deposit growth for the full year 2026. As a reminder, our latest annual guidance can be found in our most recent quarterly investor presentation, which is published on our Investor Relations website.

I would also like to take a moment to thank my colleagues, many of whom are shareholders of this company, too. I could not be prouder of our teams at Five Star Bank and Courier Capital for the excellent service they provide to our customers and communities and the strong financial outcomes they deliver. As we look ahead to the remainder of 2026, we are focused on disciplined execution of our financial performance targets and our community banking strategy. We will continue to deliver a simple, connected and trusted banking experience for our customers and communities, driving sustainable performance and long-term value creation for our shareholders.

At this time, we'll begin the question-and-answer portion of the proceedings. As Susan stated earlier, we'll do our best to respond to as many questions as possible and address any unanswered questions shortly after the meeting.

Seeing no questions. I'll turn the meeting back over to Susan.

On behalf of the company's Board of Directors and senior management, we thank you for your participation in today's meeting and your continued interest and investment in our company. The 2026 Annual Meeting of Shareholders is hereby adjourned.

This concludes today's webcast. You may now disconnect.

Hello, and welcome to the Financial Institutions, Incorporated First Quarter 2026 Earnings Call. My name is Josh, and I will be the moderator for today's call. [Operator Instructions]

At this time, I would like to introduce your host, Marty Birmingham. You may proceed, Marty.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants. They 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 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 as an exhibit to Form 8-K or in our latest investor presentation available on our IR website, www.fisi-investors.com.

Please note, this call includes information that may only be accurate as of today's date, April 24, 2026.

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

Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our first quarter results underscore the strength of our community banking franchise, reflecting disciplined execution by our team and a continued focus on sustainable profitability.

We delivered net income available to common shareholders of $20.6 million or $1.04 per diluted share, representing improvement from both the linked and year-ago quarters. The first quarter operating results also supported meaningful improvement on key measures of profitability over both the linked and year-ago quarters, including return on average assets of 137 basis points, return on average tangible common equity exceeding 15% and an efficiency ratio of 57%.

Our management team and Board took strategic actions during the quarter that reflect our commitment to prudent capital deployment and long-term shareholder value creation. In January, we completed the refinancing of $65 million of legacy sub-debt issuances. In addition, we repurchased a little over 163,000 shares, bringing the total repurchase since December to approximately 500,000 shares or half the 5% authorization approved under the current buyback program. In February, our Board also approved a 3.2% increase in our quarterly cash dividend to $0.32 per common share.

Tangible book value per share increased 1.1% to $28.15 this quarter as strong earnings more than offset the impact of our share repurchase activity and some downward pressure in AOCI driven by interest rate volatility. Our capital actions underscore our Board's confidence in our strategy and long-term outlook, while reaffirming our commitment to disciplined capital management and long-term shareholder value.

From a balance sheet perspective, total loans were down modestly on a linked-quarter basis and up 1.6% year-over-year. Commercial loans were relatively flat on a linked-quarter basis, with business loans up 1% and mortgage down modestly. Compared to the first quarter of 2025, both categories were up about 5%.

On our January call, we indicated that our expectation for first quarter commercial growth would be modest, given the magnitude of loans that were closed in late 2025 and higher payoffs we anticipated to take place in the first quarter. Given geopolitical and economic uncertainty in the first quarter, we did see some of our commercial customers taking a cautious approach by tightening their balance sheets and paying down debt with cash reserves, which impacted both sides of our balance sheet in the form of lower loans and deposits.

Asset line activity. In the fourth quarter of 2025, we originated approximately $270 million in commercial loans with roughly $135 million rolling off. In the first quarter of 2026, originations were $147 million with $158 million in payoffs and paydowns. Based on the size and health of the pipelines we have today, we expect to see loan growth rebound through the second half of the year and continue to expect full year loan growth of 5%, driven by commercial.

In our Upstate New York markets, we are seeing demand pick up on the C&I side, particularly in Rochester and Buffalo. In Syracuse, excitement on the ground is palpable following the Micron groundbreaking earlier this year. With a seasoned local lender joining our team recently, we believe we are well positioned to support the growth that will take place in Central New York.

In our Mid-Atlantic portfolio, where we have a small team of CRE lenders, we have experienced higher refinancing activity for construction loans, which is a testament to the high quality of the sponsors and the liquidity of this portfolio.

Turning to consumer loans. On-balance sheet residential grew modestly, up about 1% from the end of the linked and year-ago quarters. Sold and serviced residential mortgages of $298 million were up 1.5% during the quarter and more than 6% year-over-year, as we shift more production to our off-balance sheet service portfolio, supporting fee income. In the Upstate New York metros of Rochester and Buffalo, the housing market remains hotter with home values projected to climb another 4% or more in 2026. Both mortgage and home equity applications were up 10% year-over-year, and we are enthused about our opportunity as we enter the busier spring and summer home buying season.

Consumer indirect loans were down 2.4% from the end of the fourth quarter and around 8% from the first quarter of 2025 to $788 million. As we have shared previously, we have been comfortable allowing runoff to outpace originations given our focus on profitable spreads and favorable credit mix. Originations in the first 2 months of the quarter were lighter than we planned, but March was very solid, with April pacing well. We feel well positioned to capitalize on the seasonal uptick in foot traffic and car-buying activity that occurs in the summer months in our footprint.

Credit remains stable on this line of business given the prime lending nature of our operations. We lend through a network of more than 360 new auto dealers across New York State. And the portfolio has an average loan size of approximately $20,000 and a weighted average FICO score exceeding 700.

Period-end total deposits were $5.34 billion, up 2.5% from December 31 and down about 1% from the March 31 of 2025. We offboarded the remaining $7 million of BaaS-related deposits in the first quarter, marking the completion of our Banking-as-a-Service wind-down. This was the main driver of the year-over-year decline in total deposits and nonpublic deposits as we took BaaS deposits to 0 at the end of last month from approximately $55 million at March 31, 2025. Both the reciprocal and public deposits year-over-year has also allowed us to reduce our use of brokered wholesale deposits.

Our reciprocal deposit base is differentiated, one anchored on 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 for more than a decade, and the average relationship tenure across the portfolio is 5 years. Our reciprocal product offering helps us retain important customer relationships while reducing traditional collateralization requirements on public and institutional funds, and providing us viable liquidity, including during the 2023 banking crisis.

Our public deposit base is well established through hundreds of local municipalities, school districts and other governmental entities. Balances reflect seasonality associated with tax collections and state aid, and as a result, this funding segment peaks in the first and third quarters and remains well managed. Our team remains highly focused on the retention and acquisition of core nonpublic deposits.

We continue to target low single-digit deposit growth for the full year even as we allowed some higher-priced single-product CDs to roll off at maturity in the first quarter, benefiting margin.

It's now my pleasure to turn the call over to Jack for more details on our results, including some favorable updates to our guidance.

Thank you, and good morning, everyone. Our business lines came together to achieve profitable financial performance in the first quarter, highlighted by NIM expansion, durability of key noninterest income categories and disciplined expense management.

Starting with net interest margin, the 5 basis point increase on a linked-quarter basis was driven by lower interest-bearing liability costs. Cost of funds decreased 15 basis points from a linked-quarter as higher-rate CDs mature alongside overall downward deposit repricing. And as a reminder, fourth quarter margin was impacted by the level of sub-debt we were carrying in December ahead of the mid-January call of $65 million of past issuances.

The 367 basis point NIM we reported for the first quarter was stronger than we anticipated due to favorable deposit pricing. While we continue to see competitive pressure on deposit pricing, we are strategically emphasizing our primary customer relationships, including those with maturing time deposits, which may modestly impact our cost of funds. We still anticipate modest incremental NIM expansion for the rest of the year and now expect to achieve full year net interest margin in the upper 360s. As a reminder, our guidance is based on a spot rate forecast, which does not factor in potential future rate cuts.

Investment securities yields remained stable at 4.48% quarter-over-quarter, while average loan yields decreased 13 basis points as compared to the fourth quarter, primarily reflecting the timing of the December rate cut. As a reminder, approximately 40% of our loan portfolio is tied to variable rates, with a repricing frequency of 1 month or less.

Noninterest income was $10.7 million for the quarter, compared to $11.9 million in the fourth quarter. The primary driver of the variance was lighter commercial back-to-back swap activity given the rate environment and origination activity. As a result, associated swap fee income was $239,000, as compared to $1.1 million in Q4. However, our loan pipelines are supportive of higher originations for the remainder of the year, which will positively impact swap activity and noninterest income.

Investment advisory income of $3.1 million was consistent with the fourth quarter of 2025. This revenue is largely derived from Courier Capital, our wealth management subsidiary serving mass affluent and high net worth clients, businesses, institutions and foundations. New business was solid during the quarter, offset by market-driven outflows that led to a modest decline in AUM from year-end 2025. With assets under management of nearly $3.6 billion, Courier Capital remains one of the largest RIAs in our region.

Company-owned life insurance revenue of $2.8 million was consistent with the linked-quarter. Limited partnership income of $244,000 was about half the level reported in the fourth quarter of 2025. Associated revenue fluctuates quarter-to-quarter given the performance of underlying investments.

A net loss on other assets of $481,000 was recognized in the first quarter of 2026, compared to a net loss of $225,000 in the fourth quarter of 2025. The first quarter loss relates to the write-down of 2 branch locations, one which we are preparing to consolidate in the second quarter and another that has been held for sale from the previous branch optimization. These declines were partially offset by $1.8 million of other noninterest income, which was up about $340,000 from the linked-quarter, reflecting insurance proceeds related to a past deposit-related charge-off.

We reported quarterly noninterest expense of $35.6 million, down from $36.7 million in the fourth quarter. Salaries and benefits expense, the primary driver of NIE, was down $722,000 or 3.7%, reflecting lower incentive compensation and lower medical expenses. We do expect to see annual medical expenses to be in line with our self-funded plan experienced in 2025, and that's reflected in our full year guidance. Professional service expenses were down $366,000 or about 20% for the linked-quarter, reflecting the lower level of interest rate swap transactions along with lower other professional and consulting fees.

Occupancy and equipment expenses declined $239,000 or around 6%, due in part to seasonal snow plowing expense impact in the fourth quarter. These reductions were partially offset by higher computer and data processing expenses, which were up $277,000 or 4.7% from Q4. The increase was primarily due to the reversal of prior accruals associated with the termination of a vendor relationship in the first quarter. This will be largely offset by the elimination of associated recurring costs moving forward.

Prudent expense management remains a top priority, reflecting our commitment to maintaining the positive operating leverage we have achieved. Given our favorable first quarter results, we now expect to deliver a full year efficiency ratio approaching 57%.

We reported an effective tax rate of 15.5% in the first quarter, driven by appreciation in our stock price that positively impacted the tax deduction associated with long-term stock-based compensation that vests annually in the first quarter. The 2026 effective tax rate is now expected to be at the lower end of our guided range of between 16.5% to 17.5%, including the impact of the amortization of tax credit investments placed in service in recent years.

In looking at credit costs, net charge-offs were 44 basis points of average loans, compared to 21 basis points in the linked-quarter. First quarter charge-offs included a portion of a previously disclosed commercial business relationship placed on nonaccrual status in 2023 that was fully reserved for in a prior year through a specific reserve in our allowance process. We expect to remain within our previously disclosed full year charge-off guidance of 25 to 35 basis points.

Our allowance for credit losses was 97 basis points of total loans this quarter, down slightly from year-end 2025. The decline reflects lower loss rates and reduced qualitative factors, which are driven by improving seasonal trends in indirect delinquencies and favorable performance in our commercial loan pools. We did increase the qualitative factor tied to the economic environment to reflect ongoing geopolitical and macroeconomic uncertainties. Overall, the ACL remains at the lower end of our historical range and we remain comfortable with the allowance given our strong asset quality.

That concludes my prepared remarks, and I'll now turn the call back to Marty.

Thanks, Jack. Our first quarter results reflect strong underlying profitability, disciplined balance sheet management and a capital position that provides flexibility as we continue to invest in our business while returning capital to shareholders. While the broader economic environment remains dynamic, we are seeing positive momentum in our lending and wealth management pipelines.

Our profitable results also support the positive revisions to our NIM, efficiency ratio and tax guidance that Jack shared. Supported by a dedicated team in building a unique space in our region's banking industry, we believe we are well positioned to achieve our targets for full year 2026 and create long-term value for our shareholders. Thank you for your attention this morning and your continued support and interest in our company.

That concludes our prepared remarks. Operator, can you please open the call for questions?

[Operator Instructions] The first question comes from the line of Damon DelMonte with KBW.

First question is just on the margin. I appreciate the updated guidance there. And Jack, hopefully you could just kind of talk about some of the dynamics that give you confidence that you're able to maintain this upper 360s level for the remainder of the year.

Yes. Damon, so the margin came in a little bit above our expectations for the quarter. That was primarily driven by a benefit that we recognized through cost of funds. Our cost of interest-bearing liabilities continue to drift downward through January, February and into March. Frankly, the cost of interest-bearing liabilities ended March at 2.49%, which is about 9 basis points lower than the January print.

We do see some pressure coming through from a competitive standpoint on deposits in our market. So I do believe that we are approaching the bottom from a cost of funds perspective. But given where our loan pipeline stands and the spreads that we're recognizing on originations, I think we're going to start to see some lift on the earning asset side, which is going to provide us that margin stability through the rest of the year.

Got it. Okay. And can you just remind us on the asset side, do you have a lot of back book repricing to happen this year?

We have, from a cash flow perspective, we have about $1 billion on a rolling 12-month basis of cash flow that comes off the loan portfolio. But just from an overall yield standpoint, we are seeing on the commercial portfolios, incremental improvement in new origination yields versus what's running off. And that's driving some of that earning asset yield benefit that we're seeing.

We did have some compression that occurred on our floating rate portfolio to start the year, and that was driven by the December rate cut that we had. So about 40% of our portfolio is variable. Given our rate forecast for the year and expectations, we believe that can be tempered.

Got it. Okay. Great. And then I guess maybe a quick question on capital management. Good to see you guys are active with the buyback. Marty, just kind of wondering what your thoughts are as you kind of look out on the landscape of growth expectations and managing capital and still having around half of your buyback left. Do you think you guys are still on the trail to continue with the buyback?

We still have capacity, as I indicated. And we have a couple of [ governors ] that we're thinking about. Number one is our CET ratio, CET1, and really a floor of 11%, and as well, and before that, is ensuring we've got capacity to support growth. And we talked about our confidence in terms of being a back half of the year experience for us in terms of driving our balance sheet growth, and our pipelines are healthy and they are demonstrating vibrancy relative to all the loans that flow through at the end of the year. So I would say those are the factors.

What we have done we're thrilled with, Damon, because the earn-back is at or around a year. So that's been a very good use of capital.

The next question comes from the line of Manuel Navas with Piper Sandler.

This is [ Ekyu Nazir ] on behalf of Manuel. I wanted to ask a question about the loan growth. How do you guys plan to rebound to maintain the 5% guide there? And could you provide some more insight on the pipelines?

Sure. So today, the pipeline currently stands at almost $1 billion, $950 million-ish. That's up from $650-ish million at year-end, and it's up historically by other prior year period measurements.

So we -- that's -- commercial has been a lumpy business historically in terms of how it flows through to the balance sheet, opportunities to ultimately the balance sheet. So we're very comfortable that -- where we stand today and the growth of the pipeline where it is, that that ultimately will translate to opportunities for growth in the balance sheet. Our C&I pipeline activities are basically 2x where we've been historically. So that's a good leading indicator. And our CRE opportunities currently stand around a little over $600 million.

So we are monitoring that closely. We have a very aggressive internal process in terms -- disciplined process, I should say, relative to monitoring opportunities and processing them. And we keep a very close eye on term sheets that have been vetted by our credit folks and been issued and those that are seeking approval internally, that the customer has accepted, where we've issued commitments and where commitments have been accepted by the customer. So it's obviously a timing issue, but we're comfortable that it will ultimately flow through to the balance sheet.

And the other component there is we've been a very successful construction lender and we have construction commitments that are planned to draw down over the remainder of the year for projects that are in flight. And those are not represented in the $1 billion loan pipeline that Marty mentioned. So we're very confident in our ability to achieve that 5% target.

That's helpful. I also wanted to ask, are you seeing pricing get tougher on loans or deposits? And how is the competition in that regard?

Yes. This is Jack. So as I mentioned earlier, we are seeing the market being quite competitive on deposit rates, particularly higher-rate CDs and money market accounts. Our focus is more on relationship-based pricing, which is why we allowed some of those higher-rate single-account CD products to -- or customers to roll off during the quarter, which is where we saw some of our deposit balances declined on the retail side.

But as we are out there in our commercial pipelines, we've seen success with deposit growth that supports loan originations. And as Marty mentioned, through the C&I pipeline being 2x where it's been historically, that's the portfolio that's a bit more deposit-rich on the commercial side, which should provide some balance sheet funding as those originations trickle through.

On the pricing on the commercial side, it's as competitive as it has been, but spreads that we've observed have been within our tolerances and aligned with what we have budgeted for the year. So we're comfortable there.

Thank you. That concludes today's question-and-answer session. I would now like to pass the call back to Marty for any closing remarks.

Thank you very much, operator, for your assistance and thanks to everyone who joined us. We look forward to updating you on our second quarter in July.

Ladies and gentlemen, thank you for attending today's conference call. This now concludes the conference. Please enjoy the rest of your day. You may now disconnect.

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.

[Operator Instructions]

It is now my pleasure to hand over to your host, Kate Croft, Director of Investor Relations, to begin. Please go ahead.

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.

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 guide, supported by growing net interest income of $200 million and durable noninterest 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 a 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 positions.

Strength of the company's credit rating and favorable coupon on our recent debt instruments 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 Technologies 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 health care 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 managed 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 a prime 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. Period-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 5 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 or 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 as does continued 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.

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 in 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-360s. 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 was coupled with the mid-January calls 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 1 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 paydowns 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. Noninterest 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 for COLI income in 2025. The year prior, noninterest 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 redeployed strategy we executed last January for the carrier's late June redemption of the surrender 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 1 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 to 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 experience. We reported quarterly noninterest expense of $36.7 million compared to $35.9 million in the third quarter, reflecting accruals for performance-related incentive compensation in the fourth 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 settlements. 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 have 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 noninterest 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 base increases.

The 2026 effective tax rate is expected to be between 16.5% to 17.5%, including the impact of the amortization of tax credit investments placed in service in recent years. This was down from the 18% we reported in 2025, primarily due to the taxable COLI surrender and redeploy transaction executed during the year.

We are budgeting full year net charge-offs of 25 to 35 basis points of average loans. While our experience in recent years has been lower than us, 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.

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 Instructions]

The first question comes from Damon DelMonte from KBW.

Hope you're all doing well today. 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 at play.

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 2 outstanding facilities didn't occur until mid-January. So margin was impacted by about 6 basis points on a monthly basis because of that. After that retirement that occurred in the middle of January, we can see margins start to expand incrementally on a monthly basis throughout the year.

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

Yes. I think we've demonstrated the ability to reprice deposits pretty aggressively. So as we 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, we saw a 25 basis points of rate adjustment.

Got it. Okay. And then with regards to the outlook for loan growth, I think, Marty, in your prepared comments, 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 an intentional runoff on the indirect auto? And then secondly, do you feel better about your C&I prospects or your CRE prospects for the growth.

So we have been being very intentional with the management of the outstandings of our indirect portfolio, Damon. So yes, that's how we're planning to drive 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 '25. 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 in our borrowers of all types and sizes, small business, CRE and C&I starting in the early first quarter of '25 and really continuing at this point. So I think as Jack commented, it's going to 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 in commercial.

Yes. Just to add a little color on the equal weighting there. That would be on a percentage basis, Damon. So CRE having a larger portfolio, we'd anticipate 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.

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 on your thoughts going forward into '26. It seems like the shares are probably still attractive at these levels, but just curious on your thoughts.

So I think we're very pleased with what -- how we were able to execute in the fourth quarter. I think it's fundamental as we think about one of our constraints is our common equity Tier 1 at 11% and 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 options for us. We did, as we shared, rollover 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 constrained capital relative to CET1.

The next question comes from Manuel Navas from Piper Sandler.

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.

Manuel, this is Jack. I guess one of the areas that could push on ROA is accelerated pace of asset originations. But I think we're 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 that we put out.

That's great. And 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 reasonable assumption? How does that work with your progression of growth across the year?

Yes. 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 want to break below. We ended the year at 11.1% and we've projected to add another 40 to 50 basis points of CET1. So we have capacity to continue to execute on that additional liquidity.

Okay. And then with the deposit targets, there's a little bit of 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.

Yes. This is Jack. I can take that one again. So as we mentioned in the call, we're focused on -- mainly on core deposit acquisitions, 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, in the past year or so, we've spoken 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.

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 still good about our preparation as we turn the calendar into 2026 to really pursue this aspect of what can positively influence our NIM.

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

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.

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

Hello, everyone, and thank you for joining the Financial Institutions, Inc. Third Quarter 2025 Earnings Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions]

It is now my pleasure to hand over to your host, Kate Croft, Director of Investor Relations, to begin. Please go ahead.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Martin Birmingham and CFO, Jack Plants. They 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.

Reconciliations of these measures to GAAP financial measures were provided 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-nvestors.com. Please note that this call includes information that may only be accurate as of today's date, October 24, 2025. I will now turn the call over to President and CEO, Marty Birmingham.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our company reported strong third quarter 2025 financial results marked by balance sheet growth, robust revenue generation, improved profitability metrics and meaningful build of tangible and regulatory capital.

Our teams delivered growth on both sides of the balance sheet, including loan growth of 1.2%, driven by commercial lending in our Upstate New York market and a 3.9% increase in total deposits as seasonal increases of public deposits were supported by growth of core nonpublic deposits in our commercial and consumer business lines.

Record quarterly net interest income and increased noninterest income led to net income available to common shareholders of $20.1 million or $0.99 per diluted share for the third quarter. These earnings translated to return on average assets and equity of 132 basis points and 13.31%, respectively, both up notably from the linked and year ago periods.

Based on our strong year-to-date performance, we are making several upward revisions to our full year 2025 guidance and tightening some ranges previously provided. Among these changes are updates to profitability metrics, including return on average assets and return on average equity. We now expect ROAA for the year to exceed 115 basis points, up from our previous guide of 110 basis points and an ROAE of greater than 12%, up from 11.25%.

Given our team's continued execution, along with the opportunities we see in our markets across business lines, we would expect to raise the bar for profitability again next year as we target incremental improvement in returns through 2026. We laid out loan growth of between 1% and 3% at the start of the year amid an uncertain economic environment. Given the strength of our performance year-to-date, we expect to achieve the high end of this range.

As a reminder, our loan growth guide also reflects our expectations for consumer indirect loan balances to remain relatively flat year-over-year. with growth being driven by our commercial franchise. To that end, total commercial loans of about $3 billion reflect an increase of 1.6% from June 30, 2025, and 8.3% from September 30, 2024.

Commercial business loans increased 2% during the third quarter of 2025, reflecting both new originations and increased line utilization which may come down in the fourth quarter. Commercial mortgage loans were up 1.5% from the end of the linked quarter and up 8% year-over-year. Third quarter commercial growth was driven by our upstate New York markets, including C&I activity in the Syracuse region and CRE in Rochester. In the Syracuse market, we continue to see expanding opportunities fueled by Micron Technologies' $100 billion investment in our region.

For example, our Syracuse team recently closed a notable deal supporting the expansion of medical office space within close proximity to Micron's Central New York semiconductor site. Our pipelines remain strong across upstate New York markets, and we believe that we'll be able to maintain momentum heading into 2026 and as pent-up demand for credit is likely to be released with future rate cuts.

Turning to consumer lending. Our indirect portfolio rebounded nicely in the third quarter on the heels of softer second quarter originations. Consumer indirect balances of $838.7 million at September 30 increased 0.6% from June 30 and were down 4.1% year-over-year. As a reminder, we are a prime lending operation with more than 350 reputable new auto dealers across New York State. Credit extension is for individual vehicle purchases, not floor planned financing, and we stay within a well-defined credit box, resulting in a portfolio with a weighted average FICO store exceeding 700.

This portfolio's small average loan size of about 20,000 provides natural risk dispersion. Residential lending was up modestly from the end of the linked quarter and flat to the year ago period. The housing market remains tight in the Rochester and Buffalo regions and home prices have continued to increase, particularly in Rochester. That said, new listings and inventory are up on a year-over-year basis in both regions, which is promising. Our pipelines also look healthy heading into the fourth quarter and mortgage and home equity applications are up 12% and 11% year-over-year, respectively.

Turning to credit quality. Annualized net charge-offs to average loans for the quarter of 18 basis points were half the level we reported in the linked quarter and relatively in line with the 15 basis points recorded in the third quarter of 2024. In the third quarter, we recovered approximately $400,000 related to a previously charged off construction loan associated with a historic property in our Rochester market.

Our consumer indirect charge-off ratio was 91 basis points in the most recent quarter, up seasonally from the linked period but down from the third quarter of last year. This remains comfortably within our historic range, reflecting the prime lending nature of our indirect business. While we experienced 2 basis point increase in our ratio of nonperforming loans to total loans to 74 basis points at September 30, 2025. This is down notably from 94 basis points 1 year ago. We continue to work through the 2 commercial relationships that have made up the majority of nonperformers for the past several quarters. The $1.5 million increase in total nonperforming loans during the third quarter relates to 4 smaller commercial loan downgrades, each in different industries and geographies facing unique issues.

Accordingly, this is not indicative of a downward trend in our overall commercial loan asset quality. The overall health of both our consumer and commercial portfolios remained solid and reflects enhanced diversification over the years. Indirect auto balances and residential lending make up 18% and 16% of total loans, respectively.

Our commercial portfolio is well diversified by loan type, client type and geography and does not include any lending to nondepository financial institutions. We have consistently employed strong fundamental underwriting processes and have experienced credit professionals working in separate credit delivery and relationship-based functions. That credit discipline is reflected in our low credit costs.

We remain comfortable with our guided full year net charge-off ratio range of between 25 and 35 basis points and our current loan loss reserve ratio of 103 basis points. Period end, total deposits were $5.36 billion, up 3.9% from June 30, driven by seasonal increases in our public deposit portfolio and also reflective of growth in core nonpublic deposits.

As a reminder, public deposits are sourced through long-standing relationships with more than 320 local municipalities and the balances peak in the first and third quarters. Total deposits were up a modest 1% from a year ago, reflecting an increase in broker deposits to help offset the BaaS platform wind down we initiated in September 2024. BaaS deposits were a modest $7 million at the end of the third quarter, and we now expect those to flow off the balance sheet in early 2026. We continue to expect total deposits at year-end 2025 to be generally flat with the prior year-end. It's now my pleasure to turn the call over to Jack for additional details on our performance and outlook.

Thank you, Marty. Good morning, everyone. Net interest margin expanded 16 basis points on a linked-quarter basis, reflective of improved yields on average earning assets alongside deposit repricing that supported reduced funding costs. Our active balance sheet management contributed to 11 basis points of improvement to investment securities yields largely related to the modest portfolio repositioning that occurred in June.

Activity continued during the third quarter when we sold $22.3 million of 30-year fixed rate mortgage-backed securities with higher expected prepayment speeds, the proceeds of which were reinvested into investment-grade corporate bonds. As this small restructuring was completed in September 2025, we expect to see further benefit to investment security yields in the fourth quarter.

Average loan yields increased 3 basis points as compared to the second quarter of 2025. As a reminder, approximately 40% of our loan portfolio is tied to floating rates with a repricing frequency of 1 month or less. We expect loan yields to decline slightly in the fourth quarter given the recent rate cut. Cost of funds decreased 11 basis points from the linked quarter as higher rate CDs matured alongside overall downward deposit repricing.

Given our year-to-date results, we're tightening our expected range for full year net interest margin to between 350 and 355 basis points. This guidance includes the expectation for modest margin pressure in the fourth quarter, given recent FOMC activity, as deposit repricing lags loan repricing, given the adjustable percentage of the loan portfolio previously mentioned.

That compression is expected to be temporary based upon deposit repricing assumptions. Looking ahead to 2026, we anticipate incremental margin improvement to be driven by changes in earning asset mix through loan growth, coupled with active management of our funding costs. Third quarter double-digit margin expansion supported strong net interest income of $51.8 million, up $2.7 million or 5.4% from the second quarter.

Noninterest income was $12.1 million, up $1.4 million or 13.6% from the linked quarter, reflecting increases from several revenue streams. Investment advisory revenue topped $3 million, up 4.8% on a linked quarter basis. Courier Capital experienced positive net flows as new business and market-driven gains offset outflows pushing AUMs to $3.56 billion at quarter end, up $173.6 million or 5.1% from June 30. During the third quarter, we announced the opening of a satellite office in Sarasota, Florida. The office allows our wealth management firm to better serve existing clients who spend time in Florida, while also opening the door to new relationships in one of the nation's most dynamic retirement markets.

Third quarter company-owned life insurance income was $2.8 million, down from $3 million last quarter. As a reminder, in the first quarter, we initiated a COLI restructuring and the redemption of the surrender policy proceeds from the carrier did not occur until June, contributing to higher levels of COLI revenue in the first half of the year. Swap fee income was up 150% to $847,000 as a result of increased commercial back-to-back swap activity during the quarter.

We also recorded a net gain on investment securities of $703,000, primarily related to the modest restructuring we completed in September. We expect noninterest income, excluding gains or losses on investment securities, impairment of investment tax credits and other categories that are difficult to predict, such as limited partnership income to exceed our original guidance of up to $42 million for the year.

Noninterest expense was $35.9 million in the third quarter compared to $35.7 million in the linked quarter. This remains somewhat elevated, largely due to higher claims activity in our self-funded medical plan that resulted in a $452,000 increase in salaries and benefits expenses. While we do have stop-loss insurance, given the level of claim activity that we've experienced to date, we expect this expense category to remain somewhat elevated in the fourth quarter.

As a result, we now expect full year expenses to come in closer to $141 million, approximately 1% higher than our original guide of $140 million. Professional services expenses of $1.7 million were up $237,000 from the second quarter, driven in part by outsourced compliance review expense and third-party commissions on swap transactions. These increases were partially offset by lower occupancy and equipment expenses due to a change in facilities maintenance service vendors and timing of costs associated with an ongoing ATM conversion as well as lower FDIC assessments.

The ATM conversion project is substantially complete, resulting in an upgraded customer experience and the associated expense is now substantially reflected in our run rate. The strength of our balance sheet and growth of our relationship-based business lines supported robust revenue expansion that has more than surpassed expense growth during the year. The year-to-date efficiency ratio of about 58% puts us solidly below the 60% threshold we were targeting this year.

We remain intently focused on expense management as we finish 2025 and move into 2026 in order to maintain positive operating leverage and a favorable efficiency ratio. Considering the strength of earnings from the first 9 months of the year, we are narrowing the range for our expected effective tax rate to between 18% to 19% for 2025, including the impact of the amortization of tax credit investments placed in service in recent years.

We've been keenly focused on our capital stack as evidenced by the refreshment of our share repurchase plan during the quarter. We are also carefully considering our options relative to the outstanding sub debt given the repricing of both tranches that occurred in 2025. We are comfortable with our capital position, especially given the improvement in both our TCE and regulatory ratios in the third quarter.

TCE improved to 8.74% and common equity Tier 1 increased to 11.15%, given organic increases in common equity through strong earnings, coupled with active management of our balance sheet and risk-weighted assets. Overall, our prudent balance sheet management, credit disciplined loan growth and resilient noninterest income has supported strong revenue generation and positive operating leverage.

I am proud of our team's execution, strength of our operating results and the corresponding growth across tangible equity and regulatory capital ratios. That concludes my prepared remarks, and I'll now turn the call back to Marty.

Thanks, Jack. Our third quarter results demonstrate our capabilities and reinforce our excitement and optimism about the opportunities ahead. Profitable organic growth remains a top priority, and we believe that our year-to-date momentum will support a strong finish to 2025 and drive incremental performance in 2026.

I would like to thank you for your attention this morning. Operator, this concludes our prepared remarks. Please open the call for questions.

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

First question, just regarding the margin and the outlook. Jack got the commentary here in the fourth quarter kind of being down modestly. Can you just kind of give us a little perspective if we have a couple of rate cuts this quarter, kind of when you would expect the margin to bounce back in '26?

I mean is it kind of a step down this quarter and then a catch-up going into '26 with some kind of a grind higher? Or how do you think about the margin?

Yes. We've been fairly aggressive with some of our deposit repricing. We demonstrated that in the fourth quarter of last year. We made some changes right at the end of September. And with the expectation that there's going to be a cut this month in October, we're preplanning for adjustments there.

So our guided range that we provided for full year margin, just given that there's -- it's late in the year would have -- a rate cut would have a modest impact to the full year guide. We'd still hold on that guidance potentially at the bottom end of the range. But I would expect that going into 2026, our jumping off point would probably be somewhere around 3.60%.

Got it. Okay. And then from there, you think it can kind of grind higher as you continue to benefit from new loan production and repricing of other fixed rate loans and continued management on the cost of fund side?

That's correct.

Okay. Great. And then just second question here on the buyback. Kind of good to see capital levels growing valuation still remains right around tangible book value. What are your thoughts on getting a little bit more active in the buyback and supporting the shares a little bit?

Well, we're pleased that our Board approved the buyback. It's another option that we have to support the shares and invest in ourselves, and we look forward to updating the market, Damon, when activity occurs.

Okay. Great. And if I could just sneak one more in on the loan growth. It sounds like you seem a little bit more optimistic today than you did maybe a quarter or 2 quarters ago. How do you look at maybe coming out of '25 and into '26, do you think you can kind of get back to that mid-single-digit rate of net growth?

This is Jack. I can take that one. So we're in the stages of building out our financial plan for 2026. Certainly, our experience we've had lately at the tail end of 2025 has been encouraging. I think that high -- or mid-single-digit growth, as you can is appropriate for modeling purposes.

We currently have no further questions. So I'd like to hand the call back to Marty for any final and closing remarks.

Thanks to everyone who called in this morning. We look forward to continuing the conversation next quarter. Have a wonderful weekend.

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

Hello, everyone, and thank you for joining the Financial Institutions, Inc. Second Quarter 2025 Earnings Call. My name is Lucy, and I will be coordinating your call today. [Operator Instructions] It is now my pleasure to hand over to your host, Kate Croft, Director of Investor Relations to begin. Please go ahead.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants. They 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'll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these measures to GAAP financial measures were provided 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, July 25, 2025. I'll now turn the call over to President and CEO, Marty Birmingham.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our financial performance for the second quarter of 2025 was marked by growing revenue that supported a 4% increase in net income available to common shareholders to $17.2 million and a 5% increase in diluted earnings per share as compared to the linked quarter.

Our results continue to benefit from our prudent balance sheet stewardship, which translated into continued net interest margin expansion, up 14 and 62 basis points from the linked and year ago quarter, respectively, and net interest income growth up approximately 5% and 19%.

Complementing NII growth was durable noninterest income of $10.6 million, up 2.4% from $10.4 million in the first quarter. Second quarter 2024 noninterest income of $24 million included a $13.5 million gain associated with the sale of our former insurance business. Excluding this gain, noninterest income was $10.5 million.

We continue to deliver from a profitability standpoint, achieving an annualized return on average assets of 113 basis points, up 3 basis points from the first quarter and an efficiency ratio of just below 60%. At the midpoint of 2025, we remain solidly on track to achieve the targets we laid out at the start of this year and are affirming our full year 2025 guidance today.

Total loans at period end of $4.54 billion were fairly consistent with March 31 as commercial business lending growth was more than offset by a reduction in consumer indirect balances. However, I would note that average loans were up $47.9 million or 1% from the first quarter, driven by both commercial business and commercial mortgage loans.

On a year-over-year basis, total and average loans are each up about 2%. Total commercial loans of $2.94 billion were flat with March 31, 2025, and up 5% from June 30, 2024. With respect to commercial business loans, we experienced a 2.4% increase during the quarter, which reflected both new originations and increased line utilization and balances in this category were up modestly year-over-year.

Commercial mortgage loans were flat with March 31, 2025, and up 6% year-over-year, driven by growth in our upstate New York markets. Our overall commercial loan portfolio remains healthy. Nonperforming commercial loans declined by $7 million from March 31 to June 30 of this year. And while we did report $2.5 million of commercial net charge-offs in the quarter, the higher charge-off this quarter related to 1 of the 2 commercial relationships that have made up the majority of our nonperformers for some time.

As we have shared with you, one of these is a commercial relationship made up of multiple credit facilities to a CRE sponsor in our Southern tier region. In the second quarter, the multibank group foreclosed on the related property and the associated assets were moved into a joint limited liability corporation.

Given this, the related assets are no longer reflected in nonperforming loans. A $580,000 charge-off was recorded in the second quarter related to this specific loan that was part of the overall credit relationship. We also charged off a portion of another credit facility associated with this relationship for which we have a specific reserve in place, driven by a change in the current appraised value of the underlying real estate serving as collateral.

As of June 30, our remaining credit exposure to this borrower totaled $7.1 million, and we have a $2.9 million specific reserve associated with the relationship. The remaining mortgage loan and line of credit are secured by property in the Tompkins County, Ithaca area, and we continue to actively manage this situation in pursuit of resolution.

Given our existing commercial pipelines and our strong first quarter loan growth, we continue to expect to achieve full year loan growth of between 1% and 3%. The pipeline is largely supported by commercial lending in our upstate New York markets, where we have seen momentum in our Rochester region in particular.

Loan growth is tapered in the Mid-Atlantic region given high competition from lenders and increased refinance activity for construction loans, which is a testament to the high quality of the sponsors we are working with.

Looking out further, we believe that we'll see stronger lending opportunities in early 2026, with activity stimulated by the recently passed tax bill and pent-up demand that would be accelerated by potential rate cuts.

Residential lending was up modestly from the end of the linked quarter and flat with a year ago, with credit metrics remaining solid and favorable. While national housing inventory is up notably, it continues to be very tight in our upstate New York markets, particularly in Rochester as we continue to face high competition.

Home equity lending remains a bright spot as homeowners opting to stay in their homes focus on home improvement or debt consolidation. Year-to-date closed home equity loans and lines of credit are up 44% from the comparable period in 2024, while year-to-date application volume is up 19%.

Consumer indirect balances were down 2.3% from March 31 and 7% year-over-year to $833.5 million at June 30. Consistent with much of the industry, many of the new car dealers we work with saw a jump in sales in March as many consumers who were contemplating car purchases opted to do so before auto tariffs went into effect.

Reduced consumer demand translated to a slowdown in production through much of the second quarter, coupled with our spread discipline that did not follow dramatic pricing reductions observed from competitors. However, purchase activity experienced a rebound in June that has continued in July, boding well for third quarter production.

Credit metrics for this asset class improved in the second quarter. Our consumer indirect net charge-off ratio was 45 basis points, down from 103 basis points in the first quarter and nonperforming loans fell 12% on a linked-quarter basis.

As a reminder, this is a prime lending operation and one in which we have a demonstrated track record through multiple economic cycles. With a yield of 6.6% in the most recent quarter and newly originated loans coming on at more than 8% as well as the small average loan sizes and short duration supporting steady cash flow, this portfolio provides us with very attractive risk-adjusted returns.

Overall, net charge-offs were 36 basis points of average loans in the second quarter and 29 basis points for the first half of 2025, and our full year expectations of between 25 to 35 basis points are unchanged. Period-end total deposits were down about 4% from March 31, 2025, reflective of typical seasonality within our public deposit portfolio as well as the continued outflow of Banking-as-a-Service or BaaS deposits.

As a reminder, public deposits sourced through the more than 300 municipalities that we serve throughout Upstate New York peak in the first and third quarters. Total deposits were relatively flat with June 30, 2024, as an increase in broker deposits offset BaaS deposit outflows and a decrease in reciprocal deposits.

Average deposits were relatively flat as compared to both the linked and year ago quarters. As a reminder, we are planning for flat deposits year-over-year in 2025, given the wind down of our BaaS offering, which had approximately $100 million of associated deposits at year-end 2024.

At the end of the second quarter, just $7 million of BaaS-related deposits remained on our balance sheet. We are in the process of migrating our final live BaaS client to its new banking partner and expect that to be completed late in the third quarter.

It's now my pleasure to turn the call over to Jack for additional commentary on our performance and our outlook for the second half of the year.

Thank you, Marty, and good morning, everyone.

As Marty shared, our full year 2025 guidance remains unchanged, including net interest margin of between 345 and 355 basis points. The 14 basis points of margin expansion achieved during the quarter was a result of both improved yields on average earning assets to the tune of 8 basis points and our ability to effectively manage deposit costs, which declined 6 basis points from March 31, 2025.

Average loan yields were up 6 basis points, and our average investment securities portfolio yield increased by 9 basis points. We actively manage our investment portfolio to balance duration, yield and risk, which led us to execute a modest restructuring of $60 million in mortgage-backed securities.

The restructuring occurred in early June, and the sold portfolio was anchored in bonds that were experiencing increased prepayment speeds. This transaction did not result in a book loss. We continue to anticipate incremental margin expansion through the remainder of the year as we focus on reinvesting more than $500 million in expected loan cash flows into higher-yielding loans while remaining focused on management of funding costs.

As a reminder, our modeling uses a spot rate forecast as of the most recent quarter end and does not factor in future rate cuts. As we've shared in the past, our balance sheet is fairly neutral for the first 50 basis points of potential cuts, and we'd expect to see benefit beyond that, largely due to lags in deposit repricing.

In the second quarter, noninterest income was $10.6 million, up $200,000 from $10.4 million recorded in the first quarter. Second quarter company-owned life insurance income was $3 million, up from $2.8 million last quarter. As a reminder, in the first quarter, we initiated a COLI restructuring and given the late June redemption of the surrendered policy proceeds from the carrier, this contributed to higher levels of COLI revenue in the first half of the year.

We expect our future quarterly run rate to be reduced by approximately $275,000 from recent levels. Investment advisory revenue increased approximately 5% on a linked-quarter basis and 4% from the second quarter of 2024.

Career Capital experienced positive net flows as new business and market-driven gains offset outflows, driving AUM to $3.34 billion at June 30, up $218 million or 7% from March 31. We continue to expect noninterest income of between $40 million to $42 million for the full year 2025, excluding losses on investment securities, impairment of investment tax credits and other categories that are difficult to predict, such as limited partnership income. Noninterest expense was $35.7 million in the second quarter compared to $33.7 million in the linked quarter. Our second quarter results were somewhat elevated in part due to timing and some higher costs that are expected to be nonrecurring, including certain benefits and technology-related expenses.

As a reminder, first quarter expenses were lower than anticipated given timing variances related to planned spending and the sizable deposit-related recovery recorded for that period. Second quarter salaries and employee benefit expenses were $1.2 million higher than the first quarter, given planned staffing additions as well as elevated medical claims in the second quarter due to an increase in higher cost claimants.

We have stop-loss insurance in force as part of our self-insured medical plan, and we expect the insurance to cover some of the higher cost claims in the second half of the year, with overall medical expense expected to moderate.

As we shared with you when we introduced our guidance in January, NIE this year includes a number of in-process technology enhancement and upgrade initiatives. Among these is an ATM conversion project, which we began in late 2024 and is expected to be completed later this year. This contributed to the $392,000 increase in occupancy and equipment expenses over the first quarter as did timing given a change in facilities maintenance service centers.

Computer and data processing expenses were also up $392,000, given higher expenses for in-process initiatives and enhancements related to cybersecurity and risk management software to support our CRE monitoring and stress testing process.

These increases were partially offset by lower professional services and other expenses as compared to the linked quarter. Year-to-date, our expense run rate is on track with our full year guide of approximately $140 million, and we remain intently focused on expense management through the coming quarters to support positive operating leverage in 2025.

Our provision for credit losses was $2.6 million in the current quarter compared to $2.9 million in the linked quarter. The lower provision on a linked quarter basis was driven by a combination of factors, including improvement in the forecasted loss rate for pooled loans and a reduction in specific reserves, partly offset by higher net charge-offs.

At June 30, 2025, the loan loss reserve coverage ratio was 104 basis points compared to 108 basis points at March 31, 2025, and we continue to remain comfortable at this level given our ongoing focus on credit discipline. The effective tax rate is expected to fall between 17% to 19% for the year, including the impact of the amortization of tax credit investments placed in service in recent years.

Our capital position remains strong with regulatory and tangible capital ratios expanding. Our common equity Tier 1 ratio increased 46 basis points from March 31 and 81 basis points from June 30, 2024, while our TCE ratio increased 46 and 220 basis points, respectively.

As we shared with you in our April investor call, early in the second quarter, we utilized a portion of the proceeds of our public equity offering to call $10 million of fixed to floating sub debt that was issued in 2015 and began repricing quarterly in April.

Outstanding subordinated debt for the company currently totaled $65 million, including the remaining $30 million tranche from April 2015 and the $35 million tranche issued in October 2020.

We will continue to evaluate options for these sub debt facilities moving forward. That concludes my prepared remarks, and I'll now turn the call back to Marty.

Thanks, Jack. Overall, we are pleased with our second quarter and year-to-date results and look forward to driving sustainable, profitable growth through year-end and into 2026.

We believe we are on the right path, squarely focused on the fundamentals of community banking. We have strong retail and commercial banking franchises that are complemented by a growing wealth management business.

With a stronger capital position and capacity for growth, a well-situated branch network and experienced in market talent, we believe we are well positioned to maximize the strong organic growth opportunities we see in our core upstate New York markets.

This strengthens our confidence in our ability to deliver consistent execution to drive value over the long term. I would like to thank you for your attention this morning. Next week, we look forward to engaging with many of you further at the KBW Community Bank Investor Conference in New York. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions]

The first question is from Damon DelMonte with KBW.

Just wanted to start off with the outlook for loan growth. Well, first off, I mean, thanks for reaffirming the guidance and what you provided before. It's good to see that things kind of remain on track. So just kind of curious with the loan growth outlook, Marty, would you say that the trends in the upstate New York markets are much more -- providing much more opportunity for you than the Mid-Atlantic area. Obviously, Mid-Atlantic is a lot smaller of your overall portfolio. But just curious if like you're seeing pockets of growth across your footprint, which could maybe get you to the higher end of your range for the full year.

So yes, we have seen in our recent experience, Upstate being -- having more momentum, more robust opportunities. Damon, the other thing that has impacted our overall growth has been, as I mentioned, the prepayment of construction loans, a fairly meaningful number, actually a year ahead of schedule.

So while that is challenging for us to drive the balance sheet footings, it definitely reinforces the strong quality of the underlying credits and the sponsors that we are working with and would emphasize that point.

Got you. Okay. That's helpful. And then maybe one for Jack. When you were talking -- when you kind of given some of the points of guidance, did you say that you thought the provision would be similar to this current quarter's level? Or are you referencing net charge-offs?

Provision for the quarter was impacted by the performance of our overall loan portfolio with higher prepayment speeds that came through, as Marty referenced. So given that CECL is a lifetime loss estimate, having a shorter average life on the portfolio reduces forecasted lifetime losses, which resulted in that lower provisioning level. So all else equal, I would expect our coverage ratio to remain in that 104 to 108 basis point range for the rest of the year. So that was some commentary on provisioning.

As it pertains to charge-offs, despite the higher charge-offs in the second quarter, which were related to the commercial loans that Marty referenced in the call, we're maintaining our full year guidance of the NCO range.

Okay. Perfect. And then I guess just lastly on the expense front. I think you pointed out a couple of items in the compensation line and occupancy line, which kind of drove things up. So if we kind of zero in on that $140 million for the full year, we could probably pull back those two categories a little bit and that would probably get us on par there. Is that accurate?

Yes. We've continued to indicate that our quarterly expense guidance does have some volatility associated with timing. Year-to-date, our NIE is running around $70 million. Our full year guidance was for $140 million. That remains intact. The second quarter was driven by some higher medical costs associated with our self-insured policy and some high-cost claimants. We do have stop-loss insurance that we expect to kick in and normalize that volatility for the next 2 quarters.

We currently have no further questions. So I'd like to hand back to Marty Birmingham for any final and closing remarks.

Thanks for your help this morning, operator, and thanks to those that have participated. We look forward to talking to you at the conclusion of our next quarter.

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