Financial Institutions, Inc.

Greetings and welcome to the Financial Institution's second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce Ms. Kate Croft, Director of Investor Relations for the company. Ms. Croft, you may begin.

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 SBC 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 payroll GAAP measures. Non-GAAP to GAAP reconciliations can be found in the earnings release filed as an exhibit to Form 8K 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 24th, 2026. I will now turn the call over to President and CEO, Marty Birmingham.

Thank you, Kate, and good morning, everyone, and thank you for joining us today. Our second quarter performance was strong by many measures. Loans increased 2.7% from the end of the first quarter and 4.8% year-over-year driven by commercial lending in our core western and central New York markets. Our ability to effectively manage funding costs supported by a three basis point improvement to net interest margin from the first quarter. Margin was up 21 basis points from the year-ago quarter. credit quality remained stable and non-interest expenses were flat, allowing revenue growth to drive further improvement in our quarterly efficiency ratio to nearly 55%. Capital levels continue to build, underscoring our capacity to support growth while maintaining a strong risk profile. Common equity tier one ratio was 11.44%, up seven basis points from the late quarter and 60 basis points year over year, while our TCE ratio was 9.02%, up 13 and 41 basis points respectively. Lastly, assets under management and our wealth subsidiary were up 13% during the quarter to reach $4 billion on a combination of positive net flows and market-driven gains. Year-over-year assets under management was up 19%. Overall, Discipline execution by our lines of business translated to diversified revenue, well-managed expenses, and sustained earnings and profitability. Net income available to common shareholders of $20.8 million was up 1% from the link quarter and 21% year-over-year. On a diluted basis, we earned $1.04 per share this quarter, consistent with the first quarter and up from $0.85 in the second quarter of 2025. In addition, annual book value per share increased to $28.72 this quarter, up 2% quarter over quarter and more than 10% year over year. In looking at our balance sheet, the commercial activity that we signaled would drive 2026 loan growth has gained momentum. Total commercial loans were up 4.3% and 9.1%, from March 31, 2026 and June 30, 2025, respectively. Commercial industrial lending was particularly strong, but the growth was well-rounded, with our commercial real estate and business banking teams also contributing to our success. In our Syracuse market, where Micron broke ground on its semiconductor campus earlier this year, we're seeing increased activity among industrial suppliers and contractors. We remain enthusiastic about the opportunities this $100 billion investment will create as the region evolves to support development and population growth. Turning to consumer lending, residential mortgage is gaining momentum amid what continues to be a tight housing market in upstate New York. On balance sheet, residential lending increased 1.5% and 2.2% from the end of the linked and year-ago quarters, respectively. Sold and serviced residential mortgages of $302 million were up 1.4% during the quarter and more than 7% year-over-year as we shift more production to our off-balance sheet service portfolio in support of fee income. While the spring and summer are typically more active home buying seasons, production also benefited from our talent bench as producers who have joined since the second half of 2025 continue to grow relationships. Originations were particularly strong in Rochester and Batavia, and both mortgage and home equity applications are up by double-digit rates year-over-year, supporting our positive outlook for the year. Consumer indirect loans, which are originated through a network of more than 360 new auto dealers across New York State, were down 2.1% from the end of the late quarter and 7.5% from the year-ago quarter. This reflects our continued discipline on spreads and prime credit mix. which has led us to allow runoff to outpace originations. Credit metrics remain solid in this line of business with recoveries supporting an improved net charge-off ratio for quarter two of 59 basis points for this portfolio. Given our year-to-date performance, we continue to target full-year 2026 loan growth of 5%. Investment securities were down from the comparable length in year-ago periods by about 9% and 2% respectively. The link quarter decline was primarily due to public deposit seasonality and short-term treasuries that served as collateral on municipal deposits in Q1. Period end deposits of $5.3 billion were down by a modest 0.7% from March 31st and up 2.8% from June 30, 2025. The link quarter variance largely reflects seasonality in our public deposit portfolio, which peaks in the first and third quarters of the year and connects with tax collection and state aid. both in each of our deposit categories, public, non-public, and reciprocal, contributed to the year-over-year increase, partially offset by a decrease in broker deposits. Our team remains highly focused on the retention and acquisition of core non-public deposits, and we continue to target low single-digit deposit growth for the full year. Now, my pleasure to turn the call over to Jack for additional details on our results and guidance. Thank you, and good morning, everyone.

The structure and composition of our balance sheet continues to support healthy earnings, with both net interest income and net interest margin increasing during the second quarter. Net interest income grew to $53.4 million, driven by a combination of loan growth and an additional day in the quarter, as compared to the first quarter of 2026. We reported three basis points of net interest margin expansion on a linked-quarter basis were driven by lower interest bearing liability costs, as earning asset yields were fairly stable. Investment security yields of 4.46% were down two basis points quarter over quarter, while average loan yields were 6.07% in both the first and second quarters. As we signaled on our April call, absent FOMC activity, we believe deposit rates have reached a low point. Expansion moderated a bit in the second quarter, and we expect a more stable margin in the coming years. Based on the strength of our year-to-date results, we are raising our full-year NIM guide from the upper 360s to approximately 370 basis points based on our spot rate forecast. Non-interest income increased to $11 million, up 2.6% from the first quarter of the year. Investment advisory revenue largely derived through our wealth management subsidiary, Career Capital, increased to $3.3 million, up 7.4% from the first quarter. As Marty mentioned, assets under management reached $4 billion as of June 30, 2026, marking a new milestone. We have built a very strong team, and investments in talent in recent years have helped us bring in new business that contributed meaningfully to AUM growth. We also continue to develop new relationships in Florida, where we opened a small office in late 2025 to serve our seasonal Florida residents and retirees. Banking services fee income, including swap fees, card interchange, and loan services income, along with service charges on deposits, increased $596,000, or 17% from the linked quarter. Notably, swap fee income more than doubled from the first quarter, given increased back-to-back swap volume as lending activity strengthened. In addition, loan servicing income was up nearly 45%, reflecting successful execution of a residential mortgage off-balance sheet strategy. Company-owned life insurance revenue of $2.9 million was up 4% from the linked quarter. All the income has come in higher than expected in the first half of the year, and we now anticipate earning at least $11 million for the full year, up from the $10.5 million we originally guided. We recorded a loss for limited partnership income of $140,000, compared to a gain of $244,000 in the first quarter. As a reminder, revenue associated with these partnerships, which are primarily small business investment companies, fluctuates given the performance of underlying investments. We reported quarterly non-interest expense of $35.6 million, consistent with the linked and year-ago quarters. On a linked quarter basis, salaries and benefits expense was up 3%, reflecting the full impact of annual merit increases that took effect mid-Q1 and the impact of an additional business day in Q2. Computer and data processing expenses were down 11.3% from the first quarter of 2026 when we incurred contract termination costs associated with a vendor relationship we exited. We noted on last quarter's call those costs will be largely offset by the elimination of associated recurring expenses moving forward. Permanent expense management remains a top priority while we maintain positive operating leverage. You now expect to achieve a full year efficiency ratio of below 57%. We reported an effective tax rate of 17.3% in the second quarter compared to 15.5% in the first quarter. The linked quarter tax rate was 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. Credit costs were well managed with net charge-offs totaling 11 basis points of average loans compared to 44 basis points in the linked quarter. All allowance for credit losses increased by three basis points, 1% of total loans. While the ACL remains at the lower end of our historical range, we remain comfortable with the allowance and the associated coverage ratio given our strong asset quality. Our previous guidance for the full-year charge-off ratio, tax rate, non-interest expense growth, and non-interest income remain unchanged and are outlined on slide five of our investor presentation. Overall, our second quarter results demonstrate continued execution against our financial objectives, supported by healthy revenue trends, disciplined expense management, and solid asset quality. That concludes my remarks. I'll now turn the call back to Marty.

Thanks, Jack. Overall, we're very pleased with our performance and energized about the opportunities ahead of us in the second half of the year. Our results for the second quarter and for the last six quarters reflect the strength of our core businesses, disciplined balance sheet management, and continued focus on profitability. Given our year-to-date return on average assets, we are raising our original guide from 1.22% to at least 1.3%. Similarly, we now expect to achieve return on average equity for the full year of at least 12.5%, up from the 11.9% we had guided. Return on average tangible common equity is approximately 15% for the year-to-date period, and we remain focused on delivering profitable growth to drive shareholder value. Strong capital position and good momentum to help us forward. We remain focused on building full relationships, executing at a high level, and making smart investments in talent and technology in order to unlock the full potential of our company and deliver long term value for our shareholders. That concludes our prepared remarks. Operator, please open the call for questions.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Damon Del Monte with KBW. Please proceed with your question.

Hey, good morning, guys. Hope you're all doing well. And thanks for taking my questions this morning. So I just wanted to start off on loan growth. Obviously, a very solid quarter. You know, I think the commentary around what you're seeing, your markets and your pipelines is very encouraging. So just looking to kind of bridge the connection between, you know, first half growth was about 8% and you're kind of sticking with your 5% full year. A couple of things, Damon. First of all, over the course of the last, I'd say, eight to 10 months, we've been able to recruit six commercial lending professionals to our team.

that are supporting our small business through CRE and CNI lending. So those associates are starting to ramp up their pipelines that ultimately will start to flow through to outcomes that hit our balance sheet. Beyond that, the team continues to focus on the fundamentals of loans and deposits as we talked about driving outcomes primarily in upstate New York. Baltimore LPO continues to be stable with about $400 million of outstandings. And we have experienced some payoffs and paydowns there earlier than expected. But from my perspective, that's a good indicator of liquidity as well as reinforces the credit quality.

Got it. So do you have a little bit more optimism than the full year of 5% just kind of given that commentary? Or could there potentially be some TRE payoffs, which could mute the stronger origination activity.

Yeah, this is Jack. So we're optimistic on the commercial portfolio. Where we're seeing a little bit of softness is just more runoff in the indirect portfolio versus what it originally modeled. And that's just driven by our discipline on spread. We're seeing a higher level of Tier 1, which is the higher FICO scores come through the balance sheet. We're not really pushing on The lower credit tiers there. So there's a higher level of runoff in the indirect portfolio, but commercial is supplementing that in a great way. And with those commercial lenders coming through, I'm optimistic about commercial growth. Got it.

That's helpful. Thanks. And then maybe one on the margin, you know, appreciate the color and the updated guidance on that. Yeah, I guess if the rate environment's kind of shifted, right, and it kind of, we're implying now higher for longer, and, you know, there's growing sense that we could see a rate hike. So, just, Jack, kind of wondering how you feel the margins position, you know, should there be a 25 basis point hike either later this year or early in 27?

Yeah, I think we're fairly insensitive to a 25 basis point adjustment, either up or down, and our interest rate risk modeling supports that. So, We're maintaining our guidance as we've presented.

Got it. Great. Okay. I'll step back. Thank you very much.

Thanks, Damon.

Thank you. Our next question comes from the line of Manuel Nava with Piper Sandler. Please proceed with your question.

Hey, guys. Hello. Congrats on the great quarter. This is Eknor speaking on behalf of Manuel. I wanted to ask about your increase in the profitability guide. What can drive the ROA beyond the 1.3% that you provide?

So the core PP&I, so pre-provision net income performance we've had year-to-date has really driven some year-to-date performance that supplements that higher ROA guidance that we've provided. To your question, though, we're firm on that. We think that 1.3% is achievable based upon year-to-date performance in our outlook. Should we see other factors come through provisioning, that can help to supplement that further, but we view our core performance and achievement of 1.3% ROA as intact.

Thank you. And also I wanted to ask from repurchases, you didn't do any repurchases this quarter, but with capital levels higher, what is your view on capital returns going forward?

This is Jack. So we still believe that the franchise is undervalued based upon our PE and tangible book value multiple. When you look at our profitability metrics relative to our peer group, And that buybacks remain an efficient use of capital before we're positioned in the market.

And sorry, last question. You did kind of touch on this with deposit costs kind of hitting the nearing its bottom. What kind of pricing competition do you see in the market right now?

The market's fairly competitive on the CD side, but we remain out there active regionally and with our value proposition and connection that we have with proximity to management and our team that's in these markets. So we think that we're as relevant as any of the competitors that are in the market today.

Okay. Thank you, guys. I'll step back.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Birmingham for any final comments.

Thank everyone for their participation this morning. We look forward to continuing to update you in October.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.