FISI Q1 2026 Earnings Call Transcript

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DATE

Friday, April 24, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — Martin K. Birmingham
• Chief Financial Officer — William Jack Plants

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TAKEAWAYS

• Net income to common shareholders -- $20.6 million, or $1.04 per diluted share, representing sequential and year-over-year improvement.
• Return on average assets -- 1.37%, improving from both prior periods.
• Return on average tangible common equity -- Exceeded 15% for the quarter.
• Efficiency ratio -- 57% for the quarter, with full-year guidance now targeting 57% as well.
• Net interest margin (NIM) -- 3.67%, up 5 basis points sequentially, with full-year NIM guidance revised upward to the upper 3.60% range.
• Cost of funds -- Decreased by 15 basis points sequentially, ending March at 2.49%, driven by lower interest-bearing liability costs and maturing higher-rate CDs.
• Total loans -- Down modestly sequentially and up 1% year over year; commercial loans up about 5% year over year and stable sequentially.
• Commercial loan originations -- $147 million, with $158 million in paydowns during the quarter; pipeline stands at approximately $950 million, up from roughly $650 million at year-end.
• Residential mortgages sold and serviced -- $298 million, up 1.5% for the quarter and more than 6% year over year.
• Consumer indirect loan balances -- $788 million, down 2.4% sequentially and approximately 8% year over year.
• Total deposits -- $5.34 billion, up 2.5% since December 31, down about 1% from March 2025 due to intentional run-off of Banking-as-a-Service (BaaS) related deposits.
• Share repurchases -- Over 163,000 shares repurchased in the quarter, totaling around 500,000 shares since December under the current buyback program (half of the 5% authorization).
• Quarterly cash dividend -- Increased by 3.2% to $0.32 per common share as approved in February.
• Tangible book value per share -- Rose 1.1% to $28.15; earnings more than offset AOCI pressure and share repurchase impact.
• Allowance for credit losses (ACL) -- 0.97% of total loans, down versus year-end 2025, attributed to lower loss rates and improved indirect performance, but qualitative factors for economic uncertainty increased.
• Net charge-offs -- 0.44% of average loans versus 0.21% sequentially; included a previously disclosed fully reserved relationship.
• Noninterest income -- $10.7 million, down sequentially primarily due to a decline in swap fee income to $239,000 (from $1.1 million).
• Noninterest expense -- $35.6 million, down from $36.7 million sequentially, driven by lower salaries/benefits, professional service fees, and occupancy expenses.
• Effective tax rate -- 15.5% for the quarter; full-year guidance now at the lower end of 16.5%-17.5% range.
• Commercial and industrial (C&I) loan pipeline -- Described as "2x where we have been historically," indicating a significant increase in opportunities.
• Banking-as-a-Service (BaaS) -- Wind-down completed with all related deposits offboarded.
• Guidance -- Company expects full-year loan growth of 5%, driven by commercial business, and low single-digit total deposit growth.

SUMMARY

The company executed comprehensive capital actions, including refinancing $65 million of subordinated debt, expanding share repurchases, and increasing the quarterly cash dividend while supporting tangible book value growth. Management stated confidence in achieving its updated guidance targets, including a higher net interest margin and a more favorable efficiency ratio for the full year. A notable increase in commercial loan pipelines and C&I activity, along with a completed BaaS wind-down, positions the company to pursue targeted growth and disciplined balance sheet management under current market conditions.

• Chief Financial Officer Plants said, "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 continued 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," providing context for the upward NIM revision.
• Management confirmed construction commitments planned for drawdown are incremental to the $950 million loan pipeline figure.
• Repurchase activity yielded a buyback earn-back period of around one year, described by Birmingham as "a very good use of capital."
• Professional service and occupancy expenses declined sequentially, while higher computer and data processing costs related to terminated vendor relationships are expected to be offset in future quarters.
• C&I originations are described as more "deposit-rich," expected to support funding as these loans move onto the balance sheet.

INDUSTRY GLOSSARY

• Banking-as-a-Service (BaaS): Provision of banking services through third parties, often fintechs; also a source of substantial nonpublic deposits, now eliminated by the company.
• Commercial and Industrial (C&I) Loans: Loans to businesses for general corporate purposes, excluding real estate-secured lending.
• Swap Fee Income: Revenue earned from facilitating derivative contracts, such as interest rate swaps, for borrowers.
• Allowance for Credit Losses (ACL): A reserve reflecting management’s estimate of the expected credit losses on loans and other credit exposures.

Full Conference Call Transcript

Martin K. 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 thousand shares, bringing the total repurchases since December to approximately 500 thousand 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, and 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% year over year. Commercial loans were relatively flat on a linked-quarter basis, with business loans up 1% and mortgage down modestly. Compared to 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. In 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 serviced 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 are 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 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 two 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 operation. 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 thousand and a weighted average FICO score exceeding 700. Total deposits were $5.34 billion, up 2.5% from December 31 and down about 1% from 03/31/2025. 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 zero at the end of last month from approximately $55 million at 03/31/2025. Growth in 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 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 for more than a decade, and the average relationship tenure across the portfolio is five years.

Our reciprocal product offering helps us retain important customer relationships while reducing traditional collateralization requirements on public and institutional funds, providing us valuable 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 collection 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 is now my pleasure to turn the call over to Jack for more details on our results, including some favorable updates to our guidance.

William Jack Plants: 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, a 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 the linked quarter, with higher-rate CDs maturing alongside overall downward deposit repricing. 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 3.67% 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 3.60s. 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. Approximately 40% of our loan portfolio is tied to variable rates, with a repricing frequency of one month or less. Noninterest income was $10.7 million 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 thousand as compared to $1.1 million in Q4.

However, our loan pipelines are supportive of higher originations for the remainder of the year, which should positively impact swap activity and noninterest income. Investment advisory income of $3.1 million was consistent with 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 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 thousand was about half the level reported in 2025. Associated revenue fluctuates quarter to quarter, given the performance of underlying investments. A net loss on other assets of $481 thousand was recognized in 2026, compared to a net loss of $225 thousand in 2025. The first quarter loss relates to the write-down of two branch locations—one which we are preparing to consolidate in the second quarter, and another that has been held for sale from previous branch optimization. These declines were partially offset by $1.8 million of other noninterest income, which was up about $340 thousand 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 thousand, or 3.7%, reflecting lower incentive compensation and lower medical expenses. We do expect annual medical expenses to be in line with our self-funded plan experienced in 2025, and that is reflected in our full-year guidance. Professional service expenses were down $366 thousand, or about 20%, from 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 thousand, or around 6%, due in part to seasonal snow-plowing expense that impacted the fourth quarter.

These reductions were partially offset by higher computer and data processing expenses, which were up $277 thousand, 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 expenses 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. 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.

It 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 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 uncertainty.

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 will now turn the call back to Marty.

Martin K. Birmingham: 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 and filling 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: Certainly. Ladies and gentlemen, we will now begin the question and answer session. To queue for a question, please press star followed by 2. If you are using a speakerphone, please pick up the handset before using the keypad. Again, if you would like to ask a question, please press star followed by 1. The first question comes from the line of Damon DelMonte with KBW. You may proceed.

Damon Paul DelMonte: Hey, good morning, guys. I hope everybody is doing well today. First question, just on the margin. I appreciate the updated guidance there. And Jack, hopefully, you could talk about some of the dynamics that give you confidence that you are able to maintain this upper 3.60s level for the remainder of the year.

William Jack Plants: Thanks, Damon. 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 continued 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 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 are recognizing on originations, I think we will 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.

Damon Paul DelMonte: 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?

William Jack Plants: 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. From an overall yield standpoint, we are seeing, on the commercial portfolios, incremental improvement in new origination yields versus what is running off, and that is driving some of the earning asset yield benefit that we are 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. About 40% of our portfolio is variable, but given our rate forecast for the year and expectations, we believe that can be covered.

Damon Paul DelMonte: Got it. Okay, great. And then a quick question on capital management. Good to see you guys are active with the buyback. Marty, just wondering what your thoughts are as you look out at the landscape of growth expectations and managing capital, and still having around half your buyback left. Do you think you are still on track to continue with the buyback?

Martin K. Birmingham: We still have capacity, as I indicated, and we have a couple of governors that we are thinking about. Number one is our CET1 ratio—really a score of 11%—and, as well, capacity to support growth, even before that, ensuring we have it. We talked about our confidence in terms of a back-half-of-the-year experience for us in driving our balance sheet growth, and our pipelines are healthy and demonstrating vibrancy relative to all the loans that flowed through at the end of the year. So I would say those are the factors. What we have done, we are thrilled with, Damon, because the earn-back is at or around a year, so that has been a very good use of capital.

Damon Paul DelMonte: Got it. Great. I appreciate that color. That is all that I have for now. I will step back. Thank you.

Operator: Thanks, Damon. Thank you. The next question comes from the line of Manuel Navas with Piper Sandler. You may proceed.

Analyst: Hey, good morning. This is Ekman Najar on behalf of Manuel. I wanted to ask a question about the loan growth. How do you plan to rebound to maintain the 5% guide, and could you provide some more insight on the pipelines?

William Jack Plants: Sure. Today, the pipeline currently stands at almost $1 billion—$950 million-ish. That is up from $650 million-ish at year-end, and it is up historically by other prior-year period measurements. Commercial has been a lumpy business historically in terms of how it flows through to opportunities and ultimately to the balance sheet. We are very comfortable that, where we stand today and with the growth of the pipeline, that ultimately will translate to opportunities for growth in the balance sheet. Our C&I pipeline activities are basically 2x where we have been historically, so that is a good leading indicator. Our CRE opportunities currently stand at over $600 million. We are monitoring that closely.

We have a very disciplined internal process 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 then issued, those that are seeking approval internally that the customer has accepted, where we have issued commitments, and where commitments have been accepted by the customer. It is obviously a timing issue, but we are comfortable that it will ultimately flow through to the balance sheet. The other component is that we have 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.

Those are not represented in the $1 billion loan pipeline that Martin K. Birmingham mentioned, so we are very confident in our ability to achieve that 5% target.

Analyst: Thank you. That is helpful. I also wanted to ask, are you seeing pricing get tougher on loans or deposits? How is the competition in that regard?

William Jack Plants: 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 roll off during the quarter, which is where we saw some of our deposit balances decline on the retail side. But as we are out there in our commercial pipelines, we have seen success with deposit growth that supports loan originations. With the C&I pipeline being 2x where it has been historically, that is a portfolio that is 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 is as competitive as it has been, but spreads that we have observed have been within our tolerances and aligned with what we have budgeted for the year, so we are comfortable there.

Analyst: Thank you very much, guys.

William Jack Plants: Thank you.

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

Martin K. Birmingham: Thank you very much, operator, for your assistance. Thanks to everyone who joined us. We look forward to updating you on our second quarter in July.

Operator: 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.

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