Hello, and welcome to the Financial Institutions, Inc. Q1 2026 Earnings Call. My name is Josh, and I will be the moderator for today's call. All lines will be muted during the presentation portions of the call, with an opportunity for Q&A at the end. If you would like to ask a question, please press star followed by one on your telephone keypad, and to remove that question, please press star followed by two. At this time, I'd 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 Chief Executive Officer, Marty Birmingham, and Chief Executive Officer, Jack Plants . They will be joined by additional members of the company's leadership team during the Q&A 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.
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 24th, 2026. I will now turn the call over to President and Chief Executive Officer, Martin Birmingham.
Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our Q1 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 Q1 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. 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 Q1 of 2025, both categories were up about 5%. On our January call, we indicated that our expectation for Q1 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 Q1. Given geopolitical and economic uncertainty in the Q1, 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 Q4 of 2025, we originated approximately $270 million in commercial loans, with roughly $135 million rolling off. In the Q1 of 2026, originations were $147 million, with $158 million in payoffs and paid out. 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-quarter 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 servicing 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 Q4 and around 8% from the Q1 of 2024 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 in 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 $20,000 and a weighted average FICO score exceeding 700.
Period-end total deposits were $5.34 billion, up 2.5% from December 31st and down about 1% from March 31st of 2025.
We off-boarded the remaining $7 million of BaaS related deposits in the Q1, 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 March 31, 2025. Growth in reciprocal 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 and 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 Q3s 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 Q1, 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. Good morning, everyone. Our business lines came together to achieve profitable financial performance in the Q1, highlighted by NIM expansion, durability of key non-interest 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 the linked quarter as higher rate CDs matured alongside overall downward deposit repricing. As a reminder, Q4 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 Q1 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 Q4, 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 one month or less.
Non-interest income was $10.7 million for the quarter, compared to $11.9 million in the Q4. 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 should positively impact swap activity and non-interest income. Investment advisory income of $3.1 million was consistent with the Q4 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 Q4 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 Q1 of 2026, compared to a net loss of $225,000 in the Q4 of 2025.
The Q1 loss relates to the write-down of two branch locations, one which we are preparing to consolidate in the Q2, and another that has been held for sale from a previous branch optimization.
These declines were partially offset by $1.8 million of other non-interest 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 non-interest expense of $35.6 million, down from $36.7 million in the Q4. 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 experience in 2025, and that's reflected in our full year guidance. Professional service expenses were down $366,000 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 $239,000 or around 6%, due in part to seasonal snowplowing expense that impacted the Q4.
These reductions were partially offset by higher computer and data processing expenses, which were up $277,000 to 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 Q1. 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 Q1 results, we now expect to deliver a full year efficiency ratio approaching 57%. We reported an effective tax rate of 15.5% in the Q1, 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 Q1.
The 2026 effective tax rate is now expected to be at the lower end of our guided range of between 16.5%-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. Q1 charge-offs included a portion of a previously disclosed commercial business relationship placed on non-accrual 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 basis points 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 uncertainty. Overall, the ACL remains at the lower end of our historical range and we remain comfortable with allowance given our strong asset quality. That concludes my prepared remarks and I'll now turn the call back to Marty.
Thanks, Jack. Our Q1 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?
Certainly. Ladies and gentlemen, we will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. To remove that question, please press star followed by two. If you are using the speakerphone, please pick up the handset before using the keypad. Once again, if you would like to ask a question, please press star followed by one. The first question comes from the line of Damon DelMonte with KBW. You may proceed.
Hey, good morning, guys. Hope everybody's doing well today. First question is just on the margin. Appreciate the updated guidance there. Jack, hopefully you could just 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.
Yeah, thanks, Damon. The margin came in a little bit above our expectations for the quarter. That was primarily driven by 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 249, which was 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. I do believe that we are approaching the bottom from a cost of funds perspective. 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. Can you just remind us on the asset side, do you have a lot of back book repricing to happen this year?
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. 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 compressions that occurred on our floating rate portfolio to start the year, and that was driven by the December rate cut that we had. About 40% of our portfolio is variable. Given our rate forecast for the year and expectations, we believe that's going to be covered.
Got it. Okay, great. 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 in 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 track to continue with the buyback?
We still have capacity, as I indicated. We have a couple of governors that we're thinking about. Number one is our CET1 ratio, CET1, and really a floor of 11%. As well, even before that, is ensuring we've got capacity to support growth. 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. Our pipelines are healthy, and they are demonstrating vibrancy relative to all the loans that flow through at the end of the year. I would say those are the factors. What we have done, we're thrilled with, Damon, because the earn back is at around a year, so that's been a very good use of capital.
Got it. Great. Appreciate that color. That's all that I have for now. I'll step back. Thank you.
Thanks, Damon.
Thank you. The next question comes from the line of Manuel Navas with Piper Sandler. You may proceed.
Hey, good morning. This is Ahmad El Naggar 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? Could you provide some more insight on the pipelines?
Sure. Today the pipeline currently stands at almost a billion dollars, $950 million-ish. That's up from $650 million-ish at year-end, and it's up historically by other prior year period measurements. Commercial's been a lumpy business historically in terms of how it flows through to the balance sheet opportunities to ultimately the balance sheet. We're very comfortable that where we stand today and the growth of the pipeline where it is, that ultimately will translate to opportunities for growth in the balance sheet. Our C&I pipeline activities are basically two times where we've been historically, so that's a good leading indicator. Our CRE opportunity is currently standing a little over $600 million. We are monitoring that closely. We have a very aggressive internal process in terms of disciplined process, I should say, relative to monitoring opportunities and processing them.
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's accepted, where we've issued commitments and where commitments have been accepted by the customer. It's obviously a timing issue, but we're comfortable that it will ultimately flow through to the balance sheet.
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 billion-dollar loan pipeline that Marty mentioned. We're very confident in our ability to achieve that 5% target.
Thank you. That's helpful. I also wanted to ask, are you seeing pricing get tougher on loans or deposits? How is the competition in that regard?
Yeah, this is Jack. 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 or customers to roll off during the quarter, which is where we saw some of our deposit balances declined on the retail side. As we are out there in our commercial pipelines, we've seen success with deposit growth that supports loan originations. As Marty mentioned, with 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 align with what we've budgeted for the year, so we're comfortable there.
Thank you very much, guys.
Thank you.
Thank you. That concludes today's Q&A session. I would now like to pass the call back to Marty for any closing remarks.
Well, thank you very much, operator, for your assistance, and thanks to everyone who joined us. We look forward to updating you on our Q2 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.