Greetings, and welcome to the Financial Institutions third 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 is 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. We 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.
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 that this call includes information that may only be accurate as of today's date, October 30th, 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. In the third quarter, our team delivered healthy balance sheet growth while maintaining solid profitability. Commercial lending strength drove loan growth of more than 2% from the end of the second quarter and nearly 6% YoY. Net interest margin of 3.7% was stable relative to the linked quarter and up 5 basis points from the third quarter of 2025. This supported stronger net interest income generation, which reached a new quarterly high of $54.3 million. Investment advisory income, the company's leading contributor of non-interest income, increased about 2% and more than 10% from the linked and year-ago quarters respectively. Our efficiency ratio remained below 57% for the quarter, reflecting our strong focus on sustained profitability. Our strong capital position allowed us to repurchase more than 185,000 shares of common stock during the quarter.
This performance came together to support net income available to common shareholders of $19.6 million, or $0.99 per diluted share. While this was lighter than the linked quarter, our year-to-date performance has been very strong and supportive of the targets we established at the start of the year. To that end, our core earnings guidance is unchanged, though we did tighten some ranges based on year-to-date results. We are affirming our guidance for full-year loan and deposit growth, net interest margin, returns on average assets and equity, and efficiency ratio. On the credit side, we now expect an annual net charge-off ratio of about 30 basis points, at the midpoint of the previous range of 25- 35 basis points. In addition, the high end of our tax rate guidance has been lowered, and we have made some refinements to non-interest income.
Jack will walk through these during his discussion of the income statement in a few minutes. Before that, I would like to provide some commentary on third quarter balance sheet trends. Commercial lending continues to lead overall loan growth. Total commercial loans increased 3% from June 30, 2026, and more than 10% from September 30, 2025. Growth in the quarter was driven by commercial real estate lending, including strong construction mortgage activity in Upstate New York and increased activity in our Mid-Atlantic market. Commercial and industrial loans also increased as originations more than offset lower line utilization as compared to the second quarter. We continue to see compelling commercial lending opportunities across Buffalo, Rochester, and Syracuse regions. While competition remains intense and has created spread pressure, the quality of our existing commercial pipeline underpins our confidence in the opportunities ahead.
We believe that the pipeline positions us well for the remainder of the year and heading into 2027. Third quarter credit activity included the transfer of a foreclosed property to other real estate owned, which reflected the final exposure to a previously disclosed commercial business relationship that had been in workout. Turning to consumer lending, our on-balance sheet residential portfolio was up modestly during the quarter and up just over 2% YoY. Sold and serviced residential mortgages were up more than 2% and approximately 7% from the linked and year-ago quarters respectively, as our models weighted toward a held-for-sale approach in support of fee income. Home equity lines of credit have been a bright spot, with third quarter applications up 30% YoY, and we have seen sustained demand throughout October.
Consumer indirect loans increased about 1% from the second quarter of 2026, and were down 7% YoY. We originate these loans through a network of more than 360 new car dealers across New York State and maintain discipline on spreads and prime credit mix. That supports solid credit metrics as compared to national trends. Our third quarter delinquency ratio, which is inclusive of loans 30 and 60 days past due and those on non-accrual, is more than 100 basis points lower than the recent national average for loans just 30 and 60 days past due. As we approach the end of the year, we expect typical seasonality to impact both volume and credit metrics for this line of business. Investment securities were up 4.5% from the second quarter and a little more than 2% from the year-ago quarter.
The linked quarter increase was primarily due to public deposit seasonality, and we expect the portfolio to come back down in the fourth quarter. Period-end total deposits of $5.47 billion were up more than 3% from June 30, 2026, and 2% from September 30, 2025. Linked quarter growth was led by public deposits, which peak in the first and third quarters of each year, but deposit growth was broad-based with all categories contributing. On a YoY basis, public deposits were down modestly, partially offsetting growth in all other categories. We continue to focus on shifting some public deposits to our reciprocal portfolio, which helps to relieve collateral requirements in the securities portfolio. The retention and acquisition of core non-public deposits remain high priorities, 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, Marty, and good morning, everyone. Our third quarter results underscore the strength of our core businesses, disciplined balance sheet management, and continued focus on profitability. Loan growth drove an increase in average earning assets, while effective balance sheet management supported a stable net interest margin of 370 basis points. Net interest income increased 2% from the prior quarter to $54.3 million. The investment portfolio yield of 4.46% was consistent with the linked quarter, and the average loan yield picked up 1 basis point to 6.08%. The cost of average interest-bearing liabilities increased 6 basis points to 2.67% for the third quarter. We expect that the latest Fed rate hike in September will have a positive impact on our margin in the fourth quarter, as earning assets reprice and we actively manage our funding costs. Non-interest income of $10.5 million was down 4.5% from the linked quarter.
Key driver of this variance was lower commercial back-to-back swap activity in the third quarter, following a very strong second quarter. We now expect swap fees for the year to come in between $750,000 and $1.2 million, down from the previous guidance of $1 million- $2 million. We also recorded a loss of $274,000 for limited partnership income in the third quarter, compared with a loss of $140,000 in the second quarter. As a reminder, revenue associated with these partnerships, which are primarily small business investment companies, fluctuates given the performance of underlying investments. Investment advisory revenue growth was again a highlight, up about 2% QoQ and nearly 11% YoY , leading us to increase our full-year guide from the mid-single-digit growth below double-digit growth versus 2025. Our wealth management subsidiary, Courier Capital, is the primary driver of this revenue stream.
With $4 billion in assets under management as of September 30th, this continues to be an important component of our diversified fee income. Year-to-date, new business activity has been strong, reflecting investments we have made in attracting top talent. Company-owned life insurance revenue of $2.9 million was up 2% from the linked quarter. COLI income is now expected to exceed $11 million for 2026. We reported quarterly non-interest expense of $36.8 million, up about 3% from the linked quarter. Salaries and benefits expense of $19.7 million was up 3% from the second quarter, as expected, driven by costs related to our self-insured medical plan that typically increase as we approach year-end. As a reminder, we modeled higher benefits expense in our guidance based on our 2025 experience.
Professional services expense of $1.5 million was $212,000 or 17% higher than the linked quarter, primarily driven by the timing of typical external audit-related expenses. There were also a couple of one-time items included in other non-interest expense that together totaled about $325,000. This included write-downs associated with other real estate owned and a legal settlement to resolve an employment-related matter. Prudent expense management remains a top priority while we maintain positive operating leverage, and we remain on track to limit full-year non-interest expense growth to the low single digits and to achieve an efficiency ratio below 57%. We reported an effective tax rate of 16.9% in the third quarter, compared to 17.3% in the second quarter. We have tightened our annual tax guidance to between 16.5% and 17%, down from between 16.5% and 17.5%.
Annualized net charge-offs to average loans were 33 basis points in the third quarter, compared to 11 basis points in the linked quarter. As Marty mentioned, we now expect this ratio to be approximately 30 basis points for full year 2026. Our allowance for credit losses were fairly stable, down 1 basis point to 99 basis points of total loans as of September 30th, 2026. We remain comfortable with the allowance and associated coverage ratio given our strong asset quality. Overall, our third quarter results underscore our ability to translate disciplined execution into growth, with commercial lending leading the way. Our full-year profitability targets remain intact, outlined by a return on average assets of at least 130 basis points and a return on average equity of at least 12.5%.
Despite the impact of AOCI from the securities portfolio, our balance sheet remains a source of strength, with a TCE ratio of 8.4% and a CET1 ratio of 11.36%. This provides us with flexibility to pursue growth while returning capital to shareholders. Together, these measures underpin our capital allocation priorities, supporting organic loan growth, investing thoughtfully in our business, and returning value to our shareholders. That concludes my remarks. I will now turn the call back to Marty.
Thanks, Jack. Overall, our year-to-date performance has been strong, and we are well-positioned to maintain momentum through the fourth quarter. Our team remains focused on credit discipline loan growth, core non-public deposit growth, prudent expense management, and disciplined execution against our strategy. Our focus on these priorities remains centered on delivering profitable growth and creating long-term value for our shareholders. That concludes our prepared remarks, operator. Please open the call for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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 keys. One moment, please, while we poll for questions. The first question is from Damon DelMonte from KBW. Please go ahead.
Hey, good morning, everyone. Hope you're all doing well today, and thanks for taking my questions. First question, just probably for Jack here on the margin. I think you had said that you should probably see a little benefit to the margin from the rate increase that we saw in September. Just wondering if you could kind of walk us through some of the thoughts behind that outlook, and then also, if we do get another rate hike here in December, kind of how you think the margin would be responding as we go into 2027?
Yeah, thanks, Damon. As you may recall, about 43% of our loan book floats off of prime and SOFR, and then we've got about 13% of the remaining book that is adjustable from a five-year point of the curve on in. We've seen some immediate repricing from that rate hike in the back half of September. It has a little bit of a muted impact on monthly margin, just given the timing of the adjustment for the quarter. But as we wrapped up September, our monthly margin was about 3.72%. And as we look to the rest of the year, I think we're targeting December wrapping up around 3.75%. So, the earning asset side of the portfolio continues to benefit for the rest of the year. If there's a hike in December, the impact would be fairly muted on the quarterly margin.
Got it. Would you expect those dynamics to continue as we go into 2027, given the additional rate hike?
No.
Okay, great. I guess just on loan growth, solid quarter. I think you guys had kind of messaged earlier in the year that you thought the growth would be more in the back half of the year, and I think we saw a good second quarter and now a good third quarter. I know you kind of reiterated the mid-single digits for the year, but anything that's kind of standing out here in the fourth quarter that really gives you confidence for another solid quarter?
Well, it's Marty, Damon. Thanks for the questions this morning. Our pipelines continue to be pretty solid and consistent with where they've been in the YoY periods, going back to 2025, 2026, and the outlook for 2027. So, that's across the board in CRE and C&I, as well as generally upstate for the most part, but even our Mid-Atlantic loan team is showing growth in their opportunities that they're looking at. Specifically, how that translates to the outlook, Jack, how would you-
Yeah, I'd say that we've been actively replenishing our pipelines across all portfolios, and they remain strong. From a sizing perspective, the pipeline is around the same size as it was when we entered the year. So, our commercial lending folks have been really active in replacing the cash flow that comes off and generating new clients to backfill. So, I'm optimistic about our ability to generate loan growth on the commercial side through year-end.
Okay, great. Appreciate that color. Then just one more quick one for me. Jack, I noticed the average securities were down linked quarter. Just curious, should we expect there to be a kind of a build back up, or do you think it's going to be kind of run rating at a lower level now?
There will be a seasonal build back up for collateral to secure public deposits that come in at the end of September into the first part of October. Those purchases are largely on short-term T-bills. We've been actively working with our public depositors to try to transition their collateralization needs into our reciprocal deposit portfolio to relieve some of the need to use investment securities.
Got it. Okay, that's helpful. That's all that I had. Thank you very much.
Thank you.
The next question is from Manuel Navas from Piper Sandler. Please go ahead.
Hey, good morning. Could you go into a little bit more detail on your strong deposit flows? How much was seasonality and public funds versus maybe some commercial wins? Just kind of future discuss the deposit initiative that you're leaning into most.
Yeah, this is Jack. I'll take that one. Good morning, Manuel. To remove some of the seasonality, I'd look at the year-to-date performance, and we've really had strong performance across the commercial platform for the first nine months of the year. That momentum's really been driven by the investment that we made and have continued to make in our treasury management platform. Typically, we'll lead with a loan origination and then bring the deposit profile from that customer along, and we're really seeing some solid wins.
Manuel, the other thing I just would add is that primacy is a fundamental strategic focus across all of our business activities. Primacy of relationship on a consumer basis, small business, commercial. All of our sales teams are aligned, and they are incented to try to maximize the opportunity and balance utilization of our balance sheet in terms of loans with deposits that come with that. We feel good about the progress we've made reinforcing alignment, and the outcomes are starting to follow that.
Appreciate that. As you kind of think about where you're ending the year with that NIM at 3.75%, I think that should be really helpful. What are kind of some of the puts and takes to potentially targeting positive operating leverage next year? Is that first a goal, and what are some of the puts and takes for that?
Yeah, this is Jack. I'll take that one. We're in the probably middle phases of building out our 2027 plan, but our target right now is positive operating leverage of 200-300 basis points and an efficiency ratio that's approaching 55%.
I appreciate that. What would be the biggest ways you could potentially outperform it?
It would really come from some sort of accelerated loan growth, but we're really disciplined in where we're pricing. Right now, that's where our target is. We'll be able to share more details when we come out with our fourth quarter earnings and our guidance for full year 2027.
It's-
Okay
-we have our eye on loan growth and disciplined pricing and ensuring we have adequate spreads. The other thing related to deposits, like every bank of all sizes, to the extent we can continue to drive our cost of funds down, that would be an accelerator of performance and operating leverage.
The buyback was nice this quarter. Can you just talk a little bit about where it fits in in your capital deployment? Are you going to keep this pace? How does it fit in versus organic growth? How does it fit in versus conversations on M&A?
Yeah, I think that's exactly it. It kind of really depends. It's really been a really nice opportunity for us. I think since we initiated our program, we've purchased a total of 686,000 shares. The earn back in the early part of the program was a year or less, and most recently, about three years or less. As long as we're undervalued, we know the risk of execution, and it's a very straightforward capital decision for the company. But of course, we are on a path and driving growth, so we're balancing all those issues.
Appreciate that. Appreciate the commentary.
There are no further questions at this time. I would like to turn the floor back over to Mr. Birmingham for closing comments.
Thank you very much for joining us. We look forward to continue to keep you updated on our progress at our next call.
This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.