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DATE
Friday, Oct. 24, 2025, at 8:30 a.m. ET
CALL PARTICIPANTS
- President & Chief Executive Officer — Marty Birmingham
- Chief Financial Officer — Jack Plants
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TAKEAWAYS
- Loan Growth -- Total loan portfolio increased 1.2% in the third quarter, led by commercial lending in Upstate New York, with commercial loans rising 1.6% from June 30, 2025, and 8.3% year-over-year.
- Total Deposits -- Period-end deposits reached $5.36 billion, up 3.9% from June 30, reflecting seasonal increases and growth in core non-public deposits while SaaS deposits declined to $7 million at quarter-end.
- Net Income -- Net income available to common shareholders was $20.1 million, equating to $0.99 per diluted share.
- Profitability Metrics -- Return on average assets was 132 basis points, and return on average equity was 13.31%.
- Guidance Updates -- Management raised full-year 2025 guidance, now expecting ROAA above 115 basis points for the full year and ROE greater than 12% for the full year.
- Credit Quality -- Annualized net charge-offs to average loans measured 18 basis points; non-performing loans to total loans rose two basis points sequentially to 74 basis points at quarter-end, but down from 94 basis points one year ago.
- Loan Portfolio Composition -- Indirect auto loans and residential lending comprised 18% and 16% of total loans, respectively, as of September 30, with indirect balances at $838.7 million as of September 30, up 0.6% sequentially and down 4.1% year over year as of September 30.
- Net Interest Margin -- Net interest margin expanded 16 basis points sequentially; year-end guidance tightened to a 350–355 basis point range with expectations for modest compression in the fourth quarter.
- Net Interest and Noninterest Income -- Net interest income reached $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 second quarter.
- Wealth Management Revenue -- Investment advisory revenue exceeded $3 million, up 4.8% from the second quarter. AUM increased 5.1% from June 30 to $3.56 billion at quarter-end.
- Noninterest Expense -- Noninterest expense totaled $35.9 million, reflecting an increase in salaries and benefits due to higher self-funded medical plan claims of $452,000, with projected full-year expenses now closer to $141 million.
- Efficiency Ratio -- Year-to-date efficiency ratio was approximately 58% for the first nine months, below the company’s 60% target threshold.
- Capital Ratios -- Tangible common equity improved to 8.74%, and common equity Tier 1 increased to 11.15%.
- Buyback Activity -- Management confirmed board approval for a refreshed share repurchase plan during the quarter.
- ATM Conversion -- The ATM conversion project was substantially completed, and related expenses are now largely incorporated into the ongoing cost structure.
SUMMARY
Financial Institutions' (FISI +9.37%) third-quarter earnings call emphasized revised 2025 guidance, including higher targets for return on average assets and equity, reflecting stronger-than-anticipated profitability. Management pointed to commercial loan pipelines -- especially in Upstate New York -- as key drivers of expected growth, supported by migration of new business surrounding large regional projects. The company narrowed its net interest margin guidance for the full year and expects temporary margin compression in the fourth quarter due to the timing of deposit and loan repricing. The call noted that recent SaaS deposit runoff and finalization of the ATM conversion signal a shift in deposit mix and technology expenses going forward.
- Management indicated future guidance may again be raised in 2026 based on ongoing operating momentum.
- CFO Jack Plants forecasted that the full-year net interest margin's starting point would likely be around 3.60% going into 2026, contingent on rate adjustments.
- Discussion included plans for incremental margin improvement driven by asset mix changes and deposit cost management.
- Buyback authorization was described as another option available to support the shares and invest in the company, with updates to follow on execution.
- Pipelines for mortgage and home equity applications were reported up 12% and 11% year-over-year, respectively, as indicators of continued lending activity.
- Expense projections were revised upward by approximately 1% over initial full-year guidance, attributed to persistently higher self-insured medical claims.
INDUSTRY GLOSSARY
- SaaS deposits: Deposits generated through software-as-a-service platforms, typically involving fintech partnerships or digital client acquisition channels.
- COLI: Company-owned life insurance -- an asset held by banks for employee benefit funding, generating tax-advantaged income.
- C&I activity: Commercial and industrial lending -- loans provided to businesses for working capital, equipment, or expansion unrelated to real estate.
- CRE: Commercial real estate -- loans collateralized by income-producing properties such as office, retail, industrial, or multifamily buildings.
- Swap fee income: Fees earned from facilitating interest rate swaps, typically involving client hedging solutions.
Full Conference Call Transcript
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 non-public deposits in our commercial and consumer business lines.
Record quarterly net interest income and increased non-interest 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 ROE 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 13% 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 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 Technology's $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 will be able to maintain momentum heading into 2026, 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 lender to more than 350 reputable new auto dealers across New York State. Credit extension is for individual vehicle purchases, not floor plan financing, and we stay within a well-defined credit box, resulting in a portfolio with a weighted average FICO score exceeding 700. This portfolio of small average loan size of about $20,000 provides natural risk dispersion.
Residential lending was up modestly from the end of the 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, with mortgage and home equity applications 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 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 direct 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 a two basis point increase in our ratio of non-performing loans to total loans to 74 basis points at September 30, 2025, this is down notably from 94 basis points one year ago.
We continue to work through the two commercial relationships that have made up the majority of non-performers for the past several quarters. The $1.5 million increase in total non-performing loans during the third quarter relates to four 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 remains 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 non-depository 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 non-public 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 brokered deposits to help offset the SaaS platform wind-down we initiated in September 2024. SaaS 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 is now my pleasure to turn the call over to Jack for additional details on our performance and outlook.
Jack Plants: 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 thirty-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 three basis points as compared to 2025. As a reminder, approximately 40% of our loan portfolio is tied to floating rates, with a repricing frequency of one 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 are 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. Career 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 a 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 non-interest 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. Non-interest 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 have 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 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 nine 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 have 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 one 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 discipline, loan growth, and resilient non-interest income have 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 will now turn the call back to Marty.
Marty Birmingham: 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.
Lucy: Thank you, Marty. The first question comes from Damon DelMonte of KBW. Your line is now open. Please go ahead.
Damon DelMonte: Hey, good morning, everyone. Hope you are all doing well, and thanks for taking my questions here. 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 2026? I mean, it kind of a step down this quarter and then a catch-up going into 2026 with some kind of a grind higher? How do you think about the margin?
Jack Plants: Yes. We have 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 September. And with the expectation that there is going to be a cut this month in October, we are pre-planning for adjustments there. For full-year margin, so our guided range that we provided just given that there is it is late in the year, would have a rate cut would have a modest impact on the full-year guide. We would still hold on that guidance potentially at the bottom of the range. But would expect that going into 2026, our jumping-off point would probably be somewhere around $3.60. Got it. Okay.
Damon DelMonte: And then from there, think you 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.
Jack Plants: That is correct.
Damon DelMonte: Okay, great. And then second question here on buyback. Kind of just 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? Buyback and supporting the shares a little.
Marty Birmingham: Well, we are pleased that our Board approved the buyback. It is 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.
Damon DelMonte: 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 two 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?
Jack Plants: This is Jack. I can take that one. So stages of building out our financial plan for 2026. Certainly, our experience we have had lately and at the tail end of 2025 has been encouraging. I think that high or mid-single-digit growth, as you conveyed, is appropriate for modeling purposes.
Damon DelMonte: Okay, great. That is all that I have for now. I will step back. Thank you.
Marty Birmingham: Thanks, Damon.
Lucy: We currently have no further questions. So I would like to hand the call back to Marty for any final and closing remarks.
Marty Birmingham: Thanks to everyone who called in this morning. We look forward to continuing the conversation next quarter. Have a wonderful weekend.
Lucy: This concludes today's call. Thank you all for joining. You may now disconnect your lines.