FISI Q4 2025: Net Interest Margin Expands 71bps on Asset Mix Shift, Signals 2026 Profitability Upside
FISI closed 2025 with a decisive net interest margin (NIM) expansion, supported by a transformative shift in earning asset mix and disciplined cost management. Management’s 2026 guidance prioritizes further margin gains, measured loan growth, and capital return, with commercial lending and core deposit acquisition as key levers. Investors should watch for incremental NIM improvement and the pace of commercial loan production as the year unfolds.
Summary
- Margin Expansion Driven by Asset Restructuring: Transformative securities moves and loan mix supported a 71bps YoY NIM gain.
- Commercial Lending Anchors Growth Outlook: Upstate New York markets and CRE/C&I pipelines set the stage for 2026 loan growth.
- Capital Return Remains a Priority: Buybacks and dividend hikes reflect confidence, but CET1 discipline governs future pace.
Performance Analysis
FISI delivered solid top-line and bottom-line results in 2025, exceeding its own return targets and showcasing strong margin dynamics. Net interest income for the year reached $200 million, with non-interest income at $45 million, underpinned by robust commercial lending and durable fee businesses. The efficiency ratio improved to 58%, demonstrating continued operating leverage as non-interest expenses were tightly managed despite higher medical claims and technology investments.
Net interest margin (NIM) expanded by 71 basis points year over year, closing at 3.62% for Q4 and 3.53% for the full year. This gain was largely attributed to the fourth quarter 2024 securities restructuring and improved loan mix, though Q4 saw a minor sequential dip due to the December sub-debt issuance. Commercial loan growth was a highlight, with balances up 11% YoY, while consumer indirect loans were intentionally allowed to run off. Deposit balances ended the year up 2% YoY, despite the wind-down of banking-as-a-service (BAS) deposits. Share repurchases and a dividend increase signaled capital strength and management’s confidence in the business model.
- Commercial Lending Outpaces Consumer: CRE and C&I lending drove 4% annual loan growth, offsetting planned indirect auto runoff.
- Deposit Base Shifts to Core Relationships: Reciprocal and core deposits replaced brokered and BAS deposits, supporting funding stability.
- Expense Control Offsets Healthcare Cost Headwinds: Non-interest expense growth was contained, with higher salaries and benefits largely from talent investments and medical claims.
Management’s focus on asset mix, prudent capital actions, and disciplined loan growth positions FISI for incremental profitability in 2026, though execution on commercial pipelines and deposit initiatives will be key to sustaining this trajectory.
Executive Commentary
"We are incredibly proud of these results and excited about the coming year and opportunities ahead. That sentiment is shared by our board, which approved a more than 3% increase to our quarterly dividend and new share repurchase plan in 2025, providing authorization to buy back up to 5% of common shares. These actions reinforce our board and management team's confidence in our strategy and our disciplined approach to long-term value creation."
Marty Birmingham, President and CEO
"We anticipate higher performance for full year 2026 with a targeted return on average assets of at least 122 basis points, return on average equity exceeding 11.9% and an efficiency ratio of below 58%. We also expect margin expansion in 26 as we continue to shift our earning asset mix and actively manage funding costs."
Jack Lance, CFO
Strategic Positioning
1. Asset Mix and Margin Management
FISI’s shift toward higher-yielding loans and away from legacy securities is driving sustainable NIM gains. Management’s proactive restructuring in late 2024, coupled with a focus on commercial originations, positions the bank to weather rate volatility and fund growth with less reliance on expensive brokered deposits. Approximately 40% of the loan book is variable rate, allowing for nimble repricing in changing rate environments.
2. Commercial Lending as the Growth Engine
Loan growth is increasingly anchored in commercial real estate (CRE) and commercial & industrial (C&I) segments, especially in upstate New York core markets. The pipeline remains robust, with management citing over $700 million in commercial opportunities and positive momentum from regional economic catalysts like the Micron Technologies investment in Syracuse. Residential lending is expected to rebound as new producers scale and refinance activity rises.
3. Core Deposit Acquisition and Retention
Deposit strategy centers on deepening core relationships and shifting away from transactional and brokered funding, aided by a differentiated reciprocal deposit product. This approach reduces collateral requirements and enhances customer stickiness, with over 20% of reciprocal customers maintaining relationships longer than a decade. The wind-down of BAS is nearly complete, further simplifying the funding mix.
4. Prudent Capital Allocation and Return
Share repurchases and a dividend hike signal management’s capital discipline, but CET1 (common equity tier 1) constraints will moderate the pace of buybacks. The recent sub-debt issuance at favorable terms provides incremental liquidity, but management remains committed to keeping CET1 above 11% to retain strategic flexibility.
5. Operating Leverage and Cost Discipline
Expense management remains a core pillar, with targeted low-single-digit growth for 2026 and a focus on balancing talent investments with technology upgrades. The company is budgeting for ongoing healthcare cost pressure but expects to maintain positive operating leverage as revenue expands.
Key Considerations
FISI’s quarter reflected a strategic pivot toward margin-centric growth and capital return, with commercial lending and core deposits as primary drivers. The business model’s resilience hinges on continued execution in these areas, as well as disciplined risk management and expense control.
Key Considerations:
- Commercial Loan Pipeline Execution: Sustained growth depends on converting robust pipelines, particularly in CRE and C&I, into funded balances across 2026.
- Deposit Competition and Mix Shift: Ongoing industry-wide deposit competition could pressure funding costs, making core relationship acquisition critical for margin defense.
- Capital Deployment Flexibility: CET1 discipline will determine the pace of share repurchases and potential for further capital return actions.
- Expense Headwinds from Healthcare Claims: Elevated medical claims may persist, requiring offsetting revenue or further cost containment to preserve operating leverage.
- Regional Economic Tailwinds: Large-scale investments like Micron’s $100 billion project in Syracuse could drive outsized lending opportunities if realized as anticipated.
Risks
Key risks for FISI include heightened deposit competition, potential credit normalization in commercial lending, and persistent healthcare cost inflation impacting expense ratios. Execution risk remains around the timing and realization of commercial loan pipelines, especially given economic uncertainty. Additionally, further rate cuts could compress NIM if deposit repricing cannot keep pace.
Forward Outlook
For Q1 2026, FISI guided to:
- Incremental NIM expansion post sub-debt retirement, with margin expected to build monthly.
- Commercial loan growth to be lighter in Q1 but accelerate in the back half of the year.
For full-year 2026, management provided guidance:
- Return on average assets (ROA) of at least 1.22%
- Return on average equity (ROE) exceeding 11.9%
- Efficiency ratio below 58%
- Mid-3.60s NIM (does not assume rate cuts)
- 5% annual loan growth, low-single-digit deposit growth
Management highlighted several factors that will influence 2026 outcomes:
- Commercial lending pipelines and regional economic catalysts
- Deposit acquisition initiatives and retention of core relationships
- Expense discipline, especially around healthcare and talent investments
Takeaways
FISI enters 2026 with momentum in margin and capital return, but faces execution risks around commercial lending and deposit growth.
- Margin Expansion Sets a Higher Base: The 71bps YoY NIM gain is sustainable if asset mix and funding cost discipline hold, but further rate cuts could test this resilience.
- Commercial Lending and Deposit Growth Are the Key Levers: Execution on robust pipelines and core deposit initiatives will determine whether 2026 guidance is met or exceeded.
- Capital Return Remains a Strategic Option: Buybacks and dividends are in focus, but CET1 constraints require careful balance with growth ambitions and risk management.
Conclusion
FISI’s Q4 capped a year of decisive margin improvement, capital discipline, and strategic repositioning toward commercial lending and core deposits. The 2026 outlook is constructive, but will require continued execution on loan pipelines, deposit acquisition, and cost control to sustain profitability gains and deliver long-term shareholder value.
Industry Read-Through
FISI’s results underscore a broader industry pivot toward margin defense and capital return as the rate environment plateaus. Regional banks with strong commercial pipelines and differentiated deposit products are best positioned to navigate funding cost pressures and competitive headwinds. The intentional runoff of indirect consumer lending and focus on core commercial relationships signal a shift away from transactional, rate-sensitive business lines toward more durable, relationship-driven growth. Other regional banks should monitor the impact of healthcare cost inflation and the importance of maintaining CET1 flexibility in capital deployment decisions.