KBRA Affirms Ratings for Financial Institutions, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Financial Institutions, Inc. (NASDAQ: FISI) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its bank subsidiary, Five Star Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings reflect FISI's improved profitability driven by meaningful NIM expansion, disciplined expense management, and relatively stable credit costs. Importantly, we expect the initiatives implemented over the past year to continue supporting durable earnings and favorable profitability metrics. After a period of underperformance relative to peers, ROA has tracked near 1.3% since 3Q25 and is solidly above the similarly rated peer average. Noninterest income contributes approximately 17% of operating revenues. Fee revenues are supported by the company’s wealth management platform, with $4.0 billion in AUM at 2Q26, which provides a stable source of fee-based income and enhances overall revenue diversification.

FISI’s capital position has strengthened meaningfully following strategic initiatives undertaken in recent years, including an equity offering and securities portfolio restructuring, which enhanced balance sheet flexibility and supported more sustainable earnings and internal capital generation. Since YE25, the CET1 ratio has improved modestly, while the TCE ratio remained relatively stable, as solid internal capital generation was partially offset by AOCL pressure stemming from interest rate volatility and share repurchases. While FISI’s capital position has improved, regulatory capital metrics remains somewhat below similarly rated peers. Looking ahead, KBRA expects continued gradual improvement in capital ratios, supported by sustained profitability, organic growth initiatives, and prudent capital management.

Asset quality has remained appropriate for the ratings, with NPA and NCO ratios of 0.82% and 0.27%, respectively, broadly in line with peer averages. The ratings continue to be supported by an experienced management team with deep knowledge of its local markets and a conservative credit culture, underpinned by prudent underwriting standards, sound credit administration, and a granular loan portfolio with generally low LTV ratios. Management expects credit losses to remain generally stable in the near term.

FISI’s funding profile is supported by a solid core deposit base, representing approximately 85% of total deposits. The company's cost of deposits (2.07% as of 2Q26) is slightly above average and attributable to a higher proportion of CD balances and public funds. The loan-to-deposit ratio has remained relatively stable at approximately 90%. Management remains focused on strategic deposit initiatives aimed at deepening full banking relationships, preserving balance sheet flexibility, mitigating funding cost pressures, and supporting measured growth.

Rating Sensitivities

A rating upgrade is not likely in the near term. Sustained strong profitability and continued capital accretion toward levels consistent with higher-rated peers, supported by further revenue diversification, a stronger deposit franchise, stable asset quality, and continued growth and scale across its operating footprint, could support positive rating momentum over time. Conversely, a more aggressive stance with capital or liquidity, or any unforeseen credit/earnings problems could potentially pressure the ratings.

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