KBRA Affirms Ratings for Financial Institutions, Inc.; Revises Outlook to Stable

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 revised to Stable from Negative.

Key Credit Considerations

The Outlook revision to Stable from Negative reflects a sustained improvement in profitability, including ROA above 1.0% (ROA of ~1.2% for 9M25) and an enhanced capital position (CET1 ratio of 11.2% at 3Q25). Earnings had been under pressure in recent years from NIM compression as the Fed raised interest rates and material one-time events (litigation and fraud), which limited internal capital generation. The improved positioning reflects strategic initiatives implemented over the past year, most notably, a material restructuring of the securities portfolio that coincided with a common equity raise. As a result, FISI’s earnings and capital metrics are now broadly in line with similarly rated peers. Looking ahead, KBRA expects profitability to remain fairly stable, supported by incremental NIM expansion (YTD NIM expansion of 63 bps). Capitalization is also expected to strengthen further, driven by stronger internal capital generation from the enhanced earnings profile and management’s measured approach to balance sheet growth (low-to-mid single digit loan growth).

FISI’s ratings continue to be supported by an experienced management team with deep knowledge of its local markets. Further, in response to the fraud incident, FISI strengthened its ERM framework by establishing new risk oversight through additional committees. KBRA believes the company maintains a conservative credit culture – aside from a few isolated issues within the CRE portfolio in recent years – reinforced by prudent underwriting standards, solid credit administration, and a granular loan portfolio, including within its CRE portfolio, which has ~$3.7 million weighted average loan commitment and with generally low LTV ratios, (mid-50% LTVs and DSCR in the 1.5x range for non-recourse office and multifamily CRE). For loans underwritten with somewhat higher risk characteristics, a majority carry full or limited personal or corporate recourse, helping to mitigate potential losses. As such, NPA and NCO activity has generally trended in line with the rated peer averages. Most of the NCOs in recent years have stemmed from the indirect auto portfolio (weighted average FICO above 700 with ~3.5 years average duration), which represents roughly 18% of total loans. The annual charge-off ratio within this portfolio has ranged 0.45% to 0.89% from 2008 to 2024, excluding the exceptionally low 0.14% reported in 2021, and the current charge-off levels remain within historical range. This portfolio is largely prime and continues to generate sound risk-adjusted returns. Looking ahead, management expects commercial lending to drive portfolio growth, while consumer exposures are anticipated to remain relatively stable.

Other ratings considerations include a fairly diversified revenue mix even following the sale of the insurance agency in 2Q24, with fee income representing nearly 20% of total revenues, which is diversified across investment advisory and durable banking services fee income that includes service charges, card interchange income. Further, the wealth management segment, which reflected $3.6 billion of AUM, provides a stable and recurring source of revenue. Following the securities portfolio restructuring, KBRA views the liquidity position as much improved. Management has generally demonstrated a conservative approach to liquidity, evidenced by a loan-to-deposit ratio typically in the mid-80% range. One less favorable characteristic is FISI’s relatively higher-cost deposit base (2.33% in 3Q25), partly reflecting a funding mix that includes a higher proportion of CDs, representing 31% of total deposits. That said, FISI remains focused on expanding its core in-market deposits through targeted campaigns aimed at growth in key metro areas such as Rochester, Syracuse, and Buffalo. We also acknowledge that the company maintains a higher level of municipal deposits at ~23% of total, though we believe they are adequately priced and have provided durability over the years.

Rating Sensitivities

A rating upgrade is not currently expected, though continued improvements in earnings and capital, further revenue diversification, a stronger deposit base, stability in credit quality, and continued growth and scale within footprint, could facilitate positive rating momentum over time. Conversely, a rating downgrade is not expected, but any unexpected credit issues, a more aggressive stance with capital or liquidity, or any unforeseen credit/earnings problems could potentially pressure the ratings.

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