Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the First Interstate BancSystem Inc. Second Quarter 2026 Earnings Call. I will now hand the conference over to Nancy Vermeulen. Please go ahead.
Thanks very much. Good morning, and thank you for joining us for our second quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes might differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent quarterly report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the quarterly report and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings, and the company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. Again, this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, we encourage you to do so. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2026. Joining us from management this morning are Jim Reuter, our Chief Executive Officer; David Della Camera, our Chief Financial Officer; and other members of our management team. And now I'll turn the call over to Jim Reuter. Jim?
Thank you, Nancy, and thank you for joining us on our earnings call today. During the second quarter of 2026, we continued to improve the long-term earnings power and efficiency of the franchise. Net interest margin expanded for the ninth consecutive quarter. Deposit costs continued to decline. Criticized loans declined meaningfully, and we further executed on operating model efficiencies while investing in relationship-driven growth. Commercial loan production improved in the second quarter, especially in the Rocky Mountain region. However, reported loan balances declined more than expected, primarily due to elevated payoffs. The payoff activity was concentrated in credits with limited relationship value, including criticized loan payoffs, secondary market activity in loans, and loans in divested markets, and we anticipate continued payoff pressure in the near term. We continue to repurchase shares and maintain a disciplined approach to long-term value creation. Our focus will remain on shareholder returns and disciplined growth as we work to optimize our balance sheet, improve our profitability and return metrics, and grow deposits and loans in a thoughtful manner. We have maintained our underwriting discipline and have chosen not to seek avenues for near-term balance growth that are not consistent with the relationship-based focus. Noninterest-bearing balances increased year-over-year when adjusted for sold deposits. On the expense side, in the second quarter, we continued aligning staffing levels with our updated operating model with an emphasis on revenue-generating roles. We secured two highly sought-after locations in Colorado and other locations are in progress in core markets. We introduced an updated advertising campaign and brand refresh, and we also made further investment in data management to support our ability to leverage new technology. We have seen improvement in digital engagement and digital payment activity and our client satisfaction metrics remain strong. We continued repurchasing shares in the second quarter as part of the authorization we announced in August of last year. Since the inception of the program, we have purchased roughly 8 million shares, returning $270 million to shareholders. We have increased our repurchase authorization by an additional $150 million, along with our earnings release, bringing the total authorization to date to $450 million. Share repurchases remain a key part of our capital deployment strategy. Many of the outcomes reflect deliberate actions that improve the long-term value of the franchise. Through ongoing fixed asset repricing, disciplined capital deployment, operating model optimization, and continued focus on relationship banking, we are building a more efficient organization. We remain confident in our ability to deliver improving returns over time. And now I will hand the call over to David to discuss our results and our guidance in more detail. David?
Thanks, Jim. I'll start with our results for the quarter. The company reported net income of $83.9 million, or $0.87 per diluted share, in the second quarter compared to $60.2 million, or $0.61 per diluted share, in the first quarter. Net interest income increased by $1.5 million compared to the prior quarter, or 0.7%, to $202.2 million. This was driven primarily by an expansion in the net interest margin and an extra accrual day in the quarter and was partially offset by a decline in interest-earning assets due in part to the branch sale completed in April. Yield on average loans increased 2 basis points to 5.62% and total deposit costs declined 3 basis points compared to the prior quarter. Total funding costs decreased 4 basis points compared to the first quarter. Our fully taxable equivalent net interest margin was 3.48% for the second quarter compared to 3.43% during the first quarter and 3.32% during the second quarter of 2025. Noninterest income was $61.7 million, an increase of $20.6 million from the prior quarter. This increase was driven by a gain of $19.5 million from the branch transaction that closed during the second quarter. Noninterest expense was $158.9 million for the second quarter of 2026, an increase of $1.3 million from the prior quarter driven by an increase in other expenses, including higher advertising expense, professional fees mostly related to new branding efforts, an increase in donations expense, costs related to branch closures, and various smaller expense items. OREO expense increased $1.7 million compared to the prior quarter, driven by a valuation adjustment in the first quarter. These increases were mostly offset by a decline in salaries and wages and employee benefits from the prior quarter. Moving to the balance sheet. Loans decreased by $447 million in the second quarter. This included a continued decline in agricultural loans, a decrease in residential loans, and the ongoing amortization of the indirect portfolio as well as a notable increase from the prior quarter in loan paydowns and payoffs. Payoff activity accelerated during the latter part of the quarter and included criticized loans and loans we would view as non-relationship in nature. In completing a detailed review of commercial loan payoffs during the quarter, we would categorize the vast majority as not affecting core relationships. Payoffs also included elevated secondary market activity and loans from divested markets, pulling forward some of our future payoff expectations. We expect accelerated payoff activity to continue through the rest of 2026, again pulling forward some of our previous outer-year payoff expectations, which we anticipate will create variability in near-term reported balance growth despite improving commercial production. Total deposits decreased $441.7 million to $21.4 billion as of June 30, 2026, with more than half of the impact in the quarter driven by the sale of $244 million of deposits in the Nebraska branch transaction. As Jim noted, our deposit mix improved in the quarter and noninterest-bearing balances returned to growth not only during the quarter, but more importantly, also on a year-over-year basis, adjusted for the branch sales. Average deposits declined $212.3 million during the quarter, less than the periodic change in deposits as we saw some end-of-period outflows related to larger customer deposit movements. We experienced declines in interest-bearing balances and specifically time deposits as we allowed some higher-cost money to exit the balance sheet while focusing on relationship growth. While this pressures near-term deposit balances, we believe this is prudent given our balance sheet position, and we are focused on protecting and growing core relationships to continue driving an enhanced deposit profile. The ratio of loans held for investment to deposits was 66.6% at the end of the quarter compared to 67.3% at the end of the prior quarter and 72.3% at the end of the second quarter of last year. Turning to credit. Net charge-offs increased by $7.3 million in the second quarter to $9.7 million, or 27 basis points of average loans, driven by partial or total resolutions of previously reserved credits. The company recorded a $3.2 million reduction of provision for credit losses in the second quarter, driven primarily by the decline in loans. Criticized loans decreased $95.8 million, or 9.3%, from the prior quarter. And over the past 12 months, criticized loans have declined 22%. Our total funded allowance decreased to 1.28% of loans held for investment from 1.33% in the first quarter. The decrease in coverage this quarter broadly reflects the noted resolutions of previously reserved credits within nonperforming loans. We repurchased approximately 1.9 million shares in the second quarter totaling approximately $69 million and repurchases since initiation of the program in August totaled about $270 million. As Jim stated, we have announced an increase to the authorization of $150 million, bringing the cumulative total authorization to $450 million. Share repurchases remain a key capital allocation tool to drive shareholder value, and we anticipate remaining active in coming quarters. Finally, we declared a dividend of $0.47 per common share, which equates to a 5.3% annualized yield based on the average closing price of the company's common stock during the second quarter. Our Common Equity Tier 1 capital ratio ended the second quarter at 14.54%, an increase of 24 basis points from the prior quarter. Our leverage ratio was 9.59% at the end of the second quarter compared to 9.56% at the end of the prior quarter. Our capital levels provide us with flexibility to continue enhancing shareholder returns while supporting long-term accretive growth. Moving to our guidance. Our balance sheet expectations now reflect lower ending loans and a smaller earning asset base compared to the prior quarter. This includes more meaningful payoffs within our commercial loan portfolio and further success in exiting some non-relationship and out-of-market credits. While we had previously assumed these would exit the bank over the coming years, the proactive approach we have taken has resulted in accelerated payoffs in the second quarter, and we anticipate this to continue through the rest of 2026. On the deposit side, the guidance incorporates the positive trends we are seeing within customer acquisition, offset by an expectation for continued pressure in higher-cost deposit categories. Mortgage production has trailed our expectations and our forecast now includes a more meaningful near-term decline in that portfolio. Together, these expectations result in both a smaller near-term balance sheet and a higher composition of investment securities, lowering our near-term revenue growth expectations. This is partially offset by a more favorable deposit mix and cost trend, and we anticipate continuing to deploy capital during this period of balance sheet transition to enhance shareholder returns. As Jim noted, our expense forecast includes continued reinvestment in our new branding efforts and the addition of 14 relationship managers year-to-date. The operational efficiencies we have created have enabled us to add these relationship managers while still managing to what we believe is a structurally lower staffing level compared to our pre-reorganization workforce. These recognized savings as well as the noted expense additions are mostly within our second quarter run rate, and they inform our go-forward expense guidance. We expect the trend of meaningful asset repricing to extend over the coming years with the near-term tailwinds accelerating into 2027. We anticipate this will drive sequential improvement in our return profile through the remainder of 2026 and provide an even greater benefit to our net interest margin into 2027. Overall, our ninth consecutive quarter of net interest margin expansion reflects the continued benefit of fixed asset repricing and improving funding costs. During a period in which the Fed funds rate was reduced 75 basis points, loan yields were relatively stable at 5.62% compared to 5.65% a year ago. Investment security yields increased from 2.72% to 2.98%, while total deposit cost declined from 1.33% to 1.17%. These trends highlight the continued improvement in the underlying profitability of the balance sheet. Finally, our investor presentation contains a new slide this quarter titled Enhancing Franchise Productivity, which highlights some key metrics we're focused on internally and believe will further improve over time: net interest margin, deposits per share, deposits per branch, and net interest income per share. We believe these metrics highlight the value of the company's low-cost deposit base and the benefit of fixed asset repricing, accretive capital deployment, and operating efficiencies generated through progress and branch optimization. Our intent is to drive greater earnings efficiency and strengthen our best-in-class deposit base, while our active capital deployment increases our shareholders' relative stake in the value of those deposits. Over the prior 12 months, net interest margin has improved 16 basis points. Average deposits per average diluted share has improved approximately 2%. Average deposits per branch has improved 6% and net interest income per share has improved 4%. With that, I'll hand the call back to Jim.
Thank you, David. We remain committed to the strategy we have consistently outlined. While growth and balance sheet trends may be uneven from quarter to quarter, our focus remains on the long-term drivers of franchise value, which are deepening customer relationships, growing numbers of clients and core deposits, improving credit quality, optimizing our operating model, and deploying capital in a disciplined manner. We believe the consistent execution of this strategy will strengthen the core value of the franchise and create increasing value for our shareholders over time. And now I would like to open the call for questions.
Questions and answers
Your first question comes from Matthew Clark with Piper Sandler.
Just on the loan portfolio, how much of the loan book has no deposit relationship that you'd like to exit or where you expect payoffs to happen? I'm trying to ring fence what portion of the loan book might be slated for runoff. And if you're not willing to answer that question, maybe the easier question is when do you see earning assets stabilizing and starting to grow again?
Matt, a couple of comments. I'll start with earning assets. From an earning asset perspective, given the balance sheet, it's really a deposit ending and average conversation. Based on our guide, we think 3Q would be the bottom from an average earning asset perspective because 2Q ended lower on an average basis, but ending earning assets should be flat to improving from here and then higher into the back half. From a loan portfolio perspective, a couple of comments. We talked about that out-of-market portfolio; we have defined that as about a mid-$600 million number right now. The payoffs from that portfolio were about $100 million in this quarter. That's kind of where the non-relationship is. So a couple of comments on the portfolio decline in the quarter as a whole: you start with that $447 million number. When you take out indirect residential and agricultural loans, it gets you to a more mid-$200 million number, and then the criticized and those out-of-market payoffs get you down to about $100 million. So that $100 million number is more of that commercial core, if you will. Most of the payoffs were really non-relationship in nature during the quarter. As we think about the forward period, some of those recent relationship manager additions that we talked about really support the production level we think we need. While the balances declined more than we thought, we view it as a lot of pulling forward of some of those outer-year payoffs that we expected. The pure relationship growth was actually very good in the quarter in our view, and balances and relationship changes were different figures in the quarter. As we think about the forward, again, a lot of that is we think there are more payoffs in some of those books. We've increased our expectation for payoffs, for example, in that out-of-market portfolio, which again paid off a mid-teens periodic number in the quarter. That's more, in our view, pulling forward some of that near-term asset mix issue.
Okay. And what kind of ROA improvement do you think you can generate next year?
I think we're probably too early to talk about 2027 guidance. But if we can see continued underlying improvement in that noninterest-bearing level and then help solve that interest-earning asset mix, we think there's some really strong imputed value in the earnings profile. We're a little too early to give you an ROA number, but we do expect it to continue to move higher over time.
Your next question comes from the line of Kelly Motta with KBW.
As part of your prepared remarks, you mentioned payoffs and proactive portfolio management shrunk the size of the loan book, but production was higher. Can you provide any color and detail around that? And what's your outlook from here with what you've done on the reorganization team front in order to help stave off some of that continued pressure from payoffs ahead?
Kelly, that's a good question. The inflection point we missed was largely due to increased payoffs. We've seen a significant positive step-up in production. Keep in mind, the reorganization was completed at the end of the first quarter. As we mentioned earlier, we've also added 14 additional relationship managers. We've had good expense control and efficiency gains, but we've used some of that to add production and we're continuing to see growing pipelines. We mentioned in the opening that the Rocky Mountain region has been very strong for us, but we're seeing it across the whole footprint. Our footprint is diverse; it's not equal across all states, and we're not going to force equal production because different economies provide different opportunities. We're seeing what we hoped to see. We would like to see one more step-up in that area, and July is off to a good start. We like the results we're seeing from our reorganization.
Okay. The guide implies some continued contraction, a kind of an upper single-digit pace in the back half of the year. It was nice to see the improvement in criticized loans. I'm wondering how much of that is related to proactive portfolio management and credit work versus just things moving to performing and normal aspects there.
A couple of comments. To your point, the guide implies roughly a $600-ish million decline at the midpoint from current levels in the loan book. Breaking down where that comes from: we think it's a high $100s number in that out-of-market portfolio. We're expecting some continued pull forward of some of those future maturities there. We think it's probably approaching a $100 million decline in indirect 1-4 residential loans. From there, we see higher payoffs, which gets you to the remainder of the commercial portfolio, maybe in the $200 million range. We think the core portfolios are, to Jim's point, stable to improving, but we believe there will be some additional larger payoffs on some of those non-relationship loans. We're hopeful some of that is criticized, given the proactive approach, but there's an assumption for higher payoff and higher secondary market activity in there, which again pulls forward some of that 2027–2028 expectation.
Got it. That's helpful. Last question for me: in light of the increased payoffs, it was nice to see margin higher and loan yields up slightly. Was there any notable prepayment fees within that, and where are new originations coming on?
No notable prepayment fees in the quarter from a margin perspective. New loan yields are coming in low to mid-6% depending on type.
Your next question comes from Timur Braziler with UBS.
Maybe talk to your expectation for fixed asset repricing to start driving accelerating NII growth through next year. If you look back since the 1Q 2024 trough in margin, margins are up 55 basis points since then on the fixed asset repricing story, but NII has essentially been flat. What gives you comfort that there's greater NII growth next year through fixed asset repricing if the balance sheet remains a little bit in flux?
As you look back to that point, there were a couple of branch sales in there, which resulted in a smaller balance sheet and reduced NII relative to that. For 2027, and as we have that slide in our investor presentation, those loans are maturing at what I would call reinvestment yields for investments. There's the ability to turn those into new loans, which provides significant implied upside to NII. There's also downside protection if some of those loans leave the balance sheet. We view it as a good position from an optionality perspective. The production focus we have, the addition in relationship managers, and some of the success we're seeing in pipeline give us optimism that we'll see improvement. It's a mix-shift conversation, but we think it's a combination of strong downside protection to NII and upside optionality if we're able to see the improved production we're expecting.
Looking at the slide that has the maturing/repricing schedule, $2.2 billion through 2027 is about 16% of your loan book, not inclusive of the classified portion. Is this still an opportunity, or given some of the payoff trends, are you now expecting more of that maturing/repricing balance to exit the balance sheet over the next 1.5 years?
At the rate those are rolling off, it's certainly an opportunity given the current rate environment. As we discussed, it's a relationship focus for us. There's a real opportunity here: enhancing existing relationships, adding new relationships, or rolling assets into market rates. Given the mid-4s roll-off coupon, there's a lot of opportunity for us.
Your next question comes from Jeff Rulis with D.A. Davidson.
David, I know you said you want to stay away from 2027 guidance, but just wanted to check in on the general direction. If you are pulling forward or accelerating payoffs, what does that mean for loan balances next year? If you're targeting, say, a 10% loan runoff this year, does that improve the chances for flat or positive growth in 2027? Any directional view would be helpful.
Good question, Jeff. The intent of pulling forward some of those payoffs where we see an opportunity is to provide greater visibility into the outer years. We are too early to give a guide for loans in 2027. We want to continue to see these new relationship managers and the reorganization results start to come through before we provide a specific guide for next year. Certainly, our goal is to create a portfolio we believe is a growth portfolio.
Jeff, I don't have anything to add to what David said other than reinforcing that the momentum we're seeing is strong. When you look at our balance sheet, we have great optionality, and we're going to be smart with how we grow the bank. We'll focus on low-cost deposits, proactive credit management, expense control, and disciplined capital management. We reset the inflection point, but that doesn't change our underlying confidence in the growth—our bankers are doing a great job, and we're seeing that build.
Understood. And a follow-up: you said you'd anticipate the average earning asset balance to bottom in Q3, but period-end earning assets should be up in Q3 versus Q2?
Yes. We had some late flows in 2Q that affected ending versus average deposits, which translates into earning assets. We think 3Q will be more flat on an ending basis relative to averages, and our guide implies 4Q being higher on an average basis.
We have reached the end of the Q&A session. I will now turn the call back to Jim for closing remarks.
Thank you, and thank you for the questions today. As always, we welcome calls from investors and analysts, so please reach out if you have any follow-up questions. Thank you for tuning into the call today. Have a great day.
This concludes today's call. Thank you for attending. You may now disconnect.