First Interstate BancSystem, Inc. Q2 FY2025 earnings call

• First Interstate continued refocusing capital investment, optimizing balance sheet, and improving core profitability. They stopped new originations and indirect lending, and signed an agreement to outsource the consumer credit card product.
• The company has a strong brand, branch network in growth markets, a low-cost granular deposit base, and strong community bankers. They anticipate higher profitability from recent strategic actions, branch optimizations, organic growth through relationship banking, and asset repricing.
• Proactive credit risk management led to stability in nonperforming asset levels, modestly lower classified asset levels, and 14 basis points of annualized net charge-offs. Criticized loans increased due to slower multifamily lease-up but management is comfortable with collateral and guarantors.
• The company ended Q2 with a 72% loan-to-deposit ratio, minimal short-term borrowings, and strong capital. They opened a branch in Columbia Falls, MT, and anticipate sequential branch actions moving forward.

For the second quarter of 2025, the company reported net income of $71.7 million or $0.69 per diluted share compared to $50.2 million or $0.49 per diluted share in the first quarter. Net interest income was $207.2 million in Q2, an increase of $2.2 million from the prior period. Net interest margin was 3.32% on a fully tax equivalent basis, and excluding purchase accounting accretion, it was 3.26%, up 12 basis points from the prior quarter. Other borrowed funds ended Q2 at $250 million, down from prior periods. Yield on average loans increased 6 basis points to 5.65% in Q2. Noninterest income was $41.1 million, down $0.9 million from the prior quarter. Noninterest expense declined by $5.5 million to $155.1 million in Q2. Net charge-offs totaled $5.8 million, representing 14 basis points of average loans on an annualized basis. Classified loans declined $24.4 million or 5.1%, while criticized loans increased $176.9 million or 17.2% due to slower lease-up in the multifamily book. Loans held for investment declined $1 billion. Deposits declined $102.2 million. The common equity Tier 1 capital ratio ended the quarter at 13.43%.

• Net interest income is expected to increase in the high single digits in 2026, supported by continued margin improvement assuming generally flat loan balances in 2026.
• Noninterest income guidance is modestly lower due to the outsourcing of the consumer credit card product.
• Noninterest expense guidance has been reduced from a 2%-4% full year increase to 0%-1% for 2025, driven by expense discipline and controlled staffing levels.
• Anticipate modestly lower loans in the third quarter, more stability in the fourth quarter, and optimism to grow loans long term. The Arizona and Kansas branch transaction is expected to result in tangible book value accretion of roughly 2% and an increase in the common equity Tier 1 ratio.

• Criticized loans increased due to slower lease-up in the multifamily book, which could potentially lead to volatility in charge-offs if not managed properly.
• The impact of loan runoff and balance sheet adjustments on portfolio stability, including potential further drift in criticized loans.

Q: Jeff Rulis asked about the timing of loan portfolio stabilization.

A: David Della Camera said they anticipate modestly lower loans in the third quarter, more stability in the fourth quarter, and optimism to grow. Jim Reuter added about intentional loan payoffs and proactive credit work with a new credit committee process.

Q: Andrew Terrell asked about the increase in criticized loans.

A: James Reuter said the increase was due to slower lease-up in multifamily projects, but management is comfortable with collateral and guarantors.

Q: Kelly Motta asked about expense reinvestment and loan yields.

A: James Reuter said they won't sacrifice talent for cost savings and will invest in growth, while David Della Camera discussed security purchases and new loan yields.

Q: Jared Shaw asked about year-end '25 loan levels.

A: James Reuter said the guide excludes other items, with additional impacts from indirect and held-for-sale balances.

Q: Matthew Clark asked about loans transferred to held-for-sale.

A: David Della Camera said they were all tied to the Arizona and Kansas branch transaction.

Q: Timur Braziler asked about capital priorities and credit trends.

A: James Reuter said they have strong capital and will consider all options for shareholder value, and are optimistic about replacing runoff loans with growth.