First Interstate BancSystem, Inc. Q3 2026 Earnings Call - FIRST INTERSTATE BANCSYSTEM INC

Financial Performance:

• Reported Q3 2026 net income of $62.2 million ($0.65 per diluted share), down from $83.9 million ($0.87/share) in Q2 2026.
• Net interest income (NII) rose $4 million (2%) sequentially to $206.2 million, driven by a 5 basis point increase in loan yields to 5.67%.
• Fully taxable equivalent net interest margin (NIM) expanded to 3.55% in Q3 2026 from 3.48% in Q2 and 3.36% in Q3 2025, marking the 10th consecutive quarter of NIM growth.
• Non-interest income fell $18.4 million to $43.3 million, primarily due to a $19.5 million one-time gain from a Nebraska branch transaction in Q2 2026.
• Non-interest expense decreased $1.8 million to $157.1 million, maintaining a disciplined base despite strategic investments.
• Net charge-offs increased to $9.9 million (28 basis points of average loans); provision for credit losses was $10.5 million.
• Average loans decreased $296 million to $21.4 billion (total deposits), influenced by $47.7 million in indirect loan declines and $64.9 million in out-of-market portfolio runoff.
• Total deposits fell $52.8 million to $21.4 billion; excluding the exit of a large high-cost collateralized deposit, core deposits grew, with non-interest-bearing balances expanding.
• Loan-to-deposit ratio stood at 65.4% at quarter-end, down from 66.6% in Q2 and 70.1% YoY.
• Capital levels remain robust with a Common Equity Tier 1 (CET1) ratio of 14.36% and a leverage ratio of 9.49%.
• Share repurchases totaled approximately 2 million shares ($76 million) in Q3, bringing the total to <del>10 million shares (</del>$347 million) since August 2025.
• Declared a dividend of $0.47 per share, representing a 5% annualized yield.

Guidance and Future Outlook:

• Q4 2026 balance sheet guidance anticipates meaningful commercial loan payoffs and further reduction of non-relationship/out-of-market credits.
• NII guidance implies sequential expansion in Q4, supported by asset repricing tailwinds (including September rate hikes), stabilization of earning assets, and strong non-interest-bearing deposit performance.
• NIM growth is expected to decelerate sequentially in Q4 compared to Q3 as the full impact of the large high-cost deposit exit is realized and deposit repricing lags behind asset repricing.
• Expense guidance includes two new branch openings in Colorado in H1 2027 and three branch consolidations in Q4 2026, with continued focus on efficiency.
• Management does not provide 2027 guidance today but anticipates continued fixed-asset repricing and yield curve support to drive earnings through 2027.
• Long-term outlook focuses on stabilizing the earning asset mix, with a strategic intent to resume earning asset growth once deposit growth and lending opportunities align.
• Operating leverage is expected to materialize through fixed-asset repricing, improved margin, and organic deposit growth without requiring significant new capital investment.

Business Segments and Product Lines:

• Primary strategy focuses on relationship banking, deepening customer relationships in markets with existing franchise advantages.
• New client acquisition remains strong in the Rocky Mountain region, driven by operating deposits and associated services.
• Indirect lending portfolio declined $47.7 million; residential portfolio declined $36.8 million due to expected payoffs and runoff.
• Out-of-market portfolio continues to be a target for reduction, contributing to the overall loan balance decline.
• Investment portfolio strategy involves reinvesting in shorter-duration assets to reduce interest rate sensitivity while managing unrealized losses.
• Commercial lending pipeline shows underlying strength, with improved production and unfunded construction commitments increasing.
• Branch optimization program includes targeted expansion in high-opportunity markets and consolidation of underperforming locations.

Market and Competitive Landscape:

• Competitive advantage cited as the combination of relationship-focused community banking with sophisticated treasury, commercial, and wealth management solutions.
• Market share efforts focus on granular, low-cost deposit base expansion rather than rate promotions.
• Average deposits per branch improved 6% over the last 12 months; average deposits per share increased ~3%.
• Management notes that their average branch size (<del>$79 million) differs from peers (</del>$150 million) due to a higher mix of rural and mid-market locations, maintaining a lower cost structure.
• Credit portfolio criticized loans declined 19% year-over-year, though stabilized slightly in Q3; non-performing assets fell 6% during the quarter.

Risks and Challenges:

• Loan balance decline risk driven by commercial payoffs, indirect loan amortization, and intentional runoff of non-strategic/out-of-market portfolios.
• Interest rate volatility impacts investment portfolio unrealized losses and deposit beta assumptions.
• Potential for higher credit stress in the higher rate environment, particularly regarding property/business performance and upcoming loan maturities.
• Margin compression risk in Q4 due to the lag in deposit repricing relative to asset repricing following the removal of high-cost deposits.
• Seasonality risks in deposit growth, with Q4 typically showing mixed seasonality (strong early, weak late).

Management Commentary and Tone:

• Tone is confident and disciplined, emphasizing the successful execution of a multi-year strategic plan to improve long-term earnings power.
• Management highlights the "relationship banking" model as a key differentiator that drives scalable, low-cost funding.
• Confidence expressed in the balance sheet's neutrality to interest rate risks and the ability to generate earnings growth through repricing and operational efficiency.
• Commitment to capital discipline is reaffirmed, balancing shareholder returns (dividends/buybacks) with strategic investments.
• Management expressed optimism regarding the "trapped earnings" in assets maturing through 2027.

Analyst Questions and Answers:

• Deposits: Analysts asked about Q4 deposit trends despite seasonal headwinds; Management confirmed expectations for flat YoY (excluding sold deposits) with strength in non-interest-bearing core deposits.
• NII Growth: Q&A clarified that NII per share has already expanded, but dollar NII growth will require deposit stabilization and earning asset growth; NII expansion is driven by margin expansion even with flat balance sheet.
• Asset Repricing: Management indicated yield spreads of 40-50 basis points on 5+ year investment portfolios and mid-6% new loan yields.
• Capital Deployment: Confirmed active share repurchase program continues; future levels will depend on balance sheet growth opportunities, but near-term excess capital supports continued buybacks.
• Credit Quality: Management acknowledged a slower pace of improvement in criticized loans recently but noted a 18% YoY decline, attributing this to dynamic portfolio management and proactive risk assessment in a higher rate environment.
• Earning Asset Mix: Clarified that Q4 loan balances are expected to remain under pressure due to payoffs, with a potential mix shift toward securities; long-term intent is to stabilize or improve the loan mix as deposit growth accelerates.
• Expense Efficiency: Confirmed that current expense base supports growth without new major investments; normal inflation and merit increases are expected but no "step-up" in spending is required.
• Unfunded Commitments: Reported an increase in unfunded construction commitments, indicating strong underlying commercial production.

Other Key Points:

• The exit of a single large, high-cost, fully collateralized customer contributed a 3 basis point improvement to NIM and was a primary factor in deposit mix improvement.
• Management highlighted a strategic refocus on "relationship-based" clients over transactional ones to ensure sustainable deposit growth.
• The company is not using rate promotions to drive deposit growth; growth is attributed to branding and banker relationship expansion.
• The investment portfolio utilizes shorter maturities and floating-rate products to diversify risk and manage exposure to interest rate movements.
• The quarter marked the 10th consecutive quarter of NIM expansion, attributed to fixed-asset repricing and disciplined funding costs.