10-Q: First Interstate BancSystem Reports Q2 Profit Growth

First Interstate BancSystem, Inc. reported increased net income and improved net interest margin for Q2 2025, despite a contraction in its loan portfolio and a rise in non-performing loans.

Summary

• Net income for the three months ended June 30, 2025, increased by $11.7 million to $71.7 million, or $0.69 per diluted share, compared to $60.0 million, or $0.58 per diluted share, for the same period in 2024.
• Net income for the six months ended June 30, 2025, increased by $3.5 million to $121.9 million, or $1.18 per diluted share, compared to $118.4 million, or $1.15 per diluted share, for the same period in 2024.
• Net interest income increased by $5.5 million to $207.2 million for Q2 2025, and by $10.4 million to $412.2 million for the six months ended June 30, 2025, compared to the respective prior year periods.
• The net interest margin improved to 3.30% for Q2 2025, up 33 basis points from 2.97% in Q2 2024.
• The cost of funds decreased to 1.50% during Q2 2025 from 1.86% in Q2 2024, benefiting from recent declines in short-term interest rates.
• Total assets decreased by $1,571.0 million (5.4%) to $27,566.4 million as of June 30, 2025, from $29,137.4 million at December 31, 2024.
• Loans held for investment, net of deferred fees and costs, decreased by $1,491.5 million (8.4%) to $16,353.4 million as of June 30, 2025.
• Non-performing loans increased by $52.8 million (37.4%) to $194.1 million as of June 30, 2025, with non-accrual loans rising by $54.4 million (39.3%) to $192.7 million.
• The allowance for credit losses increased to $209.6 million (1.28% of loans held for investment) as of June 30, 2025, from $204.1 million (1.14%) at December 31, 2024.
• A $0.3 million reduction of credit losses was recorded for Q2 2025, compared to a $9.0 million provision in Q2 2024.
• Net charge-offs decreased to $5.8 million (0.14% annualized) for Q2 2025, from $13.5 million (0.30% annualized) in Q2 2024.
• The company completed the outsourcing of its consumer credit card portfolio in June 2025, selling $74.2 million in loans and recognizing a $4.3 million gain.
• Plans to sell twelve Arizona and Kansas branches, including approximately $705 million in deposits and $331 million in loans, are anticipated to close by early Q4 2025.
• The company issued $125.0 million in fixed-to-floating rate subordinated notes due June 15, 2035, and intends to early redeem $100.0 million of 2020 Subordinated Notes on August 15, 2025.

Sentiment

Score: 7

Explanation: The company demonstrated strong profitability growth and improved net interest margin, coupled with robust capital and liquidity positions. However, significant increases in non-performing loans and criticized assets, alongside a contraction in the overall loan portfolio, introduce a degree of caution. Strategic divestitures are ongoing, which could be positive long-term but add short-term operational shifts.

Positives

• Net income increased significantly by 19.5% for the quarter and 3.0% year-to-date.
• Net interest margin expanded by 33 basis points quarter-over-quarter, driven by lower interest expense.
• Cost of funds decreased, benefiting from recent interest rate declines.
• Net charge-offs decreased both quarter-over-quarter and year-to-date, indicating improved loan loss performance.
• The company maintains strong liquidity with $8.5 billion in total available liquidity as of June 30, 2025.
• Capital ratios exceed all regulatory requirements to be deemed 'well-capitalized'.
• Successful outsourcing and sale of the consumer credit card portfolio generated a $4.3 million gain.
• The company's deposit base is diversified geographically and by depositor type, contributing to stability.

Negatives

• Total assets decreased by 5.4% and loans held for investment decreased by 8.4% since December 31, 2024.
• Non-performing loans increased by 37.4% to $194.1 million, with non-accrual loans rising by 39.3% to $192.7 million.
• Criticized assets increased during Q2 2025, particularly in the multifamily portfolio, attributed to macroeconomic conditions and slower lease-up.
• Investment securities portfolio decreased by 5.6% and held significant gross unrealized losses of $560.9 million on securities held for more than twelve months.

Risks

• Continued volatility in economic markets, including potential recessionary signs, could adversely impact the balance sheet and income statement.
• Changes in U.S. policies, such as new tariffs or trade policies, could affect client deposit levels and loan credit quality.
• Macroeconomic conditions have contributed to slower lease-up in the multifamily portfolio, increasing criticized assets.
• Interest rates are highly sensitive to many factors beyond the company's control, potentially impacting net interest income.
• The effectiveness of disclosure controls and internal control over financial reporting is subject to inherent limitations, including human error and fraud.
• The company is involved in various claims and litigation in the normal course of business, though no material adverse effect is currently expected.

Future Outlook

The company expects continued volatility in economic markets, potentially including recessionary signs, which could impact its balance sheet and income statement. It anticipates the closing of the Arizona and Kansas branch sale by early fourth quarter of 2025. The company is also evaluating the impact of the recently signed One Big Beautiful Bill Act (OBBBA) on its consolidated financial statements.

Management Comments

• The company has ample liquidity, and its capital ratios exceed all regulatory requirements to be deemed well-capitalized as of June 30, 2025.
• The deposit base is diversified, including by depositor and geographically, across the communities served.
• Recent declines in short-term interest rates have benefited the company's cost of funds, primarily resulting in reduced rates on variable rate debt.
• Macroeconomic conditions have contributed to slower lease-up in the multifamily portfolio, which resulted in an increase in criticized assets during the second quarter of 2025.
• Statutory, regulatory, and debt covenant limitations on the Bank's ability to pay dividends to the parent company are not expected to impact the ability to meet ongoing short-term cash obligations.
• The company is not aware of any events reasonably likely to have a material adverse effect on its liquidity, capital resources, or operations, nor any regulatory recommendations regarding liquidity that would have a material adverse effect.

Industry Context

The company's performance reflects broader banking industry trends, including the impact of fluctuating interest rates on net interest margin and cost of funds. The Federal Reserve's rate adjustments directly influenced the company's profitability metrics. The increase in criticized assets, particularly in the multifamily real estate sector, aligns with concerns about macroeconomic conditions affecting loan portfolios across the banking industry. Strategic divestitures, such as the sale of branches and outsourcing of credit card operations, indicate a focus on optimizing core community banking services and adapting to competitive pressures.

Comparison to Industry Standards

• The company's capital ratios (Total risk-based capital: 16.49%, Tier 1 risk-based capital: 13.43%, Common equity tier 1 risk-based capital: 13.43%, Leverage capital ratio: 9.37%) exceed the minimum requirements for capital adequacy and to be deemed 'well-capitalized' under Prompt Corrective Action requirements, indicating a strong capital position relative to regulatory benchmarks.
• The diversified deposit base, with 64.6% FDIC insured deposits, suggests a stable funding profile, which is a key strength compared to less diversified or more wholesale-funded institutions.
• The increase in non-performing loans and criticized assets, particularly in the multifamily portfolio, warrants close monitoring as it could indicate a deterioration in asset quality that may diverge from peers experiencing more stable loan performance, though net charge-offs decreased.
• The net interest margin improvement to 3.30% in Q2 2025, coupled with a decreasing cost of funds, positions the company favorably in managing interest rate risk compared to banks struggling with rising funding costs.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in various claims and litigation in the normal course of business, but management does not expect the ultimate disposition to have a material adverse effect on financial condition, results of operations, or liquidity.

Stakeholder Impact

• Shareholders: Positive impact from increased net income and EPS, stable dividend, and increased stockholders' equity. Potential concern from loan portfolio contraction and increased non-performing loans.
• Customers: Customers in Arizona and Kansas will transition to Enterprise Bank & Trust due to branch sale. Consumers seeking indirect loans will need to find alternative financing as the company discontinued this program.
• Creditors: The issuance of new subordinated notes and redemption of older ones alters the debt structure. Strong capital and liquidity positions are favorable for creditors.
• Employees: Operational shifts due to the discontinuation of indirect lending and credit card outsourcing may impact certain employee roles, though no specific details on employee impact were provided.

Next Steps

• Closing of the sale of Arizona and Kansas branches, anticipated by early fourth quarter of 2025.
• Early redemption of the $100.0 million 2020 Subordinated Notes on August 15, 2025.
• Payment of the quarterly dividend of $0.47 per common share on August 21, 2025.
• Evaluation of the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements.

Key Dates

Recommendation

The company demonstrates improved profitability with increased net income and an expanding net interest margin, supported by a reduction in funding costs. Its capital and liquidity positions remain strong, exceeding regulatory requirements. However, the significant increase in non-performing loans and criticized assets, coupled with a contraction in the overall loan portfolio, introduces a notable risk. The ongoing strategic divestitures (indirect lending, credit card portfolio, branch sales) are reshaping the business, which could be beneficial long-term but create short-term uncertainty. A 'Hold' recommendation is appropriate, advising investors to monitor asset quality trends and the successful execution of strategic initiatives before making further investment decisions.

Keywords

Banking, Financial Services, SEC Filing, Quarterly Report, Net Income, Net Interest Margin, Loans, Deposits, Non-performing Loans, Credit Quality, Capital Ratios, Liquidity, Subordinated Notes, Branch Sale, Credit Card Portfolio, Interest Rates, Economic Outlook