Executive Summary / Key Takeaways

• Strategic Transformation Underway: First Interstate BancSystem is undergoing a significant strategic pivot under new CEO Jim Reuter, shedding non-core, transactional businesses like indirect lending and divesting branches in Arizona and Kansas to refocus on "full relationship banking" and organic growth in its core, high-growth markets.
• Robust Financial Performance & Margin Expansion: The company reported strong Q2 2025 net income of $71.7 million, up from $60.0 million year-over-year, driven by lower credit loss provisions and expanding net interest income. The net interest margin (FTE, ex-purchase accounting) rose 34 basis points to 3.26% in Q2 2025, benefiting from reduced funding costs and asset repricing.
• Strong Capital and Liquidity: FIBK maintains robust capital levels, with a Common Equity Tier 1 (CET1) ratio of 13.43% at June 30, 2025, and ample liquidity, boasting a 72% loan-to-deposit ratio and minimal short-term borrowings. This financial strength provides significant flexibility for future capital deployment.
• Positive Outlook for Net Interest Income: Management anticipates continued net interest margin improvement, projecting Q4 2025 NIM (ex-purchase accounting) to approximate 3.4%. Furthermore, 2026 net interest income is guided to increase in the high single digits, assuming flat loan balances, driven by ongoing asset repricing tailwinds.
• Proactive Credit Management: While criticized loans, particularly in multifamily, increased in Q2 2025 due to slower lease-up, management expresses confidence in the underlying collateral and strong guarantor support. The company's proactive approach to credit risk management aims to stabilize asset quality metrics over time.

A New Chapter: Refocusing for Relationship-Driven Growth

First Interstate BancSystem, Inc., a regional banking stalwart with roots tracing back to 1879, is embarking on a transformative journey. Incorporated in Montana in 1971, FIBK has historically expanded its footprint to 301 banking offices across fourteen states by June 30, 2025. This extensive network, spanning the Rocky Mountain, Pacific Northwest, Midwest, and Southwest regions, serves a diverse client base from individuals to businesses and municipalities. The company's core business revolves around community banking, offering a comprehensive suite of commercial and consumer banking services, including online and mobile banking.

The arrival of CEO Jim Reuter on November 1, 2024, marked a pivotal shift towards a strategy centered on "full relationship banking" and organic growth, a departure from the previous decade's emphasis on large-scale mergers and acquisitions. This new direction aims to align incentives with deposit growth, loan pricing, and new customer acquisition, optimizing capital deployment in markets where FIBK holds strong market share and sees high growth potential.

In a competitive landscape dominated by larger national and super-regional players like U.S. Bancorp (USB), Wells Fargo (WFC), and Bank of America (BAC), FIBK differentiates itself through a community-focused model. Its strength lies in localized expertise and personalized service, particularly in underserved areas like Montana and Idaho. While larger competitors benefit from immense scale, broader technological investments, and diversified revenue streams, FIBK's agility and deep community ties foster stronger customer loyalty. Regional peer Zions Bancorporation (ZION) operates on a similar model, but FIBK's strategic refocus aims to sharpen its competitive edge through enhanced operational execution and customer-centric services. Indirect competitors, including fintechs like Block (SQ) and PayPal (PYPL), pose a threat by offering frictionless digital services, potentially pressing deposit growth and loan volumes. FIBK's response involves increasing investment in digital delivery channels to enhance customer experience and operational efficiency, aiming to bridge any technological gaps and support its organic growth strategy.

Strategic Initiatives: Streamlining for the Future

FIBK's strategic reset has already yielded significant actions. In Q4 2024, the company discontinued new originations in its indirect lending business, a portfolio that represented approximately 4% of total loan balances and 81.9% of the consumer loan portfolio by June 30, 2025. This move was driven by the recognition that indirect lending did not foster relationship banking and was dilutive to returns. The cash flow generated from the amortization of this portfolio, which had a mid-6s yield, is now being redirected to support core customer acquisition.

Further streamlining occurred on April 28, 2025, with the announcement of the divestiture of 12 branches in Arizona and Kansas to Enterprise Bank & Trust (ETBK). This transaction, expected to close by early Q4 2025, involves approximately $705 million in deposits and $331 million in commercially-oriented loans as of June 30, 2025. Management anticipates this divestiture will be accretive to tangible book value by approximately 2% and improve the CET1 ratio by 30 to 40 basis points, aligning capital with core, high-growth markets. In Q2 2025, FIBK also outsourced its consumer credit card product, selling $74.2 million of loans and recognizing a $4.3 million gain. This action, while reducing income statement lines, is expected to be largely neutral to forward net income.

These strategic exits, coupled with the intentional runoff of certain transactional agricultural and real estate loans, have led to a near-term reduction in the loan portfolio. Management views this as a necessary "reset" to align the balance sheet with its long-term organic growth strategy. Complementing these divestitures, FIBK is actively optimizing its branch network, with plans to reposition, open, or consolidate branches in late 2025 and into 2026. The goal is to improve the average branch size, which at $76 million, is currently smaller than its peers. The company also opened a new branch in Columbia Falls, Montana, in Q2 2025, a small but concrete example of its renewed focus on organic expansion.

Financial Performance: Evidence of a Turnaround

First Interstate BancSystem's financial performance in Q2 2025 and H1 2025 provides compelling evidence of its strategic pivot taking hold. Net income for Q2 2025 surged to $71.7 million, or $0.69 per diluted share, a notable increase from $60.0 million, or $0.58 per diluted share, in Q2 2024. This improvement was primarily driven by a $9.3 million reduction in the provision for credit losses and a stronger net interest income. For the first half of 2025, net income reached $121.9 million, or $1.18 per diluted share, up from $118.4 million, or $1.15 per diluted share, in the prior year period.

Net interest income (NII), the company's largest revenue source, increased by $5.5 million in Q2 2025 compared to Q2 2024, reaching $207.2 million. This growth was largely attributable to a significant decrease in interest expense, stemming from reduced rates and average balances of other borrowed funds. The net interest margin (NIM) saw substantial expansion, with the reported NIM increasing 33 basis points to 3.30% in Q2 2025 from 2.97% in Q2 2024. On a fully tax-equivalent (FTE) basis, excluding purchase accounting accretion, the NIM expanded 34 basis points to 3.26%. This margin expansion underscores the effectiveness of FIBK's liability management and asset repricing efforts. Loan yields also saw a positive trend, increasing 6 basis points sequentially to 5.65% in Q2 2025, driven by the repricing and payoffs of lower-yielding loans. Concurrently, interest-bearing deposit costs declined 1 basis point, and total funding costs fell 9 basis points, reflecting an improving mix shift away from higher-cost borrowings.

Noninterest income for Q2 2025 was $41.1 million, a slight decrease from the prior quarter. This figure included a $7.3 million valuation allowance related to loans transferred to held-for-sale for the Arizona and Kansas branch transaction, partially offset by a $4.3 million gain from the consumer credit card portfolio outsourcing. Noninterest expense demonstrated strong discipline, declining by $5.5 million to $155.1 million in Q2 2025 compared to Q1 2025, due to lower seasonal payroll taxes and reduced incentive compensation estimates.

Credit quality, a key focus for management, showed mixed signals. While net charge-offs decreased to $5.8 million (an annualized 0.14% of average loans) in Q2 2025 from $13.5 million (0.30% annualized) in Q2 2024, criticized loans increased by $176.9 million, or 17.2%, from Q1 2025. This rise was primarily concentrated in larger multifamily loans, reflecting slower lease-up activity. Despite this, management remains confident in the underlying collateral and strong guarantor support for these credits. Non-accrual loans did increase by $54.4 million to $192.7 million, mainly in commercial real estate, agricultural real estate, and commercial loans. However, approximately $130.3 million of these non-accrual loans were adequately collateralized, requiring no additional allowance for credit losses. The total funded allowance for credit losses increased to 1.28% of loans held for investment, up from 1.24% in Q1 2025.

Capital, Liquidity, and Outlook: A Foundation for Future Growth

FIBK's capital and liquidity position remains robust, providing a strong foundation for its strategic objectives. The Common Equity Tier 1 (CET1) ratio improved significantly by 90 basis points to 13.43% at June 30, 2025, exceeding all regulatory requirements. This accretion is expected to continue through 2025. The company's liquidity is ample, with a loan-to-deposit ratio of 72% and minimal reliance on short-term borrowings or brokered deposits. As of July 31, 2025, the bank had $5.2 billion in available borrowing capacity with the FHLB and $2.4 billion with the Federal Reserve Bank.

Other borrowed funds have been substantially reduced, ending Q2 2025 at $250 million, down $2.2 billion year-over-year. The recent issuance of $125 million in 7.62% fixed-to-floating rate subordinated notes due 2035, coupled with the planned redemption of $100 million in 2020 subordinated notes, further optimizes its funding structure.

Management's outlook for 2025 and 2026 is optimistic, underpinned by clear guidance. The company anticipates continued net interest margin improvement, projecting the Q4 2025 NIM (excluding purchase accounting accretion) to approximate 3.4%. For 2026, net interest income is expected to increase in the high single digits compared to 2025, assuming generally flat loan balances. This NII growth is primarily driven by the tailwinds of fixed-rate asset repricing, as a significant portion of the loan and investment portfolios are set to mature or reprice at higher rates. The guidance incorporates an assumption of 125 basis points in Fed rate cuts for the remainder of 2025, but management believes this will not materially impact the 2025 NII forecast due to the balance sheet's shift to a mostly neutral interest rate sensitivity.

Loan balances are expected to decline modestly in the near term, influenced by strategic exits and lower customer demand, with earning asset levels projected to bottom in Q3 2025. However, the company aims to stabilize and return to organic loan growth in the medium term, replacing runoff with new, relationship-based production. Near-term asset allocation will favor reinvestment into the investment portfolio, focusing on shorter-duration, lower-risk securities. Noninterest expense guidance has been reduced to a 0-1% increase for the full year 2025 (compared to 2024), reflecting disciplined cost control while still investing in production-driven areas and digital delivery channels to support future growth.

Conclusion

First Interstate BancSystem is executing a deliberate and comprehensive strategic transformation, pivoting towards a relationship-driven, organic growth model. The company's recent financial performance, marked by expanding net interest margins and strong capital accretion, validates the initial success of these initiatives. While challenges in credit quality, particularly within the multifamily sector, warrant ongoing vigilance, management's proactive approach and confidence in underlying collateral provide reassurance.

The clear guidance for continued net interest income expansion into 2026, fueled by asset repricing and disciplined expense management, paints a compelling picture for investors. FIBK's strong capital and liquidity offer substantial flexibility for future growth and shareholder returns. As the company continues to shed non-core assets and invest in its core community banking franchise and digital capabilities, it is strategically positioning itself to unlock long-term value, leveraging its deep regional presence and customer-centric approach to thrive in a competitive banking landscape.