First Interstate BancSystem Resets After One-Time Earnings Lift

First Interstate Bancsystem ((FIBK)) has held its Q4 earnings call. Read on for the main highlights of the call.

First Interstate BancSystem Leans on One-Time Gains as It Resets for Leaner Growth

First Interstate BancSystem’s latest earnings call painted a cautiously optimistic picture: management showcased clear progress on capital strength, margin expansion, and credit quality, but also acknowledged that a sizable portion of the quarter’s earnings was driven by one-time gains and that core growth remains pressured. The tone balanced confidence in structural improvements—such as deleveraging the balance sheet, optimizing the branch footprint, and stepping up capital returns—with realism about weaker loan production, deposit volatility from divestitures, and near-term net interest income (NII) headwinds.

Strong Q4 Headline Earnings, but Heavily Boosted by One-Time Gain

First Interstate reported Q4 2025 net income of $108.8 million, or $1.08 per diluted share, sharply higher than $71.4 million, or $0.69 per share, in the third quarter. Management made clear that the jump was largely driven by a gain on sale related to the divestiture of its Arizona and Kansas branches. While the headline numbers suggest a very strong quarter, investors should recognize that the bulk of the earnings lift is non-recurring, and underlying run-rate profitability remains more modest.

Robust Share Repurchases Signal Confidence in Valuation

Capital return to shareholders was a major theme. The bank repurchased roughly 3.7 million shares through year-end 2025 for about $118 million, with approximately 2.8 million shares—around $90 million—bought back in Q4 alone. The board increased the share repurchase authorization by $150 million, bringing total capacity to $300 million and leaving about $180 million still available. This aggressive buyback pace signals management’s confidence in the bank’s capital position and in the attractiveness of its stock at current levels.

Capital Ratios Strengthen as Tangible Book Value Climbs

Capital metrics improved meaningfully during the quarter. The common equity Tier 1 (CET1) ratio rose to 14.38%, up 48 basis points quarter over quarter, while the leverage ratio stood at about 9.61%. Tangible book value per share increased 2.9% in Q4 to $22.40. These trends underscore a stronger regulatory capital footing and provide management with greater flexibility for ongoing repurchases, dividends, and strategic repositioning of the balance sheet.

Deleveraging the Balance Sheet and Eliminating Borrowed Funds

First Interstate continued to simplify and strengthen its funding profile. Other borrowed funds, which totaled $1.6 billion at the end of 2024, were reduced to zero by the end of 2025. This deleveraging enhances balance sheet flexibility and meaningfully reduces interest expense on borrowed money. With no remaining other borrowings, the bank enters 2026 with a cleaner and less rate-sensitive liability structure, supporting future margin performance.

Net Interest Margin Edges Higher Despite Earning Asset Pressure

Net interest margin (NIM) showed incremental improvement in Q4. Fully tax-equivalent NIM rose to 3.38% from 3.36% in Q3 and 3.20% a year earlier. On an adjusted basis, excluding purchase accounting accretion, NIM improved to 3.34%, up 4 basis points sequentially and 26 basis points year over year. This margin expansion came even as overall earning assets declined, signaling progress in repricing and in the reinvestment of lower-yielding securities into higher-yielding assets.

Credit Quality Metrics Trend Better Despite One Large Charge-Off

The credit picture is improving, though not without noise. Criticized loans fell by $112.3 million, or 9.6%, in Q4, and non-performing assets declined by $47.3 million, or 26%. The funded reserve ratio dipped slightly to 1.26% of loans from 1.30% in Q3. However, the quarter saw a notable spike in net charge-offs, which rose by $19.8 million to $22.1 million, driven largely by a single large credit with an $11.6 million specific reserve. While full-year net charge-offs at 24 basis points remained in line with the bank’s long-term expectations, the Q4 volatility underscores that idiosyncratic credit events can still impact results.

Dividend Remains a Key Pillar of Shareholder Returns

Alongside buybacks, First Interstate maintained a generous dividend payout. The board declared a quarterly dividend of $0.47 per common share, translating to an annualized yield of approximately 5.7% based on the average closing price in Q4. The company returned about $48 million in dividends during the quarter. Together with buybacks, this underscores a shareholder-friendly capital return strategy supported by a strengthened capital base.

Footprint Rationalization and Organizational Restructuring Aim to Unlock Growth

Management is reshaping the franchise to focus on core, contiguous markets and streamline decision-making. The company completed the sale of its Arizona and Kansas branches and announced the sale of 11 branches in Nebraska, reducing its footprint from 14 states to 10 contiguous states. It also moved to a flatter organizational structure built around state presidents to enable faster local decision-making and drive organic growth. While these moves generate near-term restructuring costs, they are intended to create a more focused, efficient, and growth-ready regional bank.

Loan Balances Fall Sharply Amid Strategic Run-Off and Weak Production

Loan balances declined meaningfully in Q4 and for the full year. Total loans dropped by $632.8 million in the quarter, including $72.5 million moved to held-for-sale and $62.8 million of indirect loan amortization. Management acknowledged that 2025 loan production came in lower than expected, and that intentional run-off and asset disposals weighed on balances. While some of this decline is strategic, it also highlights a challenge in generating new volume to replace runoff.

Deposit Levels Reflect Branch Sales, Underlying Growth More Stable

Deposits were also affected by the strategic reshaping of the footprint. Total deposits declined by $516.7 million in Q4 to $22.1 billion, largely due to the sale of $641.6 million of deposits in the Arizona and Kansas branch transaction. Excluding those sold deposits, the underlying deposit base actually increased during the quarter. The reported decline thus reflects portfolio repositioning rather than pure outflows, but it contributes to headline compression in balance sheet size.

Net Interest Income Squeezed by Smaller Balance Sheet and Lower Yields

Despite better margins, overall net interest income (NII) remained under pressure. NII slipped by $0.4 million quarter over quarter to $206.4 million, a 0.2% decline, and fell by $7.9 million, or 3.7%, versus the prior year. The main drivers were a decrease in earning assets and a slight decline in yields, with the yield on average loans dipping 1 basis point to 5.67%. The result is a mixed picture: healthier margins but a smaller earning asset base limiting total revenue.

Non-Recurring Gain Drives Non-Interest Income Surge

Non-interest income surged by $62.9 million from the prior quarter, almost entirely due to the $62.7 million gain on the sale of the Arizona and Kansas branches. This underscores how much Q4 earnings benefited from a one-time event. Core fee income did not experience a similar step-change, meaning investors should not extrapolate Q4’s non-interest income level into 2026.

Operating Costs Rise on Restructuring, Incentives, and Closures

The restructuring of the franchise carried a cost. Non-interest expense rose by $8.8 million quarter over quarter to $166.7 million. This included $2.3 million of branch closure expenses, $4.2 million of severance tied to the organizational redesign, and $5.6 million of higher incentive accruals. While these items skew Q4 expense levels higher, management presented them as largely transitional costs tied to its footprint optimization and workforce realignment.

Product Rationalization and Indirect Portfolio Run-Off Weigh on Growth

The bank is deliberately simplifying its product set and winding down lower-return activities. It outsourced its consumer credit card product and stopped originating indirect lending, a business that will continue to amortize and run off. Management expects the indirect portfolio’s continued runoff to contribute an additional 1–2% decline in loan balances in 2026. While this should improve risk-adjusted returns and complexity over time, it further dampens headline loan growth in the near term.

Loan-to-Deposit Ratio Compresses as Loans Shrink

Reflecting the combined impact of loan runoff and deposit movements, the loans held for investment to deposits ratio fell to 68.8% at quarter-end, down from 70.1% in Q3 and 77.5% a year earlier. This lower loan-to-deposit ratio highlights a more liquid, less leveraged balance sheet but also signals underutilized funding. For investors, it suggests capacity for future loan growth—if the bank can successfully ramp production in its core markets.

Near-Term NII Headwinds and Q1 Seasonality

Management flagged a softer start to 2026 for net interest income. The company expects reported NII in the first quarter of 2026 to be approximately 3% lower than in Q4 2025, driven by fewer accrual days and normal deposit seasonality. This implies a near-term earnings drag even as NIM is expected to continue to grind higher, reinforcing that the earnings recovery will likely be gradual rather than immediate.

Forward Guidance: Gradual NIM Expansion, Flat Loans, and Disciplined Expenses

For 2026, First Interstate guided to low single-digit deposit growth with normal seasonal patterns and total loans roughly flat to slightly lower, excluding an additional 1–2% decline from the continuing runoff of the indirect portfolio. Loans are expected to fall in the first half before modest growth emerges in the second half. Management anticipates sequential NIM expansion from the Q4 adjusted level of 3.34% to above 3.50% by year-end, implying roughly 5 basis points of improvement per quarter. This is expected to be driven by reinvesting lower-yielding securities into higher-rate assets and by new loan production in the low-to-mid 6% range. Fee income is expected to see modest year-over-year growth. On costs, the bank is guiding to roughly flat to slightly lower total expenses compared with 2025—around $630–$645 million for the year, or about $159–$160 million per quarter—even after accounting for roughly 1% higher medical costs and reinvestment in relationship managers, branch relocations/openings, and marketing. The outlook reflects the sale or closure of 17 branches and embeds the expanded $300 million share repurchase program, with about $180 million of capacity remaining.

In sum, First Interstate BancSystem’s earnings call portrayed a bank that is structurally stronger, more focused, and increasingly shareholder-oriented, but still working through the earnings drag of portfolio runoff, business exits, and a smaller balance sheet. Margin expansion, improved capital, and better credit quality are clear positives, yet core NII growth and loan production remain key execution tests. For investors, the story is one of a disciplined regional bank trading near a transition point—leveraging capital strength and cost control while it seeks to reignite sustainable, organic growth in a leaner footprint.