First Interstate BancSystem, Inc. Common Stock (DE) 2026 Q3 Earnings Call

Jim? Thank you, Nancy, and thank you for joining us on our earnings call today.

In the third quarter of 2026, we continued to execute against our multi-year strategic plan, further improving the long-term earnings power of the franchise. Net interest margin expanded for the 10th consecutive quarter and non-interest-bearing deposits continued to increase, reflecting our focus on relationship growth. We maintained our disciplined approach to long-term value creation, investing in the markets where we see the greatest opportunity to deepen customer relationships and grow core deposits while enhancing shareholder returns through additional share repurchases. The execution of our multi-year strategy has required deliberate changes to both the composition of the balance sheet and our geographic footprint. We have exited certain non-strategic markets, initiated a long-term branch optimization program that includes both targeted expansion and consolidation, and refocused lending activities to customers that align with our relationship banking model.

Our primary objective is to protect and strengthen the quality of the deposit franchise and add new customers. As we expected, new client acquisition remained strong in the Rocky Mountain region. New production continued to be concentrated among relationship-based clients represented by operating deposits and associated services. Going forward, our capital, talent, and branch investments will increasingly follow markets where we have an existing franchise advantage or an attractive opportunity for relationship growth. We believe the current expense base supports a production level that would stabilize earning asset mix when producing at capacity. While we expect our new teams to follow a typical ramp-up period, we believe the banking organization now has the capacity and market coverage required to support growth.

This improvement in our operating model strengthens one of our key differentiators, combining the relationship focus, local decision-making, and high-touch service of a profitable community bank with the sophisticated treasury, commercial banking, and wealth management solutions of a larger institution. We have seen meaningful improvement in criticized loan levels over the past 12 months, which reflects our long-term commitment to disciplined credit decision-making. Credit was stable in the third quarter, with little change in criticized loans and a modest reduction in non-performing assets. Effective risk management continues to be a priority for us as strong credit discipline, combined with a high-quality customer deposit foundation, will support performance in all economic cycles. We believe our low-cost deposit base, which is granular across a large number of customers and geographies, provides a competitive advantage over the long term.

In the third quarter, we also continued to optimize our capital structure through prudent execution of our share repurchase program. We repurchased approximately 2 million shares during the quarter, bringing total repurchases to approximately 10 million shares since the program began in late August 2025. Together with our dividend, repurchases are an important component of our total shareholder return. Through ongoing fixed asset repricing, capital deployment, operating model optimization, and continued focus on relationship banking, we are building a more efficient organization. We remain confident in our ability to continue to deliver improved earnings over time. With that, I will hand the call over to David.

David? Thanks, Jim. I'll start with our results for the quarter.

The company reported net income of $62.2 million or $0.65 per diluted share in the third quarter, compared to $83.9 million or $0.87 per diluted share in the second quarter. Net interest income increased by $4 million compared to the prior quarter, or 2%, to $206.2 million. Yield on average loans increased 5 basis points to 5.67%, and total funding costs decreased 4 basis points compared to the second quarter.

Deposit costs benefited from the exit of a large, high-cost, fully collateralized customer where our long-term return objectives were not being met. Excluding this balance, deposits increased during the quarter. This was a unique customer from both a size and pricing perspective. That exit contributed an approximately 3 basis point improvement to our net interest margin in the quarter and did not have a material impact on net interest income. Our fully taxable equivalent net interest margin was 3.55% for the third quarter, compared to 3.48% during the second quarter and 3.36% during the third quarter of 2025. As Jim mentioned, this marks our 10th consecutive quarter of net interest margin expansion, and fixed asset repricing should remain a tailwind to earning asset yields and underlying margin improvement into 2027. Over the past few years, we have used cash flows from the investment portfolio to eliminate wholesale borrowings.

Since we began reinvesting in 2025, we have targeted shorter duration, reducing the balance sheet sensitivity to changes in interest rates. Based on our current interest rate risk modeling, the balance sheet is broadly neutral from a net interest income perspective in both the near term and over the next 12 months. While continued asset repricing and reinvestment at current market yields provide sequential support to earning asset yields. Non-interest income was $43.3 million, a decrease of $18.4 million from the prior quarter. This decrease primarily reflected the $19.5 million gain recognized in the second quarter from the Nebraska branch transaction. Non-interest expense was $157.1 million for the third quarter, a decrease of $1.8 million from the prior quarter. Moving to the balance sheet. Loans decreased by $296 million in the third quarter. A number of payoffs we anticipated in the third quarter shifted into the early fourth quarter.

As we look to the loan decline in the quarter, this was influenced by a $47.7 million decline in indirect lending loans, a $64.9 million decline in the retained out-of-market portfolio, and a $36.8 million decline in the residential portfolio. While total deposits decreased $52.8 million to $21.4 billion in the quarter, when adjusted for the exit of the one large collateralized deposit, deposits increased quarter-over-quarter. Our deposit mix further improved in the quarter as non-interest-bearing balances extended the increase we experienced in the prior quarter. The ratio of loans held for investment to deposits was 65.4% at the end of the quarter, compared to 66.6% at the end of the prior quarter and 70.1% at the end of the third quarter of last year. Turning to credit. Net charge-offs increased by $0.2 million in the third quarter to $9.9 million, or 28 basis points of average loans.