First Interstate BancSystem's Q2 2025: Key Contradictions in Loan Portfolio, Capital Return, and Credit Quality

Loan portfolio stabilization and runoff, capital return and shareholder value enhancement, credit quality and reserve adequacy, loan growth expectations, and capital allocation strategy are the key contradictions discussed in First Interstate BancSystem's latest 2025Q2 earnings call.



Capital and Balance Sheet Optimization:
- First Interstate BancSystem ended the quarter with a 72% loan-to-deposit ratio, minimal short-term borrowings, and no broker deposits. The common equity Tier 1 capital ratio was 13.43%.
- The bank is actively optimizing its balance sheet, focusing on core markets to improve profitability and has seen stability in nonperforming asset levels.

Non-interest Income and Margin Improvement:
- Net interest income increased by $2.2 million to $207.2 million, driven by a 12 basis points increase in net interest margin to 3.32%.
- This improvement was due to reduced interest expense and higher yield on average loans, which increased by 6 basis points to 5.65%.

Credit Risk Management and Loan Portfolio:
- Nonperforming asset levels remained stable, with a slight decline in classified assets. However, criticized loans increased by 17.2%.
- The increase in criticized loans was largely due to slower lease-up in the multifamily book, but the bank remains confident in the underlying value of the properties and guarantors.

Strategic Transactions and Branch Optimization:
- The bank announced the outsourcing of its consumer credit card product, resulting in a $74 million loan divestiture, and plans for sequential branch optimizations.
- These moves align with efforts to refocus capital investment, optimize the balance sheet, and improve core profitability in growth markets.

Guidance and Future Expectations:
- First Interstate anticipates a high single-digit increase in net interest income in 2026, supported by continued margin improvement and expectation for flat total loan balances.
- The guidance includes expectations for reinvestment into the investment portfolio in the near term, reflecting a balance sheet shift towards securities.