First Interstate BancSystem, Inc. Class A Aktie

Hello, and thank you for standing by. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Interstate BancSystem, Inc. First Quarter 2026 Earnings Call.

[Operator Instructions]

I would now like to turn the call over to Nancy Vermeulen. Please go ahead.

Thanks very much. Good morning, and thank you for joining us for our first quarter earnings conference call.

As we begin, please note that the information provided during this call will contain forward-looking statements, and actual results or outcomes might differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary notes regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings, and the company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.

Again, this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, we encourage you to do so. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the fourth quarter of 2025.

Joining us from management this morning are Jim Reuter, our Chief Executive Officer; David Della Camera, our Chief Financial Officer; and other members of our management team. Now I'll turn the call over to Jim Reuter. Jim?

Thank you, Nancy, and thank you for joining us on our earnings call today. In the first quarter of 2026, we completed the redesign of our banking organization, which was a major step forward in the ongoing strategic focus on full relationship banking. This, along with the expansion of our teams in key markets such as Colorado, is translating into an increase in production as we move into the second quarter. As a reminder, we initiated the redesign in the fourth quarter of last year with the intent of changing our banking organization from a layered structure to a flatter, more streamlined model, resulting in a better client experience.

We completed the transition in the first quarter, successfully integrating top performers from within the company with exceptional external talent to create a more agile structure focused on delivering the full capabilities of the bank. We remain focused on disciplined earning asset growth, supporting earning asset repricing to drive the value inherent in our best-in-class deposit base. Over the course of 2025, we began reorienting our branch network to geographies that have high growth potential for us, which entailed divestitures of some of our lower density markets and planned branch openings in areas where we have opportunities to gain market share.

We completed the previously announced consolidations of 4 branches in Eastern Nebraska, the closures of the single branches in Minnesota and North Dakota and the opening of an additional branch in Montana in the first quarter. On April 10, after quarter end, we completed the sale of 11 branches in rural Nebraska and later in the month, completed a major upgrade of our branch location in Sheridan, Wyoming. We are currently consolidating 2 locations in Iowa and Oregon, which will close early in the third quarter.

We have made significant progress optimizing our branch network in the past 18 months. And while we believe most of the large activity is behind us, branch optimization will always be an ongoing process to ensure we can serve our customers most effectively and efficiently. Our overall objective is disciplined growth, placing assets on the balance sheet that are accretive to our return profile as we work to unlock the underlying value in our balance sheet. As we focus our capital investment in 2025, we initiated a share repurchase authorization and have purchased about 6 million shares since announcing the program last August. We continue to see value in share buybacks and are in a position to return capital as well as grow organically.

Turning to credit. In the first quarter of 2026, credit quality was generally stable with a modest decline in criticized loans. We experienced a modest increase in nonperforming loans that was driven by one individual credit. Net charge-offs were 6 basis points of average loans. In addition to efforts to optimize our physical branch network mentioned earlier, we are also investing in digital channels to meet customers where they are, whether that be in a branch or online. We have made improvements to our online account opening experience and our Zelle P2P service. Both of these changes have produced positive results that are supporting our efforts to attract and retain customers.

In addition, we are making investments in our management of data to ensure we are able to leverage new technologies and integrate the use of AI, which are key to many of our strategic initiatives. Finally, we brought a new marketing partner on board in the first quarter, and this firm is now developing a creative campaign across consumer and business platforms. Given that the transformation at First Interstate is now visible in our footprint, our balance sheet and our delivery of first-class services and products, the timing is right to increase brand presence. You will begin to see that across our footprint over the summer months. And now I will hand the call over to David to discuss our results and our guidance in more detail. David?

Thanks, Jim. I'll start with our results for the quarter. The company reported net income of $60.2 million or $0.61 per diluted share in the first quarter compared to $108.8 million or $1.08 per diluted share in the fourth quarter. Net interest income decreased by $5.7 million compared to the prior quarter or 2.8% to $200.7 million. This was driven primarily by fewer accrual days in the first quarter compared to the fourth quarter, a reduction in earning assets due mostly to seasonally lower deposits and a reduction in the yield on earning assets due to fourth quarter rate movement.

These impacts were partially offset by a reduction in the cost of interest-bearing liabilities. Yield on average loans decreased 7 basis points to 5.60% and total deposit costs declined 10 basis points compared to the prior quarter. Total funding costs decreased 8 basis points compared to the fourth quarter, and results were broadly in line with our initial expectations shared on the prior earnings call. Our fully tax equivalent net interest margin was 3.43% for the first quarter compared to 3.38% during the fourth quarter and to 3.22% during the first quarter of 2025.

This is the eighth consecutive quarter in which we have seen margin expansion, and we continue to anticipate sequential expansion over the near and medium term. Noninterest income was $41.1 million, a decrease of $65.5 million from the prior quarter. The decline was driven by a gain on sale of $62.7 million associated with our divestiture from Arizona and Kansas and a $1.4 million gain from the sale of certain equity securities, both of which were recognized in the fourth quarter. The remainder of the decline was generally driven by seasonality in our fee businesses, including payment services.

Noninterest expense was $157.6 million for the first quarter of 2026, a decrease of $9.1 million from the prior quarter. Severance expense totaled $1.3 million during the quarter and was primarily related to the redesign of the banking organization and branch closures. As a reminder, fourth quarter results included $4.2 million in severance expense, $2.3 million in expenses related to the pending branch closures and a $1.2 million reversal related to the FDIC special assessment accrual.

Results this quarter benefited from medical expense favorability to expectations as well as an OREO valuation adjustment, which benefited expenses by just over $1 million. We continue to exhibit discipline across expense categories while reinvesting in areas to support accretive organic growth, including the addition of relationship managers and increased advertising expense, which is included in our forward expense guidance.

Moving to the balance sheet. Loans decreased by $473.2 million in the first quarter, which included $58.1 million of continued amortization of the indirect portfolio and a decline in agricultural loans as well as loan paydowns and payoffs. Total deposits decreased $205.3 million to $21.9 million (sic) [ billion ] as of March 31, 2026. Year-over-year, excluding the impact of the Arizona and Kansas sold deposits, deposits were a little changed.

Our deposit performance in the first quarter reflected what we view as normal seasonality and was modestly favorable to our initial expectations. We effectively captured beta on our interest-bearing deposits with the cost declining 12 basis points compared to the prior quarter. The ratio of loans held for investment to deposits was 67.3% at the end of the quarter compared to 68.8% at the end of the prior quarter and 76.4% at the end of the first quarter of the prior year.

As a note, the previously disclosed sale of 11 branches in Western Nebraska that closed in April contained approximately $244 million in sold deposits. Turning to credit. Net charge-offs decreased by $19.7 million in the first quarter to $2.4 million or 6 basis points of average loans. Total provision for credit losses was $6.7 million in the first quarter. Criticized loans decreased $18.6 million or 1.8% from the prior quarter. Our total funded provision increased to 1.33% of loans held for investment from 1.26% in the fourth quarter. The increase in coverage this quarter broadly reflects specific credit activity within nonperforming loans.

We repurchased approximately 2.4 million shares in the first quarter, totaling approximately $84 million and repurchases since initiation of the program in August totaled about $202 million. We continue to view share repurchases as our immediate capital allocation priority. We believe the accretive combination of earning asset growth, share repurchases, fixed asset repricing and the stabilization and improvement of our earning asset mix will drive shareholder value.

Finally, we declared a dividend of $0.47 per common share, which equates to a 5.3% annualized yield based on the average closing price of the company's common stock during the first quarter. Our common equity Tier 1 capital ratio ended the first quarter at 14.30%, a decrease of 8 basis points from the prior quarter. Our leverage ratio was 9.56% at the end of the first quarter compared to 9.61% at the end of the prior quarter.

Moving to our guidance. Our guidance continues to include the impact of the sale of 11 branches in Nebraska, which closed subsequent to the end of the first quarter, while excluding the anticipated gain on sale from the transaction, which we expect will total approximately $19 million. Broadly, our guidance is generally consistent with the prior quarter with little change to our ranges for net interest income, noninterest income and noninterest expense. Our guidance continues to anticipate a decline in loan balances in the second quarter with stabilization and modest growth in the back half of the year. We continue to anticipate a benefit from fixed asset repricing over the next couple of years.

As outlined in our investor presentation through 2027, we anticipate $2.6 billion of fixed and adjustable rate loans with a weighted average yield of 4.5% to mature or reprice. We expect an additional $2 billion of securities cash flows over the same period at a weighted average yield of 2.7%. Both the dollar amount and rate of anticipated investment portfolio cash flows have increased over the prior 2 quarters as we continue to target a short to mid-duration profile for new purchases.

Similar to prior periods, we also continue to expect sequential improvement in our net interest margin each quarter in 2026 and into 2027, given the expectation for improving spread between loans and deposits and due to the loan repricing dynamic and continued amortization of lower-yielding investment securities. With that, I will hand the call back to Jim. Jim?

Thanks, David. First Interstate's strengths are in our low-cost deposit base, supported by dominant share in growing markets. Our balance sheet exhibits strong liquidity and capital flexibility, and we anticipate benefiting from earning asset repricing over the coming years. We are pleased with the underlying momentum in the business, and we anticipate meaningful improvement to our return profile as we move forward. Now we would like to open the call up for questions.

[Operator Instructions]

Your first question is from the line of Andrew Terrell with Stephens Inc.

I wanted to start off just on loan growth. I see on the guidance slide, you're kind of assuming some improving production informed by strong commercial pipeline. I was hoping you could just quantify. I know there's been a lot of moving pieces recently, but maybe give us some color on what's building in the pipeline, how optimistic you are on returning to flat balance sheet growth, just given the decline we've seen recently as you guys have worked through some credit. Just maybe love to unpack the pipeline build a little bit more.

Yes, sounds good, Andrew. Good question. And we I would just say that we expected as we put out our forward guidance for 2026 that we would see this decline, the first part leveling off midyear and then growing in the back half. And what I can tell you is we're seeing good pipeline activity. I'm not going to give you an exact number because, as you know, pull-through rates are always something that you have to make an assumption on. But I will say it's the best activity I've seen in 18 months since I've been here.

Post the banking reorg, we have a flatter org chart with more people in production roles, we actually increased the number of bankers on the ground. We have clear scorecards and goals, and it's driving really strong sales activity. The bankers are doing not only a great job with that loan pipeline. I know that's the focus of your question, but -- they're bringing full relationships. I sit in loan committee every week, and it's become the default that you're talking about the deposits that are coming with the loan. So with that said, though, we won't chase growth for the sake of growth.

It will be smart growth that provides the appropriate return, credit profile that's accretive to our bottom line and build shareholder value. And so best pipeline I've seen. It's coming from all parts of the footprint, but they're not all created equal. We're seeing stronger activity in the Rocky Mountain region, Colorado, in particular, given the opportunity we have there.

Great. I appreciate it, Jim. And if I could move over to the margin quickly. Was there any NPL interest reversal that negatively impacted loan yields this quarter?

You guys have obviously done a good job in improving loan yield in the face of rate cuts, but this quarter, loan yields were down 7 basis points. Was there anything onetime in the loan yields? And any other headwinds we should contemplate when we think about the fixed asset dynamics going throughout the year?

Nothing material there, Andrew. I think the decline you saw quarter-over-quarter was essentially the impact of the 4Q rate cuts. So each rate cut, all else equal, has about a 5 basis point impact on our loan yields, about 20% of the portfolio is variable. So that was really just that quarter-over-quarter impact there.

Got it. Okay. And then on the securities front, it looks like you built the bond book a little bit this quarter. You still got a pretty healthy cash position, and it's elevated versus where you ran at several years ago. I guess, updated thoughts on where you'd like to run cash at, David? And then should we expect incremental securities purchases going forward?

Yes. So I think a couple of comments there. Second quarter, we have the -- where we had the branch transaction that closed early in the period. So a little bit of a use of cash there, which is part of that. I think you'll see our cash position move around a little bit just given deposit seasonality as we try to smooth investment purchases over time. We will continue to be active in the investment space, just given the securities cash flow we have coming over the next few years, but probably a little outsized growth this period just given that change in loans that we anticipated.

Our next question is from the line of Matthew Clark with Piper Sandler.

I want to start with the weighted average rate on new loans and securities as we think through the cash flows coming off both those portfolios going forward?

Yes. So first quarter for loans, kind of low sixes. I think later in the quarter, a little bit higher as the base rate moved higher. And then on new securities, I would think in that 5-year plus about 60 basis points, give or take, is kind of where the market is right now for those new purchases.

Okay. And then spot rate on deposits at the end of March and your outlook for deposit costs with the Fed on hold. Are there any other opportunities to reduce some higher cost deposits?

So March interest-bearing deposit cost was 1.55%, so a few basis points lower than the full quarter. I think as we go into the second quarter, we feel like we're generally kind of where we will be without Fed moves. So again, a few basis points of improvement we anticipate quarter-over-quarter just given ending versus average. But I think we've moved our rates where we think they will be given where the Fed is. And so without additional movements, I think you should expect us to settle around where that is.

Okay. And then just on criticized, any line of sight on a more material decline in those balances? Any resolutions coming up that you can see or upgrades?

Yes. Good question, Matt. I mentioned it in my opening comments, but we've continued to see stabilization in the credit bucket. That's a result of the proactive credit management and the great work by our bankers and credit teams. It's a dynamic part of the bank, so it won't move in a straight linear path quarter-to-quarter. But directionally, over the long term, I'm confident we'll see continued improvement.

Okay. And then just one minor housekeeping item. Is your full year NII guide on a taxable equivalent basis or a GAAP basis?

It's a GAAP basis, Matt.

Your next question is from the line of Jared Shaw with Barclays.

I guess maybe a little more specifically on the payment services revenue. How should we think about that going forward given the branch restructuring? Should we expect to see growth in that this year going forward?

Yes. Good question again, Jared. And I would just say that the pipeline activity, I mentioned the bankers are doing a great job of bringing deposits. They're also given incentives to bring along partners in the bank, both in treasury management as well as payments. And that's happening in spades and talking to folks in treasury management, they've never been busier accompanying bankers on calls. So that should give us some help in that area.

And Jared, I would just add as well, as you think about the year-over-year impact, we just remind about the impact of the consumer credit card outsourcing last year, which happened in the second quarter. And then I would note the first quarter is generally seasonally lower for us. So just actual seasonality as well as day count impacting that.

And one other thing I would add, Jared, is just from a payment standpoint, philosophically, I've always had the mindset that payments are a key service a bank offers. In fact, my philosophy is if you make the First Interstate Bank the easiest account to move money to and from, you end up with more idle funds in those operating accounts and those operating accounts tend to be your lowest cost deposit source. So it's a priority from a strategy standpoint to lean in into that space.

That's great color. Jim, you talked about spending time on data management and making sure that, that's in the place where you need it to be to take advantage of future opportunities. Can you give us an update on where are you sort of in that journey? And how are you looking at the opportunity of AI and maybe some other sort of newer to come tech and help you with that progress of restructuring the bank?

Yes. So shortly after I started, we kicked off a project to get to one clean data source like any bank of our size and then through a series of merger and acquisition transactions, you end up with data in a lot of different places. And having one source of truth is really important, not just in the past, but when you think about the future with AI, if you don't have a good data source, you'll just make bad decisions faster. From an AI -- so that project wraps up early summer. And so we will have finished and be ready to go.

But that hasn't slowed our efforts of looking at AI solutions. We have, as all banks do a lot of jobs that are stare and compare in audit, compliance, different parts of the bank. And those are ripe for AI to make you more efficient. But we're also piloting a business development tool that helps gather industry data, data that we have within our own 4 walls and really build a story and playbook for a business development officer as they're out on a client call, which we think from our pilot work will increase the success of those efforts. So in addition to the data, we are moving forward with AI efforts.

Okay. And then finally, just you mentioned a specific nonperformer impact or a specific loan impacting nonperformers this quarter. Any color around that? And can you share any color around broader ag trends that you're seeing or any areas of concern there with higher energy prices?

Yes. So the loan that we've called out is one we've had on our radar really for a better part of the time that I've been here, and we're just like I mentioned earlier, proactive credit management. Sometimes those end the way you want. Sometimes they end in ways that you don't necessarily want. We're appropriately reserved for various outcomes, and it's just part of the resolution. That's all the color I would share on that.

And as far as -- I think your second question was on ag lending. And yes, you saw we had about almost $100 million in ag leave us this quarter. Those were tied to annual reviews that when we looked at the loan, just not the type of credit we want to make. But ag will always be an important part of our footprint, part of our portfolio given our footprint. But if you look, it's not a large part. And as far as the energy prices, fertilizer, different things in the Midwest, when we put together ACL, there's always qualitative factors.

So just know that we take a look at those macroeconomic issues as we layer in those qualitative factors on our ACL. We're not seeing any acute stress, but there's certainly more conversations going on with customers. And there'll be some customers advantaged by it as well, like we have a customer that does refurbished parts for combines and heavy equipment, and they're seeing an uptick in their business. So it's mixed, but no doubt going to have an impact on the -- especially the Midwest grain part of our market.

Our next question is from the line of Jeff Rulis with D.A. Davidson.

Question on the -- I know you've given us a few pieces on the -- around NII, but maybe on the earning asset side, would seem to back into something in the range of $24.5 billion by year-end. Is that plus or minus a good figure to use?

Yes. I think just the pieces of our guide probably imply kind of maybe a few hundred million below that depending on kind of where you use on the ranges. But it implies from Q1 higher through the year just as deposit seasonality would -- and modest deposit growth would drive earning asset improvement, assuming we're able to see that.

Okay. David, and not to get too specific, but on that margin lift then, we've seen kind of 3 to 5 basis points a quarter expansion. Would you expect a similar decelerate, accelerate type movement? I know you've talked about into '27. So that's a pretty good visibility. But just I guess, in the near term, next couple of quarters, is that 3 to 5 move in the ballpark?

It is, yes. I think we still think about it sequentially. I think, again, the back half, we probably have a little bit more of a tailwind given a couple of things: one, that earning asset repricing; two, the deposit seasonality. And then three, we have the branch transaction, while not a large transaction, that does provide a modest headwind in the second quarter, but we do think of it as sequential expansion, and that's an appropriate range from our view to think about it.

Appreciate it. And you did mention the buyback. I mean you're over a couple of million shares a quarter kind of pace, and it seems like a very -- again, your highlighted capital tool at this point. Also a figure to maybe roll forward. That's kind of in that ballpark of where you've been on the buyback, barring significant valuation change or other opportunities coming around. Is that a good pace?

I think it's a good question. We think about it on a long-term basis, obviously. And then we are always looking at market conditions, et cetera, as we deploy capital. So I don't think we're necessarily solving for a specific amount each quarter as much as we are trying to move our capital deployment over time towards our targets. So I think you should expect us to continue to be active, but the actual dollar amount will obviously depend on facts and circumstances. To your point, we view it as an important tool in the near and long term to make sure we have the right capital level and drive value.

Your next question is from the line of Timur Braziler with UBS Financial.

First question, just a follow-up on the cadence of NII. So the guidance was left unchanged, implying that 1Q is the trough. I'm just wondering, is more of that growth back-end loaded corollary to the margin comments that David, you just made? Or is the expectation with the fixed asset repricing and some steady margin improvement that to get to that guide is going to be kind of stair step throughout the rest of the 3 quarters here?

Yes. Good question. I would say we do think about the sequential improvement with the note that we think the back half is a little bit better than 2Q with the branch transaction kind of being the driver of that. I think just a couple of additional notes I'd make as well. Day count does have an impact, of course, just given a lot of our assets are day count earners. So 3Q, 4Q have 2 more days than 1Q, for example.

Seasonality obviously matters as that drives our expectation for higher earning assets. Generally, kind of summer into fall are better seasonal deposit quarters for us. So if that recurs, that would drive higher earning assets in that period. And then to your point, that fixed asset repricing, we view as something that continues over time. So those would be the factors how we think about that.

Okay. Got it. And then maybe circling back to credit. So the criticized portfolio is still fairly large and then you have a good chunk of your loan book coming due over the next 24 months. Are those 2 related? And should we think that as you have a larger portion of the loan book repricing and/or maturing that, that's going to lead to the curing kind of at a faster pace of some of the criticized?

Yes. No, Timur, I wouldn't tie those 2 together because we have a very robust process when we put a loan on a watch or criticized level that we're looking at them every quarter. So renewal will not make a big difference there because we're asking borrowers to do things as we travel throughout the term of the loan. So we don't wait until it's up for renewal before we'll ask for concessions or things that we need from the borrower.

And maybe to that point, can you just provide us an update kind of on what the 1Q renewals were, what the retention rate was and what the uptake on the spread had been?

Yes, we don't tend to provide that level of detail on renewals and different things because it just doesn't make sense. It could lead to, frankly, folks making leaps that don't correlate with results.

Your next question is from the line of Kelly Motta with KBW.

My first few, I'd like to circle back to the commentary around deposits. I appreciate the color that the March spot was about 1.55% for interest-bearing. Just as we think about the Nebraska deposits that were sold early this quarter, wondering if there was -- how the cost of those compared relative to the overall book?

Yes, sure. I would say slightly lower, but not materially different and represented about 1% of the total deposit base. So it won't have a material impact on 2Q cost of deposits. It will, of course, impact earning assets -- earning asset levels, but not a material total deposit cost impact.

Got it. That's helpful. And then with where your deposits are now slightly inclusive of the sale, they're slightly below kind of your $22 billion to $22.5 billion EOP guide. Wondering to get back to that range, is that mostly seasonality? Or are you assuming some organic growth with the changes you've made on the front lines to drive relationship banking?

Sure. So I think it's going to be mostly seasonality second quarter -- late second quarter into third and fourth quarter, but there is an assumption of some slight year-over-year growth when you kind of adjust, if you will, for the different branch sales and things like that. We view it as quite a bit lower than what we would like to be growing over kind of the medium and long term, but there is some modest year-over-year growth by the end of the year in the underlying.

Got it. And then on the criticized, they remain elevated, although the overall level hasn't changed much. Just kind of within that, can you provide any color in terms of -- have you -- has that pool of loans stayed relatively consistent? It's the same ones you're watching? Or is there -- have there been movements significantly in and out kind of offsetting one another? Just trying to get a sense of the dynamics here.

Yes. No, that's a good question, Kelly. And loan portfolios are dynamic by nature. I can tell you there's a set of loans in there that has been in there most of the time, but there is some movement in and out, just as you would expect. We see payoffs. We see borrowers cure, we see projects. We see the primary source of repayment showing up and meeting expectations. And then there's some new ones that get added to it. So it's a living, breathing part, but I think we're doing the right job of proactively managing it. And I still am confident directionally over the long term, you'll see that number come down.

Got it. Last one, if I could just slip it in real quick. I heard the additional color around buybacks, very active this quarter. Just want to confirm, in the past, there's been no appetite for securities restructuring. Just wanted to confirm that's still the case here.

Yes, sure. I don't think we've changed our view there. We still think we have a strong tailwind there over the long term as that portfolio cash flows. So I would say we would still have the same kind of view and thought process there.

There is a follow-up question from the line of Andrew Terrell with Stephens Inc.

I just wanted to clarify on the discussion around the average earning assets at the end of the year. I think we were -- the $24.5 billion range was mentioned. It feels like you're 23.7-ish today on average earning on an end-of-period basis or earning assets end of period. You've got the branch sale that will take a little bit away from that. It feels like 24-ish is probably closer range on average earning. And I just want to -- maybe -- I think you said a couple of hundred million below $24.5 billion, but just wanted to get updated expectations there, a more kind of fine point on it.

Yes. I think the pieces of the guide together, Andrew, is kind of in the, we'll call it, $24 billion to $24.5 billion range. So it kind of depends on when the growth comes in from an average perspective with deposits. But I think you're right, it's -- we'll call it $24 billion to $24.5 billion..

At this time, there are no further questions, and that will conclude the question-and-answer session. I will now turn the call over to Jim for closing remarks.

All right. Thank you, and thank you for the questions today. And as always, we welcome calls from investors and analysts. So please reach out if you have any follow-up questions, and thank you for tuning into the call today, and have a great day.

This concludes the First Interstate BancSystem, Inc. First Quarter 2026 Earnings Call. Thank you all for joining. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the First Interstate BancSystem Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 29, 2026.

I would now like to turn the conference over to Nancy Vermeulen. Please go ahead.

Thanks very much. Good morning, and thank you for joining us for our Fourth Quarter Earnings Conference Call. As we begin, please note that the information provided during this call will contain forward-looking statements, and actual results or outcomes might differ materially from those expressed by those statements.

I'd like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and in our more recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. And the company does not undertake to update any of the forward-looking statements made today.

A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.

And again, this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, we encourage you to do so. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the third quarter of 2025.

Joining us from management this morning are Jim Reuter, our Chief Executive Officer; David Della Camera, our Chief Financial Officer; and other members of our management team.

And now, I'll turn the call over to Jim Reuter. Jim?

Thank you, Nancy. And good morning, everyone, and thank you for joining us on our call today. Over the course of 2025, we made meaningful progress to improve core profitability, refocus capital investment and optimize our balance sheet through reorienting our footprint to geographies where we have brand density, strong market share and high potential for growth.

We announced branch divestitures in Arizona, Kansas and Nebraska, outsourced our consumer credit card product and discontinued originations in indirect lending. We have intentionally allowed certain larger transactional loans to run off in favor a disciplined effort to grow full banking relationships. That includes deposits, loans and corresponding fee generating services. These strategic actions among others we have taken have generated capital for us over the past year.

In August of 2025, we announced a share repurchase authorization and began executing under that plan repurchasing approximately 3.7 million shares through year-end for a total of approximately $118 million.

Our Board has approved an incremental $150 million share repurchase authorization bringing the total authorization to $300 million to provide further capacity to continue executing under that plan.

Additionally, our balance sheet remains strong and flexible. We reduced our other borrowed funds from $1.6 billion at the end of 2024 to 0 at the end of 2025. Throughout 2025, we maintained a proactive approach to credit, and we are now beginning to see favorable results in our reported credit quality.

Following stabilization in the third quarter, credit quality metrics improved in the fourth quarter. Criticized loans decreased by $112.3 million or 9.6% in the fourth quarter and non-performing assets decreased by $47.3 million or 26%. Net charge-offs were elevated in the fourth quarter driven by one larger credit for which we had already set a specific reserve of $11.6 million.

For the full year of 2025, net charge-offs were 24 basis points of average loans, which is in line with our long-term expectations. We also continued to execute on our ongoing branch network optimization, focusing our capital deployment in markets where we have existing density or high growth potential.

We closed on the sale of our branches in Arizona and Kansas in the fourth quarter, exiting those states. Subsequent to that transaction, in October, we announced the sale of 11 branches in Nebraska, which we expect to close early in the second quarter of 2026, and we will consolidate four additional branches in Nebraska in February. The company will have 29 branches remaining in Nebraska after the pending sale in closures.

We will also close the single branches we have in North Dakota and Minnesota in the first quarter, which will consolidate our footprint from 14 states to 10 contiguous states. To drive profitable organic growth, we have made a series of investments, including building out a new commercial banking team in Colorado, and we have new branch openings underway in the state of Montana. We have a new fully operational branch in Columbia Falls and another branch opening soon in Billings.

We are also relocating one of our branches in Sheridan, Wyoming to a location that will better serve the needs of our customers in that market. The full optimization of our remaining 10 states is an ongoing effort as we perform state-to-state reviews.

In the fourth quarter, we began a transformation of the banking organization. We are changing the organization from a layered, regional and market structure to a flatter model. Our new State Presidents represent high performers, a majority of which are from within bank and select external talent, bringing proven track records of expertise, energy and strong commitment to our institution.

We believe the combination of the right internal and external talent will support our growth. Along with other talented leaders throughout the organization, these leaders will play a critical role in our drive to allocate our resources as efficiently as possible for profitable organic expansion, focusing on areas where we have density or potential for growth.

This new, more streamlined chain of responsibility is designed to speed up our local decision-making processes and align the decision framework with our organic growth and return on capital discipline. We expect this redesign to be nearly complete in the first quarter, and we view it as a significant driver of our expectation for improved organic growth.

Loan balances declined during the year due to a variety of factors, including intentional non-relationship loan run-off, branch transactions, indirect lending run-off and the outsourcing of our consumer credit card product.

Additionally, as we have discussed in prior quarters, production was lower than initially estimated during the year. This is partially influenced by continued competition in the market, both on a spread and credit basis.

With that said, we are optimistic that the recent actions we have taken, most specifically the banking organization redesign will drive increased activity. Our net interest margin also continued to improve in the fourth quarter as we saw more sequential improvement in the spread between loans and deposits, and we continue to reinvest lower yielding cash flows from our investment portfolio.

Our FTE net interest margin, excluding purchase accounting accretion improved 4 basis points in the fourth quarter, increasing from 3.3% at the end of the prior quarter to 3.34% at year-end. That level represents a 26 basis point increase from the fourth quarter of 2024.

Our organic growth focus, elevating best-in-class talent from within, while adding select external talent and serving our customers with what they typically expect from a large bank, but with a personal community-oriented purpose, is designed to create a competitive advantage for us over the long term.

And with that, I will hand the call over to David to discuss our financial results in more detail. David?

Thanks, Jim. I'll start with our results for the quarter. The company reported net income of $108.8 million or $1.08 per diluted share in the fourth quarter compared to $71.4 million or $0.69 per diluted share in the third quarter.

Net interest income decreased by $0.4 million compared to the prior quarter or 0.2% to $206.4 million. Net interest income decreased $7.9 million or 3.7% compared to the fourth quarter of 2024, primarily due to a reduction in earning assets and a reduction in the yield on earning assets. These effects on NII were partially offset by a decrease in interest expense on other borrowed funds.

The closing of the Arizona and Kansas branch sale in early October, drove a decline in interest-earning assets in the fourth quarter of 2025. Yield on average loans decreased 1 basis point to 5.67%. Total deposit costs declined 5 basis points and total funding costs decreased 10 basis points, all compared to the third quarter.

Our fully tax equivalent net interest margin was 3.38% for the fourth quarter compared to 3.36% during the third quarter and compared to 3.20% during the fourth quarter of 2024. Excluding purchase accounting accretion, the adjusted FTE net interest margin was 3.34%, an increase of 4 basis points from the prior quarter.

Non-interest income was $106.6 million, an increase of $62.9 million from the prior quarter, driven by a gain on sale of $62.7 million associated with our divestiture from Arizona and Kansas.

Non-interest expense was $166.7 million for the fourth quarter of 2025, an increase of $8.8 million from the prior quarter. This includes $2.3 million of costs associated with branch closures in Nebraska, North Dakota and Minnesota.

Severance expense totaled $4.2 million during the quarter and was related primarily to the redesign of the banking organization and branch closures. Incentive accruals in the fourth quarter increased by $5.6 million compared to the prior quarter.

Turning to credit. Net charge-offs increased by $19.8 million to $22.1 million, driven mainly by one credit for which we had an $11.6 million specific reserve. As Jim mentioned, for the full year of 2025, net charge-offs were 24 basis points of average loans.

Total provision for credit losses was $7.1 million for the fourth quarter. Criticized loans decreased $112.3 million or 9.6%. Our total funded provision decreased to 1.26% of loans held for investment from 1.30% in the third quarter.

Moving to the balance sheet. Loans decreased by $632.8 million in the fourth quarter, which included $62.8 million of continued amortization of the indirect portfolio and $72.5 million in loans moved to held for sale as a result of the Nebraska branch sale as well as larger loan payoffs, which included some criticized loans.

Total deposits decreased $516.7 million to $22.1 billion as of December 31, 2025, driven by the sale of $641.6 million of deposits in the Arizona and Kansas transaction. Excluding sold deposits, deposits increased in the quarter.

The ratio of loans held for investment to deposits was 68.8% at the end of the quarter compared to 70.1% at the end of the prior quarter and 77.5% at the end of December the prior year. We repurchased approximately 2.8 million shares in the fourth quarter, totaling approximately $90 million and repurchases since initiation of the program in August totaled approximately $118 million.

Our regulatory capital ratios continued to improve in the fourth quarter, driven by a reduction in risk-weighted assets related to the Arizona and Kansas divestiture, the decline in loans and higher net income due mostly to the closing of the branch sale, partially offset by our deployment of capital through share repurchases.

In the fourth quarter, we returned approximately $138 million of capital to shareholders, consisting of $90 million from the repurchase of shares and $48 million in dividends. Tangible common equity was approximately flat in the period, and tangible book value per share increased 2.9% in the fourth quarter to $22.40 per share.

We continue to view share repurchases as our immediate capital allocation priority in addition to our ongoing focus on organic growth, which provides us the opportunity to drive EPS growth in excess of net income growth. We have increased our share repurchase authorization by $150 million to $300 million and roughly $180 million of capacity remains under the program.

Finally, we declared a dividend of $0.47 per common share, which equates to a 5.7% annualized yield based on the average closing price of the company's common stock during the fourth quarter.

Our common equity Tier 1 capital ratio ended the fourth quarter at 14.38%, an increase of 48 basis points from the prior quarter. Our leverage ratio was 9.61% at the end of the fourth quarter compared to 9.60% at the end of the prior quarter.

Moving to our guidance. Our guidance includes the impact of the sale of 11 branches in Nebraska and the closure of 6 additional branches in Nebraska, North Dakota and Minnesota, while excluding the anticipated gain on sale related to the Nebraska branch sale.

For reference, the North Dakota and Minnesota branches totaled roughly $30 million in combined deposits at the end of 2025.

Starting with our balance sheet. We are including an assumption of low single-digit deposit growth for 2026 with normal seasonality.

Turning to loans. Our guidance assumes an assumption of roughly flat to slightly lower total loans for 2026, excluding the continued run-off of our indirect portfolio, which will contribute an additional 1% to 2% in total loan decline.

Our guidance has an underlying assumption that loans declined in the first half of the year while modestly growing in the back half.

As we have outlined in our investor presentation, we anticipate an increased quantity of lower rate loan maturities over the next couple of years. This provides us a powerful reinvestment dynamic, and we believe it protects our net interest income dependent on a supportive rate environment.

The pace of our NII expansion will be dependent upon our ability to renew and/or add new customer relationships to the bank. We are optimistic about our ability to see success here, and we'll continue to exercise discipline, ensuring that assets placed on our balance sheet are accretive to our return profile.

We also continue to expect sequential improvement in our net interest margin given the expectation for improving spread between loans and deposits and due to the loan repricing dynamic and continued amortization of lower-yielding investment securities.

To discuss timing in 2026 specifically, as we look to the first quarter due to fewer accrual days and the expectation for normal deposit seasonality in the first quarter, our guidance, as displayed includes an assumption that reported NII is approximately 3% lower in the first quarter than the fourth quarter level of 2025.

Moving to expenses. We anticipate approximately flat to slightly lower expenses in 2026 compared to the reported full year 2025 level. We continue to exercise discipline across our controllable expenses to support reinvestment and growth initiatives. Our guidance assumes reinvestment into the business, such as the addition of relationship managers to our teams, the new branches we discussed previously and increasing our advertising expenditure as compared to 2025 levels.

We also anticipate normalization in medical insurance expense in 2026, and our guidance includes an assumption that total 2026 expenses are about 1% higher due to this normalization.

With that, I'll hand the call back to Jim. Jim?

Thanks, David. And as we look to 2026, we are in a position of strength. Our strong balance sheet and capital position, disciplined approach to credit risk management, focused franchise and redesigned banking organization positions us for success as we continue to execute our client-first community banking strategy.

And now, I would like to open up the call for questions.

Thank you. [Operator Instructions] Your first question comes from Jeff Rulis with D.A. Davidson.

I wanted to check in on the -- just the loan balances. And Jim, just kind of bigger picture, I guess, if you exclude the branch sales, the indirect runoff, I think maybe the under toe of other runoff is maybe greater than maybe perceived kind of mid last year. It sounds as if that was sort of a production issue. And I know, Jim, one of the tenets of your approach is sort of motivating rallying that organic growth. Just to try to course correct on maybe the other runoff is that we've got the guide for this year, but I wanted to check in on maybe what you've seen in '25 versus kind of as we entered it from a production standpoint?

Jeff, that's a good question. If you peel it back, a good portion of the decline in loan balances are related to payoffs of criticized loans, which we consider that to be good news. And/or you're right, there's some larger loans in there that were financed in the secondary market, but that was the intention of those loans when they were originally booked. I would put out or point out that even with the decline in loans, our deposits went up over $100 million, net of the sale of Arizona and Kansas. So I think that shows you that the loans leaving are not significant relationships with big deposits.

We did see improved loan production in the month of December and some parts of the footprint. As I've talked to folks, we have some good pipeline activity. I also mentioned in the opening comments, the re-org of the banking organization, which I consider a very important catalyst for growth. It's a flatter org structure. We have, have more people in production roles, faster decisions and, frankly, a better client experience.

We also added some new team members in Colorado, where we see a real good opportunity for growth. And with that said, I will tell you, Jeff, the adjustments to our credit culture in 2025 and the most recent reset of the banking org has in the short-term impact of new loan production. But from my past experience, it gives me confidence because the model we put in place, which combines disciplined credit management and a flatter and powered accountable leadership team has led to good organic growth. And when you combine that with our more focused franchise and brand density and growth markets, it gives me confidence in our ability to produce more in 2026.

Appreciate it. And David, just on the margin, maybe check it back in, I think there was a somewhat of an assumption of maybe approaching 3.5% or north of that by the end of '26. Could you -- it sounds like maybe Q1 we're treading water. I don't want to put words in your mouth. We got the NII guide. But the pace of margin expansion still left to go, at least for this year? Any commentary there?

Yes. Sure. Good morning, Jeff. So, a couple of comments there. I think we still see kind of north of 350 by year-end '26. So really no change there. The mix is a little bit different in the short run, given the change in loans, but trajectory, we still see the same way. We still think of it as sequential margin improvement every quarter.

Our first quarter commentary on NII, that's really driven by as noted, the lower accrual days and also lower average balances quarter-over-quarter on the deposit side, so a little bit lower on the earning asset side. But on an underlying basis, we expect NIM to be higher in the first quarter than it is in the fourth quarter.

Okay. And David, the pace over the course of the year to get to that, I mean, a moderate increase in Q4, we shouldn't read into the fact that -- I guess, that would suggest greater expansion from the metric over the course of the year to get north of 3.5%. Is that fair?

Yes. So we're starting the 3.34x purchase accounting in the fourth quarter. So kind of in that 5-ish basis point range a quarter, we'll have -- obviously, it will be a little bit different each quarter, but something like that sequentially is how we're thinking about it. That's right.

Your next question comes from Matthew Clark with Piper Sandler.

Just a little more on the margin there. What kind of reinvestment rates are you getting on new loans and securities these days?

Yes, sure. So, on the security side, we talked last quarter, a 5-year plus 80% to 90%. That's come in a little bit in recent periods. So we think of that more in the 5-year plus 60% to 70% on that side. And then on the loan side, new production kind of in the low to mid-6s is kind of on a weighted average basis, it will of course be composition dependent. But somewhere in that range is what we're seeing.

Okay. And on the buyback, you bought over 75% of the $150 million that you authorized in two quarters. You've got a new one now. CET1 up to 14.4%. And I think you've mentioned in the past that you don't want to run with capital in excess of peers. So, is it fair to assume that we'll see a similar cadence of buyback activity here this year?

Yes. I think like you mentioned, we said last quarter, we want to approach that peer median over time. And I think we mentioned capital will lag the balance sheet movements a little bit. So that will continue to happen. But as you noted, we've been meaningfully executing there, and we plan to continue executing. Of course, pace will be dependent on market conditions and things like that, but we absolutely intend to be -- continue to be active on that buyback.

Okay. And then last one for me on criticized, down 10% this quarter. How much more improvement do you think you can make this year? Do you have any line of sight on kind of how much of a reduction we might see and the timing around that?

Yes, Matt, that's a good question. Credit is a living, breathing part of a bank. Our proactive approach, I think you've seen for the last two quarters has stabilized that and trended it down. But for me to make absolute predictions, there's a lot of assumptions in that. But you can expect us to continue to make good progress. That's the best I can say on that.

Your next question comes from Kelly Motta with KBW.

Maybe turning it around to the expense side of things. Q4 was impacted by several different kind of noisy year-end items and some one-timers. Can you -- as we look to 1Q, with your guide kind of assuming flattish expenses year-over-year, wondering kind of what's a good jumping off point in 1Q? And then as we think ahead and kind of consider the glide path through the year, how should we be thinking about the cadence of expenses off of that and the puts and takes?

Yes, sure. So to your point, a number of moving parts, I think to specifically answer that, we think expense seasonality is actually relatively flat next year given some of the timing on taxes in the first quarter, offsetting kind of the normal merit and other increases as we go through the year. So, kind of the underlying assumption, if you were just to use the midpoint of the expense guide would kind of be that $159 million to $160 million range each quarter.

Okay. That's really helpful. And then kind of with the loan outlook, like as was mentioned by another analyst, I think the balance is lower than maybe what we had expected. In terms of your guidance, for next year. Obviously, some of the reduction in loan balances is payoffs of criticized, which is good. Does your guidance contemplate additional room for payoffs? Or should that continue to occur, which would obviously help your credit, could there be downside to that loan number?

Sure. So I'll make a couple of comments on that. I think broadly, the short answer is, yes, we are assuming that we do see some larger payoffs within there. And again, I think our view is the first quarter, we see lower loans and then optimistic about some modest growth as we get into the back half of the year. But our underlying assumption does include we think we'll see some more larger payoffs within that.

Your next call comes from Andrew Terrell with Stephens, Inc. Andrew, go ahead.

I wanted to follow up just on the criticized point. I think, Jim, you mentioned earlier, just a lot of the payoffs we've seen over the past year have been on criticized loans. But when I look at just criticized balances overall, I mean they're basically flat to where we started this year. They're still off relative to 2024 levels.

I guess I'm curious what's driving kind of the refill in that bucket? And I guess, do you feel like you've worked through everything at this point and we should just see balances moderate from here?

Yes, Andrew, that's a good question. So when I was talking about criticized going down, it's specific to this quarter, loans move from watch to criticized -- and I just want to reiterate what criticized is. I mean it's basically a loan, we feel good about the underlying collateral, the guarantors, different things, but it's missed some of its targets. And so, we're taking that proactive approach to managing credit, which I think you can see it produces good outcomes. So that's what you'll continue to see from us, Andrew, but there will be movement up and down.

But if you look at the overall trajectory, it's going in the right direction. I'd also say new loans and renewals, we have a really good process in place with a loan committee. We're making fast, good decisions and everybody is on the same page. So kind of back to that loan production question that was asked by Jeff at the beginning of the call, that clear direction of what we want to do is given our bankers even more confidence as they're out talking to customers about what we can and can't do. But I feel good about our credit culture today.

Yes. And then, I wanted to ask more specifically on just -- I mean, it sounds like loans down a bit, in the first quarter. But you're optimistic about kind of back half. But then you also referenced just the level of competition, you mentioned credit rate-related competition, maybe some slower production from the team than kind of what you're expecting. So I'm just trying to figure out kind of what's driving the back half of the year optimism around production and kind of net growth increasing?

What drives my confidence is I talked about the banking re-org and the structure we put in place. And we did a lot of things, Andrew, in 2025 to recalibrate and change our approach to the business. And I feel like those things are pretty much behind us, and we can go on the offense at this point in time. We are seeing increased competition on rates and terms and things. And I will tell you, we're not going to grow for the sake of growth. We're going to put on disciplined credits that are profitable because that's what will ultimately enhance long-term shareholder value. We're 20 years without a credit cycle. And so, I just think discipline matters and I would say that's where gray hairs and some years of experience probably are beneficial today.

Yes. And just one last one, just to confirm on the guidance, the expense guidance, $630 million, $645 million for the year that does incorporate -- any actions from sold or closed branches net of reinvestment? I just want to make sure that's an all-in guide.

That's correct, Andrew. All the figures displayed in the guidance assume that the Nebraska branch transaction closes early in the second quarter.

Your next call comes from Jared Shaw with Barclays. Please go ahead.

Maybe just looking at the -- more specifically the markets that you do like versus the ones that you're exiting when you look at like Colorado, do you feel that you have the overall physical footprint you need there? Or is there an expectation that you could potentially reinvest some of the savings into adding a few locations? And then you talked about hiring some teams there. What's the -- what's sort of the outlook for continued hiring going forward?

Yes, Jared, that's a good question. I'll speak to the overall franchise and footprint. When you look at Page 5 of our investor presentation, I think when you look at that map, it looks very logical, they're contiguous. And specifically -- and you also look on the bottom of that page, you'll see we're in markets that have better growth prospects than the national average. So, we feel good about the overall footprint. To Colorado specifically, we do have the branch network we need right now. And we've also built out a really strong team that I'm confident is the right team, and they're seeing good activity, and they're on the ground calling on customers, building relationships.

We will look at some additional locations in Colorado as we will, throughout the rest of our footprint. I mentioned in the opening comments, a new location in Billings. And then we're actually -- the relocation of the branch in Sheraton is branch #1 for First Interstate Bank and we built a new facility with better visibility and to better meet our customers' needs. But Colorado continues to be an exciting opportunity for us, and I like our chances and like the team we have there.

And then just, sort of, sticking with the Colorado. As you look at growing there, are you -- is this going to be full relationships, sort of, at the beginning? Or are you going to be leading with loan growth and it's going to take a little while for deposit growth to backfill in your mind?

As I've said from, I think, almost earnings call day 1, it will be focused on full relationships. But with that said, Jared, I know from experience that sometimes you make your first loan, you build the relationship and you deliver, you get some deposits and then over time through your consistent execution, you get the full relationship. So, I'm not naive to think that day 1, you get everything. So, it will be a mix of leading with some loans, but with the eye towards getting deposits and full relationships.

Your next call comes from Timur Braziler with Wells Fargo.

Can you give us a sense of the $3 billion of loan maturities and resets over the next 2 years? What portion of that $3 billion would you characterize as sort of non-relationship?

Yes, Timur, I think we think about relationships a couple of ways. I mean, there's the loans that today we have the full relationship and then there's some where we have an opportunity to develop a full relationship. So everything is going to be situationally dependent. And as you look at those loans, the rate coming off there is some new production. And obviously, we'd want to deploy those into higher-yielding assets.

But I think holistically, we have some downside protection to net interest income. And then of course, as we -- as we're optimistic about additional loan production, we're looking to replace that with market assets. But every loan that comes due gives us an opportunity to either expand or retain their relationship.

Okay. And for those that you're looking to retain that have come up to date, just the competitive landscape for being able to keep those on your own balance sheet. I mean, are you getting a little bit of a home field advantage given that these are already your customers to begin with? Or do you feel as though it's kind of full fisticuffs and in terms of battling to keep these clients on board?

Timur, it really depends. I will tell you that we had a few more in this last quarter that their intention from day 1 was to go to the secondary market. And so, that's going to be hard for us to compete with. But on a go-forward basis, like David said, our goal is to expand the relationship. And if we don't get that completely done with this loan, that doesn't preclude us from renewing it, because like I said in the earlier comment, sometimes you have to do a couple of things for a customer before they're like, okay, I want to bring everything over to you.

Yes. Okay. And then just one more for me on credit. The charge-off wording still includes long-term charge-off guidance of 20 to 30 basis points. I'm just wondering what does this imply that there is maybe some more variability here in the near term? And just that in the context with the allowance ratio, we saw a little bit of release here as you had a specific credit kind of charged off. How do we think about those two components?

Yes, Timur. I think, a couple of things. So from an allowance coverage perspective, relatively similar quarter-over-quarter total funded ACL, but of course, an improvement in NPL coverage. So that ticked up during the quarter. And I think as we think about that coverage going forward, I think as we said before, it's kind of situationally dependent based on fact and circumstances of each quarter. As Jim said, we're optimistic for credit improvement. But each quarter, the committee and -- and internally, we look at facts and circumstances and determine what's appropriate at that time.

Your next call comes from Tim Coffey with Janney.

Jim, a question for you on kind of what is a targeted long-term loan-to-deposit ratio?

That's a good question. Obviously, we're lower than our peers right now. We like that flexibility. And I think that actually speaks to one of the strongest aspects of First Interstate, which is a low-cost granular deposit base. Long term, I don't really like to set a target. I can tell you it's north of where we are today, because I think to the extent we can find high-quality loans at the right price, that's our preference over investment securities. But we would like it higher than it is today. That's probably the best answer I can give you right now.

Okay. And then more near term, do you anticipate the exit loan deposit ratio in '26 will be higher than where it is right now?

So, I think just our underlying guidance says loans down slightly and deposits up slightly. So all else equal, we view it as slightly lower in the near term and then would just echo kind of Jim's comments on the longer term as we kind of look to grow the book.

Okay. And then a question about the fee income guide. What are some of the puts and takes in that?

So, I think, it implies some modest growth year-over-year, kind of puts and takes modest impact from the reduced branches, just lower associated customer activity there. I think longer term, we think there's opportunities in some of the underlying areas such as swap fees and things like that. But we're not assuming material acceleration in those type of items in 2026. As we kind of grow the full relationship banking, we're optimistic about areas like TM, long term, et cetera. So a couple of different areas that we're very focused on.

One more question. We have a question from Jeff Rulis with D.A. Davidson.

Yes. Just maybe fair or unfair. I just wanted to check into initial thoughts on maybe '27 on three fronts. It seems like a lot of momentum would be building on the margin and the loan growth front. Just your thoughts on the trends as it rolls into '27 on those two areas. And then, you touched on the buyback. I know we're, if you got a flat balance sheet into growing capital, if you've got any commentary as you get into '27 on those trends would be helpful.

Sure, Jeff. I'll start on kind of the margin. I think given the cash flow profile, what's rolling off the balance sheet, we continue to think margins sequentially improved in '27. Obviously, that's a little bit with out, and it's going to depend on the rate curve at that time. But broadly, we would continue to expect improvement and the cash flow profile from loans is actually a little bit more favorable in '27 and then continued favorability in the investment cash flow profile based on what we see today.

From a capital front, I think I'd just reiterate capital is always an ongoing conversation. I think we've demonstrated and we'll continue to demonstrate our approach there to enhance shareholder value. So we'll continue to look at that as time goes on and ensure we have the right capital stack to support the company.

And Jeff, as to loan growth, David touched on this, that we show a slight decline in the first part of the year and then leveling off and picking up towards the end. So, our hope would be we'd be building on that in '27. But, if you have a crystal ball as to the economy and what it's going to look like in '27, I'd love you to send that over to me because that would give me more confidence of what to predict. You look at the job numbers. And while unemployment is somewhat stable, new jobs actually haven't been that great. And then yesterday, the Fed gave some mixed reviews, which they're good at doing these days and understandably so. But assuming what we project in '26 happens, we would expect to build on that into '27, Jeff.

Yes. Thanks, Jim. I know that was more bank specific understanding the macro swings. So thank you. Appreciate it.

There are no further questions at this time. I will turn the call back over to Jim Reuter.

Thank you, and thank you, everybody, for your questions today. And as always, we welcome calls from our investors and analysts. So, please reach out if you have any follow-up questions, and thank you for tuning into the call today, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.

Good morning, ladies and gentlemen, and welcome to the First Interstate BancSystem, Inc. Third Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference call over to Ms. Nancy Vermeulen. Please go ahead.

Thank you very much. Good morning. Thank you for joining us for our third quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes might differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.

Again, this quarter, along with our earnings release, we have published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, we encourage you to do so. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the second quarter of 2025. Joining us from management this morning are Jim Reuter, our Chief Executive Officer; David Della Camera, our Chief Financial Officer; and other members of our management team. Now I'll turn the call over to Jim Reuter. Jim?

Thank you, Nancy, and good morning, everyone, and thank you for joining us on our call today. This continues to be an exciting and busy time at First Interstate. Last quarter, I opened the call by stating our 3 ongoing priorities, which are refocusing our capital investment, optimizing our balance sheet and improving core profitability. We continued executing on those initiatives in the third quarter. And in August, we announced a share repurchase authorization and are actively executing under that plan. As we've discussed in prior calls, we are continuing to perform our state-by-state review across the footprint. One of our goals is improving density in areas where we have strong market share and growth potential, which should improve our return on capital over time and drive long-term shareholder value. As part of this effort, we closed on the previously announced divestiture of our branches in Arizona and Kansas on October 10 and announced the sale of 11 branches in Nebraska the following week. We also will be closing 4 branches in Eastern Nebraska in the first quarter of 2026 to optimize our branch network in those markets. As we look to future growth, we continue to make investments in the franchise, including smaller actions like opening another location in Billings, Montana in early 2026 and adding talent in markets where we see growth opportunities. We look forward to continuing to share incremental progress over coming quarters.

Looking at the Nebraska transaction announced on October 16, the 11 branches involved in the sale comprise a total of roughly $280 million in deposits and about $70 million in associated loans. We were pleased to find a partner whose business strategy fits those locations well. We view this as a positive outcome for our customers, employees and shareholders. We anticipate this transaction closing at the beginning of the second quarter of 2026, pending required approvals. Altogether, these optimizations further improve density across the footprint while also further streamlining our operations and increasing our average branch size.

We remain focused on organic growth as a driver of long-term shareholder value. Our approach will focus on growing full relationships in a disciplined manner. The combination of our strategic actions and slower-than-expected recent growth has resulted in increasing capital ratios, which we are actively managing to enhance long-term shareholder value. David will cover this in more detail.

Now we'd like to spend a moment discussing our recent balance sheet trends. Some of the decline in loan balances is due to intentional refocusing of our production to ensure consistent credit quality and to drive stability and long-term performance. This includes the actions we previously communicated, such as the discontinuation of indirect lending originations, the intentional runoff of some nonrelationship loans and the outsourcing of our consumer credit card product. With that said, production has been weaker than we anticipated over the past couple of quarters. We believe there are a few factors driving this. First, we have seen increased competition for certain deals with some instances of structures we were unwilling to match and in recent months, increased pricing competition. While organic growth will always be the top priority, we will do so in a disciplined way to drive long-term stability in our credit and financial results.

Second, demand for real estate lending remains muted and new construction activity is soft. Finally, while activity is picking up, expected production is below replacement levels today in light of known and expected payoff activity. This informs our view of a decline in loan balances in the fourth quarter, which is included in our guidance. This includes some criticized and larger loan payoffs anticipated in the fourth quarter.

On the subject of credit, we were pleased to see credit quality stabilize in the third quarter. We believe our proactive approach to credit risk management, disciplined underwriting standards on new production as well as lack of exposure to national nontraditional lending positions us well. Nonperforming assets decreased $11.9 million or 6% to $185.6 million as of September 30, 2025, from $197.5 million as of June 30. Net charge-offs decreased $3.5 million in the third quarter or 60% to $2.3 million. Our largest criticized loan, which totaled just over $50 million paid off in full at the beginning of October, providing a positive start to the fourth quarter results. Following this payoff, we now have only 2 customers with balances over $50 million, both of which are past-rated credits.

Credit risk management is an ongoing process within a bank. And while we won't be providing a specific forecast for criticized loan levels over time, we believe our proactive approach to credit risk management puts us in a good position to continue managing loss content while resolving individual credits. We are optimistic that we will see continued improvement in reported credit levels from here. As noted, our charge-off activity in the third quarter was very muted at 6 basis points. We maintain our long-term charge-off guidance of 20 to 30 basis points, noting that charge-off activity can fluctuate on a quarterly basis. With that, I will now hand the call over to David to discuss the results in more detail.

Thanks, Jim. I'll start with our results for the quarter and then discuss capital. For the third quarter of the year, the company reported net income of $71.4 million or $0.69 per diluted share compared to $71.7 million or $0.69 per diluted share in the second quarter. Net interest income decreased $0.4 million compared to the prior quarter or 0.2% to $206.8 million. Net interest income increased $1.3 million compared to the third quarter of 2024 or 0.6%, primarily due to a decrease in interest expense resulting from decreased rates and average balances of other borrowed funds.

Purchase accounting accretion decreased $0.7 million in the third quarter versus the prior period. Yield on average loans increased 3 basis points to 5.68% in the third quarter. Total deposit costs increased 2 basis points compared to the second quarter with total funding costs decreasing 5 basis points. Our fully taxable equivalent net interest margin was 3.36% for the third quarter compared to 3.32% during the second quarter and compared to 3.04% during the third quarter of 2024. Excluding interest accretion from the fair value of acquired loans, the adjusted FTE net interest margin was 3.30%, an increase of 4 basis points from the prior quarter, primarily driven by lower interest expense resulting from decreased borrowings.

Noninterest income was $43.7 million, an increase of $2.6 million from the prior quarter, driven by a valuation allowance on loans transferred to held for sale in the second quarter and partially offset in that same quarter by the gain on sale from our credit card outsourcing. Noninterest expense was $157.9 million for the third quarter of 2025, an increase of $2.8 million from the prior period. This includes $1.1 million associated with the property valuation adjustment for a branch included in the Arizona and Kansas divestiture, which closed after the end of the third quarter and $0.7 million of unamortized costs related to the payoff of the 2020 $100 million subordinated note issuance, which was paid off in the third quarter.

Turning to credit. As Jim mentioned, net charge-offs decreased $3.5 million in the third quarter to $2.3 million, representing 6 basis points of average loans. Total provision for credit losses was 0 for the third quarter and criticized loans decreased $38.9 million or 3.2%. Our total funded provision increased to 1.3% of loans held for investment from 1.28% in the second quarter. Moving to the balance sheet. Loans decreased by $519 million in the third quarter, which included $66.8 million of continued amortization of the indirect portfolio and larger loan paydowns and payoffs. Total deposits decreased $25.6 million to $22.6 billion as of September 30, 2025. The ratio of loans held for investment to deposits was 70.1% at the end of the quarter compared to 72.3% at the end of the prior quarter and 78.8% at the end of September in the prior year.

Finally, we declared a dividend of $0.47 per common share, which equates to a 6% annualized yield based on the average closing price of the company's common stock during the third quarter. Our regulatory capital ratios continued to increase with our common equity Tier 1 capital ratio ending the quarter at 13.9%, an increase of 47 basis points from the prior quarter, driven by lower risk-weighted assets. Tier 1 capital was approximately unchanged as retained earnings were utilized to repurchase shares in the quarter.

Before we outline our guidance, we'd like to provide some detail on the impacts we anticipate from the 2 branch transactions we have discussed. With respect to the Arizona and Kansas divestiture that closed earlier in October, we anticipate recognizing an approximately $60 million pretax gain in fourth quarter results. The impact of this transaction is included in our guidance on a go-forward basis. Excluding the impact of the gain, we anticipate the quarterly impact on net interest income to be about $6 million. We anticipate a quarterly ongoing expense reduction versus third quarter levels in the $3.5 million to $4 million range, which includes the benefit of some operating efficiencies gained from exiting those 2 states in their entirety.

Regarding the Nebraska branch sale, we have just announced this month, we view this as approximately 1% dilutive to annual net interest income and reducing noninterest expense by about 1% on a run rate basis. Upon closing, we anticipate around 15 basis points of CET1 accretion.

Moving to our net interest income results for the quarter and our forward expectations. Net interest income was essentially flat quarter-over-quarter, excluding purchase accounting accretion. While modestly lower than our prior expectations, this is reflective of a near-term change in asset composition. We continue to expect sequential improvement in the margin and net interest income from our fourth quarter levels into 2026 and 2027. And on that front, we have expanded our fixed and adjustable rate repricing disclosure in the investor presentation to provide 2027 expectations. First, within the earning asset base, we would note a couple of items in the quarter. As Jim mentioned, loan balances declined more than expected. We were pleased to see sequential improvement in our loan yields as the portfolio continues to reprice over time. As a reminder, just over 20% of the loan book is variable, and we do not have any active swaps.

Within the investment portfolio, call activity was elevated across multiple security types, including some higher-yielding bank sub debt. Given the significant spread tightening in this type of credit that occurred in the quarter, we reinvested proceeds in lower risk-weighted securities, which, while impacting near-term NII slightly, we view as accretive on a return on capital basis. Additionally, approximately 10% of our investment portfolio is comprised of AAA CLOs, which we hold in the context of our interest rate risk management to provide a natural hedge to our more fixed rate lending book.

During the quarter, as spreads tightened, more than half of these securities were called and we actively reinvested in the new issuance market. This resulted in both less carry during the quarter as well as an impact on average balances as presented in the margin calculation as the longer settlement periods resulted in higher average unsettled balances. The impact of higher unsettled securities, while not affecting net interest income, reduced reported net interest margin by about 2 basis points in the quarter. We believe the continued amortization of low-yielding mortgage-backed securities as well as other select maturities in the portfolio will provide us an earnings tailwind as we move through the next few years.

While not included on our slide, our 2028 to 2030 cash flow expectations in the investment portfolio based upon current market expectations are roughly $1 billion in each year at around a 2.5% yield. In total, our current expectation is that about 2/3 of the investment portfolio, excluding the CLO exposure, will cash flow through 2030.

On the funding side, we ended the quarter with no other borrowed funds outstanding, a decline of $250 million from the prior quarter. Additionally, we paid our $100 million sub debt issuance in full in August, which had converted to its variable rate prior to being called. This will provide additional benefit to the cost of funds in the fourth quarter as compared to the third quarter. Our interest-bearing deposit costs increased 3 basis points in the third quarter as we experienced select customer movement into higher-yielding products ahead of the anticipated Fed rate cut. This activity resulted in deposit costs modestly higher than our prior expectations in the quarter, but we believe it was prudent to protect key relationships.

During the quarter, we did take steps to capture interest-bearing deposit beta in the fourth quarter. We have reduced our offered CD rate by 55 basis points from the level on June 30 and anticipate seeing the benefit of this reduction beginning in the fourth quarter and more meaningfully in 2026. We have also proactively managed our exception pricing book, shortening duration in preparation for Fed moves and providing more immediate flexibility in managing deposit costs with the initial benefit of this action occurring in October. We are optimistic for a slightly higher beta in the coming quarters than we experienced in recent periods.

As we look to 2026, while we will provide more explicit guidance on our January call, we wanted to provide some commentary today. We have intentionally managed the balance sheet to what we view as a mostly neutral position, which we feel is prudent over a long horizon. As we think about the impact of Fed cuts to our net interest income, the ability of the bank to move interest-bearing deposit costs lower will be a key factor. We have taken an intentional approach to thoughtfully achieve the necessary beta and early results are positive. With that said, we would acknowledge there will be some lag in beta in the near term. From the anticipated fourth quarter annualized level, which includes the impact of the Arizona and Kansas divestiture, we anticipate net interest income expansion around mid-single digits in 2026, assuming approximately flat total loans and modest deposit growth. On the expense side, our current expectation is to keep expense growth to a low single-digit increase over the anticipated full year 2025 level.

Moving to capital. We are making balance sheet decisions with a long-term view to enhance returns and shareholder value. As we continue to communicate, our long-term strategy remains focused on generating well-priced organic growth within our markets where we have brand density and are well positioned to serve the needs of our customers. In addition to the strategic actions to date that have successfully generated capital, in recent periods, risk-weighted assets have declined more than anticipated. While we look to drive growth, we will do so in a disciplined manner, ensuring that assets placed on the balance sheet are accretive to our return profile. With that in mind, regulatory capital levels are strong and continue to improve. As we have previously stated, we do not intend to hold excess capital. In August, we announced a share repurchase authorization and began executing shortly thereafter. This included entering into a 10b5-1 plan in early September. We have repurchased about 1.8 million shares through October 28 or about 1.7% of common shares outstanding. We believe that the current valuation of our equity does not reflect the long-term fundamental earnings power of the franchise, given the meaningful gap to market rates in our investment portfolio as well as an expectation for improving core spread between our loan yields and deposit costs over time. As a result, we view share repurchases as our immediate capital allocation priority in addition to our ongoing focus on organic growth, which provides us the opportunity to drive EPS growth in excess of net income growth. And now I'll turn the call back to Jim. Jim?

Thanks, David. We continue to execute on our strategic plan to focus on organic growth and leverage our strong balance sheet to support our customers. One year in, I would like to reflect on what we have achieved as a team since arriving here in November of 2024. Over the past year, we have shifted our company to focus solely on organic growth and relationship banking. We have completed a deep dive on credit management that has brought about stability, positioning us for performance in various economic scenarios. We have exited nonrelationship businesses and exited transactional loans. We have made significant progress assessing our branch footprint, exiting markets that do not make sense for our organic growth strategy and focusing investments in areas where we have strong share and growth opportunities. We have taken capital freed up by these efforts and are returning it to our shareholders through share repurchases with the goal of creating long-term shareholder value. These efforts have positioned us for an exciting future as we look to 2026. And now I would like to open up the call for questions.

[Operator Instructions] And your first question comes from Andrew Terrell from Stephens.

Maybe just to start just on kind of the loan growth outlook. I appreciate the 4Q guidance and 2025 has been somewhat of kind of a transition year. I guess I'm just curious, as you look out into 2026, do you think you're in a position to return to net loan growth? Can you talk about the opportunities and the headwinds to getting the balance sheet back to net growth?

Andrew, this is Jim. That's a good question. And loan growth is our #1 focus, as you pointed out, based on the trends. And I touched on some of this in the call. We've seen some challenges here in the last quarter, just less demand, both real estate and construction. And we also had some higher payoff activity associated with non-relationship loans and the loan types that we're not interested in renewing.

The other thing, there's just been less construction loan tailwind funding as we've originated fewer construction loans in the last couple of years. And then we also had some loans go to the secondary market. Your question is on the go forward. We do see improved opportunity for growth. We've made a number of changes to our credit culture, and the team is comfortable with that new playbook. In fact, we also just implemented some streamlined approval processes because speed to market matters. We actually just had 4 meetings where we got the teams together in Boise, Billings, Denver and Omaha with a real focus on business development, growing the pipeline. And we're in the process of determining our goals for 2026, and there are incentives tied to these goals, what you measure is what you move, which includes not only loan growth but also deposits. But we've been intentional about setting us up for growth, refocusing the footprint and prioritizing our deployment of capital, as well as putting in a risk culture to support smart growth, and we're now on the offense. And given our growth communities and strong balance sheet, we're optimistic about our growth in '26.

Great. I appreciate that, Jim. If I could ask just on capital. Your CET1 has built pretty materially over the past year or so. And I think given the guidance and the branch in the fourth quarter should continue to build pretty nicely in the near term. You've got the buyback that you're active on currently, but $150 million on the buyback doesn't feel like it moves the needle a lot relative to the capital that you've built. So I guess the question is, should we expect you to get more active on the buyback front? Or are you interested in securities restructuring transactions, 2/3 of the bond book, it sounds like cash flows before 2030, but that's a decent ways out. Would you entertain a securities restructuring with the excess capital?

Andrew, I think I'll take that question backwards and start with the securities restructure. I think if you think about our recently announced buyback and kind of how we're thinking about our capital priorities, we don't view that as our priority right now. So we think the tail end, the combination of those cash flows and then the tangible book value accretion we'll get over the next few years. We think that's meaningful. So our focus right now isn't on the securities restructure. It's on the repurchases. So to your point, the $150 million, it moves us towards our objectives, but there is optionality there. So whether it's organic growth accretive to our return profile or additional return of capital to shareholders, that's what we'll be looking at as we execute that buyback. Like we said, we're not intending to hold excess capital. So as we get through that buyback, we'll obviously look and see what makes sense at that time and then consider additional repurchases if it makes sense at that time. Obviously, we manage capital through a few different lenses, looking at our capital ratios, holding company bank, regulations, bottom-up build market assessment, all those things you'd expect. And we -- our current analysis does indicate we have healthy capital levels relative to those lenses. So we'll be looking at additional actions as we go forward based on the facts and circumstances.

Your next question comes from Kelly Motta from KBW.

I appreciate the preliminary outlook for mid-single-digit NII growth next year. Just wondering if you could help us kind of put together, you get great disclosures on the roll-off, but where new loan originations have been coming on? And if you could -- I know that your commentary mentioned that it's been a bit slower than you'd expected. Just if you could size kind of what production has been this quarter and the past couple, that would be helpful as we look forward.

Kelly, so I think from a yield perspective, we've talked in the past kind of that 5-year point of the curve is where we're most sensitive from a new production standpoint. That's, of course, come down a little bit in recent periods. So if you look at pricing over the third quarter, where we saw a roll on July, August was higher than September, right? So kind of moving into the 6s into September. It's going to depend on composition, of course, what those loans look like, what the types are, et cetera. But given where the 5-year is anywhere from kind of low 6s to high 6s depending on -- I know it's a wide range, but it kind of depends on where the curves are and what the composition looks like. And then I think Jim talked a little bit about production. There's obviously a gap today between that and flat loans. So I think that's kind of how we would size that.

Got it. That's helpful. And your guidance here implies some additional larger payoffs. As you look ahead to 2026, is there any way to size kind of how much more of a headwind could come from some of this intentional runoff, which results in a smaller balance sheet, but is prudent from a risk-adjusted perspective?

Yes. So I think we've been pretty intentional about that in 2025. It doesn't mean more won't occur as we go forward and we look at individual loans, but we feel like we've done a good job making our way through that process, and we feel like we're getting closer to where we're comfortable from that perspective.

Okay. That's super helpful. Last question to close the loop on loans and production. Jim, you've mentioned now you have these branch sales to kind of redistribute some of the expense base and capital to where you see better opportunities for growth. Can you speak to anything you've done on the recruiting side and the opportunity there as you look ahead?

Yes. So we -- as you mentioned, we've continued to refocus the footprint and reinvest where we see growth opportunities. So yes, we have acquired some talent in Colorado in specific and because we see opportunities there. But we've also just seen some additional opportunities in kind of that Rocky Mountain Northwest part of our footprint, a little bit more activity. But yes, to answer your question, we recruited talent, and I've been player coach on the ground as well.

And your next question comes from Jeff Rulis from D.A. Davidson.

A couple of questions on credit. I wanted to -- first, I don't know if you've got the size of the balance of that criticized loan that paid off in October.

Yes. So the October payoff on that criticized loan was just over $50 million.

Okay. Great. And just to kind of course correct on the net charge-offs. I think you've got about 13 basis points year-to-date, and you've mentioned a couple of times muted and continue to reiterate the 20 to 30 basis points. Is that visibility on some of the credits that you're running through? I just want to -- and is that a historical years out? Or is it the 20 to 30 kind of in the next kind of 6 to 9 months type of guide?

Yes. Good question, Jeff. I think the way we think about our charge-off guide is that's kind of our longer-term expectation. Given our loan book has a smaller consumer portion, it's less consistent on a quarterly basis and charge-offs are going to be driven, of course, by unknown actions as well as resolution of credits on a quarterly basis. So there might be volatility on a quarterly basis. Obviously, we've seen positive results year-to-date, but we think 20 to 30 is the right long-term expectation there.

Okay. So nothing like a Q4 specific, something is coming down the pipe that you're happy to operate below that, but you're just going to kind of put that guide out there. Is that fair to say?

Yes. It's going to depend on resolution of specific credits, right? So we're not specifically guiding to any individual resolutions, but there could be quarters where there's higher or lower figures depending on activity in that quarter.

And did you guys have a classified assets number, maybe linked quarter? I didn't see it in the release.

It's -- I think it's kind of midway through the release, up very slightly on a reported nominal basis there.

Okay. Sorry I missed that. And then I guess -- sorry, last question, just on the margin. I appreciate Slide 9 and the earning asset yield, quite a bit of roll-off here coming on loans and securities. I don't know if you hazard sort of a terminal margin level other than you've guided towards upwards in the near term. But as you kind of exit '26, is there a a broader range that you think you kind of settle in at? That's a lot of loans, a lot of securities coming off at below market rates. So I just want to kind of -- obviously, execution on the deposit side, as you mentioned, but any thoughts on the margin as we exit '26?

Yes. So the mid-single-digit flat loan guide would imply a north of 350 ex purchase accounting exit rate through '26, kind of around that 350 for the full year and then an exit north of that. It's obviously going to depend on the curves and the level of loan and deposit growth, but that's kind of what that would imply. We think our long-term margin can be higher than that, right? And you can look at the historical performance as well as just the current yield on the investment portfolio, but that's kind of how we think about that.

And Jeff, David touched on this in the opening comments, but we've also shortened the duration of exception priced deposit relationships and things just in anticipation if we have further rate cuts, we have flexibility and can be nimble there as well.

And your next question comes from Jared Shaw from Barclays Capital.

So just going back to the growth discussion and your focus on, I guess, you could call it better markets or more dense markets. How does that sort of match up with your commentary on pricing and terms becoming more difficult? Jim, in the past, you talked about the attractiveness of Denver and your background there, but it feels like from just hearing other banks that that's a target for a lot. Do you see the competitive environment moving in your direction where you're going to be able to actually execute on some of that desire to grow in those markets? Or do you think you end up having to change some of the parameters?

I can just tell you in general, and I think this holds true probably across everybody's footprint. It's more competitive in metro markets than it is mid and smaller markets. We have a pretty strong presence in mid and smaller markets. The thing is, Jared, we'll remain disciplined. I touched on it in the opening that we've seen some efforts from a competition standpoint on structure and pricing. And those are 100% risk-weighted assets. And so they're rated at that level for a reason. So you want to be disciplined, and we're not going to chase growth for growth's sake, but we want to grow, but we're going to be smart about it because in these times, I think that chasing growth for growth's sake isn't a good decision either.

Okay. And then just looking at the -- David's commentary about sort of flat loans after a bit of a decline in fourth quarter, but then your answer about optimistic for growth in '26. What's the optimistic for growth in '26? Is that production in sort of the early stages or as we move through the year, maybe that growth increases?

Jared, I'll take the first half and then turn to Jim for the second half of the question. So I think just on that '26 discussion we had in the prepared remarks, our intent there was to help with the our view of '26 if loans were flat. That isn't necessarily a loan guide at the current time, but that's kind of our view of the underlying repricing of the balance sheet.

Yes. And Jared, on the reason for the optimism in '26, I mentioned we just went on the road, and there was a number of us executives that did that and met with the teams, brought everybody together, which hasn't happened for a few years and got them in the same room. And I can see the talent. I've met all the talent out on the road, but getting everybody in the room together, sharing ideas, best practices, what's working and talking about the importance of growth makes a difference. We are in relationship banking, both internal and external. And so I look at that. And then I just look at -- when you look at our balance sheet, it is a really strong balance sheet. I mean we have liquidity. We have strong capital. It's a position of strength to operate from. And then you combine that with the core low-cost funding source, I just think we're in a really good position for '26.

Okay. And then maybe shifting to the expenses. David, I guess the guide for next year is low single-digit growth in expenses versus the full year '25. So that, I guess, includes the benefits from the branch divestitures. Should we be looking -- or is there an expectation for positive operating leverage in '26? And are there any investment initiatives in systems or technology or maybe even incrementally new branches as you go through the year that's included in that?

Yes. So a couple of things. I think to be clear on that low single digits, it's low single digits, right? So we're very focused on expenses, and we're being careful and thoughtful. And investment is important, and we're continuing to make investments. There are some branches we're adding. We mentioned branches in the prepared remarks, but it's a thoughtful approach as we wait to see that growth come. And so broadly, yes, there is an expectation for improved operating leverage.

And Jared, we're going to be -- until we see the growth, we're going to be very disciplined, as David mentioned, on expenses. And the same goes with our capital levels. I mean absent organic growth, we already talked about the authorization for a stock buyback. We will continue to make sure we're enhancing shareholder return.

And your next question comes from Matthew Clark from Piper Sandler.

First one for me, just on capital again. You mentioned you don't want to hold excess capital, but your CET1 is 13.9%. What's your -- what do you view as your CET1 target? And how quickly can you get there?

Yes. So I think it's a good question. I think capital levels lag balance sheet a little bit, right, when you see these type of changes in risk-weighted assets. I think from a target perspective, we'd kind of guide you from a CET1 perspective, more in line with the peers in the near term. And I talked before about kind of our process, right? So that does imply a significant amount of optionality, right, which I mentioned earlier as well. So the 150 starts to move us in that direction, but there is optionality for us to consider additional return of capital and grow organically. So we feel like we're in a good position to continue to enhance returns.

Okay. And then do you have the spot rate on deposits at the end of September?

Yes. So interest-bearing deposit costs in September were 1.8%. Like we said before, we've seen some positive movement into October as it relates to capturing beta, but 1.8% interest-bearing was the September spot.

Okay. And then your core loan yields were up 3 basis points, I think, to 5.68%. I guess what's your view of the core loan yield outlook with the back book repricing next year and assuming the forward curve plays out?

Yes. So it's a good question. Obviously, timing of rate cuts matter. 20% of the loan -- a little over 20% is variable. So each cut is about 5 basis points in immediate change in loan yields. So next year or over the next 12 months, if there's 4 or so cuts, we think that probably broadly will offset a lot of the expansion, right, which is kind of how we talked about in the context of expanding spread between loans and deposits. What's helpful in this environment to us is we do get that back book repricing, which helps offset some of that rate impact as rates move. So obviously, the 5-year is important as we think about that repricing, but we see it as an improving core spread story.

And your next question comes from Timur Braziler from Wells Fargo.

Trying to tie the NII guidance for next year to the deposit side. It looks like deposit betas in 3Q ticked down a little bit as cost of deposits went up by 2 basis points. I think in your ALCO disclosure, the assumption is a 31% beta almost immediately on future cuts, cycle-to-date beta is closer to 12%. I guess how do you calibrate those two? And as you talk about '26 NII, I guess, which beta assumption are you guys using?

Yes, Timur, I'll take that in a couple of different responses. So I think to your point, we have seen lower beta to date than we would have expected, and we talked about that a little bit in our prepared remarks. We think from here, given some of the actions we've taken, and we're seeing that in October so far, we anticipate capturing a higher beta than that. But we do when we talk about the lag, that is a lag to that expected longer-term beta, right? Because I think where you see that lag is a little over 10% of our deposits are CDs and those, of course, lag. The vast majority reprices in a 12-month period, around 7 months is kind of where we see most of our activity there, but that lags. So we think that impact starts coming more meaningfully in '26 as we see those rates come down. But our guidance does assume some lag in deposit beta versus our expectation for a more 12-month period.

Okay. And I guess kind of some of the branch sales and the balance sheet movements, I mean, is it fair to say that much of the NII growth is kind of back-end loaded next year?

We think of it sequentially, yes. That's how we think of it. I think the Q4 and our guidance includes the impact of the branch sale, right, the Arizona and Kansas branch sales. So that does step down the near term. And then we see it as sequential through '26. Q1 is always a lower NII period for us just given the two fewer days and just how our loans accrue. But yes, we view it as sequential through the year.

Okay. And then on the loan side, I asked this last quarter as well, but it looks like low teens of outstanding loans reprice or reset over the next 12 months. And last quarter, I asked if this was an opportunity or a potential threat. It seems like production, at least now, to your point, is below replacement levels. I guess how are you thinking of that -- of those resets, reprices kind of over the next 12 months? Is there incremental optimism that production starts to pick up? And if that's the sense, and maybe just give us a little bit of color as to what asset classes you see picking up and absorbing some of those loan runoffs.

Yes, Timur, that's a good question. The asset classes, I think one of the strengths of the bank, I'll start with that, is the diversity of our balance sheet, I mean, and our footprint lends to that. So you'll see -- we see opportunities in C&I as well as CRE. And as far as backfilling what will be maturing and coming up, there was more intentional runoff this year of things that just didn't fit the profile of what we wanted to do on an ongoing basis as well as some large transactional loans. There's less of that in 2026. And so when you combine that with production that I think we can achieve in 2026, I think you'll see a return to some loan growth.

Great. And if I could just one more on M&A. Maybe you had some of the BMO branches were in your footprint. I'd love to hear your thoughts around how that played out and if that was something that you guys were potentially looking? And then maybe from the other side, can you just take us inside the boardroom? I know there's been a lot of change with Class A, Class B share dissolution over the last years and still some family ownership. Can you just give us some thoughts as to how the Board is thinking about the franchise and if they're at all open to potentially partnering with another institution and taking advantage of some of this recent M&A activity?

Yes, Timur, as we've stated in our earnings calls from day 1, we're focused on organic growth and believe our brand density and branch network and in the growing markets, combined with our strong balance sheet, give us the growth opportunities in front of us. So M&A is not something we're focused on. And absent near-term growth and given our current valuation, we're going to buy back stock. But we're focused on executing our strategic plan and around organic growth. And our Board takes their fiduciary responsibility seriously. So anything that would come our way, they would certainly evaluate to look at what's best for shareholders. But we're focused on executing on our strategic plan because we're really confident of our future success.

There are no further questions at this time. Mr. Jim Reuter, you can continue.

All right. Thank you, and thank you, everybody, for your questions today. And as always, we welcome calls from our investors and analysts. So please reach out if you have any follow-up questions, and thank you for tuning into the call today. Have a good day.

Ladies and gentlemen, this concludes today's conference call. We thank you very much for your participation.

Good morning, ladies and gentlemen, and welcome to the First Interstate BancSystem Inc. Second Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, July 30, 2025.

I would now like to turn the conference over to Nancy Vermeulen. Please go ahead.

Thanks very much. Good morning. Thank you for joining us for our second quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes might differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release. and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.

Again, this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. If you have not downloaded a copy yet, we encourage you to do so. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2025. Joining us from management this morning are Jim Reuter, our Chief Executive Officer; David Della Camera, our Chief Financial Officer; and other members of our management team.

Now I'll turn the call over to Jim Reuter. Jim?

Thank you, Nancy, and good morning, everyone, and thank you for joining us on our call today. This remains an exciting and busy time at First Interstate. This quarter, we continued our efforts to refocus our capital investment, optimize our balance sheet and improve core profitability. In addition to our decision in the first quarter to stop new originations and indirect lending, followed by our April announcement of the Arizona and Kansas branch transaction. We signed an agreement this quarter to outsource our consumer credit card product and the underlying loans moved off of our balance sheet. We continue to take steps to refocus the franchise in our core markets where we enjoy strong market share and believe there is high growth potential.

First Interstate has a strong brand and branch network located in growth markets a market-leading low-cost granular deposit base and a team of strong community bankers. We believe these attributes when combined with recent strategic actions branch optimization, future organic growth through relationship banking and the continued repricing of our assets will lead to higher profitability. We continue to take a proactive approach to credit risk management.

This quarter, we were pleased to see stability in nonperforming asset levels, modestly lower classified asset levels and 14 basis points of annualized net charge-offs. Criticized loans did increase generally reflective of slower lease-up in our multifamily book, and we will discuss that in more detail later in the call. Our recent strategic decisions have led to strong levels of capital and liquidity, providing us with a solid and flexible foundation. We ended the quarter with a 72% loan-to-deposit ratio minimal short-term borrowings on the balance sheet and no broker deposits. Capital had also continued to meaningfully accrete with our common equity Tier 1 capital ratio, ending the quarter at 13.43% and with an expectation for continued accretion through 2025.

Later in the call, David will address new commentary we have added to our guidance regarding our anticipation for a high single-digit increase in net interest income in 2026, supported by our expectation for continued margin improvement assuming generally flat total loan balances in 2026. We are sharing this color to highlight what we believe is the impact of our disciplined approach to repricing maturing assets as we continue to focus the organization on organically growing loan balances over the long term. We have also added a slide to our investor presentation this quarter, highlighting the strength of our deposit profile, which we believe is the key driver of the long-term value of the franchise.

93% of the deposit base is located in areas where we have top 10 market share and about 70% of our deposits are in markets that are growing faster than the national average, supporting long-term organic growth. We opened 1 additional branch this quarter in Columbia Falls, Montana, which is a small example of our future efforts to drive organic growth. We did not announce any branch consolidations in the second quarter but we anticipate sequential action moving forward as we progress through 2025 and into 2026.

With that, I will hand the call off to David to give more details on our quarterly results and to discuss our guidance. David?

Thank you, Jim. I will start with our second quarter results. For the second quarter of the year, the company reported net income of $71.7 million or $0.69 per diluted share compared to $50.2 million or $0.49 per diluted share in the first quarter. Net interest income was $207.2 million in; the second quarter, an increase of $2.2 million over the prior period. This increase is primarily driven by a reduction in interest expense from reduced other borrowed funds balances, partially offset by lower interest income on earning assets resulting from a decrease in average loan balances. Our net interest margin was 3.32% on a fully tax equivalent basis, and excluding purchase accounting accretion, our net interest margin was 3.26%, an increase of 12 basis points from the prior quarter.

Other borrowed funds ended the second quarter at $250 million, a decline of $2.2 billion from a year ago and $710 million from the end of the prior quarter. Yield on average loans increased 6 basis points from the previous quarter to 5.65% in the second quarter, driven by continued repricing and payoffs of lower-yielding loans. Interest-bearing deposit costs declined 1 basis point in the second quarter compared to the first quarter, and total funding costs declined 9 basis points due to improving mix shift driven by the reduction in other borrowed funds. Noninterest income was $41.1 million, a decrease of $0.9 million from the prior quarter. Results this quarter include a $7.3 million valuation allowance related to movement of Arizona and Kansas loans that are included in the branch transaction to held for sale. This was partially offset by a $4.3 million gain on sale related to the outsourcing of our consumer credit card product.

Results were generally in line with our expectations, excluding these items. Noninterest expense declined in the second quarter by $5.5 million to $155.1 million. This decline compared to the prior quarter was due to lower seasonal payroll taxes and reductions in incentive-based compensation estimates. Results include roughly $1.5 million in property valuation adjustments and lease termination fees associated with properties in Arizona and Kansas. We continue to exhibit expense discipline related to our staffing levels driving results favorable to our prior expectations. As part of that discipline, we are thoughtfully developing efficiencies as we move forward, which includes our ongoing analysis related to the branch network and are carefully controlling staffing levels and other marginal spend.

Turning to credit. Net charge-offs totaled $5.8 million representing 14 basis points of average loans on an annualized basis. We recorded a reduction to provision expense for the current quarter of $0.3 million, driven by lower loans held for investment. Our total funded provision increased 1.28% of loans held for investment from 1.24% at the end of the first quarter. Classified loans declined $24.4 million or 5.1% and nonperforming loans also declined modestly. Criticized loans increased $176.9 million or 17.2% from the first quarter of 2025, driven mostly by some of our larger multifamily loans generally reflective of slower lease-up. Broadly, we are comfortable with the underlying value of the properties in guarantor's ability to support in these circumstances, but lease-up time lines are slower than initially anticipated at underwriting driving movement into the criticized bucket.

Turning to the balance sheet. Loans held for investment declined $1 billion, which included the impact from the strategic moves we have discussed. The decline was influenced by $338 million in loans related to the Arizona and Kansas transaction that was held for sale, $74 million of loans sold with the consumer credit card outsourcing and $73 million from the continued amortization of the indirect lending portfolio. The remaining reduction was influenced by higher larger loan payoffs, including loans we strategically exited. We are remaining diligent in adhering to our pricing and credit discipline. And while competition is always strong for great clients, we are seeing initial indications of increasing pipeline activity. We do believe that loans will decline in the near term but remain optimistic that we will stabilize and return balances to growth in the medium term.

Deposits declined $102.2 million in the second quarter and are approximately flat compared to the prior year, adjusted for a larger temporary deposit on our balance sheet at the end of the second quarter of 2024. Finally, in the second quarter, we declared a dividend of $0.47 per share or a yield of 7.0%. Our common equity Tier 1 capital ratio improved 90 basis points to 13.43%. Moving to our guidance. Our guidance as displayed includes the impact of the consumer credit card outsourcing and excludes the impact of the branch transaction, which we anticipate closing in the fourth quarter.

Broadly, the consumer credit card outsourcing reduces the major lines of the income statement and is mostly neutral to forward net income. We have updated our guidance to reflect our current assumption of 125 basis point rate cut for the remainder of 2025. As of the end of the second quarter, our balance sheet has shifted from slightly liability sensitive to mostly neutral, and we do not believe the rate cut include in our guidance is meaningful to the net interest income forecast we have presented for 2025. Our net interest income guidance reflects an anticipation of continued margin improvement with an expectation of fourth quarter net interest margin, excluding purchase accounting accretion, to approximate 3.4% compared to the 3.26% figure reported in the second quarter. Compared to the prior quarter's forecast, in addition to the impact from the outsourcing of consumer credit cards, the net interest income forecast was modestly impacted by lower risk-weighted density.

Our guidance now assumes a more meaningful near-term asset allocation into the investment portfolio versus loan balances as loans have declined more than previously anticipated. We anticipate beginning to reinvest into the investment portfolio in this quarter. We have added commentary in our guidance, noting that we anticipate net interest income to increase in the high single digits in 2026 compared to 2025, supported by our expectation for continued margin improvement assuming generally flat loan balances in 2026. We're sharing this to highlight what we believe is the impact of our disciplined approach to repricing maturing assets and continue to believe we will grow loan balances over the long term.

To provide additional detail, we've included the slide in our investor presentation detailing near-term fixed asset maturity and adjustable rate loan repricing expectations. Note that loan balances represent maturities in the case of fixed rate loans and maturities or repricing events in the case of adjustable rate loans. These figures displayed do not include contractual cash flow or any prepayment expectations. We expect loan yields to continue to benefit from the tailwinds of fixed rate repricing a key component of our expectation for continued net interest margin and net interest income improvement.

The investment security figures displayed represent current market expectations for total principal cash flows during each period which provides another source of anticipated net interest income expansion. Noninterest income guidance is modestly lower than the prior quarter, impacted by the outsourcing of our consumer credit card. Finally, we reduced our noninterest expense guidance from an expectation in the prior quarter for a 2% to 4% full year increase to 0% to 1% for the full year of 2025 compared to the reported 2024 number.

In addition to favorability in the second quarter expense levels to prior expectations, we are carefully controlling staffing levels and other expense levers while continuing to invest in production-driven areas as we look to drive our balance sheet growth. These areas of continued focus have reduced our forward expectation of expenses in the near term. While near-term loan levels are lower than previously anticipated, leading to some modest pressure in net interest income in the near term, we are carefully controlling the expense base as we look to drive an efficient return profile for our shareholders.

Turning to the Arizona and Kansas branch transaction. We stated in our previous earnings call that we anticipate tangible book value accretion of roughly 2% at the close of the branch transaction, an improvement in our common equity Tier 1 ratio of approximately 30 to 40 basis points. As noted, we modestly increased loans associated with the transaction since the prior quarter. Together with the anticipated recognition of the deposit premium in the fourth quarter, which would occur concurrent with close. We continue to anticipate total tangible book value accretion of approximately 2% from the transaction, which would include the impact of the held-for-sale valuation allowance recognized this quarter. We now anticipate our CET1 ratio to increase at the high end of the noted range given the additional loans included.

With that, I will hand the call back to Jim. Jim?

Thanks, David. We are diligently focused on continuing to make sequential progress on our strategic plan and added a slide in our investor presentation to outline our focus areas, which include refocusing capital investment, optimizing the balance sheet and improving core profitability. We believe earnings will continue to improve through 2026 and into 2027, and the ongoing remix of our balance sheet is providing us with liquidity and capital flexibility. We are actively working through our asset quality levels and are optimistic that we are beginning to see positive underlying credit development evidence of our disciplined proactive work on asset quality. We will continue to work diligently to improve the earnings profile of our institution, and we look forward to sharing our progress with you. Now I will open the call up for questions.

[Operator Instructions] [Operator Instructions] The first question comes from Jeff Rulis at D.A. Davidson.

Appreciate the color in the deck and the commentary. That's helpful. A tough question, but I want to try to get the timing on the loan portfolio stabilization. It seems like it's heavy lifting upfront here with the runoff, but and maybe some further drift, but thinking about when does the portfolio run off kind of by year-end? Or are you thinking that's a first half of next year and then in terms of when the loan portfolio stabilizes?

Jeff. So a couple of things here. Good question. I think to start -- there was -- as we think about the balances in the quarter, of course, we had the held for sale. We have the indirect and the credit card. We also mentioned large loan payoffs. The other thing you'll note in one of our slides is we did see some line utilization that was a little bit lower this quarter. Adjusted for all of that, the change in loans quarter-over-quarter, we think it was more of a mid-1% number versus the reported on HFI. So as we think about going forward, we do anticipate modestly lower loans in the third quarter. That's what's incorporated in our guidance. We're hopeful for more stability fourth quarter from a reported held for investment level. And then, of course, we're optimistic we can grow.

And Jeff, this is Jim. To add on to that, when I look at the payoffs in the quarter, there were 4 larger loans A few of those were frankly intentional and it's the type of lending we don't want to do on a go-forward basis and 1 was also a multifamily that went to the secondary market. So as I've discussed the past 2 quarters, we completed a deep dive on credit, set up a new credit committee process to get everybody on the same page. And I can confidently say we're now on offense, have some specific promotions, and we're seeing some good activity in the pipeline.

That's great. Maybe a related question and trying to back into some of the NII guidance, sounds like a pretty good commitment on the security side. Any effort to try to peg where earning asset levels could be at year-end? My guess is it sounds out from here.

Yes. Good question. So our borrowings ended the quarter at about $250 million, $250 million short-term borrowing. So we would be -- we think the third quarter is where we bottom in earning asset levels. To your point, a higher level of investment securities than previously anticipated in the near term given the balance sheet trends. Long term, we'd of course, like to mix shift that into more loans. But third quarter review is the bottom earning assets. That's Arizona Kansas. So you might get a little bit of a step down into the fourth quarter, but modest, and we think we're around the bottom there.

Okay. Just the last ONE 1 on the capital side. I think you mentioned at the high end of the range of guidance. Maybe CET1 possibly by year-end, given that the branch deal should be behind you. But I guess that's part 1 is maybe a CET 1 at year-end. And then part 2 is just if you wouldn't mind kind of going through the capital priorities from there as you've got a pretty high level building here?

So I think at year-end, to your point, so [ 13.4 ] was the June 30 number. We think we are around the 40 basis point number of additional accretion from the branch transaction and then modestly lower loans in the near term. So that does get you to a higher number from here, all else equal. As we think about capital, we certainly acknowledge we have strong capital levels, and it creates significant optionality for us. We're very pleased with that. We're looking at a variety of options. So we're looking at all the different capital deployment options from here and considering how we can utilize that to enhance return. So more to come there, but we're looking at our different options.

The next question comes from Andrew Terrell at Stephens Inc.

I wanted to start off, just -- I mean it was good to see the classified loans down sequentially, but I think it was a bit surprising to see special mention step up so much this quarter. I think, particularly given the work you guys have done over the past months or so regarding kind of the credit review process. I was hoping you could talk maybe a little bit more about what drove that special mention migration that the kind of loss content you would or would not expect. And then -- does it feel like we should continue to anticipate continued migration into criticized classified?

Andrew, I'll take that. We saw, as you mentioned, the step up in the criticized A lot of that was driven with new information on some multifamily projects that, as we mentioned, primary source of repayments, what we focus on and the builder's original plans for absorption and how that project would go are not being met. I've actually looked at 2 of the 3 larger ones that are in the group that moved up and buy and seen them personally, still feel good about the collateral, really like the guarantors. So it's really that primary source of repayment. Otherwise, it was fairly flat. And I can tell you that I see the fruits of our proactive management of credit.

Okay. Great. I appreciate the color, Jim. And if I could also just ask on kind of the expense guidance. It feels like lots of kind of moving pieces here. But David, can you just maybe talk a little more about kind of near-term expectations. It seems like the guidance implies there should be kind of a core lift on expenses in 3Q? And then can you remind us just the maybe expense saves from the branch divestiture that's scheduled in the fourth quarter. And I think -- I would assume that there are no branch consolidation efforts reflecting kind of expense guidance. So should we think about those as potentially a positive to the current kind of stated guidance?

Sure. So first, I'll kind of take that back forward. So there are no branch divestitures included in the guidance, you're correct there. So anything that occurs there. Again, just given timing, we think that's more of a '26 impact than a '25 impact actually on the expense figure. But you're correct, no expectation is included in that. Related to Arizona, Kansas to remind on the commentary from the prior quarter, about a mid-2s number as a percentage of the deposit base is how we view that annualized cost impact after close there. Quarter-to-quarter, as we think about our expenses you're correct that we do anticipate third and fourth quarter to be a higher reported number than second quarter for expenses. A couple of drivers there includes things such as our medical insurance. We generally see a little bit higher in the back half than the front half. that will be included in there. There was some timing in the second quarter on some of the salary and wage items that will be modestly higher in the third quarter. And then we had some benefits in our tech spend in the second quarter. That we'll see a little bit higher in the third quarter. Nothing generally unusual, but some timing items as well that will cause that increase.

Got it. That's really helpful. I appreciate it, David. And then if I could ask also just on the guidance. One, I appreciate you guys putting some of the repricing detail into the presentations quarter. That's really helpful. On the comment for the net interest income, high single-digit growth in 2026. Does that factor in the -- I would presume kind of NI headwind from the branch divestiture in 4Q? And would that materially alter the high single-digit 2026 expectation?

So it does not include the divestiture impact. We don't believe that materially alters that figure broadly, loans and deposits associated with the transaction don't look dissimilar than the banks loans and deposits as a whole. So we wouldn't view that change is materially different. And again, the capital raised with the transaction there's different options related to that, of course. So at this time, that high single digit would be excluding any decision there related to the loans, deposits and capital. .

The next question comes from Kelly Motta of KBW.

In terms of the expense base kind of circling back to that, I appreciate the color on the expense base regarding the branch divestitures. Wondering how you're thinking about the reinvestment of the savings versus flowing to the bottom line? And specifically, with regards to frontline hires, if you have the right talent to start to drive the inflection in growth as we look to next year?

Yes, Kelly. We -- David walked through some of the color around the expense phases. But there's a couple of things here. When we look at growth and NII and different things, obviously, another lever we manage is our expenses. And so we're going to pay attention to that closely as we drive for stronger NII. But we will not sacrifice having the right people on the team and being able to do the things we need to grow. We do have the right people on the team, so the cost saves are not coming at the expense of talent. So anything we need to do to invest to grow is going to be a priority.

Got it. That's helpful. And then in terms of I appreciate the color that the NII outlook includes or securities purchases given the slowdown in loans -- maybe for David, provide color as what you're looking to add to the book and the incremental yields on that as well as the incremental yields, the new yields you're getting on the loads you are working now?

Sure. So on the security side, the incremental purchases won't look holistically dissimilar than what we currently have in the book. The way we broadly think about that is just given the structural rate sensitivity position of the company, shorter duration similar to what we have today, broadly, lower risk-weighted density and no credit risk. So that's kind of limited to no credit risk. That's broadly how we think about that. From a yield perspective, if you kind of think something like a mid-duration MBS as an example, and there's, of course, a variety of different things we would be purchasing. That's 5-year plus [ 80 to 90 ] today. That will move, of course, but something in that range. new loan production, somewhere in that 7% range. It's going to be sensitive to that 5 to 7-year point on the curve, but that's broadly where we are today.

Got it. That's helpful. Last question for me, and then I'll step back into the queue. On the loan side, I appreciate the color on some of the larger payoffs you had, some of which was intentional. Looking at the live for commercial, that was down pretty meaningfully. And I know you noted some drop down in the utilization there. Can you provide additional color as to what you're seeing on the commercial side? And if there was any sort of just like end of quarter flows that we should be keeping in mind in terms of thinking about the average balance sheet?

Yes. Thanks for the question. So I'd note a few things there. First, I would note the -- to your point, the utilization, that did have an impact there. Second would note the -- there was 1 of the larger payoffs we referenced was in that segment. that was an impact as well. The other impact is the loans that moved to held for sale. There were some commercial real estate, some C&I. So there was some impact there as well quarter-over-quarter related to that. So we don't believe that's reflective, of course, of our anticipation going forward and change in that category, certainly a focus as we think about small business, but some onetime movement in the quarter.

The next question comes from Jared Shaw at Barclays.

It's just as we're looking just to cover -- as we're looking at year-end '25 loan levels as an exit that including everything is said like down 10% to 12% when we include the loan sales, include the indirect include the -- some of that payoff activity. Is that the right way to think about it?

Yes. So how we're thinking about that is the guide of [ 6 to 8 ] is the -- excluding the other items, an additional [ 1 to 1.5 ] on indirect and then the held-for-sale balances we anticipate, of course, leaving in the fourth quarter when we anticipate that transaction to close. So that would be a marginal about 2% impact. That's correct.

All right. And then when you look at the valuation allowance that you took on those loans, can you give any color on what the rate versus credit impact of that would have been? So that valuation allowance was a rate mark on the loans. It was purely reflective of rate. And yes, so that's just a rate mark there.

The next question comes from Matthew Clark at Piper Sandler.

I appreciate the questions. First one for me on the loans transferred to held for sale $338 million. I think you called it out as being related to the branch sale. But I think when you announced the branch sale, it was only $200 million of loans. So are those all tied to those branches? Or did you guys also move some additional loans into expense?

They were all tied to the branches. There were some additional loans during the quarter that were identified related to the transaction, some relationship-related loans, so all related to the branch transaction.

Great. And then in terms of the loan portfolio, can you quantify what's left in the book that you would argue is not relationship based and would prefer to run it off. We obviously see the consumer credit portfolio being the latest piece of it. But I'm trying to get a sense for -- any way to ring-fence some kind of deliberate runoff from here?

Yes, Matthew, I don't see a lot of deliberate runoff left in the book. I do think the 1 challenge we have is multifamily that are construction that once they're leased up and fully stabilize. Some of those have an intention to go to the secondary market. So we'll see some of that. But our message to our team is we -- because something leaves doesn't give us a bogey to not find a replacement and grow the bank. So -- but I would say the bigger loans that when I arrived that I had a preference would leave the balance sheet. Most of that has already happened.

Okay. And then on the slide deck, the deposit market share slide, does that imply that you'd like to exit some additional markets where you're not in the top 5. I think it's about 30% of the total not to say you'd exit all 30%, but or is it more to illustrate an opportunity to grow market share. It just looks like Colorado kind of stands out in some of those markets has not been as tough.

Yes, Matthew. Yes, it's not to illustrate where we want to exit it to illustrate where we have existing density, which gives us an advantage. And if you look at a lot of those states and MSAs and areas, their growth areas. So we think it's a positive that we have that type of market share. And we hope to gain it in other areas as well. So where you see less of it, it's not an indication we're going to retreat. It's an indication of where we need to make progress.

The next question comes from Timur Braziler from Wells Fargo.

Looking at the capital priorities and examining the options here on a go-forward basis. I guess, I mean, Jim, you made it pretty clear that M&A is off the table looking at the dividend, you guys already have one of the highest dividends out there. I guess that would leave share buyback or some sort of balance sheet restructure one would be a slower use of capital. One would be a more kind of acute use of capital. I'm just wondering kind of where the thought is between those 2, the mix of and then to the extent that some balance sheet restructure is in the card, how much of that might be included in the 2026 NII guidance?

Yes, Timur, that's a good question. As you've already pointed out, we have strong capital levels, and it's going to increase, as we've already talked about, which gives us a lot of flexibility. And so Obviously, dividend is important to us. We've demonstrated that historically and currently today. Organic growth will be our focus if we can grow the bank and make use of the capital. But all that said, if we're not able to utilize the capital in that fashion, we will look at all options on the table, including all the things you mentioned. So we have a focus on creating shareholder value. And so that will be an active conversation for us.

And Timur, the '26 guide, that does not include or assume capital actions.

Okay. Got it. And then looking at the -- looking at the loans specifically that are maturing and/or resetting through '26, I calculate that to be about 12% of the outstanding loan book -- do you guys view that as an opportunity? Or is there a potential threat that maybe some of those either get refied away into the secondary market? Or still some composition of "the type of blending that you don't really want to do". I'm just trying to get a sense of this elevated portion of resets that are coming due in the next 18 months and what effect that might have on balance sheet composition and your expectations for average earning assets here to stabilize in the not-too-distant future?

Yes, Timur, that's a good question. And as I mentioned earlier, I don't see a lot of loans that don't fit our profile in that mix. There is some multifamily that, as I mentioned, that when stabilized, the borrowers' intent was to go to secondary market. Obviously, we're not going to compete with secondary market from a rate and structure perspective. And so that's how we show loan growth fairly flat. But our intent is to replace that with production and growth. And as I mentioned, we're seeing good activity in the pipeline and C&I, owner-occupied and different things. So that's where we're headed there and optimistic that we can replace a lot of that.

Okay. And then just last for me around credit. Just looking at the recent trends in criticized loans, coupled with your unchanged net charge-off guidance I guess, what's giving you comfort to the fact that the increase in criticized that are now over 7% of the loan book isn't going to drive some volatility around charge-off activity either in the back end of '25 or into '26.

Yes, Timur, what continues to give us confidence in that area is that a lot of the movement into criticized has been that primary source of repayment. We still like the collateral and the guarantors that are backing those credits, and they're well located, which is partly why we like the collateral. So that's why we continue to be confident. And I think, again, I've mentioned this before, proactive credit management, I think, is one of the tenants of running a good bank in all economic cycles, and that's what you're seeing in play here.

We have no further questions. I'll turn the call back over to Jim Louder for closing comments.

All right. Thank you, and thank you, everybody, for your questions. And as always, we welcome calls from our investors and analysts. So please reach out to us if you have any follow-up questions, and thank you for tuning into the call today.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.