First Interstate BancSystem (NASDAQ:FIBK) reported second-quarter 2026 net income of $83.9 million, or $0.87 per diluted share, compared with $60.2 million, or $0.61 per diluted share, in the first quarter. Results included a $19.5 million gain from a branch transaction completed during the quarter.
Management said it continued to prioritize long-term profitability, deposit mix, credit quality and operating efficiency, even as elevated loan payoffs drove a larger-than-expected decline in reported loan balances.
Margin expands as funding costs decline
Fully taxable equivalent net interest margin rose to 3.48%, from 3.43% in the first quarter and 3.32% a year earlier. The second quarter marked the company’s ninth consecutive quarter of margin expansion.
Chief Financial Officer David Della Camera said average loan yields increased two basis points sequentially to 5.62%, while total deposit costs declined three basis points and total funding costs fell four basis points. He also noted that, over the past year, investment-security yields increased to 2.98% from 2.72%, while total deposit costs declined to 1.17% from 1.33%.
“These trends highlight the continued improvement in the underlying profitability of the balance sheet,” Della Camera said.
Loan balances fall on accelerated payoffs
Loans declined $447 million during the second quarter, reflecting continued reductions in agricultural and residential loans, amortization in the indirect lending portfolio, and higher loan paydowns and payoffs. Management said the increased payoff activity accelerated late in the quarter and was concentrated in criticized loans, secondary-market activity, loans in divested markets and credits considered to have limited relationship value.
Chief Executive Officer James Reuter said the company has not pursued near-term balance-sheet growth that would conflict with its relationship-banking strategy. Commercial loan production improved during the quarter, particularly in the Rocky Mountain region, he said, though production was outweighed by payoffs.
Della Camera said the company categorizes its out-of-market portfolio at roughly the mid-$600 million level, with approximately $100 million of payoffs from that portfolio during the second quarter. He said most commercial loan payoffs did not affect core relationships.
Management expects accelerated payoff activity to continue through the rest of 2026, pulling forward some exits that the company previously expected in later years. The company’s updated outlook incorporates a smaller near-term balance sheet, including additional expected runoff in mortgage, indirect and out-of-market lending categories.
During the question-and-answer session, Della Camera said average earning assets are expected to bottom in the third quarter, while period-end earning assets are expected to be roughly flat to improving from there. Fourth-quarter average earning assets are expected to be higher, based on the company’s guidance.
New loan yields were in the low- to mid-6% range depending on the loan type, Della Camera said, and there were no notable prepayment fees contributing to second-quarter margin performance.
Deposits decline following branch transaction
Total deposits fell $441.7 million to $21.4 billion as of June 30. More than half of the decline resulted from the sale of $244 million in deposits as part of the Nebraska branch transaction.
The company said its deposit mix improved during the quarter. Noninterest-bearing balances returned to growth both sequentially and year over year when adjusted for deposits sold in branch transactions. Average deposits declined $212.3 million, less than the period-end decline, due to end-of-period outflows associated with larger customer deposit movements.
Management said it allowed some higher-cost time deposits to leave the balance sheet while focusing on core customer relationships. The loan-to-deposit ratio declined to 66.6% at quarter-end, from 67.3% in the first quarter and 72.3% a year earlier.
Credit quality improves, capital returns continue
Net charge-offs rose $7.3 million sequentially to $9.7 million, or 27 basis points of average loans, primarily from partial or total resolutions of previously reserved credits. The company recorded a $3.2 million reduction in its provision for credit losses, driven mainly by lower loan balances.
Criticized loans declined $95.8 million, or 9.3%, from the first quarter and were down 22% over the past 12 months. The total funded allowance for credit losses decreased to 1.28% of loans held for investment, from 1.33% in the prior quarter, reflecting resolutions within previously reserved nonperforming loans.
Noninterest income increased $20.6 million sequentially to $61.7 million, driven primarily by the branch-sale gain. Noninterest expense rose $1.3 million to $158.9 million, reflecting higher advertising, professional fees related largely to branding efforts, donations, branch-closure costs and other expenses. Those increases were mostly offset by lower salaries, wages and employee benefits.
First Interstate repurchased about 1.9 million shares for approximately $69 million during the quarter. Since beginning its repurchase program in August, the company has repurchased roughly 8 million shares and returned about $270 million to shareholders. It increased its cumulative repurchase authorization by $150 million to $450 million.
The company also declared a quarterly common dividend of $0.47 per share. Its Common Equity Tier 1 capital ratio rose 24 basis points sequentially to 14.54%, while its leverage ratio was 9.59%.
Management said it added 14 relationship managers year to date while maintaining what it views as a structurally lower staffing level following its reorganization. Reuter said the company is seeing growing commercial pipelines across its footprint and that July had begun positively, while emphasizing that future expansion will remain disciplined and relationship focused.
About First Interstate BancSystem (NASDAQ:FIBK)
First Interstate BancSystem, Inc is a bank holding company headquartered in Billings, Montana. Through its principal subsidiary, First Interstate Bank, the company provides a full range of commercial and consumer banking services. Its offerings include business lending, commercial real estate financing, agricultural loans, residential mortgage products, and deposit accounts suitable for individuals, small businesses, and large corporations.
The company traces its roots back to the late 1960s and has grown through a combination of organic expansion and strategic acquisitions across the Western United States.
