Q2 2025 First Interstate BancSystem Inc Earnings Call

July 30, 2025

A question and answer session. If at any time during this call you need assistance. Please press star zero for the operator. This call is being recorded on Wednesday July 30th 2025, I would now like to turn the conference over to Nancy from Union. 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.

As long 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 F. I BK Dot com information regarding our use of the non-GAAP financial measures maybe 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 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 Delek 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 improved core profitability.

In addition to our decision in the first quarter to stop new originations in 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 and 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 the 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 has also continued to meaningfully accrete with our common equity tier one capital ratio ending the quarter at 13, 43% with an expectation for continued accretion through 2025.

Later in the call David will address new commentary with 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 one additional branch this quarter in Colombia 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 enter 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 <unk> 69 per diluted share compared to $50 2 million or <unk> 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 was 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 332% on a fully tax equivalent basis, and excluding purchase accounting accretion. Our net interest margin was $3 two 6% an increase of 12 basis points from the prior quarter.

Other borrowed funds ended the second quarter of $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 six basis points from the previous quarter to 565% in the second quarter, driven by continued repricing and payoffs of lower yielding loans.

Interest bearing deposit costs declined one basis point in the second quarter compared to the first quarter and total funding costs declined nine basis points due to improving mix shift driven by the reduction in other borrowed funds.

Noninterest income was $41 1 million a.

A decrease of <unk> 9 million from the prior quarter.

<unk>. This quarter include a $7 $3 million valuation allowance related to the 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.

The results were generally in line with our expectations. Excluding these items.

Noninterest expenses 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 $3 million driven by lower loans held for investment. Our total funded provision increased to $1 two 8% of loans held for investment from 1% to 4% at the end of the first quarter classified loans declined $24 4 million or five 1%.

<unk> and nonperforming loans also declined modestly critics.

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're comfortable with the underlying value of the properties and guarantors ability to support in these circumstances.

<unk>, but lease up timelines are slower than initially anticipated that 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 moved to held for sale $74 million of loans sold with the consumer credit card outsourcing and 70.

$3 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 have remaining diligent and 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 stable.

Lies in 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.

David Della Camera: Turning to the balance sheet. Loans held for investment declined $1 billion, which included the impact on the strategic moves we've discussed. The decline was influenced by $338 million in loans related to the Arizona and Kansas transaction that moved to held for sale, $74 million of loans sold with the consumer card products outsourcing, and $73 million from the continued amortization of the indirect lending portfolio. The remaining reduction was influenced by higher and 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.

$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 moved to 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.

Finally in the second quarter, we declared a dividend of <unk> 47 per share or a yield of 7.0% our common equity tier one capital ratio improved 90 basis points to 13, 43%.

So the remaining reduction was influenced by higher larger loan payoffs, including loans, we strategically exited we have remaining diligent and 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.

Moving to our guidance our guidance is 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.

Stick that we will stabilize and return balances to growth in the medium term.

We have updated our guidance to reflect our current assumption of 125 basis point rate cut for the remainder of 2025.

David Della Camera: 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 one capital ratio improved 90 basis points to 13.43%. Moving to our guidance. Our guidance, as displayed, includes the impact of the consumer card products outsourcing and excludes the impact of the branch transaction, which we anticipate closing in the fourth quarter. Broadly, the consumer card products 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 one 25 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 included in our guidance is meaningful to the net interest income forecast, we have presented for 2025 our.

Finally in the second quarter, we declared a dividend of <unk> 47 per share or a yield of 7.0% our common equity tier one capital ratio improved 90 basis points to 13, 43%.

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 three 4% compared to the $3 two 6% figure reported in the second quarter.

Compared to the prior quarter's forecast in addition to the impact from the outsourcing of consumer credit card. The net interest income forecast was modestly impacted by lower risk weighted density.

Broadly the consumer credit card outsourcing reduces the major lines of the income statement and is mostly neutral to forward net income.

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 updated our guidance to reflect our current assumption of $1 25 basis point rate cut for the remainder of 2025.

David Della Camera: 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 included 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 card products, 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 on 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.

Impaired to the prior quarter's forecast in addition to the impact from the outsourcing of consumer credit card. The net interest income forecast was modestly impacted by lower risk weighted density.

To provide additional detail we've included a 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 <unk>.

Our actual cash flow or any prepayment expectations.

We expect loan yields to continue to benefit from the tailwind of fixed rate re pricing a key component of our expectation for continued net interest margin and net interest income improvement the investment.

David Della Camera: 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 are 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 have included a 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 have added commentary on 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 is to highlight what we believe is the impact of our disciplined approach to repricing maturing assets.

<unk> 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.

And continue to believe we will grow loan balances over the long term.

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 two zero 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.

Our actual cash flow or any prepayment expectations.

David Della Camera: 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. Non-interest income guidance is modestly lower than the prior quarter, impacted by the outsourcing of our consumer credit card products. Finally, we reduced our non-interest 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.

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.

<unk> 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.

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 and improvement in our common equity tier one ratio of approximately 30 to 40 basis points as noted we modestly increased the loans.

David Della Camera: 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 and improvement in our common equity Tier 1 ratio of approximately 30 to 40 basis points.

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 continued to anticipate total tangible book value accretion of approximately 2% from the transaction, which would include the impact of the held for sale or valuation allowance recognized this quarter.

Levels and other expense levers, while continuing to invest in production driven areas as we look to drive our balance sheet growth.

We now anticipate our CET one 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.

David Della Camera: As noted, we modestly increased the 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?

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.

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 or valuation allowance recognized this quarter.

We are actively working through our asset quality levels and are optimistic that we are beginning to see positive underlying credit developments evidence of our disciplined proactive work on asset quality.

We now anticipate our CET one 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.

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 we will open the call up for questions.

Jim Reuter: 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 developments, 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.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear a plant that you had has been raised if you wish to decline from the polling question. Please press star followed by the Q.

We believe earnings will continue to improve through 2026 and into 2027 and the ongoing remix of our balance sheet, it's providing us with liquidity and capital flexibility.

And if you are using a speaker phone please lift the handset before pressing any case.

Our first question comes from Jeff Lewis at D. A Davidson. Please go ahead.

Thanks, Good morning.

Yeah.

I appreciate the color in the deck in the commentary that's helpful.

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 we will open the call up for questions.

Tough question, but wanted to try to get the timing on the loan portfolio stabilization. It seems like it's a lot of heavy lifting upfront here with.

The run off but.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Jeff Rulis at D.A. Davidson. Please go ahead.

And maybe some further drift but.

Thinking about win.

The portfolio run off.

By year end or are you thinking.

First half of next year, then in terms of when the loan portfolio stabilizes.

If you wish to decline from the polling question. Please press star followed by the Q.

And if you are using a speaker phone please lift the handset before pressing any case.

Hi, Jeff So a couple of things here. Good question I think to start there as we think about the balances in the quarter of course, we had the held for sale we had the indirect and the credit card. We also mentioned large loan payoffs and the other thing Youll note in one of our slides as we did see some line use.

Our first question comes from Jeff Lewis at D. A Davidson. Please go ahead.

Thanks, Good morning.

Jeff Rulis: Thanks. Good morning. Appreciate the color in the deck and the commentary. That is helpful. A tough question, but want to try to get the timing on the loan portfolio stabilization. It seems like it is a lot of heavy lifting up front here with the runoff and maybe some further drift. Thinking about when does the portfolio runoff kind of by year end, or are you thinking that is a first half of next year event in terms of when the loan portfolio stabilizes?

Yeah.

I appreciate the color in the deck and commentary that's helpful.

Utilization that was a little bit lower this quarter adjusted for all of that the change in loans quarter over quarter. We think was more of a mid 1% number versus the reported on <unk>. 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.

Tough question, but wanted to try to get the timing on the loan portfolio stabilization. It seems like it's a.

A lot of heavy lifting upfront here with.

The runoff, but and maybe some further drift but.

Thinking about win.

Okay.

As the portfolio run off.

Our reported held for investment level, and then of course, we're optimistic we can grow from there.

By year end or are you thinking thats, a first half of next year event in terms of when the loan portfolio stabilizes.

And Jeff This is Jim good morning.

Add on to that when.

When I look at the payoffs in the quarter there were four larger loans.

Hi, Jeff So a couple of things here. Good question I think to start there as we think about the balances in the quarter of course, we had the held for sale, we would be indirect and the credit card. We also mentioned large loan payoffs and the other thing Youll note in one of our slides as we did see some line.

David Della Camera: Hi, 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 had the indirect and the card products. We also mentioned large loan payoffs. The other thing you will 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 was more of a mid 1% number versus the reported on an HFI. As we think about going forward, we do anticipate modestly lower loans in the third quarter. That is what is incorporated in our guidance. We are hopeful for more stability fourth quarter from a reported held for investment level. Then, of course, we are optimistic we can grow from there.

A few of those where frankly intentional and it's the type of lending we don't want to do on a go forward basis and one was also a multifamily that went to the secondary market. So as I have discussed the past two 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 has some specific promotions and we're seeing some good activity in the pipeline.

That's great maybe unrelated question in turn.

Stability fourth quarter from a reported held for investment level and then of course, we're optimistic we can grow from there.

It back into some of the NII guidance sounds like a pretty good commitment on the security side any.

And Jeff This is Jim good morning to you.

Jim Reuter: Jeff, this is Jim. Good morning. To add on to that, when I look at the payoffs in the quarter, there were four larger loans. A few of those were frankly intentional in that it is the type of lending we do not want to do on a go-forward basis. One was also a multifamily that went to the secondary market. As I have discussed the past two quarters, we completed a deep dive on credit, set up a new credit committee process to get everybody on the same page. I can confidently say we are now on offense, have some specific promotions, and we are seeing some good activity in the pipeline.

Effort to try to peg, where earning asset levels could be at year end, but my guess is it sounds up from here, but.

On to that.

When I look at the payoffs in the quarter there were four larger loans.

Okay.

Yes. Good question. So our borrowings ended the quarter about $2 50 $250 million short term borrowings. So we would be we think the third quarters, where we bought them and earning asset levels.

To your point.

Our level of investment Securities and previously anticipated in the near term given the balance sheet trends long term, we would of course like to mix shift that into more loans.

And I can confidently say, we're now on offense have some specific promotions and we're seeing some good activity in the pipeline.

But third quarter review as the bottom of earning assets, that's ex Arizona, Kansas, you might get a little bit of a step down until the fourth quarter, but modest and we think we're around the bottom there.

That's great maybe a related question.

Jeff Rulis: is 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.

Turn it back into some of the NII guidance sounds like a pretty good commitment on the security side any.

Okay.

Just a last one on the capital side.

I think you mentioned.

Efforts to try to peg, where earning asset levels could be at year end might my guess is it sounds up from here, but.

And at the high end of the range of guidance, maybe CET one possibly.

By year end, given the branch deal.

Yes.

David Della Camera: Yeah, good question. Our borrowings ended the quarter at about $250 million short-term borrowing. We think Q3 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 would of course like to makeshift that into more loans. Q3 review is the bottom of earning assets. That is ex-Arizona, Kansas. You might get a little bit of a step down into Q4, but modest, and we think we are around the bottom there.

Yeah. Good question. So our borrowings ended the quarter about $2 50 $250 million short term borrowings. So we would be we think the third quarters, where we bought them and earning asset levels.

It should be behind yet.

But I guess, that's part one is maybe a CET one at year end and then part two is just.

If you wouldn't mind kind of going through the capital priorities from there as you've got.

To your point at a higher level of investment securities and previously anticipated in the near term given the balance sheet trends long term, we would of course like to mix shift that into more loans.

A pretty high level building here.

So I think at year end to your point. So 13 four was the June 30 number. We think we are around a 40 basis point number of additional accretion from the branch transaction and then modestly lower loans in the near term so that that does get you to.

Third quarter review as the bottom of earning assets, that's ex Arizona, Kansas, you might get a little bit of a step down until the fourth quarter, but modest and we think we're around the bottom there.

Okay.

Jeff Rulis: Okay. Just a last one on the capital side. I think you mentioned the high end of the range of guidance, maybe CET1 possibly by year end, given the branch deal should be behind you. I guess that is part one is maybe a CET1 at year end. Then part two is just if you would not mind kind of going through the capital priorities from there as you have got a pretty high level building here.

Just a last one on the capital side.

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.

I think you mentioned.

And at the high end of the range of guidance maybe.

One possibly.

By year end, given the branch deal.

Should be behind yet.

But I guess, that's part one is maybe a CET one at year end and then part two is just.

There, but we're looking at our different options.

Okay.

If you wouldn't mind kind of going through the capital priorities from there as you've got.

Okay. Thanks, I'll step back.

A pretty high level building here.

Thank you. The next question comes from Andrew Charles At Stephens, Inc. Please go ahead.

David Della Camera: I think at year end, to your point, 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. 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 are very pleased with that. We are looking at a variety of options. We are looking at all the different capital deployment options from here and considering how we can utilize that to enhance return. More to come there, but we are looking at our different options.

Yeah.

Hey, good morning.

Okay.

Alright.

Hey, 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 mentioned step up so much this quarter I think particularly given the work you guys have done over the past.

Six nine months or so regarding kind of the.

Credit review process I was hoping you could just talk maybe a little bit more about what drove that special mention migration.

<unk> content, you would or would not expect a man.

Does it feel like we should continue to anticipate continued migration into.

There, but we're looking at our different options.

Criticized classified.

Okay.

Jeff Rulis: Okay. Thanks. I'll step back.

Okay. Thanks, I'll step back.

Yeah, Good morning, Andrew I'll take that.

Thank you. The next question comes from Andrew Charles At Stephens, Inc. Please go ahead.

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.

Operator: Thank you. The next question comes from Andrew Terrell at Stephens. Please go ahead.

Yeah.

Andrew Terrell: Hey, good morning.

Hey, good morning.

Yeah.

Alright.

As we mentioned primary source of repayments, what we focus on and.

Hey, I wanted to start off just I mean, it was it was good to see the classified loans down sequentially, but.

Jeff Rulis: Morning.

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

The builders original plans for absorption and how that project would go are not being met.

I think it was a bit surprising to see special mentioned step up so much this quarter I think particularly given the work you guys have done over the past.

I've actually looked at two of the three larger ones that are in the group that moved up and <unk> seen him personally still feel good about the collateral really liked the guarantors. So it's really that primary source of repayment otherwise it was fairly flat and I can tell you that.

Six nine months or so regarding kind of the.

Credit review process. So I was hoping you could just talk maybe a little bit more about what drove that special mention migration. They kind of loss content, you would or would not expect and then.

Does it feel like we should continue to anticipate continued migration into.

See the fruits of our proactive management of credit.

Criticized classified.

Okay.

Okay, Great I appreciate the color gentlemen, if I could also just ask on kind of the.

Yeah, Good morning, Andrew I'll take that we.

Jim Reuter: Yeah, good morning, Andrew Terrell. 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 two of the three larger ones that are in the group that moved up. Been by them, 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.

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.

The expense guidance it feels like lots of kind of moving pieces here, but.

David can you just maybe talk a little more about it in kind of near term expectations. It seems like the guidance implies there there should be kind of a core.

As we mentioned primary source of repayments, what we focus on and the.

The builders original plans for absorption and how that project would go are not being met I've actually looked at two of the three larger ones that are in the group that moved up and <unk> seen him personally still feel good about the collateral really liked the guarantors. So it's really that primary source of <unk>.

Lift on expenses in <unk>.

And then can you remind us just maybe expense saves from the branch divestiture. This schedule in the fourth quarter.

And I think the.

I would assume that there are no branch consolidation efforts.

Reflected in kind of expense guidance, so should we think about those as.

Potentially a positive to the current kind of stated guidance.

Payment otherwise it was fairly flat and I can tell you that I see the fruits of our proactive management of credit.

Sure. So first on the I'll kind of take that backwards to forward. So there are no branch divestitures outs included in the guidance Youre correct. There. So anything that occurs there again, just given timing, we think thats more of a 'twenty six impact on a <unk> 25 impact actually on the expense figure, but youre <unk>.

Okay.

Okay, Great I appreciate the color gentlemen, if I could also just ask on kind of the.

Andrew Terrell: Okay, great. I appreciate the color, Jim. If I could also just ask on the expense guidance, it feels like a lot of moving pieces here, but David, could you just maybe talk a little more about near-term expectations? It seems like the guidance implies there should be a core lift on expenses in Q3. Can you remind us just the expense saves from the branch divestiture that is scheduled in the fourth quarter? I think the I would assume that there are no branch consolidation efforts reflected in the expense guidance. Should we think about those as potentially a positive to the current stated guidance?

The expense guidance it feels like lots of kind of moving pieces here, but David.

David can you just maybe talk a little more about kind of near term expectations. It seems like the guidance implies there there should be kind of a core.

No expectation is included in that related to Arizona, Kansas to.

Lift on expenses in <unk>.

Remind on the commentary from the prior quarter about a mid twos number as a percentage of the deposit base is how we view that annualized cost impact after close there.

And then can you remind us just the maybe expense saves from the branch divestiture, that's scheduled on the fourth quarter.

And I think I.

Quarter to quarter as we think about our it expenses you are correct that we do anticipate third and fourth quarter to be a higher reported number in 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 on the front half that will be included in there there was some timing.

I would assume that there are no branch consolidation efforts.

Reflected in kind of expense guidance. So should we think about those as you know.

Potentially a positive to the current kind of stated guidance.

Sure. So first on the I'll kind of take that backwards to forward. So there are no branch divestitures outs included in the guidance Youre correct. There. So anything that occurs there again, just given timing we think that's more of a 'twenty six impact on a <unk> 25 impact actually on the expense figure, but you are correct.

David Della Camera: Sure. First, I will kind of take that backwards to forwards. There are no branch divestitures included in the guidance. You are correct there. Anything that occurs there, just given timing, we think that is more of a 2026 impact than a 2025 impact actually on the expense figure. You are 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 are correct that we do anticipate Q3 and Q4 to be a higher reported number than Q2 for expenses. A couple drivers there include things such as our medical insurance.

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 some timing items as well that what caused that increase.

No expectation is included in that related to Arizona, Kansas to remove.

To remind on the commentary from the prior quarter about a mid twos number as a percentage of the deposit base is how we view that annualized cost impact after close there.

Yes, that's really helpful. I appreciate it David if I could ask also just on.

On the guidance.

One I appreciate you guys, putting some of the repricing detail. The presentation. This quarter. That's that's really helpful. On the comment for the net interest income.

Quarter to quarter as we think about our it expenses you are correct that we do anticipate third and fourth quarter to be a higher reported number in 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'll be included in there there was some timing and.

High single digit growth in 2026 does that factor in.

David Della Camera: 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 Q2 on some of the salary and wage items that will be modestly higher in Q3. We had some benefits in our tech spend in Q2 that we will see a little bit higher in Q3. Nothing generally unusual, but some timing items as well that will cause that increase.

I would presume kind of NII headwind from.

The branch divestiture in <unk> and would that materially alter that the high single digit 2026 expectation.

In the second quarter on some of the salary and wage items that will be modestly higher in the third quarter.

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 bank's loans and deposits as a whole. So we wouldn't view that changes materially different and again the capital raised with.

Got it that's really helpful. I appreciate it David if I could ask also just on.

Andrew Terrell: Yeah, that is really helpful. I appreciate it, David. If I could ask also just on the guidance, I appreciate you guys putting some of the repricing detail into the presentation this quarter. That is 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 Q4, and would that materially alter the high single digit 2026 expectation?

On the guidance.

The transaction there is theres 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.

And I appreciate you guys, putting some of the repricing detail.

Presentation. This quarter, that's that's really helpful.

On the comment for the net interest income.

High single digit growth in 2026 does that factor in I would presume kind of NII headwind from.

Okay.

Yeah.

Got it okay I appreciate the color and thanks for the questions.

The branch divestiture in <unk> and would that materially alter that the high single digit 2026 expectation.

Thank you. The next question comes from Kelly Motta Keefe VW. Please go ahead.

Hey, good morning, Thanks for the question.

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.

David Della Camera: 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 bank's loans and deposits as a whole. So we wouldn't view that change as 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.

In terms of the expense base kind of circling back to that I. Appreciate the color on the expense saves relative regarding the bridge.

Bank's loans and deposits as a whole so we wouldn't view that changes materially different and again the capital raised with the transaction. There is theres 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.

Divestitures.

Wondering how you're thinking about the reinvestment of the savings versus flowing to the bottom line.

And specifically with regards to frontline higher is if you have the right talent.

Okay.

Start to drive the inflection and growth as we look to next year.

Yeah.

Got it okay I appreciate the color and thanks for the questions.

Andrew Terrell: Got it. Okay. I appreciate the color and thanks for the questions.

Yes, good morning Kelly.

David walked through some of the color around the expense saves, but yes.

Thank you. The next question comes from Kelly Motta Keefe VW. Please go ahead.

Operator: Thank you. The next question comes from Kelly Mara at KBW. Please go ahead.

There's a couple of things here when we look at growth in NII and different things obviously, another lever we manages our expenses and so we're going to pay attention to that closely.

Hey, good morning, Thanks for the question.

Kelly Mara: Hey, good morning. Thanks for the question. 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 regard to frontline hires, if you have the right talent to start to drive the inflection in growth as we look to next year.

Okay.

Some of the expense base kind of circling back to that I. Appreciate the color on the expense saves relative regarding the branch divestitures.

As we drive for stronger NII, but we will not sacrifice, having the right people on the team and being able to thing do the things we need to grow we do have the right people on the team. So the cost saves are not.

Wondering how you're thinking about the reinvestment of the savings versus flowing to the bottom line.

Coming at the expense of talent, so anything we need to do to invest to grow it's going to be a priority.

And specifically with regards to frontline higher is if you have the right talent.

Got it that's helpful.

It starts to drive the inflection and growth as we look to next year.

And then in terms of I appreciate the color that.

NII outlook includes more securities purchases, given given the slowdown in loan and maybe for David If you could provide color at what Youre looking to add to the book and the incremental yield on that as well as the incremental yield the new yields are getting on the loans you are booking now.

Yes, good morning Kelly.

Jim Reuter: Yeah, good morning, Kelly. You know, David walked through some of the color around the expense base, 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. So we are 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.

We.

David walked through some of the color around the expense saves but.

There's a couple of things here when we look at growth in NII and different things obviously, another lever we manages our expenses and so we're going to pay attention to that closely.

Sure. So on the security side, the incremental purchases wont look holistically dissimilar than what we currently have on 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.

Coming at the expense of talent, so anything we need to do to invest to grow it's going to be a priority.

Lower risk weighted density.

Got it that's helpful.

Kelly Mara: Got it. That's helpful. In terms of, I appreciate the color that the NII outlook includes more securities purchases given the slowdown in loans. Maybe for David Della Camera, if you could provide color as to what you're looking to add to the book and the incremental yield on that, as well as the incremental yield, the new yield you're getting on the loans you are booking now.

And no credit risk. So that's kind of limited to no credit risk that's broadly how we think about that.

And then in terms of I appreciate the color that.

<unk> outlook includes or securities purchases, given given the slowdown in loans.

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 five year plus 80 to 90 today that'll that'll move of course, but something in that range, new loan production somewhere in that 7% range and it's going to be sensitive to that five to seven.

Maybe for David if you could provide a color as to what youre looking to add to the bulk and the incremental yield on that as well as the incremental yield the new yields are getting on the loans you are booking now.

David Della Camera: Sure. On the securities side, the incremental purchases will not 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. That is kind of limited to no credit risk. That is 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 is of course a variety of different things we would be purchasing, that is five-year plus 80 to 90 today. That will move, of course, but something in that range.

On your 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.

Lower risk weighted density.

I'm looking at.

And no credit risk. So that's kind of limited to no credit risk that's broadly how we think about that.

The line for commercial that was down pretty meaningfully and I know you've noted some.

Dropped down in the utilization there can you provide additional color as to what youre seeing on the commercial side and.

And if there was any sort of just like end of quarter flows that we should be keeping in mind in terms of thinking.

David Della Camera: New loan production, somewhere in that 7% range, it is going to be sensitive to that five to seven-year point on the curve, but that is broadly where we are today.

Thinking about the average balance sheet. Thank you.

Yes. Thanks for the question. So I'd note a few things there first would know the to your point the utilization that did have an impact there.

And your point on the curve, but that's broadly where we are today.

Got it that's helpful.

Kelly Mara: Got it. That is helpful. Last question for me, and then I will 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 line for commercial, that was down pretty meaningfully, and I know you noted some dropdown in the utilization there. Can you provide additional color as to what you are 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? Thank you.

Second would know the there was one of the larger payoffs. We referenced was in that segment. So that was 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.

Last question for me and then I'll step back into the queue on.

On the loan side I appreciate the color on them.

Some of the larger payoffs you had some of which was intentional.

I'm looking at.

The lighter commercial that was down pretty meaningfully and I know you've noted some.

Don't believe Thats reflective of course of our anticipation going forward and change in that category certainly our focus as we think about small business, but some onetime movement in the quarter.

Dropped down in the utilization there can you provide additional color as to what youre 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 I'm thinking.

Great. Thanks, Thanks for the color I'll step back.

Thinking about the average balance sheet. Thank you.

Thank you. The next question comes from Jared Shaw at Barclays. Please go ahead.

Yes. Thanks for the question. So I'd note a few things there first would know the to your point the utilization that did have an impact there.

David Della Camera: Yeah, thanks for the question. I would note a few things there. First, I would note the, to your point, the utilization that did have an impact there. Second, I would note there was one of the larger payoffs we referenced was in that segment. So 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 CNI, so there was some impact there as well, quarter over quarter related to that. We do not believe that is reflective, of course, of our anticipation going forward and change in that category. Certainly a focus as we think about small business, but some one-time movement in the quarter.

Hey, good morning.

I guess just as we're looking just to confirm as we're looking at year end 'twenty five.

Loan levels as an exit.

Including everything is that like down 10% to 12%. When we include the loan sales include the indirect include the some.

Some of that payoff activity.

That's the right way to think about it.

<unk> believes that is reflective of course of our anticipation going forward and change in that category certainly our focus as we think about small business, but some onetime movement in the quarter.

Yeah. So how we're thinking about that as the guide of six to eight is the excluding the other items and an additional one to one and a half on indirect and then the held for sale balances and we anticipate of course, leaving in the fourth quarter. When we anticipate that transaction to close so that would be a marginal about 2%.

Great. Thanks, Thanks for the color I'll step back.

Kelly Mara: Great. Thanks for the color. I'll step back.

Thank you. The next question comes from Jared Shaw at Barclays. Please go ahead.

Operator: Thank you. The next question comes from Jared Shaw at Barclays Capital. Please go ahead.

<unk> that's correct.

Okay Alright.

Hey, good morning.

Jeff Rulis: Hey, good morning. As we're looking at year-end 2025 loan levels as an exit, is that including everything like down 10% to 12% when we include the loan sales, include the indirect, include some of that payoff activity? Is that the right way to think about it?

And then when you look at the valuation allowance that you took on those on those loans can.

It's just as we're looking just to confirm as we're looking at year end 'twenty five.

Can you give any color on what what the rate versus credit impact that could have been.

Loan.

Levels as an exit.

That's including everything is that like down 10% to 12%. When you include the loan sales include the indirect include the.

So that valuation allowance was a great mark on the loans. It was it was purely a reflective of rate.

Some of that payoff activity.

And yes, so that's just a rate mark there.

Is that the right way to think about it.

David Della Camera: Yeah, so how we are thinking about that is the guide of 6% to 8% is excluding the other items and additional 1% to 1.5% on indirect. 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 is correct.

Yeah. So how we're thinking about that as the guide of six to eight is the excluding the other items and an additional one to one and a half 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%.

Okay. Thank you.

Thank you. The next question comes from Matthew Clark of Piper Sandler. Please go ahead.

Hey, good morning, I appreciate the questions.

First one for me on the loans transferred to held for sale $338 million.

Impact that's correct.

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 loans. So.

Okay Alright.

Jeff Rulis: Okay. All right. 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 could have been?

And then when you look at the valuation allowance that you took on those on those loans can.

Can you give any color on what what the rate versus credit impact that could have been.

But it was all tied to those branches or did you guys also moved some additional loans in the U S.

They were all tied to the branches there were some additional loans during the quarter that were identified relating to the transaction some relationship related loans. So all related to the branch transaction.

So that valuation allowance was a great mark on the loans. It was it was purely a reflective of rate.

David Della Camera: That valuation allowance was a rate mark on the loans. It was purely reflective of rate. So that is just a rate mark there.

And yes, so that's just a rate mark there.

Okay.

Okay. Thank you.

Jeff Rulis: Okay. Thank you.

Great and then in terms of the.

Our loan.

Thank you. The next question comes from Matthew Clark of Piper Sandler. Please go ahead.

Operator: Thank you. The next question comes from Matthew Clark at Piper Sandler. Please go ahead.

Our loan portfolio.

Can you quantify what's left.

Hey, good morning, I appreciate the questions.

Matthew Clark: Yeah, good morning. 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, there was only $200 million in loans. Are those all tied to those branches, or did you guys also move some additional loans into HFS?

In the book that you would argue is not relationship based and would prefer to run it off obviously.

First one for me on the loans transferred to held for sale $338 million.

Obviously see the consumer credit portfolio will be in the latest piece of it but I'm trying to get a sense for.

Thank 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 loans. So.

Any way to any way to ring fence, some deliberate run off from here.

It was all tied to those branches or did you guys also moved some additional loans.

Yeah, Matthew I don't see a lot of deliberate run off left in the book I do think the one challenge we have is multifamily that our construction that once they are leased up and fully stabilize some of those have an intention to go to the secondary market. So we will see some of that but you know our message to.

They were all tied to the branches there were some additional loans during the quarter that were identified relating to the transaction some relationship related loan so all related to the branch transaction.

David Della Camera: 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.

Okay.

Matthew Clark: Okay, great. In terms of the loan portfolio, can you quantify what is 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 trying to get a sense for any way to ring-fence some kind of deliberate runoff from here.

Great and then in terms of the.

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.

Our 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.

I had a preference would leave the balance sheet most of that has already happened.

Obviously see the consumer credit portfolio will be in the latest piece of it but I'm trying to get a sense for.

Okay, and then on the slide deck, the deposit market share slide.

Any way to any way to ring fence, some kind of deliberate run off from here.

Does that imply.

That you'd like to exit some additional markets, where youre not in the top five it's about 30% of the total not to say you would exit all 30%, but or does it or is it more to illustrate and opportunity to grow market share. It just looks like Colorado kind of stands out some of those markets.

Jim Reuter: Yeah, Matthew, I don't see a lot of deliberate runoff left in the book. I do think the one challenge we have is multifamily that are construction that once they're leased up and fully stabilized, 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. 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.

Being the tough, yes, Matthew yes, it's not to illustrate where we want to exit it's to illustrate where we have existing density which gives us an advantage and if you look at a lot of those states and msas in the areas that are growth areas. So we think it's a positive that we have that type of market share.

Team as we can.

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.

I had a preference would leave the balance sheet most of that has already happened.

And we hope to gain it in other areas as well, so where you see less of it.

Okay, and then on the slide deck, the deposit market share slide.

Matthew Clark: Okay. On the slide deck, the deposit market share slide, does that imply that you would like to exit some additional markets where you are not in the top five? I think it is about 30% of the total. Not to say you would exit all 30%, but 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 as not being in the top five.

It's not an indication we're going to retreat, it's an indication of where we need to make progress.

Does that imply.

Got it okay. Thank you.

That you'd like to exit some additional markets, where you're not in the top five it's about 30% of the total not to say you would exit all 30%, but or does it is it more to illustrate.

Thank you. The next question comes from Timur <unk> from Wells Fargo. Please go ahead.

Hi, good morning.

Opportunity to grow market share it just looks like Colorado kind of stands out some of those markets is.

Looking at good morning.

Looking at the capital priorities and examining the options here on a go forward basis.

As not being in the top tier Matthew yes, it's not to illustrate where we want to exit it's to illustrate where we have existing density which gives us an advantage and if you look at a lot of those states and msas in areas that are growth areas. So we think it's a positive that we have that type of market share.

Jim Reuter: Yeah, Matthew. Yeah, it's not to illustrate where we want to exit. It's to illustrate where we have existing density, which gives us an advantage. If you look at a lot of those states and MSAs and areas, they're 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. 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.

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 dividend 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 two the mix of it and then to the extent that some bad.

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.

Got it okay. Thank you.

Matthew Clark: Got it. Okay. Thank you.

She restructure is in the cards, so how much of that might be included in the 2026 NII guidance.

Thank you. The next question comes from Timur <unk> from Wells Fargo. Please go ahead.

Operator: Thank you. The next question comes from Timur Braziler from Wells Fargo. Please go ahead.

Hi, good morning.

Jeff Rulis: Hi, good morning. Looking at the capital priorities and examining the options here on a go-forward basis, I guess, Jim, you have 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 am just wondering kind of where the thought is between those two, 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, that's a good question.

Looking at good morning.

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 orgs.

Looking at the capital priorities and examining the options here on a go forward basis, I guess, 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 dividend out there.

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 of the things you mentioned so.

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.

Wondering kind of where the thought is between those two the mix of and then to the extent that.

We have a focus on creating shareholder value and so that will be an active conversation for us.

Some balance sheet restructure is in the cards, how much of that might be included in the 2026 NII guidance.

And team are the 26 guide that that does not include or assume capital actions.

Yes, that's a good question.

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

Okay got it thanks, and then looking at the.

Looking at the loans, specifically that are maturing and are resetting through 'twenty six.

I calculate that to be about 12% of the outstanding loan book.

Do you guys view that as an opportunity or is there potential.

Organic growth will be our focus if we can grow the bank and make use of the capital.

Brett that maybe some of those either get refi Ed away into the secondary market or still some composition of quote unquote. The type of lending 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.

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.

David Della Camera: Timur, the 26 guide does not include or assume capital actions.

And team are the 26th guide that does not include or assume capital actions.

Composition and your expectations for average, earning assets here to stabilize and we're not too distant future.

Okay got it thanks, and then looking at the.

Jeff Rulis: Okay, got it. Thanks. Looking at the loans specifically that are maturing and/or resetting through 2026, 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 quote-unquote the type of lending that you do not really want to do? I am 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, 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.

Looking at the loans, specifically that are maturing and are resetting through 'twenty six I calculate that to be about 12% of the outstanding loan book do you guys view that as an opportunity or is there potential.

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 why we show loan growth fairly flat, but our intent is to replace that with production and growth and as I mentioned were.

Threat that maybe some of those either get refi Ed away into the secondary market or there's still some composition of quote unquote. The type of lending 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.

Seeing good activity in the pipeline.

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.

She'd composition and your expectations for average, earning assets here to stabilize in the not too distant future.

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.

Yes, 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 <unk>.

Jim Reuter: Yeah, Timur, that is a good question. As I mentioned earlier, I do not see a lot of loans that do not fit our profile in that mix. There is some multifamily that, as I mentioned, when stabilized, the borrower's intent was to go to secondary market. Obviously, we are not going to compete with secondary market from a rate and structure perspective. That is why we show loan growth fairly flat. Our intent is to replace that with production and growth. As I mentioned, we are seeing good activity in the pipeline and CNI owner-occupied and different things. That is where we are headed there and optimistic that we can replace a lot of that.

I guess, what's giving you comfort to the fact that the increase in criticized but are now over 7% of the loan book isn't going to drive some volatility around charge off activity.

They are in the back end of 'twenty five or into 'twenty six.

Structure perspective, and so that's why we show loan growth fairly flat.

Sure 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.

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.

Which is part of why we like the collateral. So that's why we continue to be confident and.

That's where we're headed there and optimistic that.

We can replace a lot of that.

I think you know again.

I've mentioned this before our proactive credit management I think is one of the tenants of running a good bank and all economic cycles and Thats, what youre seeing in play here.

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.

Jeff Rulis: Okay. 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 is giving you comfort to the fact that the increase in criticized that are now over 7% of the loan book is not going to drive some volatility around charge-off activity either in the back end of 2025 or into 2026?

Great. Thank you for the questions.

I guess, what's giving you comfort to the fact that the increase in criticized but are now over 7% of the loan book isn't going to drive some volatility around charge off activity.

Thank you we have no further questions I will turn the call back over to Jim <unk> for closing comments.

Alright, 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.

During the back end of 'twenty five or into 'twenty six.

Jim Reuter: 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 are well located, which is part of why we like the collateral. That is why we continue to be confident. I think, again, I have mentioned this before, proactive credit management is one of the tenets of running a good bank in all economic cycles, and that is what you are seeing in play here.

Yeah.

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

And.

I think you know again.

I've mentioned this before our proactive credit management I think is one of the tenants of running a good bank and all economic cycles and Thats, what youre seeing in play here.

Great. Thank you for the questions.

Jeff Rulis: Great. Thank you for the questions.

Thank you we have no further questions I will turn the call back over to Jim Ryan for closing comments.

Operator: Thank you. We have no further questions. I will turn the call back over to Jim Reuter for closing comments.

Jim Reuter: All right. Thank you. Thank you, everybody, for your questions. As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thank you for tuning in to the call today.

Yeah.

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

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

[noise].

Yeah.

Okay.

Q2 2025 First Interstate BancSystem Inc Earnings Call

Request a DemoDemo

FIBK

First Interstate BancSystem

Earnings