First Interstate BancSystem (FIBK) Q3 2025: CET1 Rises 47bps as Branch Consolidation and Buybacks Reshape Capital Allocation
FIBK’s third quarter marked a pivotal reset, with branch divestitures, capital redeployment, and a disciplined loan strategy driving a 47 basis point increase in CET1 capital. Management’s focus has shifted to organic growth in core markets, cost containment, and returning capital via buybacks, as loan production lags and asset mix evolves. The bank’s forward trajectory hinges on executing this disciplined growth plan while navigating a competitive pricing environment and muted loan demand into 2026.
Summary
- Capital Reallocation Accelerates: Branch sales and a $150M buyback are actively reshaping balance sheet priorities.
- Loan Growth Remains Elusive: Production remains below replacement levels, with discipline prioritized over volume.
- Margin Expansion Playbook: Asset repricing and deposit cost actions set up sequential NII growth into 2026.
Performance Analysis
FIBK’s Q3 2025 results underscore a transition phase marked by active capital management and network optimization. Net interest income was essentially flat quarter-over-quarter, as intentional loan runoff and muted production offset incremental yield improvements. The bank’s net interest margin (NIM) edged up to 3.36%, aided by lower funding costs and portfolio repricing, though loan balances declined by $519 million, reflecting both strategic actions and softer market demand.
Non-interest income rose due to one-time items, while expenses ticked higher on divestiture-related charges and note payoff costs. Credit quality stabilized: non-performing assets fell 6% sequentially, and net charge-offs dropped to just six basis points of average loans. Capital ratios strengthened materially, with CET1 up 47 basis points to 13.9%, as risk-weighted assets declined and retained earnings were partially redeployed to repurchase 1.8 million shares (1.7% of outstanding).
- Branch Optimization Impact: Arizona, Kansas, and Nebraska branch exits are set to reduce expenses, boost average branch size, and deliver a $60 million pre-tax gain in Q4.
- Loan Yield Improvement: Yield on average loans increased to 5.68%, but volume headwinds persist as production lags payoffs.
- Funding Cost Actions: Deposit cost management (CD rate cuts, repricing flexibility) positions the bank for improved margin as rates decline.
Quarterly results reflect a bank in active repositioning, balancing near-term NII headwinds with longer-term margin and capital upside from portfolio reshaping and disciplined lending.
Executive Commentary
"We have shifted our company to focus solely on organic growth and relationship banking. We have exited non-relationship 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."
Jim Reuter, Chief Executive Officer
"We do not intend to hold excess capital. In August, we announced a share repurchase authorization and began executing shortly thereafter. We believe that the current valuation of our equity does not reflect the long-term fundamental earnings power of the franchise."
David de la Camera, Chief Financial Officer
Strategic Positioning
1. Branch Network Rationalization
Branch divestitures in Arizona, Kansas, and Nebraska mark a clear shift toward footprint densification and operational streamlining. These moves are designed to concentrate resources in markets where FIBK has scale and growth potential, increasing average branch size and lowering run-rate expenses. The Nebraska sale alone involves $280 million in deposits and $70 million in loans, with further closures planned in Q1 2026.
2. Capital Deployment and Buybacks
With CET1 at 13.9%, FIBK is actively redeploying capital through share repurchases, having bought back 1.8 million shares since September. Management is clear: buybacks are the immediate priority over securities restructuring, with further actions possible if organic growth opportunities do not materialize. The bank has no intention of holding excess capital, signaling continued focus on shareholder returns.
3. Disciplined Loan Production and Credit Management
Loan production has underwhelmed, but this is largely intentional, as the bank exits indirect lending and transactional credits to focus on relationship-based, higher-return business. Credit quality has stabilized, with criticized loans and net charge-offs both declining. Management maintains a long-term charge-off guide of 20 to 30 basis points, emphasizing ongoing risk discipline over growth at any cost.
4. Margin and Funding Strategy
Deposit cost management is front and center, with proactive CD rate cuts and shortened duration on exception-priced deposits. The investment portfolio is being actively rotated, with significant cash flows expected through 2030, and AAA CLOs, collateralized loan obligations, used as a hedge against rate risk. The bank expects sequential NIM improvement into 2026 as asset repricing and funding cost actions take hold.
5. Organic Growth Focus in Core Markets
FIBK is doubling down on organic growth in its densest, most promising markets, including targeted talent acquisition and business development efforts in Colorado and the Rocky Mountain Northwest. Leadership is incentivizing loan and deposit growth, but remains unwilling to compromise on pricing or structure in competitive metro markets. The strategic goal is to return to net loan growth in 2026 while maintaining credit discipline.
Key Considerations
This quarter’s results reflect a bank in strategic transition, with management prioritizing long-term value creation through capital discipline, cost control, and targeted organic growth. Investors should weigh the following:
Key Considerations:
- Active Capital Return: Share buybacks are the current lever for excess capital deployment, with further actions possible as organic growth and balance sheet needs evolve.
- Expense Base Reset: Branch divestitures and closures are expected to yield $3.5 to $4 million in quarterly expense reductions and improve operating leverage.
- Loan Growth Challenge: Near-term loan balances will continue to decline as intentional runoff and muted demand persist, but management sees opportunity for a rebound in 2026.
- Margin Upside Potential: Asset repricing and deposit cost management should drive sequential NII and NIM gains, especially as low-yielding securities roll off.
- Competitive Pressures: Aggressive pricing and structure in key markets remain a headwind, but FIBK is committed to maintaining underwriting discipline.
Risks
Loan production remains below replacement levels, raising the risk that balance sheet contraction could outpace margin expansion if demand does not recover. Competitive pricing in core markets, especially for C&I and CRE lending, could pressure yields or force FIBK to walk away from deals, slowing growth. Deposit cost management hinges on execution, as lags in beta capture and customer migration to higher-yield products could offset NIM gains. Regulatory and macroeconomic shifts, including rate cuts, add further uncertainty to margin and growth trajectories.
Forward Outlook
For Q4 2025, FIBK guided to:
- Recognition of a ~$60 million pre-tax gain from Arizona and Kansas branch divestiture
- Sequential decline in loan balances due to anticipated payoffs and continued runoff
For full-year 2026, management outlined:
- Mid-single-digit net interest income growth (assuming flat loans and modest deposit growth)
- Low single-digit expense growth over 2025 levels, incorporating branch sale efficiencies
Management highlighted several factors that will shape results:
- Sequential NII and margin improvement as asset repricing and deposit cost actions take effect
- Potential for additional share repurchases if organic growth does not absorb excess capital
Takeaways
FIBK’s Q3 signals a deliberate pivot to capital efficiency and disciplined growth, with branch sales and buybacks supporting shareholder returns amid a muted loan environment.
- Balance Sheet Reset: The bank is actively shrinking non-core assets and redeploying capital, setting up for improved ROE and NIM as legacy securities and loans roll off.
- Growth Hinges on Execution: Management’s optimism for 2026 loan growth rests on successful business development and talent deployment in core markets, but competitive conditions remain stiff.
- Margin and Capital Levers: The sequential improvement in margin and continued buybacks provide near-term support, but sustained EPS growth depends on reigniting organic loan production.
Conclusion
FIBK’s third quarter was defined by capital redeployment, network optimization, and a disciplined approach to lending, all aimed at positioning the bank for higher returns and sustainable growth. Execution on organic growth and margin expansion will be crucial as the bank enters 2026 with a leaner, more focused footprint and ample capital flexibility.
Industry Read-Through
FIBK’s aggressive branch rationalization and capital return strategy reflect broader regional bank trends, as institutions seek to optimize footprints and redeploy capital in a low-growth, competitive lending environment. Deposit cost management and asset repricing are becoming central levers for margin defense as rate cuts loom. Banks with excess capital and disciplined credit cultures may increasingly favor buybacks over M&A, while those with diffuse networks face pressure to consolidate and densify for efficiency. Expect continued focus on shareholder returns, expense control, and selective growth in core markets across the sector.