First Interstate (FIBK) Q4 2025 earnings review
Shrinking to Health: Margins Expand as Footprint Contracts
First Interstate is executing a drastic 'shrink to grow' strategy, intentionally reducing its balance sheet to improve profitability and capital ratios. While Loans Held for Investment contracted 4% sequentially (and ~15% YoY) due to the exit of indirect lending and branch sales, Net Interest Margin (NIM) accelerated to 3.36%. The headline EPS of $1.08 was heavily distorted by a $62.7M gain on the sale of Arizona/Kansas branches; core earnings remain stable. Credit showed a mixed signal: a sharp spike in Net Charge-Offs to 56bps (driven by a single loan) contrasted with a healthy 9.6% reduction in Criticized Loans.
🐂 Bull Case
The strategy to shed low-yielding assets is paying off. Net Interest Margin (FTE) expanded to 3.38%, up 18bps YoY, despite a shrinking balance sheet. Funding costs are stabilizing, with total deposit costs falling 5bps QoQ to 1.30%.
The asset diet has bolstered capital significantly. CET1 surged to 14.38% (up ~220bps YoY). Management is actively deploying this excess, repurchasing $117.6M in stock since August and authorizing another $150M. Tangible Book Value rose to $22.40 (+11% YoY).
🐻 Bear Case
Shrinking the balance sheet creates a massive revenue hole to fill. NII fell 3.7% YoY. While FY26 guidance suggests NII stabilization ($825-$845M), the bank must eventually pivot from contraction to organic growth—a transition execution risk.
Net charge-offs spiked to an annualized 0.56% ($22.1M) in Q4, significantly higher than the 0.06% in Q3. While attributed to a single loan, it breaks the trend of stabilization seen in prior quarters.
⚖️ Verdict: ⚪
Neutral. The cleanup phase is proceeding effectively, resulting in improved margins and capital ratios. However, the sharp contraction in earning assets limits core income growth until the bank proves it can pivot back to organic loan generation.
Key Themes
NIM Expansion via Asset Repricing
Accelerating. The bank's primary profit driver is the repricing of fixed-rate assets and the exit of low-yielding indirect loans. NIM expanded 2bps QoQ to 3.36%. Adjusted FTE NIM (excluding accretion) rose 4bps QoQ. Management forecasts continued expansion through 2026.
Credit Quality Bifurcation
Mixed/Volatile. A specific $15.8M loan charge-off drove NCOs to 0.56% (annualized), well above the 20-30bps long-term guidance. Conversely, the forward-looking metrics improved: Criticized loans dropped 9.6% QoQ to $1.05B, and Non-Performing Assets fell 25.5%. The NCO spike appears isolated but warrants monitoring.
Strategic Contraction (Shrink to Grow)
The intentional reduction of the balance sheet is aggressive. Loans held for investment dropped $2.6B (-14.8%) YoY. This includes the exit of indirect lending, the sale of credit card portfolios, and branch divestitures (AZ/KS sold, NE pending). While painful for topline revenue, it has eliminated wholesale borrowings (down from $1.57B to $0 YoY) and boosted capital.
Expense Noise & Restructuring Costs
Operating leverage is clouded by restructuring. Non-interest expense rose 5.6% QoQ to $166.7M, driven by $4.2M in severance and $2.3M in branch closure costs. While management guides for $630-645M in FY26 expenses (effectively flat/down vs FY25's $640M), the transition costs are currently dragging on efficiency (52.2% ratio benefited largely from the one-time gain on sale).
Aggressive Capital Return
Accelerating. With CET1 at 14.38% (well above peers), FIBK is returning cash rapidly. They repurchased 3.65M shares since August 2025 ($117.6M) and expanded the authorization by another $150M. This creates EPS support despite the shrinking asset base.
Non-Interest Income Volatility
Core fee income is soft. Payment services revenue fell 3.6% QoQ and 9.5% YoY due to the credit card outsourcing. Mortgage banking dropped 26.7% QoQ. The massive $106.6M reported non-interest income is entirely dependent on the $62.7M one-time gain from branch sales, masking core weakness.
Other KPIs
Accelerating. Up 11.1% YoY ($20.16 -> $22.40) and 2.9% sequentially. Driven by retained earnings from the asset sales and AOCI improvements.
Distorted. The ratio appears excellent (down from 61.7% in Q3), but this is artificially lowered by the $62.7M gain on sale revenue. Excluding that one-time gain, efficiency would be significantly worse due to severance and closure costs.
Stable. The portfolio remains heavily weighted toward CRE ($8.1B) and Construction ($837M). With the shrinkage in consumer/indirect loans, the relative concentration in CRE has increased, keeping risk elevated if the sector softens.
Guidance
Stable/Slight Acceleration. Midpoint ($835M) implies ~1.2% growth vs FY25 ($825.4M). Given the smaller asset base, this confirms expectations for continued NIM expansion. Assumes two 25bps rate cuts.
Decelerating. Implies a further decline from current $15.2B levels. Management cites continued runoff of the indirect portfolio (1-2% impact). The pivot to growth is not expected to manifest in net balances until late 2026.
Stable. Midpoint ($637.5M) is effectively flat vs FY25 ($640.3M). Reflects reinvestment in relationship managers and marketing, offset by efficiency gains from branch closures.
Stable. Suggests the Q4 2025 spike to 56bps was indeed an anomaly and credit costs will normalize lower in 2026.
Key Questions
NCO Spike Details
Net charge-offs spiked to 56bps this quarter driven by a single $15.8M loan. Can you provide more color on the sector and specific nature of this credit? Was this a legacy GWB credit, and are there similar chunky exposures remaining in the Criticized bucket?
Pivot to Growth Timing
Guidance implies loans will drift lower to $14.5-$15.0B in 2026. With the indirect exit mostly complete, when specifically do you expect commercial and core relationship lending to cross over into net positive growth? Is the sales force fully staffed to execute this pivot?
Deposit Floor Strategy
Total deposit costs fell 5bps this quarter. With two rate cuts assumed in 2026 guidance, what is your assumed deposit beta on the way down, and are you seeing any resistance to rate lowering in your core rural markets?
Capital Floor
CET1 is now 14.38%, significantly above peers. Beyond the current buyback authorization, do you have a long-term CET1 target range, or will you continue to run with elevated capital until organic growth accelerates?
Fee Income Trajectory
Core fee income lines like Payment Services and Mortgage are trending down. Excluding the one-time gains from branch sales, what is the strategy to reverse the decline in recurring non-interest income in FY26?