FCNCA - First Citizens BancShares, Inc.

Operator : Hello, everyone. Thank you for joining us, and welcome to the First Interstate BancSystem Inc. Second Quarter 2026 Earnings Call. I will now hand the conference over to Nancy Vermeulen. Please go ahead. Nancy Vermeulen : Thanks very much. Good morning, and 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 quarterly report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the quarterly report and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings, and the company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. Again, this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, we encourage you to do so. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2026. Joining us from management this morning are Jim Reuter, our Chief Executive Officer; David Della Camera, our Chief Financial Officer; and other members of our management team. And now I'll turn the call over to Jim Reuter. Jim? James Reuter : Thank you, Nancy, and thank you for joining us on our earnings call today. During the second quarter of 2026, we continued to improve the long-term earnings power and efficiency of the franchise. Net interest margin expanded for the ninth consecutive quarter. Deposit costs continued to decline criticized loans declined meaningfully, and we further executed on operating model efficiencies while investing in relationship-driven growth. Commercial loan production improved in the second quarter, especially in the Rocky Mountain region. However, reported loan balances declined more than expected, primarily due to elevated payoffs. The payoff activity was concentrated in credits with limited relationship value, including criticized loan payoffs, secondary market activity in loans and divested markets, and we anticipate continued payoff pressure in the near term. We continue to repurchase shares and maintain a disciplined approach to long-term value creation. Our focus will remain on shareholder returns and disciplined growth as we work to optimize our balance sheet improve our profitability and return metrics and grow deposits and loans in a thoughtful manner. We have maintained our underwriting discipline and have chosen not to seek avenues for near-term balance growth that are not consistent with the relationship-based focus. Noninterest-bearing balances increased year-over-year when adjusted for sold deposits. On the expense side, in the second quarter, we continued aligning staffing levels with our updated operating model with an emphasis on revenue-generating roles. We secured 2 highly sought after locations in Colorado and other locations are in progress in core markets. We introduced an updated advertising campaign and brand refresh and we also made further investment in data management to support our ability to leverage new technology. We have seen improvement in digital engagement and digital payment activity and our client satisfaction metrics remain strong. We continued repurchasing shares in the second quarter as part of the authorization we announced in August of last year. Since the inception of the program, we have purchased roughly 8 million shares, returning $270 million to shareholders. We have increased our repurchase authorization by an additional $150 million, along with our earnings release bringing the total authorization to date to $450 million. Share repurchases remain a key part of our capital deployment strategy. Many of the outcomes reflect deliberate actions that improve the long-term value of the franchise. Through ongoing fixed asset repricing, disciplined capital deployment, operating model optimization and continued focus on relationship banking, we are building a more efficient organization. We remain confident in our ability to deliver improving returns over time. And now I will hand the call over to David to discuss our results and our guidance in more detail. David? David Camera : Thanks, Jim. I'll start with our results for the quarter. The company reported net income of $83.9 million or $0.87 per diluted share in the second quarter compared to $60.2 million or $0.61 per diluted share in the first quarter. Net interest income increased by $1.5 million compared to the prior quarter or 0.7% to $202.2 million. This was driven primarily by an expansion in the net interest margin and an extra accrual day in the quarter and was partially offset by a decline in interest-earning assets due in part to the branch sale completed in April. Yield on average loans increased 2 basis points to 5.62% and total deposit costs declined 3 basis points compared to the prior quarter. Total funding costs decreased 4 basis points compared to the first quarter. Our fully taxable equivalent net interest margin was 3.48% for the second quarter compared to 3.43% during the first quarter and 3.32% during the second quarter of 2025. Noninterest income was $61.7 million, an increase of $20.6 million from the prior quarter. This increase was driven by a gain of $19.5 million from the branch transaction that closed during the second quarter. Noninterest expense was $158.9 million for the second quarter of 2026, an increase of $1.3 million from the prior quarter driven by an increase in other expenses, including higher advertising expense, professional fees mostly related to new branding efforts, an increase in donations expense, costs related to branch closures and various smaller expense items. OREO expense increased $1.7 million compared to the prior quarter, driven by a valuation adjustment in the first quarter. These increases were mostly offset by a decline in salaries and wages and employee benefits from the prior quarter. Moving to the balance sheet. Loans decreased by $447 million in the second quarter. This included a continued decline in agricultural loans, a decrease in residential loans and the ongoing amortization of the indirect portfolio as well as a notable increase from the prior quarter in loan paydowns and payoffs. Payoff activity accelerated during the latter part of the quarter and included criticized loans and loans we would view as nonrelationship in nature. In completing a detailed review of commercial loan payoffs during the quarter, we would categorize the vast majority is not affecting core relationships. Payoffs also included elevated secondary market activity and loans from divested markets, pulling forward some of our future payoff expectations. We expect accelerated payoff activity to continue through the rest of 2026, again, pulling forward some of our previous outer-year payoff expectations, which we anticipate will create variability in near-term reported balance growth despite improving commercial production. Total deposits decreased $441.7 million to $21.4 billion as of June 30, 2026, with more than half of the impact in the quarter, driven by the sale of $244 million of deposits in the Nebraska branch transaction. As Jim noted, our deposit mix improved in the quarter and noninterest-bearing balances returned to growth not only during the quarter, but more importantly, also on a year-over-year basis, adjusted for the branch sales. Average deposits declined $212.3 million during the quarter, less than the periodic change in deposits as we saw some end-of-period outflows related to larger customer deposit movements. We experienced declines in interest-bearing balances and specifically time deposits as we allowed some higher cost money to exit the balance sheet while focusing on relationship growth. While this pressures near-term deposit balances, we believe this is prudent given our balance sheet position, and we are focused on protecting and growing core relationships to continue driving an enhanced deposit profile. The ratio of loans held for investment to deposits was 66.6% at the end of the quarter compared to 67.3% at the end of the prior quarter and 72.3% at the end of the second quarter of last year. Turning to credit. Net charge-offs increased by $7.3 million in the second quarter to $9.7 million or 27 basis points of average loans, driven by partial or total resolutions of previously reserved credits. The company recorded a $3.2 million reduction of provision for credit losses in the second quarter, driven primarily by the decline in loans. Criticized loans decreased $95.8 million or 9.3% from the prior quarter. And over the past 12 months, criticized loans have declined 22%. Our total funded allowance decreased to 1.28% of loans held for investment from 1.33% in the first quarter. The decrease in coverage this quarter broadly reflects the noted resolutions of previously reserved credits within nonperforming loans. We repurchased approximately 1.9 million shares in the second quarter totaling approximately $69 million and repurchases since initiation of the program in August totaled about $270 million. As Jim stated, we have announced an increase to the authorization of $150 million, bringing the cumulative total authorization to $450 million. Share repurchases remain a key capital allocation tool to drive shareholder value, and we anticipate remaining active in coming quarters. Finally, we declared a dividend of $0.47 per common share. which equates to a 5.3% annualized yield based on the average closing price of the company's common stock during the second quarter. Our common equity Tier 1 capital ratio ended the second quarter at 14.54% and an increase of 24 basis points from the prior quarter. Our leverage ratio was 9.59% at the end of the second quarter compared to 9.56% at the end of the prior quarter. Our capital levels provide us with flexibility to continue enhancing shareholder returns while supporting long-term accretive growth. Moving to our guidance. Our balance sheet expectations now reflect lower ending loans and a smaller earning asset base compared to the prior quarter. This includes more meaningful payoffs within our commercial loan portfolio and further success in exiting some non-relationship and out-of-market credits. While we have previously assumed these would exit the bank over the coming years, the proactive approach we have taken has resulted in accelerated payoffs in the second quarter, and we anticipate this to continue through the rest of 2026. On the deposit side, the guidance incorporates the positive trends we are seeing within customer acquisition, offset by an expectation for continued pressure in higher cost deposit categories. Mortgage production has trailed our expectations and our forecast now includes a more meaningful near-term decline in that portfolio. Together, these expectations result in both a smaller near-term balance sheet and higher composition of investment securities lowering our near-term revenue growth expectations. This is partially offset by a more favorable deposit mix and cost trend, and we anticipate continuing to deploy capital during this period of balance sheet transition to enhance shareholder returns. As Jim noted, our expense forecast includes continued reinvestment in our new branding efforts and the addition of 14 relationship managers year-to-date. The operational efficiencies we have created have enabled us to add these RMs while still managing to what we believe is a structurally lower staffing level compared to our pre-reorganization workforce. These recognized savings as well as the noted expense additions are mostly within our second quarter run rate, and they inform our go-forward expense guidance. We expect the trend of meaningful asset repricing to extend over the coming years with the near-term tailwinds accelerating into 2027. We anticipate this will drive sequential improvement in our return profile through the remainder of 2026 and provide an even greater benefit to our net interest margin into 2027. Overall, our ninth consecutive quarter of net interest margin expansion reflects the continued benefit of fixed asset repricing and improving funding costs. During a period in which the Fed funds rate was reduced 75 basis points, loan yields were relatively stable at 5.62% compared to 5.65% a year ago. Investment security yields increased from 2.72% to 2.98%, while total deposit cost declined from 1.33% to 1.17%. These trends highlight the continued improvement in the underlying profitability of the balance sheet. Finally, our investor presentation contains a new slide this quarter, titled Enhancing Franchise Productivity, which highlights some key metrics we're focused on internally and believe will further improve over time. Net interest margin, deposits per share, deposits per branch and net interest income per share. We believe these metrics highlight the value of the company's low-cost deposit base and the benefit of fixed asset repricing, accretive capital deployment and operating efficiencies generated through progress and branch optimization. Our intent is to drive greater earnings efficiency and strengthen our best-in-class deposit base, while our active capital deployment increases our shareholders' relative stake in the value of those deposits. Over the prior 12 months, net interest margin has improved 16 basis points. Average deposits per average diluted share has improved approximately 2%. Average deposits per branch has improved 6% and net interest income per share has improved 4%. With that, I'll hand the call back to Jim. James Reuter : Thank you, David. We remain committed to the strategy we have consistently outlined. While growth and balance sheet trends may be uneven from quarter-to-quarter, our focus remains on the long-term drivers of franchise value, which are deepening customer relationships, growing numbers of clients and core deposits improving credit quality, optimizing our operating model and deploying capital in a disciplined manner. We believe the consistent execution of this strategy will strengthen the core value of the franchise and create increasing value for our shareholders over time. And now I would like to open the call for questions. Operator : Your first question comes from Matthew Clark with Piper Sandler. Matthew Clark : Just on the loan portfolio, how much of the loan book has no deposit relationship that you'd like to exit or where you expect payoffs to happen? Just trying to ring fence what portion of the loan book might be slated for runoff? And if you're not willing to answer that question, I guess, maybe the easier question is when do you see earning assets stabilizing and starting to grow again? David Camera : Matt, so a couple of comments on that. I'll start with the earning asset. I think from an earning asset perspective, just given where the balance sheet is, it's really a deposit ending and average conversation. So based on our guide, we think 3Q would be the bottom from an average earning asset perspective because 2Q ended lower on an ending on an average basis, but kind of ending earning assets flat to improving from here and then higher into the back half. From a loan portfolio perspective, a couple of comments. I think the -- we talked about that out-of-market portfolio. We kind of defined that as about a mid-$600 million number right now. And so the payoffs from that portfolio were kind of a $100 million number in this quarter. That's kind of where the non-relationship is. So I think just a couple of comments, too, on the portfolio decline in the quarter as a whole. So you kind of start with that $447 million number. When you take out indirect residential and ag, it kind of gets you to a more mid-200 number and then the criticized in those out-of-market payoffs, gets you down to about $100 million. So that $100 million number is more of kind of that commercial core, if you will. And so most of the payoffs were really non-relationship in manner during the quarter. And then as we think about the forward, some of those recent RM additions that we talked about really supports the production level we think we need. So while the balances declined more than we thought, we view it as a lot of pulling forward of some of those outer year payoffs that we expected. And so the pure relationship growth was actually very good in the quarter in our view, and it was really a balance balances and relationship change were just different figures in the quarter. And then as we think about the forward, again, a lot of that is we think there are more payoffs in some of those books. We've increased our expectation for payoffs, for example, in that out-of-market portfolio, which, again, paid off kind of a mid-teens just periodic number in the quarter. So that's more, in our view, pulling forward some of that, as I said, in the near-term asset mix issue. Matthew Clark : Okay. And what kind of ROA improvement do you think you can generate next year? David Camera : Yes. I think we're probably too early to talk about '27 guidance. But I think if we can see continued underlying improvement in that noninterest-bearing level and then help solve that interest-earning asset mix. We think there's some really strong imputed value in the or imputed earnings profile. So I think we're a little too early to give you an ROA number. But I think needless to say, we think it continues to move higher from here over time. Operator : Your next question comes from the line of Kelly Motta with KBW. Kelly Motta : As part of your prepared remarks, I know obviously, payoffs and proactive portfolio management shrunk the size of the loan book, but you mentioned, production was higher. Can you provide any color and detail around that? And kind of your outlook from here with what you've done on the reorgan team front in order to kind of help stave off some of that continued pressure from payoffs ahead? James Reuter : Kelly, that's a good question. The inflection point we missed was, as you pointed out, largely due to increased payoffs. We've seen a significant positive movement in step-up in production. Keep in mind, the reorg was just completed at the end of the first quarter. As we mentioned in the opening comments, we've also added 14 additional RMs. And as David pointed out, we've actually had good expense control and efficiency gain, but we've used some of that to add production and we're continuing to see growing pipelines. We mentioned in the opening that the Rocky Mountain region has been very strong for us, but we're seeing it across the whole footprint, but the thing we like about our footprint, it's diverse. It's not equal across all states, and we're not going to force equal production because different economies give you different opportunities. But we're seeing what we hope to see. We would like to see one more step-up function in that area, and July is off to a good start. But we like the results we're seeing from our reorg. Kelly Motta : Okay. Great. And the guide implies -- the revised guide implies some continued contraction, a kind of an upper single-digit pace in the back half of the year. Just wondering if there's any -- it was nice to see the improvement in criticized. I'm wondering how much of that is related to some of that proactive portfolio management, credit workout versus just things moving to perm and kind of normal aspects there. David Camera : Yes. So just a couple of comments, Kelly. I think to your point, it implies, say, a $600-ish million decline at the midpoint from current levels in the loan book. It kind of breaking down where that comes from. We think it's kind of a high 100s number in that out-of-market portfolio. We're expecting some continued pull forward of some of those future maturities there. We think it's probably kind of approaching $100 million decline in 1 to 4s in indirect. And so from there, we do see higher payoffs. And so that kind of gets you to the remainder of the commercial portfolio, maybe in the $200 million range. And we think the core portfolios is, to Jim's point, stable to improving, but we believe there will be some additional larger payoffs on some of those non-relationship. We're obviously hopeful some of that is criticized, given that proactive approach, but there's an assumption for higher payoff and higher secondary market activity in there, which, again, we think is some of that '27 to '28 number being pulled forward. Kelly Motta : Got it. That's helpful. Last question for me, if I can sneak it in, just in light of the increased payoffs, it was nice to see margin higher loan yields were up slightly. Just wondering if there was any notable prepay fees within that and where new originations are coming on? David Camera : Yes, no new -- or no notable prepay fees in there for the quarter from a margin perspective. New loan yields kind of low to mid-6s, depending on type. Operator : Your next question comes from Timur Braziler with UBS. Timur Braziler : Maybe talking to your expectation for fixed asset repricing to start driving accelerating NII growth through next year. I guess if you look back since the 1Q '24 trough in margin, margins up 55 basis points since then on the fixed asset repricing story. NII has essentially been flat throughout that whole period. I guess what gives you comfort that there's greater NII growth next year through fixed asset repricing if the balance sheet does remain a little bit of flux here? David Camera : Yes. So I think as you look back to that point you're referencing, there were a couple of branch sales, of course, in there. So a smaller balance sheet due to that, which results in some reduced NII relative to that. I think to your point, as you look at '27, and we have that slide in our investor presentation, those loans are maturing at what I would call reinvestment yields for investments. Obviously, ability to turn those into new loans is provide some significant implied upside into NII. And then there's what we view as downside protection if some of those loans do leave the balance sheet. So we think it's a good position from an optionality perspective. And then we talked about kind of the production focus we have, the addition in RMs and some of the success we're seeing in pipeline. All of that gives us the optimism that we'll see some improvement there. And to your point, it's a mix shift conversation. But we think it's a combination of really strong downside protection to NII and then upside optionality if we're able to see that improved production we'expecting. Timur Braziler : Okay. And I guess looking at the slide, that has the payoff or the adjustable and fixed rate loan maturing and repricing schedule Slide 8. $2.2 billion through 2027, that's about 16% of your loan book, not inclusive of the classified portion. Is this still an opportunity? Or given some of the payoff trends? Are you now expecting maybe more of that maturing/repricing balances to exit the balance sheet over the course of the next 1.5 years? David Camera : Yes, I think at the rate those are rolling off. It's certainly an opportunity given the current rate environment. And then as we talked about in one of the earlier comments, it's a relationship focus for us. So we think there's a real opportunity here. It's either enhancing existing relationships, adding new relationships or rolling assets and into market rates. So I think given that mid-4s roll-off coupon, there's a lot of opportunity for us. Operator : Your next question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis : David, I think you mentioned you want to stay away from '27 guidance. Just wanted to just check in on the general direction. If you are pulling forward or accelerating payoffs, trying to get a sense for what that means for the loan balances next year? I mean if you're, kind of, targeting, say, 10% loan runoff this year. Does that imply that your chances for flat or positive growth in '27? Does that improve that either specific numbers or just the trend? And just would be helpful to kind of get where you view '27, even if it's vague at this point. David Camera : Yes. Good question, Jeff. I think I'll add a couple of things, and then let Jim add as well. I think the intent of pulling forward some of those where we see an opportunity to is to provide greater visibility into the outer years. But I think to the earlier comment, we're too early to give a guide for loans in '27. We want to continue to see these new RMs as well as the org redesign results start to come through before we have a specific guide for next year. But I think, certainly, our goal is to create a portfolio, we think, is a growth portfolio. So... James Reuter : Yes. And Jeff, I don't really have anything to add to what David said other than what I said earlier to Kelly in terms of like the momentum, like what we're seeing. When you look at our balance sheet, we have just great optionality and -- but we're going to be smart with how we grow the bank. And so we're going to focus on low-cost deposits and proactive credit management expense control and be disciplined with our capital management. But we reset the inflection point, but that doesn't change our underlying confidence in the growth our bankers are doing a great job, and we're seeing that building. Jeff Rulis : Understood. And a follow-on, David, you said you'd anticipate the average earning asset balance to bottom in Q3, but period-end earning assets should be up in 3Q versus 2Q? David Camera : Yes, we had some of those kind of late 2Q. Deposit flows we talked about. So the ending versus average from a deposit perspective, which translates into earning assets is lower. So 3Q, we think it's more kind of flattish from an ending down from an average and then 3Q -- or excuse me, 4Q being higher from an average is what our guide implies. Operator : We have reached the end of the Q&A session. I will now turn the call back to Jim for closing remarks. James Reuter : Thank you, and thank you for the questions today. And as always, we welcome calls from investors and analysts. So please reach out if you have any follow-up questions, and thank you for tuning into the call today. So have a great day. Operator : This concludes today's call. Thank you for attending. You may now disconnect.