First Interstate BancSystem Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome to today's First Interstate BancSystem First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Also, today's call is being recorded. And I will be standing by if anyone should need assistance.

Operator

And now at this time, I'd like to turn the call over to Ms. Andrea Walton. Please go ahead, ma'am.

Speaker 1

Thanks. Good morning. Thank you for joining us for our Q1 earnings conference call. As we begin, please note that the information provided during this call will contain forward looking statements. Actual results or outcomes may differ materially from those expressed by those statements.

Speaker 1

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 ks filed with the SEC and in our earnings release as well 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 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.

Speaker 1

Joining us from management this morning are Kevin Reilly, our Chief Executive Officer and Marcy Mutch, our Chief Financial Officer, along with other members of our management team. At this time, I'll turn the call over to Kevin Reilly. Kevin?

Speaker 2

Thanks, Andrea. Good morning, and thanks again to all of you for joining us on our call today. Again, this quarter, along with our earnings release, we have published an updated investor presentation that has some additional disclosures, which we believe would be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded PAPA yet, I would encourage you to do so.

Speaker 2

I'm going to start today by providing an overview of the major highlights of the quarter, and then I'll turn the call over to Marci to provide more details on our financials. We had solid performance in the Q1 with results generally in line or exceeding expectations. We generated $58,400,000 in net income or $0.57 per share. At this point, we believe our margin has stabilized, and we anticipate that our margin will expand in the Q2. We continue to focus on controllable expenses and remain pleased with our progress.

Speaker 2

We recorded $160,200,000 in non interest expense in the quarter, which included a couple of one time items, and we continue to invest in our feed business and processes to generate greater efficiencies. Loan demand from our customers is still muted, particularly in our real estate book. We remain disciplined in our new loan underwriting and pricing criteria. We continue to focus new production in areas where we could develop full paying relationships, which include C and I and our small business products. Our deposit performance was generally in line with expectations with seasonal weaknesses in business deposits.

Speaker 2

We also allowed $185,000,000 of fully collateralized high cost municipal deposits to leave the balance sheet. The increase in our interest bearing deposit costs slowed materially, increasing only 6 basis points quarter over quarter. Total funding cost increased 15 basis points as we expected due to late 4th quarter deposit outflows. We anticipate the 2nd quarter to reflect a flattening of our total cost of funds. During the quarter, we experienced higher cash flows from our investment portfolio due to our $300,000,000 treasury security maturing.

Speaker 2

We reinvested some cash flows early in the quarter, but we generally utilize those funds to support the seasonal and high cost municipal outflows I just mentioned. We also acted earlier in the quarter when the market was pricing in more expected rate cuts to extend some of our borrowings at lower rates. This included shifting $1,000,000,000 from the FHLB to the bank term funding program at a rate of 4.76%. This matures in January of 2025. We also extended $1,000,000,000 of our remaining FHLB advances with terms of 12 to 18 months.

Speaker 2

While we still characterize our balance sheet as modestly liability sensitive, we tilt more toward neutral considering these actions, which improved our position in a higher for longer rate environment. You'll see that our updated guidance includes an expectation for 2 rate cuts in 2024 instead of 3. However, even considering this reduction in our rate cut expectations, we are reiterating our guidance for NII. Given our profitability and prudent balance sheet management, we continue to see increases in our capital ratios in the Q1, while also continue to pay a healthy dividend to our shareholders. Now I will hand the call off to Marci to provide some additional details around our Q1 results.

Speaker 2

Go ahead, Marci.

Speaker 1

Thanks, Kevin, and good morning, everyone.

Speaker 3

As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the Q4 of 2023, and I'll begin with our income statement. Our net interest income was $200,100,000 in the Q1, a decrease of $7,700,000 Our yield on interest earning assets increased 5 basis points, which was more than offset by a 15 basis point increase in our funding costs. Additionally, there was one less accrual day in the Q1. As Kevin noted, we repositioned our borrowings mix in the quarter, which reduced our borrowing costs by 47 basis points from the prior quarter. This also partially offset the impact of a higher average level of borrowings in the period.

Speaker 3

Turning to our net interest margin. In the Q1, our net interest margin on an FTE basis decreased 8 basis points to 2.93%. Excluding purchase accounting accretion, our net interest margin was 2.84%, a 10 basis point reduction from the prior quarter. Pressure on our margin softened in the period as we saw deposits increase later in the quarter as seasonally expected. As Kevin mentioned, we believe our margin bottomed in the Q1 and should expand in the Q2.

Speaker 3

In our construction portfolio, just under $200,000,000 of commercial construction loans funded up in the Q1 and about $500,000,000 of commitments remain. We expect the pace of this funding to decelerate in the back half of twenty twenty four and the drag on loan yields to lessen. Additionally, the moderation in our interest bearing deposit costs and the slowing mix shift out of non interest bearing deposits further eases margin pressure. So even with a reduction in our rate cut expectations down to 2, we reiterate our net interest income guidance we gave last quarter. This is included in the summary of our guidance that can be found in our investor presentation.

Speaker 3

Non interest income was $42,000,000 in the Q1, a decrease of $2,400,000 from the prior period, which was again in line with our expectations. The decline from the prior quarter was driven by a $2,900,000 gain on the disposition of assets in the 4th quarter. Our lines of business performed generally in line with expectations and we continue to make investments into areas such as our treasury services business, which positions us well to add customers and increase our fee based revenues over time. Moving to non interest expense. We were pleased to report $160,200,000 in total non interest expenses this quarter, a decrease of $5,800,000 There were a few moving parts in that reported number, which included a $1,500,000 accrual for the FDIC special assessment and $2,000,000 of OREO expenses.

Speaker 3

These were offset by a $1,100,000 reversal of our prior year incentive accrual as well as lower medical claims. While we are very pleased with our expense performance this quarter and while we maintain our discipline in this area, the reported number this quarter was marginally lower than what we expect going forward. That said, we have reduced our expense guidance modestly. This takes into consideration the positive performance from the quarter, while anticipating that quarterly expenses for the remainder of the year will be slightly higher than this quarter's figure. Moving to the balance sheet.

Speaker 3

Loan balances declined $76,800,000 in the 1st quarter, primarily due to expected seasonal declines in our agricultural lines, which were down $73,300,000 We also experienced positive migration out of our construction portfolio as stabilized projects moved into the commercial real estate portfolio. The construction portfolio declined $217,300,000 during the quarter and the commercial real estate portfolio increased $191,200,000 On the liability side, total deposits declined $513,100,000 Kevin already mentioned the decision we made in the quarter to allow 2 high cost fully collateralized municipal deposits totaling $185,000,000 to leave the balance sheet. Excluding this decline, total deposits declined about 1.4% quarter over quarter due to normal seasonal declines in our business portfolio. Our seasonality assumptions include increases in business deposits toward the end of the second and into the Q3. We expect deposits to increase from March 31 to year end.

Speaker 3

As we noted in the investor deck, our deposit base is granular, our non interest bearing deposits seem to be stabilizing and we retain a steady mix of business and consumer accounts. Moving to asset quality. Our provision totaled $5,300,000 in the Q1. This comprised a funded provision of $8,400,000 with a release of unfunded provision of $3,000,000 The unfunded release was driven by a continued reduction in off balance sheet commitments. Net charge offs were $8,400,000 or 18 basis points of loans.

Speaker 3

We saw generally positive trends within the portfolio during the quarter. Criticized loans, which include non performing loans, decreased $58,300,000 or 8.5 percent, driven by both upgrades and loan payoffs. Non performing loans increased $63,700,000 or 57.2 percent, primarily due to the movement of a $54,400,000 C and I relationship to non accrual. We have been working closely with this borrower, is taking meaningful actions to stabilize performance. We are cautiously optimistic about a positive resolution.

Speaker 3

We also added a disclosure in our investor presentation related to our commercial real estate portfolio. This portfolio is granular and diversified by both property type and geography. Our most recent cash flow stress testing exercise has reinforced our view that it is well underwritten, can support higher rates and that we should expect stable performance. Overall, our earnings continue to support our strong dividend. This coupled with a reduction in off balance sheet commitments and a modest reduction in loans drove continued accretion in our capital ratios in the quarter.

Speaker 3

Our CET1 ratio improved 29 basis points to 11.37%. With that, I'll turn the call back to Kevin. Kevin?

Speaker 2

Thanks, Marcy. I am pleased with how we executed in the Q1 and remain optimistic about our performance for the remainder of 2024 and into 2025. Our strong levels of liquidity and capital provides us with flexibility to respond to market opportunities. Our liability repricing has slowed materially, and we anticipate a tailwind from asset repricing in the second half of the year. We are well positioned to be able to respond when customers' demands begins to rebound.

Speaker 2

In the meantime, we will keep enhancing our service to our existing customers and working to add to our customer base. Our continued stress testing within our loan portfolio gives us confidence that our borrowers are well positioned as loans repriced. I'm also pleased with our continued expense discipline while bouncing investments in our own infrastructure and systems, this will allow us to maintain a strong near term earnings profile, while investing in the long term success

Speaker 4

of the

Speaker 2

institution. The strength of our company provides us with the ability to continue attracting new relationships, serving the needs of our existing customers and further enhancing the value of our franchise in years to come. So with that, I'll open the call up for questions.

Operator

We'll go first this morning to Andrew Terrell of Stephens.

Speaker 4

Hey, good morning.

Speaker 2

Good morning, Andrew.

Speaker 4

Hey, if I could just start on the $54,000,000 C and I loan that was placed on non accrual this quarter. It sounds like you guys are maybe cautiously optimistic about positive resolution here. I was just hoping for maybe some incremental color. Could you share what type of industry this is in? And then maybe give us some comfort about the collateral that they could support this relationship?

Speaker 2

Yes. It's a distribution company and it's kind of deals with construction doors and stuff. It's a sizable company with over $100,000,000 in revenue. It had some, I would say, some management issues, but what they have done is they have replaced some of the senior management and they have also brought in a consultant, which we're working with. And at this point, we feel pretty optimistic that the issues that they have will be resolved and there'll be a positive outcome on this company.

Speaker 4

Okay. Understood. I appreciate it. If I could ask for Marci, I think we previously talked about being comfortably above that 3% level on the core NIM in the back half of this year. Obviously, it seems like the margins kind of stabilizing and inflecting like we previously talked about.

Speaker 4

Just as you see it today, do you feel like the 3% plus core NIM in the back half of the year is still in the cards?

Speaker 3

Yes, absolutely.

Speaker 4

Okay. And then with just looking at like the rate curve today, it looks like there's one kind of forward cut baked in. If we were to take rate cuts off the table, do you think your NII guide would still stay the same for the year? Or would it impact that if we weren't to get rate cuts, would it impact the 3% core NIM?

Speaker 2

I think with some of the actions we've taken, Andrew, with restructuring somewhere that we feel good that our guidance won't really change much if the rate increases don't come rate decreases don't come about because I think we really have restructured the balance sheet for higher for longer.

Speaker 4

Yes. Okay. I appreciate it. And then if I could ask just one more on the municipal funding. Could you share kind of the timing of when that occurred throughout the quarter and then what the rate was on the 185,000,000

Speaker 3

Yes. So it was over 5%. And timing in the quarter, some kind of one was January and one was March. Kind of split fifty-fifty there.

Speaker 5

Okay.

Speaker 4

Got it. All right. Thank you for taking the questions.

Speaker 2

Thanks, Andrew. Thanks, Andrew.

Operator

Thank you. We go next now to Chris McGratty at KBW.

Speaker 5

Great. Good morning. Kevin, just following up on the prior question on the C and I credit, the $54,000,000 where does that rank in terms of like largest relationships? Or can you help contextualize largest relationships with the bank?

Speaker 2

Yes. We only have more granular portfolio, but that's one of our larger relationships.

Speaker 5

Okay. That's perfect. Thanks. And then, just wanted to circle back on the material weakness in the Q. Just any update there in terms of resolution cost and any potential impact that it could have on overall strategy?

Speaker 5

Thanks.

Speaker 3

Yes. So Chris, we don't expect any costs related to resolving this material weakness. You'll see in the Q, we've remediated certain parts of the finding because it was an aggregation of different issues. And so we've remediated about half of them and the other half is kind of left to be remediated. But we expect to have those wrapped up well within this calendar year.

Speaker 5

Okay. And then based on that, Marci, it wouldn't affect, I guess, strategic dividends, use of the capital, anything else in your view?

Speaker 2

No. No. Absolutely not.

Speaker 5

Nothing. Okay. Perfect. Thank you.

Speaker 3

You

Operator

bet. We We'll go next with you now to Timur Braziler at Wells Fargo.

Speaker 6

Hi, good morning.

Speaker 2

Hi, Timur. Good morning, Timur.

Speaker 6

Kevin, your comments about fixed asset re pricing at the end of the year. Can you just remind us what the magnitude is both on the loans and security side and then just kind of the cadence of that magnitude?

Speaker 2

I missed the first part of your question, Timur. Could you repeat it?

Speaker 6

Sure. Kevin, you mentioned the fixed asset repricing benefiting margin trends in the back end of the year. Can you just talk to the magnitude of that both on the securities and loan side and then the cadence as well?

Speaker 2

No, she's going to handle that one.

Speaker 3

Yes. So the securities side, it's in the slide deck, Timur, on Page 13. We really don't disclose kind of the loan repricing cadence.

Speaker 2

But it's in our guidance for

Speaker 3

But it is built within the guidance that we give on overall NII.

Speaker 6

Okay, got it. And then Marci, maybe, do you have the spot rate for deposit costs at quarter end just to give us a better framework of kind of where

Speaker 3

You bet. So they were $188,000,000 for the quarter and $189,000,000 for March. That's interest bearing,

Speaker 2

TMR. That's just interest bearing, TMR.

Speaker 5

Yes. Okay. Got it.

Speaker 6

And then just one last one for me on the credit conversation. Any reserves allocated to that C and I credit? And then maybe just talk more about the relationship with the growth in non performing loans versus the allowance ratio and kind of how we should think about the interplay between the 2? Yes. I'll give you a little

Speaker 2

bit of color on the thing is, yes, we recognize a reserve on that C and I credit and that's baked into the overall reserve. We don't disclose exactly what that would be, but that reserve is baked into the overall reserve. And regards to the non performing in the coverage, we feel comfortable where we're at with regards to non performing loans. And as we said before, we believe, as we said, when someone in last month that some of these are being restructured and the pay down. So we still feel that we're in good shape with regards to dealing with the non performing loans that are there.

Speaker 3

Yes. Again, we don't see any systemic issues. We're happy with the improvement and criticized loans overall. We see our credit quality as being stable from here on out. And in terms of the reserve, at the level we are, we feel adequately reserved for what we're seeing within the portfolio.

Speaker 4

Great. Thanks for the question.

Speaker 2

Thanks, Timur.

Operator

Thank you. Questions this morning. Mr. Riley, I'll hand thanks back to you sir for any closing comments.

Speaker 2

Okay. Thank you for your questions today on the call. And as always, we welcome calls from our investors and analysts. Please reach out to us if you have any further follow-up questions. Thank you for tuning in today.

Speaker 2

Bye.

Operator

Thank you, Mr. Riley. Ladies and gentlemen, that will conclude the First Interstate Bank System Q1 earnings call. Again, we'd like to thank you all so much for joining us and wish you all a great day.

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Earnings Conference Call
First Interstate BancSystem Q1 2024
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