Q1 2024 First Interstate Bancsystem Inc Earnings Call

Participants

Kevin Riley; President, Chief Executive Officer, Director; First Interstate Bancsystem Inc

Marcy Mutch; Chief Financial Officer, Executive Vice President; First Interstate Bancsystem Inc

Andrew Terrell; Analyst; Stephens Inc

Chris McGratty; Analyst; KBW

Presentation

Operator

Good morning, everyone, and welcome to today's First Interstate Bancsystem first quarter earnings conference call. (Operator Instructions)
And now at this time, I'd like to turn the call over to Ms. Andrea Walton.

Thanks. Good morning. Thank you for joining us for our first 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 may 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 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.
Joining us from management this morning are Kevin Riley, 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?

Kevin Riley

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. If you have not downloaded a copy yet, I would encourage you to do.
So 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 Marcy to provide more details on our financials. We had solid performance in the first quarter with results generally in line or exceeding expectations. We generated $58.4 million 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 second quarter. We continue to focus on controllable expenses and remain pleased with our progress. We recorded $160.2 million 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.
Most 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 can develop full bank relationships, which include C&I and small business products.
Our deposit performance was generally in line with expectations with seasonal weaknesses in business deposits. We also allowed $185 million of fully collateralized high cost initial 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 fourth quarter deposit outflows.
We anticipate the second quarter to reflect a flattening of our total cost of funds. During the quarter, we experienced higher cash flows from our invested portfolio due to a $300 million treasury security maturity. 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 and more expected rate cuts to extend some of our borrowings at lower rates. This includes shifting $1 billion 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 billion of our remaining FHLB advances with terms of 12 to 18 months. 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 two rate cuts in 2024 instead of three. 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 first quarter, while also continuing to pay a healthy dividend to our shareholders.
Now I will hand the call off to Marcy to provide some additional details around our first quarter results. Go ahead, Marcy.

Marcy Mutch

Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the fourth quarter of 2023, and I'll begin with our income statement.
Our net interest income was $200.1 million in the first quarter, a decrease of $7.7 million. Our yield on interest-earning assets increased 5 basis points, which was more than offset by a 15 basis points increase in our funding costs.
Additionally, there was one less accrual day in the first quarter. As Kevin noted, we repositioned our borrowings mix in the quarter, which reduced our borrowing cost by 47 basis points from the prior quarter. This offer partially offset the impact of a higher average level of borrowings in the period.
Turning to our net interest margin, in the first quarter, 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 points reduction from the prior quarter.
Pressure on our margins 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 first quarter and should expand in the second quarter.
In our construction portfolio, just under $200 million of commercial construction loans funded up in the first quarter and about $500 million of commitments remain, we expect the pace of this funding to decelerate in the back half of 2024 and the drag on loan yields to lessen.
Additionally, the moderation in our interest-bearing deposit costs and the slowing mix shift out of noninterest-bearing deposits, further eases margin pressure. So even with the 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.
Non-interest income was $42 million in the first quarter, a decrease of $2.4 million from the prior period, which was again in line with our expectations. The decline from the prior quarter was driven by a $2.9 million gain on the disposition of assets in the fourth 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 $160.2 million in total non-interest expenses this quarter, a decrease of $5.8 million. There were a few moving parts in that reported number, which included a $1.5 million accrual for the FDIC special assessment and $2 million of [OREO] expenses. These were offset by a $1.1 million 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, loan balances declined $76.8 million in the first quarter, primarily due to expected seasonal declines in our agricultural lines, which were down $73.3 million. We also experienced positive migration out of our construction portfolio as stabilized projects moved into the commercial real estate portfolio.
The construction portfolio declined $217.3 million during the quarter, and the commercial real estate portfolio increased $191.2 million. On the liability side, total deposits declined $513.1 million. Kevin already mentioned the decision we made in the quarter to allow two high-cost fully collateralized municipal deposits totaling $185 million 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 third quarter.
We expect deposits to increase from March 31 to year end. 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 $5.3 million in the first quarter. This comprised of funded provision of $8.4 million with a relief of unfunded provision of $3 million. The unfunded relief was driven by a continued reduction in off balance sheet commitments. Net charge-offs were $8.4 million or 18 basis points of loans.
We saw generally positive trends within the portfolio during the quarter. Criticized loans, which include nonperforming loans, decreased $58.3 million or 8.5%, driven by both upgrades and loan payoffs.
Nonperforming loans increased $63.7 million or 57.2%, primarily due to the movement of a $54.4 million C&I relationship to nonaccrual. We have been working closely with this borrower who is taking meaningful actions to stabilize performance.
We are cautiously optimistic about a positive resolution. 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 as is well underwritten can support higher rates and that we should expect stable performance.
Overall, our earnings continued to support our strong dividend and 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. Our CET1 ratio improved 29 basis points to 11.37%.
With that, I'll turn the call back to Kevin. Kevin?

Kevin Riley

Thanks, Marcy. I am pleased with how we executed in the first quarter 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 demand begins to rebound. 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 reprice.
I'm also pleased with our continued expense discipline while balancing 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 of the 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 the years to come.
So with that, I'll open the call up for questions.

Question and Answer Session

Operator

(Operator Instructions) Andrew Terrell, Stephens.

Andrew Terrell

Hey, good morning.

Kevin Riley

Good morning, Andrew.

Andrew Terrell

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

Kevin Riley

Yes. It's a distribution company is kind of in deals with construction doors and stuff. It's a sizable company with over $100 million in revenue. It had some, I would say, 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. At this point, we feel pretty optimistic that the issues that they have will be resolved and there will be a positive outcome on this company.

Andrew Terrell

Okay, understood. I appreciate it. If I could ask from Marcy. I think we previously talked about being comfortably above that kind of 3% level on the core NIM in the back half of this year. And obviously, it seems like the margins kind of stabilizing and inflecting likely previously talked about some just as you see it today, do you feel like that 3% plus core NIM in the back half of the year is still in the cards?

Marcy Mutch

Yes. Absolutely.

Andrew Terrell

Okay. And then with just looking at like the rate curve today, it looks like there's one kind of forward cut baked. And 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 wouldn't impact the 3% core number.

Kevin Riley

I think with some of the actions we've taken, Andrew will restructure so that we'd feel good that our guidance will really change much if there if the rate increases don't come rate decrease don't come about because I think we really have restructured the balance sheet for higher for longer.

Andrew Terrell

Okay. I appreciate. And then if I can ask just one more on the municipal funding? And could you share kind of the timing of when that occurred throughout the quarter and then what the rate was on the $185 million?

Marcy Mutch

Yes. So it was over 5% in timing in the quarter. Some kind of move -- one was January, and one was March kind of split [50:50] there.

Andrew Terrell

Okay. Thank you for taking the questions.

Kevin Riley

Thank you.

Operator

Chris McGratty, KBW.

Chris McGratty

No, great morning. Kevin, just following up on the prior question on the C&I credit, the $54 million, where does that rank in terms of like largest relationships? Or can you help contextualize in our largest relationship to the bank here.

Kevin Riley

We only have five relationships over $50 million. So it is one of our larger relationships. So we are a more granular portfolio, but that's one of our larger relationships.

Chris McGratty

Okay, that's perfect. Thanks. And then on 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?

Marcy Mutch

Yeah. So Chris, we don't expect any costs related to resolving this material weakness. You'll see in the Q we've remixed, we remediated certain parts of the refining unit because it was an aggregation of different on 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.

Chris McGratty

Okay. Opinion based on that, Marcy, you wouldn't affect, I guess, strategic dividends cap use of the capital.

Kevin Riley

Absolutely not.

Chris McGratty

Perfect. Thank you for that.

Operator

Timur Braziler, Wells Fargo.

Hi, good morning. Actually my were you and Kevin, your comments about fixed asset reprice at the end of the year. Can you just remind us to what the magnitude is both on the loans and security side? And then just kind of the cadence of that magnitude.

Kevin Riley

I missed the first part of your question Tim, where could you repeat it?

Sorry, 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 in March is going to be one of the securities side.

Marcy Mutch

We in the slide deck team are on page 13, we really don't disclose kind of the the loan repricing cadence, but it's in our guidance flat. It is felt within the guidance that we give on overall NII.

Okay, got it.
And then Marcy, maybe on, do you have the spot rate for deposit costs at quarter end just to give us a better framework of kind of where that by the end Youbet's.

Marcy Mutch

So they were [188] for the quarter and [189] for March.

Okay.

Kevin Riley

Bernie, I don't know, Andrew, if you look at the interest bearing cleaner just as repairs at Genworth.

Have I got it. And then just one last one for me. On the credit conversation, any reserves allocated to that C&I credit? And then maybe just talk us more what about the relationship with the growth in nonperforming loans versus the allowance ratio and kind of how we should think about the interplay between the two Yes,

Kevin Riley

I'll give you a little bit of color. And the thing is yes, we recognize a reserve in that C&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 in regard to the non-performing -- 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 paydowns, so we still feel that we're in good shape with regards to dealing with the nonperforming loans that are there?

Marcy Mutch

Again, we don't see any systemic issues in our we're happy with the improvement in criticized loans. Overall, we see our credit quality has been stable, you know, from here on out and as terms of the reserve, you know it at the level we are we feel adequately reserved for what we're seeing within the portfolio.

Great. Thanks for the questions.

Operator

(Operators Instructions) And ladies and gentlemen, it appears we have no further questions this morning, Mr. Reilly, I'll hand things back to you, sir, for any closing comments.

Kevin Riley

Thank you for your questions today in 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, bye.

Operator

Thank you, Mr. Riley. Ladies and gentlemen, that will conclude the First Interstate Bank system First Quarter Earnings Call. Again, we'd like to thank you all so much. For joining us and wish you all a great day.