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spk05: Good morning, ladies and gentlemen, and welcome to the first Interstate Bank System, Inc. third quarter earnings call. At this time, all lines are in listen-only mode. For the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, October 26th. 2023. I would now like to turn the conference over to Andrea Walton. Please go ahead.
spk01: Thank you. Good morning. Thank you for joining us for our third 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 in 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 fidk.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 for management this morning are Kevin Riley, our Chief Executive Officer, and Marcie Mutch, our Chief Financial Officer, along with other members of our management team. At this time, I'll turn the call over to Kevin Riley. Kevin?
spk09: 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 will be helpful. The presentation can be accessed on our Investors Relations website, and 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 Marci to provide more details on our financials. In this challenging banking environment, First Interstate draws strength from our franchise value and from the robust, flexible balance sheet we have carefully built. We have seen stabilization on both sides of the balance sheet over the past quarter, and we continue to carry no broker deposits. We have reduced non-interest expense. We have increased spreads on new loans. We have paid down borrowings. In short, we have controlled the things that are in our power to control and positioned the bank to respond to appropriate opportunities when they arise. In the third quarter, we generated 72.7 million in net income or 70 cents per share. This is an increase of 8.5% from the previous quarter. We achieved modest deposit growth in the period and continue to see improved risk-adjusted spreads on new loan production. The new loan production rate, excluding draws on construction lines, increased roughly 40 basis points from the previous quarter to around 7.5%. We have achieved stability in our net interest margin and generated improvements in both asset quality and capital ratios. With that, I'll turn the call over to Marcie to provide some additional details around our third quarter results. Go ahead, Marcie.
spk03: 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 second quarter of 2023. I'll begin with our income statement. Our net interest income decreased by $4.7 million as the increase in our average yield on earning assets was outpaced by the increase in our total cost of funds. This was partially offset by a $600,000 increase in purchase accounting accretion quarter over quarter. Our reported net interest margin was 3.07%, a decrease of five basis points from the prior quarter. This is significantly less than the 24 basis point decrease we saw in the second quarter. Our adjusted net interest margin, excluding purchase accounting accretion, also decreased by five basis points from the prior quarter to 3%. This is stable to our exit rate last quarter as we expected. From here, the margin is expected to remain relatively stable to modestly lower in the fourth quarter, with earning assets also slightly lower than in our third quarter reported results. We expect this, in turn, to lead to a modest decline in net interest income in the fourth quarter. Our total non-interest income decreased $2.1 million quarter over quarter as we faced pressure in the mortgage and payment service businesses. We expect non-interest income to be similar to third quarter levels in the fourth quarter, generally reflecting our core fee run rate. While we expect continued pressure in the mortgage origination environment, our newly restructured mortgage business allows us to process volume more efficiently and with improved profitability. So while demand remains minimal in the near term, as the environment improves, we can now respond to increasing demand more profitably. Moving to total non-interest expense, reported expenses declined $2.8 million from the prior quarter as salaries and wages declined in the period. This was generally due to the severance expense we noted in the prior quarter, lower expenses from the mortgage business, and a lower incentive accrual. We anticipate a similar level of expenses in the fourth quarter. Moving to the balance sheet, loans held for investment decreased by $50 million from the end of the prior quarter. Our outstanding commercial construction lines totaled just under $900 million at the end of the third quarter. at a weighted average rate of approximately 5.5%. This represents about a $200 million decline from the prior quarter. The securities portfolio declined by $288 million in the quarter due to normal amortization with a modest impact from higher unrealized losses. On the liability side, three developments underscored the stability of our balance sheet. A reduction in short-term borrowings of $522 million, an increase of $100 million in total deposits, and a moderation of our mixed shift out of non-interest-bearing deposits. Let me reiterate that we have no broker deposits on the balance sheet. Moving to asset quality, non-performing assets decreased by $11 million and criticized loans decreased by $8.7 million from the prior quarter. This is in keeping with our principle of addressing credit matters as they arise, as you've seen us do in the past. We continue to have limited exposure in Metro office commercial real estate, and the remaining portfolio is performing well. As a note, we have de minimis exposure to syndicated national credits, and by de minimis I mean two credits for a total of $6 million, and we do not participate in that market. While our allowance for credit losses was up one basis point to 1.24% of total loans held for investment, Our total provision expense was essentially zero. Net charge-offs in the quarter were minimal at just $1.1 million, or two basis points of average loans. Our coverage rate of non-accrual loans increased to 268% in this period. Finally, all regulatory capital ratios strengthened in the third quarter as we continued to manage our risk-weighted asset exposure, and we were pleased to announce our 47-cent dividend per share. Tangible book value declined slightly as the AOCI position expanded and offset retained earnings. Going forward, our strong capital position gives us the flexibility to take advantage of market opportunities and to remain dedicated to serving the needs of our customers and attracting new households to the bank. Now with that, I'll turn it back over to Kevin. Kevin?
spk09: Thanks, Marcie. Now I'll wrap up with a few comments on our outlook. We expect our fourth quarter results to continue to display the stability we have achieved. As we complete our 2024 budgeting process, we understand the operating environment that we're heading into. With revenue growth being a challenge, we know the importance of expense control. We are taking a hard look at this, and we'll be able to provide more detail in this regard on our next call. Given the strength of our franchise and flexible balance sheet, we are well positioned to continue to protect shareholder value during these challenging times. Going forward, we will remain devoted to serving our existing customers with complementary products and services, such as the new suite of credit cards we just launched in August. We will continue to capitalize on the strength of our markets to grow our client base. In all our efforts, we will continue to enhance the strength of our high-quality, resilient franchise. So with that, we'll open up the call for questions.
spk05: Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If at any time you'd like to ask a question, please press star followed by one. If you'd like to withdraw your question, please press two or star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, and your first question comes from Matthew Clark from Piper Sandler. Matthew, please go ahead.
spk02: First one for me is around your deposit data outlook. I think in the release or in the deck, you guys talk about, you know, your expectations to be in the low to mid-30s in 4Q. How do you think about your through the cycle interest rate and deposit data, you know, assuming the Fed's done? I mean, do we settle out in the mid-30s? Do you feel like there's some lag effect there?
spk09: That's kind of what we're seeing, yeah.
spk03: Yeah, I think low to mid-30s, you know, by the end of the year. You know, and depending on the mix shift, it could go slightly higher into next year.
spk09: Yeah, to the mid-30s that you're talking about.
spk02: Got it. Okay. And then just the NII outlook. As we look into 1Q, you have a big slug of securities coming due. And just your thoughts around you know, how the margin might benefit there. It seems like we would have an uptick in the NIM there and maybe NII could trough or even, you know, maybe stabilize. Is that a fair way of thinking about it or not?
spk09: I think, Matt, that's a fair way of thinking about it. I think that you'll see a little bit slight come down in the fourth quarter and probably stabilization in the first. So we see it growing in the back half of 2024.
spk02: Okay, and then just your net charge-offs, it's great to see them come down a lot. Can you speak to the recoveries you had there? Just trying to get a sense for normalized expectations going forward.
spk09: Okay, we'll have Michael, our Chief Credit Officer, answer that question, Matt.
spk04: Good morning, Matt. The recovery was centered on a legacy Great Western Bank hospitality deal The total recovery was $3.2 million, so that helped offset. And if you remember in the prior quarter, our charge drops were elevated, but that was primarily due to one credit. So I think hopefully that answers your question.
spk02: Yep, it does. Okay, thank you.
spk05: Your next question comes from Chris McGrady from KBW. Chris, please go ahead.
spk08: Oh, great. Thanks. Kevin, you alluded to a close eye on the costs. What exactly are you looking at? I assume it's broad, but branches, businesses, repositioning of the balance sheet. How should we be thinking about this?
spk09: Well, it's not really a reposition and balance sheet as much. We're just looking at exactly what you said. We're looking at branches. We're looking at business units. We're looking at all expenses are on the table. I will tell you we're going to go into a very in-depth look at every one of these expenses to see if they're a must-have or can we do something with it.
spk08: Okay, and would the goal for that be manage expenses, the growth rate off of this year to a lower level or just outright declines?
spk09: Absolutely, that's exactly what our goal is.
spk08: So limit the growth versus absolute decline, is that right? Right. Okay. Okay, and then maybe on the balance sheet, Marcy, the securities cash flows kind of pick up early next year. At what point are you thinking about, because you do have a loan-to-deposit ratio flexibility, when do you think about reinvesting bonds, cash flows in the bond book?
spk03: You know, what we're looking at, you know, potentially doing small incremental reinvestments at this point. We're just kind of evaluating our options and where we can get, you know, potentially yields over our cost of funds.
spk08: Okay, great. Thank you.
spk05: Your next question comes from Andrew Terrell from Stevens. Andrew, please go ahead.
spk10: Hey, good morning.
spk09: Good morning, Andrew.
spk10: First, I want to start on credit quality. I mean, everything looked good this quarter. The one thing I did want to ask about was the substandard loan bucket was up about $28 million or so this quarter. Any color on what drove the building substandard?
spk09: I think it was just a migration from watch to substandard, but the good news is that the leading indicator watch didn't go up that much, so it's just a normal migration sometimes.
spk03: Yeah, there was nothing unusual, kind of a few upgrades, a few downgrades, nothing unusual in the quarter.
spk10: Okay, got it. And then just looking through the presentation, it looks like the slide on loan portfolio repricing was removed this quarter. I know it was in the last quarter presentation. It feels like the repricing kind of opportunity for you guys over the next year or so has been a big part of the narrative recently. Any reasons specifically for removing that slide from the presentation? And can you just remind us how much in either adjustable or fixed rate credit you've got that reprices or matures over the next 12 months and what the yield pickup could look like?
spk03: Yeah. So, you know, Andrew, we were really seeing that that slide was creating a lot of noise. When we looked at the variance in where folks had our NII, we believed it was attributed to that. So we are just going back to saying, here's what we expect earning assets to be. Here's where we expect NIM to be, here's what we think deposits are going to do. So that was the reason for that, because we think it was creating a lot of confusion and noise. In terms of variable, it's just over 20% of the loan portfolio, and fixed is about 60%. Okay.
spk10: Totally appreciate that. And last question for Kevin, just on the guidance for loans to be flattish in the coming quarter, just wanted to get a sense of how much of that's a result of kind of slower growth across the industry right now versus you may be being a bit more selective on the incremental credit you're willing to put on the balance sheet.
spk09: Well, we've always been selective on what we put on the balance sheet. But I will tell you that the main reason why it's flattish is just due to the fact that we believe that there's not – a lot of robust activity taking place right now in our market. Things are slowing down, so it's just a sluggish environment right now.
spk10: Yep, got it. Okay, nice quarter, and thanks for taking the questions. Thank you, Andrew.
spk09: Thanks, Andrew.
spk05: Your next question comes from Zach Westerlund from UBS. Zach, please go ahead.
spk07: Hey, guys. It's Zach on for Brody. I just had a quick one for you. Are you able to share the dollar amount of loans that are going to reprice over the next 12 months and any yield pickup associated with that?
spk03: So, Zach, as Andrew just noted, we did take that out of our presentation. I really think that we're going to give earning asset guidance and NIM guidance and let you guys sort that out.
spk07: Understood. Thank you for that. That's it for me.
spk09: Okay.
spk05: Your next question comes from Jeff Rulis from DA Davidson. Jeff, please go ahead. Thanks, good morning.
spk06: Just wanted to circle back.
spk03: Good morning, Jeff.
spk06: Hi there. Back to credit for a minute. I just wanted to, obviously the jump off point from 2Q on the non-performer increase, pretty firm that you'd see some improvement. Just wanted to see if that's largely complete, or if we talk about from 3Q to DC, is there an effort for potentially further NPA or criticized balance declines, or was that largely cleaned up from the second quarter?
spk09: I would say that we see things really stable to maybe a slight improvement going into the fourth quarter. We do not see where it should deteriorate. So I would say stable to slight improvement.
spk06: Gotcha. And then kind of doubling back to expenses. Was there anything one time in there? I mean, I know that you mentioned Q2 was a fall off in comp. That was expected. And I guess you're pointing to a similar level in Q4 as you had in Q3. But anything kind of on the lower ebbing that might come back up?
spk09: No, the thing is, I think, in Marcy's remarks, I think she talked about it pretty good. I mean, there was a one-time item last quarter of severance. We also then had the reduction of the mortgage staff that was going to be in the run rate. And then there is a little bit of incentive accrual reduction or reduced. But I would say most of it is the run rate stuff versus any kind of one-timer.
spk06: That sounds like, you know, seasonality trends will fluctuate, but a pretty managed expense message is what we're taking. Last one would be on the dividend outlook. I mean, you know, you're close to 70% of earnings payout this quarter with zero provision. Just interested in the conversations you have with the board in terms of that payout as you look at future earnings expectations.
spk09: Yeah, when we look at the dividends, there's no catalyst at this point that would make us look at cutting our dividend at this juncture.
spk06: Okay, that's all I had. Thanks.
spk05: Ladies and gentlemen, as a reminder, should you wish to ask a question, please press star, fold by one. And we have a follow-up question from Chris McGrady from KBW. Chris, please go ahead.
spk08: Oh, great. Thanks. Just on credit, a couple housekeeping items and an opinion, I guess. Do you have, Marcie, what's left on the acquired loans, the mark on the acquired loans?
spk03: You know, no. I mean, I'm not sure exactly what you're talking about. If you're talking about the remaining accretion, is that what you're asking about?
spk08: Well, just the mark, the day one mark and how much has been accreted out. Yeah, I guess is what I'm asking.
spk03: The credit mark.
spk08: I'll take whatever you have at your fingers.
spk03: You know, so just to be clear, the credit mark just, you know, it now is in the normal provision, and so that's not tracked anymore. But the purchase accounting accretion, it actually is in the deck, the remaining purchase account accretion on page 12.
spk08: Okay, I'll grab that. Thanks for that. And then more broadly, how should we think about – there's a lot of questions this quarter about just normalizing credit for the industry. Maybe an opinion on how you view or you would see as like a normalized range for charge-offs for the company.
spk03: You know, we've typically seen between 20 and 25 basis points in a normalized range. We haven't experienced that. recently, but that would be normalized.
spk08: Okay, that's helpful. Thanks, Marcy.
spk03: You bet.
spk05: Okay, there are no further questions at this time. I'll turn it back to Andrea for closing remarks.
spk09: Thank you for your questions, and as always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thanks for tuning into the call today. Thanks. Bye.
spk05: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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