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spk00: Good morning, ladies and gentlemen, and welcome to the first Interstate Bank System, Inc. Fourth Quarter Earnings Call. This call has been recorded on Wednesday, January 31st. I would now like to turn the conference over to Andrea Walton. Please go ahead.
spk05: Good morning. Thank you for joining us for our Fourth 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 statement 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 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?
spk07: 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 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. Our fourth quarter performance reflected our ability to generate strong financial results in this challenging economic environment. In the fourth quarter, we generated $61.5 million in net income, or 59 cents per share. There were some moving parts on both the balance sheet and the income statement that Marcy will go over in her remarks. For the quarter, we remain disciplined in our new loan underwriting and pricing criteria. The new production rate, excluding draws on construction lines, approximated about 7.8% during the quarter. This reflects our efforts to generate strong risk-adjusted returns on new production. Additionally, as with the prior quarter, We continue to see construction projects being completed and moving into the commercial real estate portfolio while undrawn construction lines also decline. We also saw the expected seasonal declines in deposits in December and utilized our strong liquidity profile to selectively allow some high-cost time deposits to leave the balance sheet while remaining focused on retaining our relationships. And lastly, you probably saw the 8K we filed in December, where we were able to repurchase 1 million shares during the quarter. Even with this, capital ratios continue to increase modestly, providing us with the ability to pay a healthy dividend while maintaining flexibility going forward. The challenging banking and rate environment is resulting in near-term earnings pressure But we're confident these pressures will lessen in the back half of 2024, setting us up for a strong 2025. Over the course of last year, we invested in areas to drive future efficiencies and profitability. As we noted previously, we standardized and streamlined our mortgage process. We also realigned operational support and line of business functions. These improvements have allowed us to provide an enhanced suite of products and services to our clients, such as our consumer credit card, which we discussed last quarter. At the same time, we delivered on our promise to evaluate the existing cost structure of the company, resulting in a reduction of workforce in December. In short, we continue to make strategic decisions to strengthen the long-term value and profitability of our franchise. And with that, I'll turn the call over to Marcie so she can provide some additional details around our fourth quarter results. Go ahead, Marcie.
spk04: Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be to the third quarter of 2023, and I'll begin with our income statement. Our net interest income decreased $5.9 million as the increase in our average yield on earning assets was outpaced by the increase in our total funding costs. Our reported net FTE interest margin was 3.01%, a decrease of six basis points from the prior quarter, as we continued to see less pressure on our net interest margin than we did in the first half of 2023. Our adjusted net interest margin, excluding purchase accounting accretion, also decreased by six basis points from the prior quarter, to 2.94% due to higher overall funding costs, which offset our loan yield expansion, and a one basis point reduction from reinvesting cash flows back into the investment portfolio, which I'll discuss in a minute. Looking ahead, we anticipate deposit costs moderating in the first half of the year, as the majority of our time deposits have already repriced near market rates, and the customer mix shift into higher cost deposits has slowed. That, along with the repricing of our adjustable rate and maturing assets, supports our confidence that both the margin and net interest income will begin to increase in the second half of 2024. Our total non-interest income increased $2.5 million quarter over quarter. Our fee business performed generally in line with our expectations, with the increase driven by a net gain on the sale of fixed assets. Moving to total non-interest expense, We had an increase of $4.9 million from the prior quarter, but there's a lot of noise in that number. Salaries and employee benefits expense was lower as a result of lower incentive accruals of $11.5 million, which was partially offset by higher severance costs of $3.6 million as a result of the reduction in workforce Kevin mentioned earlier. Other expenses were higher and included the special FDIC assessment of $10.5 million and an increase in our credit card rewards accrual of $2.1 million as we saw higher engagement from our clients in our new rewards program. Adjusting for the items noted, our quarterly non-interest expense would approximate $161 million. Moving to the balance sheet. Loans held for investment increased modestly by $66 million from the end of the prior quarter. As Kevin indicated, much of the growth in commercial real estate loans was driven by the movement of completed construction projects into permanent financing. Our outstanding commitments on commercial construction lines totaled just under $700 million at the end of the fourth quarter at a weighted average rate of approximately 5.7%. This represents about a $200 million decline from the previous quarter. We expect the impact on our margin from this portfolio to lessen in the back half of 2024 as those lines continue to fund up and we're seeing limited new commitments. We had a $162 million increase in the securities portfolio, which was primarily due to an increase in fair market value. We chose to reinvest approximately $135 million of cash flows back into securities, locking in a weighted average yield of 5.5% during the quarter. Going forward, we may selectively reinvest cash flows depending on the returns available on the market at the given time. I would note that the decision to reinvest some of the cash flows along with the increased fair market values in the fourth quarter will contribute to a roughly four basis point reduction in our net exit margin in the near term. On the liability side, total deposits decreased by $356 million as we saw seasonal deposit outflows during the latter half of the fourth quarter. As Kevin pointed out, we also let some higher cost retail CDs run off given the high level of liquidity we have on our balance sheet. Moving to asset quality, this is a little noisy as well. While we reported an increase in criticized and non-performing loans, we are seeing positive underlying and overall credit trends. We moved $35 million of held for sale loans back into the held for investment portfolio as the opportunity arose to restructure these loans for a more favorable outcome. This transfer accounted for the increase in non-performing loans. Excluding this transfer, non-performing loans declined $2 million. The transfer also accounted for most of the increase in criticized loans. Finally, total watch loans decreased by more than $90 million in the quarter, which was the second consecutive quarter of improvement. Through our normal course workout process, we will enter agreements with these borrowers to improve the quality of the underlying credits. And we anticipate the associated credits will either be upgraded or exit the bank in the second half of 2024. In summary, we believe total credit quality performed well this quarter, showing underlying improvement, and we remain confident in our near and long-term credit outlook. We recorded a provision for credit losses of $5.4 million, which increased our allowance for credit losses by one basis point to 1.25% of total loans held for investment. Net charge loss in the quarter remained low at $4.8 million, or 10 basis points of average loans. And finally, the leverage ratio was flat quarter over quarter with all other regulatory capital ratios modestly increasing as we continued to manage our risk weighted asset exposure. Tangible book value increased due to a positive shift in AOCI and the earnings generated during the quarter. Going forward, our strong capital position continues to give us the flexibility to take advantage of growth opportunities and allows us to remain dedicated to serving the needs of our customers and attracting new households to the bank. And lastly, we declared a dividend of 47 cents per common share, which equates to a 7.2% annualized yield on the average closing price of our stock in the period. And with that, I'll turn the call back over to Kevin. Kevin?
spk07: Thanks, Marcie. Now I'll wrap up with a few comments on our outlook and priorities for the coming year. We are entering 2024 with a high-level capital liquidity as well as a conservatively underwritten loan portfolio. This positions us well to perform this year, even if economic conditions remain challenging. In 2023, one of our goals was to manage our expense levels, which we did well. This will continue to be a focus in 2024. As mentioned, in December we completed a reduction in workforce and some organizational restructuring that will enhance our efficiencies. The cost savings from these actions, as well as leverage from our automation and process improvements, will help offset our investment in technology and risk management. These efforts are reflected in our expense guidance. In the near term, we are still seeing some reluctance from potential borrowers, but expect this to change as economic conditions and the weather improves. Given that outlook, we are expecting total loan balance to be flat or up low single digits in 2024. However, given the strength of our balance sheet, if market demands increase, we'll be able to respond quickly to additional growth opportunities. As always, customer relationships are top of mind. Considering this, we continue to make improvements in the delivery of our products and services. We recently restructured our treasury solution business, bringing in new leadership, aligning our business development efforts, and expanding our offerings. We are investing in a new consumer and small business loan origination system, which will allow us to streamline our client experience and speed up our origination process. We are enhancing our business credit card offerings, as we did with the consumer card in 2023. This will allow us to offer a more attractive, comprehensive suite of products to our business clients. We are also continuing our journey to automate manual processes to make us more efficient. While the environment is tough right now, we are taking advantage of this time to capitalize on these opportunities so that we can deliver more effectively when the environment improves. In closing, we believe that revenue growth will return in the second half of 2024. Coupled with our ongoing expense discipline, this sets us up well for a strong back half of the year. with improving operating leverage and notably improved profitability run rate as we look into 2025. We believe our diverse footprint, the talent of our people, and our disciplined culture positions us well to win. We remain focused on the long-term value of our franchise and are optimistic and confident in the future earnings power. So with that, we'll open the call up for questions.
spk00: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Andrew Terrell at Stevens. Please go ahead.
spk07: Andrew?
spk10: Hi, Andrew.
spk07: Hey, Andrew.
spk10: Hey, maybe first question on the margin. I mean, the low-kneel expansion we saw this quarter was good, and maybe a few parts to my question here. One, do you have the spot low-kneel at 1231? And then can you remind us if there are any lingering headwinds kind of from the construction fund up and then just kind of bigger picture and maybe holding rate moves aside. Just would you expect similar upward trajectory in the loan yields throughout 2024 as the seven basis points you saw in the fourth quarter?
spk04: Yeah. So the spot loan yields were about 7.8%. Again, the, you know, construction fundings, they're happening at about $200 million a quarter. You know that weighted average yield on those are 5.7, so there will continue to be some pressure from that portfolio the first half of the year, which should taper off as we get to the back half of the year. What was the second part of that question? In terms of loan yields going forward, we think there are a few basis points higher than the Q4 average.
spk10: Yeah, and then I guess just like going throughout 2024 on a quarterly basis, would you expect a similar kind of seven basis point or so pickup in loan yields per quarter?
spk04: Yeah, it should be, you know, kind of mid-single digits right in there somewhere. Okay, and then Marcy on the – In the first half, assuming – yeah. Go ahead.
spk10: Yeah. Okay. Okay. plan for the securities portfolio cash flow in the first quarter? I mean, obviously, a bigger amount of cash flow coming off the bond book in one queue. Is the plan to use that to pay down borrowings, or is there a preference to kind of build liquidity or reinvest back into the bond book right now?
spk07: I think, you know, Andrew, we're going to see what the market will give us during that period of time, and we'll make decisions accordingly. But If the market gives us good rates to reinvest in, we might take that route. But if the market has shifted dramatically, then we'll probably just pay down borrowings. The thing is how seasonally the deposits are in the first quarter. So there's a couple of moving factors. I know it's going to be hard for you to project that, but we looked at it. It doesn't materially move the numbers either way that much.
spk04: NII, right?
spk07: NII.
spk10: yeah right okay and then maybe last on the margin i'm just trying to understand the dni guide i'm just trying to understand how influential the the three rate cuts are to that to that forward guidance and i know you guys are slightly asset or slightly liability sensitive as we sit here but if we were to flex that and kind of assume the full forward curve or assume conversely kind of no rate cuts i guess how big of a driver is that cni guide and how could we see the the guide change based on those varying assumptions?
spk04: So if there's more than three rate cuts, you know, that's going to be a benefit to us. You know, we have over 50% of our CD book matures in the first half of the year and 90% by the end of the year. You know, we have our 17% of our deposits that are in the index money market, you know, product. So, you know, that's going to reprice. And then we'll see the benefit in some of our borrowing costs. you know, I think there's going to be a bit of a lag, you know, on our deposit, on the deposit side most likely. So, you know, those deposits will set potentially a little bit slower than the rate cut that comes through on, that the Fed would push through.
spk07: So, in a flat rate environment, we still see NII growing in the back half without any rate cuts at all. So, As the rate cuts increase, you'll see more benefit with regards to NII. But we have run the numbers with no rate increase at all, and NII should grow in the back half of 2024. Okay.
spk10: That's helpful. I appreciate it. Just if I can sneak one last one in. Marcy, it sounds like within your expense guidance, we should be using kind of $161 million or so as the run rate for operating expenses that I presume, kind of grow as we work throughout 2024. Is that fair? That's fair.
spk04: That's fair. Oh.
spk10: Okay.
spk03: Thank you.
spk00: Thank you. The next question comes from Chris McGrady at KBW. Please go ahead.
spk01: Hey, how's it going? This is Andrew Leischner on for Chris McGrady. On that mid-single-digit NII decline guidance for 2024, what are you assuming for your non-sparing deposit mix and your beta expectations? NII deposit expectations and… Your NIB deposit expectations and your beta expectations that go into the NII guidance.
spk04: So in the fourth quarter, our beta was 33%, and then with a spot beta at the end of the year at 34%. We continue to believe that we'll see some migration out of non-interest bearing into higher cost deposits as we go through the rest of the year.
spk07: But that's slowing.
spk04: Yeah, it is slowing. But we assume that's going to move a couple of basis points higher into the second quarter.
spk03: Okay, thank you.
spk01: And then just on capital, you had that $32 million share purchase from the estate of a single stockholder. How should we think about your capital priorities for 2024? And can you just remind us if you have any specific capital targets? Thanks.
spk07: We have some internal things, but we don't publish or talk about our internal capital levels or what we strive to have. But I will tell you that our priority – is to maintain a healthy dividend throughout the year and into the future. So that's our first priority with capital. And then to use capital for organic growth would be the second priority. I would say that unless things really go really well, I would say share repurchases at this time has been shelved. So those are probably our biggest priorities at this point.
spk03: Okay, great. I'll step back and answer the questions.
spk00: Thank you. The next question comes from Brody Preston at UBS. Please go ahead.
spk09: Hey, good morning, everyone.
spk07: Good morning, Brody.
spk09: Hey, Marcy, within the net interest income guidance, did you give the down beta that you're assuming with the cuts that you have in the back half of 23?
spk04: So we didn't give the down beta in the back half. Under our assumptions, we're assuming some lag. We actually think if rates come down, we think there's some potential to do better than we're assuming in our guidance. So we assume it will go up modestly from the 34% that it is in December. which if rates come down, we could see some benefit there.
spk09: Okay. The NII guide itself, is that GAAP or is that FTE? I just wanted to clarify.
spk04: That is GAAP. Well, it's ex-purchase accounting. Yeah.
spk09: Okay. XPA. Okay.
spk04: The expense guidance, I just wanted to... Hold on, the guide, Brody, just to be clear, is GAAP.
spk09: Which includes?
spk04: Yeah, which includes purchase accounting, yeah.
spk09: Okay, thank you for the clarification. On the expense, I just wanted to clarify, it says excluding the 10 million, the 10.5 million FDIC, you're expecting a low single-digit increase but that includes, I'm assuming that that means that you're including the severance charges and stuff that you had last year. So if I kind of just took the 10 and a half million out, it kind of implies that you're looking more towards like 658, 659 in expenses for next year, kind of like the midpoint of one to 3% up. Is that like, am I thinking about that correctly?
spk04: That's a fair way to think about it, yes. You're right on it.
spk09: All right, cool. I just wanted to make sure that I was understanding it. That's really all I had, guys. I appreciate it.
spk07: Thank you, Brody.
spk00: Thank you. The next question comes from Jeff Rulis from DA Davidson. Please go ahead.
spk06: Thanks. Good morning. On the credit side, one of the get into that ag loan kind of group. I guess first, just say to assume those were legacy Great Western credits. Is that fair?
spk07: Are you talking about the ones that moved into non-performing?
spk06: Correct.
spk07: Okay, yeah, they were, yes, legacy Great Western credits. But the thing is, we believe it's temporary because we're restructuring those loans and What we need is a payment performance for like six months on accounting rules before we can move them out of not performing into performance. So we believe those loans will move out of not performing into the third quarter of this year.
spk06: Yeah, I heard it in the prepared. I appreciate it. I was going to follow up. It's just it seems like moving that to help for investment that allows you to sort of move those through. Is that the messaging of the move?
spk07: Yeah, and it's also the messaging is that, you know, we kind of were able to restructure these into performing loans. So I think that's more of the message that they're kind of getting cleaned up.
spk06: What is the type of, if maybe they're pretty granular and mixed, but is there a type of ag that that represents and what type of geography did that come from?
spk07: It's dairy and it's Arizona or California, down that area.
spk06: All right. And on your guide of net charge-offs of 15 to 20 basis points, is that broad-based or is that including likely some of that, those ag loans to contribute to the bulk of that?
spk07: Well, we're not looking at any kind of charge-offs on those loans at this juncture, but we're talking that's just broad-based.
spk06: Okay, so no particular segment, just you think that's where you are in the cycle of 15 to 20 basis points for 24?
spk07: Yeah, I guess the thing is we haven't hit that, but we're forecasting that.
spk06: Got it. Okay, and within the... loan growth expectations kind of flat or low single digit. I guess within segment, would you, you know, got the discussion on the construction commitments, but trying to peg what segments of growth do you see in 24 versus some areas that may be flat or may be running off within that overall guide on growth?
spk07: You know, I would say, you know, the way our franchise is, we're kind of, we're in every different industry and vertical. So it's hard to say at this point. We think that's pretty much going to be growth that's going to be brought across all different verticals.
spk04: You know, I think we'll continue to focus on our small business initiative. We'll continue to focus on CNI growth. You know, all of those things, of course, but to Kevin's point, it's going to be pretty broad-based and spread across the 14-state footprint.
spk06: Okay, so the commercial real estate growth, largely from construction completion, that's a bit timing of Q4, but the balance of 24, again, kind of pointing to a pretty mixed contribution, albeit modest, for the full year.
spk07: That's correct.
spk06: Okay. Thank you. I'll step back. All right, Jeff.
spk00: Thank you. The next question comes from Adam Butler from Piper Sandler. Please go ahead.
spk08: Hey, good morning, everybody. This is Adam on for Matthew Clark.
spk07: Hi, Adam.
spk08: First, I was just wondering if you could provide some commentary around the staffing reductions that were completed in December. I was curious if it was... more surrounded by efficiency improvements in the back office or maybe lower producing, lower revenue producing producers?
spk07: Thanks. It's kind of broad with regards to that. I would say that we looked at the levels of staff that we needed in various areas based on the workload that people were doing and we made reductions in order to bring efficiencies to the levels they should be at. I would say that, you know, with that reduction, we also plan on adding, as we said in our remarks, you know, putting more expense into, I would say, risk management as well as IT so that, you know, we balance out. But we just really went through the company and looked at where we might have had some excesses and took those out.
spk08: Okay. I appreciate the color there. And then... Second, I appreciate the guidance on the NIM and NIA down in first quarter relative to the fourth quarter. Do you guys happen to have either the spot rate on interest-bearing deposits or the NIM in the month of December or at the end of December?
spk07: Thanks. I'm sure we have that. Go ahead, Marce.
spk04: So our net interest margin in December was 2.86%, and so it was lower than the fourth quarter average. And, you know, we saw pressure there because we had the vast majority of our early cycle CDs repriced in November and December. We also, you know, that was impacted by the recovering fair market value on our investment portfolio and then our decision to reinvest those investment portfolio cash flows that resulted in a couple basis point decline in NIM in December. And then lower non-interest bearing deposits, higher borrowings were also a factor there. So that's where when we talk about our first quarter NIM, you know, we expect it to be lower than the fourth quarter average and more in line with that mid-280s number.
spk08: I appreciate the color, and thanks for the time.
spk00: Thank you.
spk07: I just want to clarify that thing. That was excluding purchase accounting.
spk00: Yeah.
spk07: That NIM guidance.
spk00: Thank you. Next question comes from Timur Brasiler from Wells Fargo. Please go ahead.
spk02: Hi, good morning.
spk04: Good morning, Timur.
spk02: Maybe looking at some of the in-migration into your geographies during COVID, your construction balance has doubled over that period. I know that leading up to it, there had been a shortage of supply of housing along with other things, just inability to find workers. Can you maybe give us an update on where your geographies stand now and just some of the population migration, maybe how that's trending and if there are any areas within your geographies that you feel like might have been overbuilt given some of that migration in over the past couple of years?
spk07: You know, I would say I think the migration has probably slowed a bit, but there's definitely a shortage of houses in the majority of our markets. So we don't see really any markets right now having excesses. So, you know, there's a need for housing. So we're not right now seeing anything in any one of our markets that there's been any overbuilding. The only area I'd say that might not be where everybody's flocking to is some of the big cities like Portland and Seattle. But besides that, I think that the rest of our areas are in pretty good shape.
spk02: Okay, thanks. And Marcy, I guess the four basis points of NIM pressure from bond reinvestment at 5.5% and 1.2%, I guess I don't understand that. Did I hear that correctly, that as you're remixing the bond portfolio, that's driving incremental margin? Or maybe can you explain that?
spk07: I think the biggest thing is that the earning asset balance is bigger because, first of all, the fair market value adds more to earning assets with really not any more earnings in NII. And then, you know, with our forecast before, we were looking at bringing down the investment portfolio and reducing earning asset balances It really doesn't affect NII, but as you reinvest, you're not getting that same net interest margin. But NII improves, but the overall margin is impacted by the greater denominator.
spk02: Got it. And then lastly, Kevin, we'd love to hear your updated thoughts on M&A with some of the headwinds of 23 more or less in the rear view, purchase accounting a little bit as AOCI becomes less of a headwind. Maybe just give us an update on where you stand with M&A and how that fits into the capital deployment story at First Interstate.
spk07: That's a great question, Jamar. I would tell you that, you know, as you probably have heard from other institutions, I think there's a lot more conversations that are being had out there. As you always know, we're very disciplined on our M&A strategy. We have a priority list of institutions that we believe would make our franchise better, and we have been in touch with these banks for many, many years. It's up to the seller to sell. So I think there are more activities out there, but we're going to stay steadfast to the institutions that we believe We'll make our franchise better, and if they come and want to partner with us, then we'll probably put something together. But we're open to do something, but we're not going to just do something for the sake of doing something.
spk03: Got it. Thank you for that.
spk00: Thank you. Next question is a follow-up from Brody Preston at UBS. Please go ahead.
spk09: Hey, guys. Thanks for taking the follow-up. I just had a couple other ones. I guess if I take the guidance on loans and kind of looking at what you said about the security, cash flow, and reinvestments there in the past, it sounds like maybe average earning assets should be flattish for the year. I just wanted to clarify that.
spk07: Yep. That's exactly how we look at it, Brody.
spk09: Justin Fields- Okay, and so, if we're in the mid 280 X PA on the one Q margin. Justin Fields- You know kind of like the guidance on and I Marcy kind of implies like a pretty good step up in the in the name by the time we get to four Q and so where are you thinking that X PA margin gets to by the fourth quarter.
spk04: You know, we believe it could be comfortably over that 3% mark in the back half of the year, assuming stable deposits, and that's assuming the three rate cuts that we've discussed.
spk09: Got it. Thank you very much for that. I appreciate it.
spk00: Thank you. If there are no further questions, I will turn the call back over for closing comments.
spk07: Thank you all for your questions. 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 in today. Bye-bye.
spk00: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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