Q1 2023 First Interstate BancSystem Inc Earnings Call
Hello, and welcome to the first Interstate Bank System, Inc, Q1, 2023 earnings call.
My name is Elliot and I'll be coordinating your cold stack.
If you would like to register a question John on the presentation. Please press star followed by one on your telephone keypad.
I would like to hand over to Lisa Slyter Bray. The floor is yours. Please go ahead.
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 other 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.
<unk> is available on our website at <unk> Dot 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 will turn the call over to Kevin Riley Kevin.
Lisa Good morning, and thanks again to all you for joining us on our call today.
Again this quarter.
Along with our earnings release, we.
We have published an updated investor presentation that has some additional disclosures that we believe would be helpful.
The presentation can be accessed on our Investor Relations website.
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 will turn the call over to Marcy to provide more details on our financials.
Throughout our more than 50 year history.
First Interstate has prioritized prudent risk management.
As a result.
We have consistently been a source of strength and stability for clients during times of economic stress.
This was the case during the pandemic.
It's also the case now in the wake of the recent bank failures that had created stress across the broader banking system.
As a result of our relationship focused approach.
Which has allowed us to build a loyal client base.
We have seen stability in our insured deposit base.
And experienced limited attrition of larger uninsured business deposits since the recent bank failures.
We are seeing net growth in new deposit accounts throughout all of our markets as clients seek stability in their financial partner.
Given the strength of our balance sheet and the stability of our deposit base.
We did not have to take any extra dori balance sheet actions to mitigate deposit outflows or to otherwise address liquidity needs.
As a result, we continued to deliver strong financial performance for our shareholders.
<unk> generated $56 3 million and net income.
<unk> 54 per share.
While increasing our tangible book value per share by 5% from the end of the prior quarter.
This includes the impact of a $23 4 million dollar of loss, we incurred on the sale of investment securities in the middle of March.
And a $1 $9 million fair value Mark on loans held for sale.
Which lowered our earnings by <unk> 18.
The proceeds from the sale of investment Securities were largely used to pay down higher cost borrowings, which took place in early April .
This will help stabilize the net interest margin.
And we will add to net interest income over the next 12 months.
The impact from this transaction is included in our revised outlook.
The volatility in the markets as a result of bank failures has caused operational disruptions for many institutions, we feel very fortunate as our deposit base remains relatively stable.
And I personally responded to a very few client concerns, leaving most communication in the hands of our very capable bankers.
Our deposit declined by three 9% during the first quarter.
The majority of the outflows occurred in the first half of the quarter. When we saw anticipated seasonal activity representing approximately two thirds of the reported decline.
The additional outflows with subsequent to the bank failures in March and mainly consisted of uninsured business deposits.
Throughout the quarter.
We continue to see the migration of deposits from noninterest bearing to interest bearing accounts and saw a greater reliance on borrowed funds to cover deposit outflows.
This unfavorable change in our funding mix along with increased rates on all deposit categories.
Resulted in a higher average cost of funds and a decrease in our net interest margin during the first quarter.
As we indicated on our last earnings call.
Given the uncertainty in the macroeconomic environment and our focus on gaining full banking relationships.
We were more selective in new loan production.
Which resulted in lower levels of loan growth as compared to the fourth quarter.
As reflected in our first quarter performance.
We are prioritizing C&I growth.
Which increased at a 20% annualized rate in the quarter.
We continue to see quality lending opportunities across our footprint.
And increased total loans at a three 2% annualized rate.
Although the first quarter is typically slower for us.
You should expect growth to remain in this low single digit range for the full year.
We feel this slower pace relative to our prior outlook as more prudent in the current environment.
Considering the heightened focus on C&I growth.
And the growth in full client relationships.
Our deposit base remains very diverse and granular.
Consumer deposits make up 54% of our deposit base with an average account balance of.
Less than $20000.
Business in municipal deposits.
Our 46% of the base.
With the average account balance of about $90000.
As of the end of the quarter uninsured deposits that subject to Commoditization represented about $6 2 billion, which.
Which we had available liquidity of approximately $11 billion, which is over one seven times coverage.
Moving to capital.
It remains strong.
And we're pleased to announce a dividend of <unk> 47 per share.
There is about a 7% yield on our current stock price.
From a sensitivity perspective.
If we were to liquidate our entire available for sale portfolio and held to maturity portfolio.
And realize the market losses as of March 31.
We will remain well capitalized for all regulatory ratios.
And with that.
I'll turn the call over to Marcia to provide some additional details around our first quarter results go ahead Marcy, 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 2022, and I'll begin with our income statement.
Our net interest income decreased by $19 $5 million, which was primarily due to an increase in our interest expense, resulting from a shift in our funding mix toward higher cost short term borrowings and interest bearing deposit accounts.
Two fewer days in the quarter and $3 $2 million lower purchase accounting accretion quarter over quarter.
Our reported net interest margin decreased 25 basis points from the prior quarter to 336%.
Excluding purchase accounting accretion our adjusted net interest margin decreased by 20 basis points to 329% from the prior quarter as the 19 basis point increase in the average yield on earning assets with more than offset by the 46 basis point increase in our total cost of funds.
Importantly, both our reported and adjusted net interest margins are still comfortably above our year ago levels by 56, and 64 basis points respectively.
Given the change in funding mix and higher deposit costs in the month of March and at quarter end, we expect our adjusted net interest margin, excluding the impact of purchase accounting accretion to be lower in the second quarter relative to the first.
While we will realize the benefit to the net interest margin in April from the deleveraging activity, Kevin discussed, which will approximate $2 million and net interest income over the next 12 months.
We are starting with an adjusted margin of three 7% for the month of March.
Additionally, while we had initially believed deposit trends could remain closer to historical norms and essentially be flat year over year. We now believe this could be a challenge our current outlook assumes that deposits declined by low single digits in the second quarter, primarily related to tax payments and then will remain relatively stable.
From there through the end of the year with a continued shift out of noninterest bearing into higher cost interest bearing accounts.
With this as a baseline which pushes our assumed deposit beta up to plus or minus 30%. We are now expecting our adjusted net interest income growth in 2023 to be in the low single digit range, excluding purchase accounting accretion.
Scheduled purchase accounting accretion as you can see on slide 12 of the Investor presentation will approximate $12 million to $13 million over the remainder of 2023.
Our total noninterest income decreased $25 $2 million quarter over quarter, primarily due to the $23 $4 million loss on investment securities and the $1 $9 million right down to the fair value of loans held for sale realized during the first quarter.
Excluding these items noninterest income was relatively consistent with the prior quarter, we had a small decline in payment services revenue as a result of lower levels of consumer spending which impacted debit interchange revenue, while our wealth management revenues increased due to a combination of market performance and the seasonal benefit from annual fees.
As we look to the remainder of 2023, we're expecting to realize the benefit from current strategic efforts around mortgage and payment services in the second half of the year with that view, we now expect fee income for the full year 2023 to be down low to mid single digits from 2022, excluding securities losses in <unk>.
Both years.
Moving to total noninterest expense, our first quarter was down $9 $5 million from the prior quarter.
Salaries and benefits expense decreased primarily as a result of lower incentive compensation expense compared to last quarter, along with a reversal of $3 $8 million of 2022 incentive compensation previously accrued.
The lower salaries and benefits expense helped to offset a $1 $5 million increase in our FDIC insurance due to a higher assessment rate now in place.
Overall, our total operating expenses for the full year 2023 remains consistent with our initial guidance that said, we recognize the pressure on revenues and continue to look at ways, we can be more efficient and further reduce expenses.
Moving to the balance sheet, our loans held for investment increased $146 $5 million from the end of the prior quarter with growth coming from the C&I and commercial real estate portfolios the.
The majority of the decline in the construction portfolio reflects projects being completed and moving into the CRE portfolio.
As Kevin mentioned earlier, we're focusing on growing the C&I book and developing full banking relationships. So we're pleased to see the growth here.
On the liability side, our total deposits decreased $966 6 million most of the decline came in noninterest bearing business deposits.
The decline in noninterest bearing deposits was partially offset by increases in our balances of time deposits as we see more customers taking advantage of attractive CD rates.
Moving to asset quality nonperforming assets increased $24 million, which was primarily attributable to the migration of two loans are senior housing facility in the Midwest and a warehouse in the Pacific northwest So different industries in different geographies.
<unk> loans increased one 1% from the prior quarter and total delinquencies declined by 17% or $12 million.
Our loss experience continues to be very low with net charge offs of $6 2 million or 14 basis points of average loans in the quarter.
With our loan growth and the changes in credit quality that we saw this quarter, we saw a modest increase in our ACL percentage to 124% of loans held for investments. Our total provision expense was $15 2 million, which included $1 6 million related to unfunded commitments and $1 4 million related to the <unk>.
Investment Securities portfolio.
Lastly, we have strong capital ratios.
Our tangible capital ratio improved to 637% from a low of five 9% back in September of 2022 irregular.
Our regulatory capital ratios should continue to build throughout the remainder of the year.
While we contemplated a share repurchase in the first quarter with the volatility in the industry. We do not believe it would be prudent at this time, despite our very attractive stock price of course should conditions change we will revisit this decision.
Now I'll turn the call back to Kevin Kevin.
Thanks Marcy.
Now I'll wrap up with a few comments on our outlook.
On our last earnings call, we indicated our growth priorities for the year, we're pursuing new household growth, particularly in our new markets added to the great western merger and growing fee revenue.
We have not altered any of our planned investments for the year related to these initiatives.
And we believe the environment is even more conducive to adding products to allow us to grow our clients and increase share of wallet.
In order to better compete in mortgage we have recently centralized our fulfillment process with both digital and traditional applications are now handled by a centralized team.
To support this effort we.
We have put it in our referral program in place to Incent, our retail staff to generate leads for this team.
This will allow us to provide this basic consumer need to our clients in a more seamless and efficient manner.
We're also in the middle of strategic efforts to rollout new suite of consumer credit cards.
It will be several options for consumers to consider from a secured card all the way to an elite card.
With this.
We will provide a more competitive and user friendly reward system.
We expect to begin seeing the benefits of this re launch in the second half of the year.
As a bank that can offer the financial strength breadth of products and services and a robust digital platform of larger financial institutions combined with a high level of personal service typically associated with community banks.
We believe we have a compelling value proposition to offer both businesses and consumers who are reevaluating their banking relationships in light of the recent events.
I mentioned earlier that.
We saw that growth in new deposit accounts during the back half of March and that trend has continued in April .
We will continue to be selective in new loan production and why we're not seeing yet a decline in loan demand, we need to be disciplined and getting paid for loans we are booking.
So we may sacrifice, a little growth, if we cannot get an appropriate return.
With this in mind and with the focus on C&I and small business loans.
Both of which will contribute to our long term profitability and further increase the value of our Frankfurt size, we may see total loan growth for the year being in the low single digit range.
Before we conclude.
A few comments about credit.
In short.
While we are always on the lookout for early signs of stress, we have a granular loan book and we continue to feel positive about the stability of the portfolio.
In particular, our commercial real estate portfolio continues to perform well this portfolio is well diversified across both industry and geography.
For loans exceeding $5 million and outstanding balances.
The average loan to value at origination was 61%.
And the current average debt service coverage ratio exceeds one seven times.
Considering challenge as noted in the broader office market, particularly in the major metropolitan markets. We have taken a more granular look at our general office exposure.
In total the loans exceeding $5 million and outstanding balances. The general office exposure has an average current debt service coverage ratio of one eight times.
We also did a deep dive on our metro markets and redefined Metro to include Seattle, Portland, Phoenix, Minneapolis, Denver, and Kansas City.
Under this expanded definition as you can see on page seven of our Investor deck. We have identified 22 non owner occupied general office loans for a total exposure of $113 million.
Two loans make up $47 million.
Or 42% of the total.
Both of which are pass rated credits.
The remaining $66 million is comprised of 20 loans.
Two of which are criticized totaling seven $4 million.
In addition, we have two metro office construction loans totaling $37 million.
And the average loan to value on these two loans is 71, 3%.
We have historically performed well during times of economic stress and capitalized on opportunities to increase our market share.
<unk> prudent risk management will always remain our top priority we.
We believe the current environment will ultimately proved favorable for us in our efforts to expand our client base.
Given the strength of our balance sheet.
Our high levels of capital and liquidity.
And our continued strong asset quality we.
We are well positioned to grow our client base and take advantage with other banks fail to meet the needs of their customers.
So with that I'll open the call up for questions.
Yes.
Yes.
Thank you.
Your question. Please press star followed.
One on your telephone keypad.
If you would like to withdraw your question. Please press star followed by one.
Congrats ask your questions. Please ensure devices on mute locally.
Our first question today comes from Andre <unk> from Stephens. Your line is open.
Hey, good morning.
Good morning, Andrew.
I wanted to start on the margin.
The NII guidance, so I guess on the second quarter Guide Marcy you mentioned the core margin would move lower I guess.
It'll be lower I think versus the reported <unk> 23 core margin, but do you see margin compression from that.
Core margin for the month of March that you referenced I think $3 17 was it was referenced do you see compression from that level or just versus the full quarter average.
Andrew Good question.
We said with the $3 17 in the deleverage stage will.
Well, we see with some of the deposit runoff that Marty mentioned, we have some slight deposit run off in the first quarter. We believe with the trade and then kind of the mix shift that that should be the trough.
Net interest margin going forward.
Yes.
In our forecast.
From where we are at about 18% right now somewhere around plus or minus 30%. So that's moving noninterest bearing into interest bearing.
So.
That's kind of how we see it right now, but all bets are off that's what we're projecting is a little bit more deposit run off but.
We think it's going to stop and slow but that would be the only thing that would change I think our forecast going forward, we're very conservative in the way we're looking at it. So we really believe march's trough, yeah. So Andrew I would just add a little bit to that so again the deleverage trade. We believe that adds about $10 million for the next 12 months.
We do have a continued shift in our in our deposit mix for out of noninterest bearing.
At the time in that assumption and then also out of the investment portfolio run off so again $60 million to $70 million.
I might have answered our loan portfolio.
Got it.
The deleverage Trey do you have what the earn back.
It was on that repositioning and then.
I hear you that.
Do you have some mix shifts in the deposit base that kind of underlies that guidance do you have any other specific and kind of how much and I be compression would be included within your guidance.
Yes, my simple math would be this burning $10 million a year, a little more and we took a $23 million loss, that's kind of the math, yes little over two years.
Alright Thats fair.
Okay.
Noninterest bearing mix shifts.
So that mix shift.
Okay.
Andrew Andrew repeat that part of the question for US Yeah, I didn't hear that part of the question.
I apologize Marshall you were saying that there is some underlying your guidance. There is some continued mix from noninterest bearing deposits into time deposits do you have the specifics like how much noninterest bearing compression do you anticipate.
Really quick.
<unk>.
Hey, Andrew It's John Yeah. So if you look back on a pro forma combined company to pre COVID-19, the noninterest bearing with somewhere in the mid <unk> call. It 25% of total deposits.
The guidance to get to that 30% data by the end of the year assumed that we would go back to that level. So it's quite a bit of run off in noninterest bearing from this point forward for the balance of the year as Marcy mentioned into time deposits would be the mix shift that's assumed there.
Okay.
And then last one for me I guess I was.
Surprisingly a bit to see the the expectation for low single digit deposit decline again in the second quarter and I understand some of the macro headwinds, maybe but I I was assuming a seasonal kind of rebound might be able to help. So just curious kind of how you're tracking quarter to date versus that low single digit expectation in <unk>.
And then if you can give any color on the new account openings I know they were strong.
Just any more any more color there on how strong they were on a relative basis to prior quarters.
So Andrew most of the deposit outflow that we've seen so far it's been largely related to tax payments.
Deposits are the biggest question Mark so our in our outlook, we've left that flow that we're seeing trends from income tax payments in our forward look.
So I'm a bit a little bit as we.
We always have said deposits usually after the tax outflow that you see in April usually because of you.
Normal seasonality, if we start seeing deposits grow in May and June and going forward, we've taken a more conservative look at that in our forecast, but that's.
What we would expect but we're being a little bit more conservative in our outlook.
Yeah understood. Okay. Thank you. Thank you for taking the questions.
Thanks, Andrew next question comes from Chris Mcgratty from <unk>. Your line is open.
No.
Great Good morning.
Marci your in for John .
Just coming back to the margin for a second the improvement in your loan yields was about half of the step up in the deposit costs.
I know you've talked in prior quarters about.
Unfunded funding. So can you just walk me through how would you think about loan yields from here.
Okay.
Yes.
Loan yields.
Chris.
The yield on new loans was about six 5%, but net of that construction funding.
Six 6%.
So that's that's kind of the pressure that we saw there.
And is there a lot more on that to come.
The construction loan yields will put pressure all year long.
John .
On our margin.
Youll see less should lessen as the year goes.
Through the rest of the year.
Yes, Chris it's John So the draws will be somewhere in the range of about $75 million a month, probably for the balance of the year.
As Marty mentioned, if you strip those out the production that came on the balance sheet was kind of mid sixes. So thats dampening by about 50 basis points in the first quarter at that dampening effect Thats, what Kevin was just referring to will lessen as the year goes on.
<unk>.
If you sort of core out the loan yield for the first quarter. You are at about $5 15, we should see that step up marginally over the balance of the year that would be the expectation.
Okay. That's helpful question.
Kevin maybe a bigger picture question on.
On the ROE.
Obviously, you had a huge step up with the with the deal and rates.
And you're not alone that earnings are being pressured how do we think about normalized Roe.
For the company and then kind of a tangent to that the dividend, obviously, you've a huge dividend.
How do we think about like a targeted payout ratio.
Well targeted payout ratio I think somebody that's pretty good calculation based on our forecast right now the payout ratio is probably going to go around 65%.
And we believe we're very comfortable with that due to the fact that we're very conservative in our forecast of where we believe the earnings power of the institution is.
So we're comfortable with that dividend payout ratio at this point in time, because capital is strong and asset quality is strong and we see nothing that would concern us and cutting the dividend due to the fact that capital will continue to grow throughout the year at that dividend payout rate.
Okay, that's great and then how about kind of a comp.
Comment on ROE.
Thanks.
I'm going to throw that one to John about the ROE.
Low double digits.
It's what we would expect.
Is that growth or low double digit growth.
Total tangible common equity.
No no total equity.
Low double digit return on total equity.
Okay got it thank you.
Okay.
Our next question comes from Jared Shaw from Wells Fargo. Your line is open.
Hey, guys good morning.
Hey, Jud.
I guess I'm just.
On the deposit side with that 30% beta that's still it's still lower than what we're seeing is a lot of other banks.
What's the I guess sort of what's your thinking about being more aggressive with pricing to retain those deposits.
I would have to use as much wholesale funding or is it really not so much a pricing issue in your markets versus.
Maybe just the selection somewhere else, but I guess, what would you have to do there to where we can.
Just to bring data to keep those deposits from continuing to do well.
Yeah. Good question Jerry.
We're seeing as you know.
Quite frankly again with most of our half of our deposits are pretty much consumer and we're not seeing much change in those deposit balances at all if you go back we put out special products all the way back at the beginning of the third quarter of last year.
Index money market product as well as some CD rates at that point.
The migration and those counts we are quite hefty in the third and fourth quarter. So right now those those index accounts represent about 15% of our camp out so a lot of the migration of our customers CD represent about 8% have already migrated into some of that most of the deposit runoff.
It is really on the business side somebody uninsured stuff. So it's not it's not really a pricing issue at this point.
And we're planning on continued migration, but I would tell you the migration from the standard money market into the index and moving into the cities has dramatically slowed.
From the third quarter and fourth quarter.
Okay. When you look at that third of the deposit flow that happened after <unk> b.
So you say, that's mostly uninsured business is there an opportunity to maybe bring some of those back or where that those companies have made the decision to move it.
Uninsured deposits and its not likely to come back.
Well the customers tell you that when they when they sit there and say we're going to move some of it and they say well we'll be.
Bring it back.
I don't know anybody's guess at those they could come back.
But we're not forecasting them coming back in any big way, but they could come back I mean, the customer conversations of some of the ones that I've had I've been very very good conversations, but you know.
I do.
Do their own risk management, and we will see if they get comfortable with us moving forward those deposits could come back, but I'm not we're not betting at this juncture, yes, but our bankers are actively pursuing those customers and so.
And.
We're optimistic that they'll come back, but that's not included in our guidance.
Okay.
And then I guess shifting to credit when you look at the office exposure and thanks for the for the color on that.
How much of that came over from from great Western and has a.
There's a credit mark on it already versus how much was originated.
Lastly crew prisoners.
Well I don't know that answer off the top of my head.
I'm looking at my credit Guy, we can get you that number.
So we don't have that in front of us sorry Jared.
Okay, all right, but as we look at the allowance build.
You have to do that separate from the credit Mark you've taken right. So I mean, youre still youre still looking at the total estimated losses on the on the gross portfolio of whether or not you have a credit mark on that or not is that right in terms of how we saw the allowance grow as the ratio this quarter.
Yes, so jared under the new accounting rules again, that's all in the allowance at this point and so that that full credit markets included in the allowance.
Well isn't that credit Mark included in the net balance on the reducing the balance that you brought over separate from the allowance.
Yeah.
I'll amortize and so.
There is some there but yes it's.
Yes.
Really you should think of the allowance is incorporating the full credit mark.
Got it Okay and then just finally from me on the new card initiatives that you've talked about.
With these with the rewards do you think is that going to be profitable in 'twenty, three or I guess, how long will that take.
To become profitable in terms of the rewards and the expense that the rollout versus contribution.
That's a good question.
<unk> really is not that large.
Bringing a new cards and rewriting the program and rewards. So it's not really a large expense and we're just looking at our belief is that with a very competitive card, which will be competitive to the other large credit cards out there and our rewards will be similar that that our belief is that we.
We could pretty much doubled our card volume with regards to consumer over the next three years.
Yes, and all of that again is baked into the guidance that we expect.
You know the net profitability of that car to be.
Yes.
Great. Thank you.
Yeah.
Our next question comes from Brody Preston from UBS. Your line is open.
Hey, good morning, everyone.
I wanted to ask just a follow up on that question on the card. So if you are successful on the card as you hope to be I guess, where would the extra expenses tied to that wind up showing up would that show up in my data processing and other expenses or something like that.
It's going to show up in other expenses, Thats, where our reward process. Unfortunately.
On other expenses.
Part of this whole redone as Mastercard.
Mastercard's, a great partner and they're helping US go there so with that partnership.
They help cover some of the cost of moving us forward there.
Got it Okay, and then I wanted to ask on the one to three year loan repricing bucket do you have a sense for the $5 5 billion in there do you have a sense for what the loan yield of.
Of that bucket.
[noise], Yes, Brody hey, its John .
Low force call it four in a quarter.
Okay. So repriced from four in a quarter up to six six and a half.
Okay.
On the current production levels, yes that would be correct.
Okay. That's helpful.
And then I did want to ask unexpected.
The expenses were pretty solid this quarter.
And so I did want to ask sorry, I got a new kitten and the thing is just like going Crazy right now.
[laughter].
I did want to ask on the expenses.
They seem to quite a bit better than what I was looking for and so I wanted to understand within your within your guidance what the like what the exit run rate for the fourth quarter. It looked like and if there was any kind of seasonal pickup that we should expect in the back half of the year.
Yes, I think if you just take this quarter.
And add back the $3 8 million dollar incentive adjustment that was it.
In a reversal of accrual from last year I think you are kind of right there.
Okay got it and then I did want to follow up on the office CRE exposure.
For the two eight to the $280 million in total CRE exposure with yields under $5 25, I guess would those reprice in the next 12 months up to that similar kind of six five production yield or I guess like help us think about bifurcated.
<unk> production yield just trying to get a sense for if those rates reset you know kind of where the resetting from and where they're going to.
Yes. This is Mike Luckily.
We're anticipating and we're looking at these and stressing them based on resetting in the six 5% to 7% rate.
When they reprice and mature.
And we're having those conversations right now.
Understood.
Alright.
I think that's all I had for you because you answered <unk> question. So I appreciate you taking my questions.
Hey, Brian .
Our next question comes from Mark Clark from Piper Sandler Your line is open.
Hey, good morning.
Alright.
Okay.
Just a few questions and I apologize if I missed them.
Paired comments, but the uptick in commercial real estate non performers what drove those and kind of what's the.
Situation in plan for resolution.
Yes, so the nonperforming increase Matt was it was just a couple of lines. One was a senior housing facility in the Midwest and the other was.
Warehouse.
Pretty important.
<unk>.
They are just working through the normal process.
We believe that they are they are marked appropriately fully collateralized.
Yeah.
Yeah, just just to follow up one of the one of the loans, we did take a charge. The other we have reserve Amit.
So we do think we do have those properly mark.
Okay, and I guess, where they just mismanaged I guess what drove them.
Into nonaccrual.
Yes.
So on this.
I'd like to believe not on the seniors housing what they've been facing is higher cost and lower reimbursements for their fixed cost.
That is being addressed and state legislatures across our footprint.
Is that in the health.
Sure.
Sure.
Medicaid reimbursement. So this asset in particular sits in Iowa, and they have increased their reimbursement rates, so that should help that along.
The warehouse property I think that's the issue there is centered around the owner has a lot of other property in Portland.
Portland.
The real estate market is under some stress there.
Yes, yes.
Probably an understatement.
Okay, and then just on.
On your construction loan yields as these things fund I'm, a little surprised that the rates I know they were booked a while ago, but I'm still surprised that those rates are kind of below.
Portfolio yields I guess, what are you typically charge on a.
Construction loans.
So that again those were that pricing with all put in place like 12 months ago.
And so it's just rolling forward and it's the same thing we talked about last quarter is it it is low compared to them.
<unk>.
So what we do today, but but that's just kind of flow through and is going to impact us for the next three quarters.
And the reason why that draws coming in now because we make the owner put in their equity first.
So they fully use their money first before we start funding. So that's what that's kind of delayed into funding yes.
Yes, just to add onto what Kevin said.
We had tightened our construction lending so there was more equity coming in so that is just going to delay it even more so that's what you are seeing some of the stuff goes back even more than 12 months.
The good news on that is that the rate, we know that at the rate that the customers being charged.
<unk> works and so we shouldnt see.
Asset quality asset quality issues as a result of our construction fundings.
Okay, and then just any update on share repurchase and your.
Appetite.
Yeah, So I mean.
In my prepared remarks, I, just said, it's kind of off the table right now although the stock price is very attractive and it would make sense just in this environment.
We're not going to pull that trigger at this time, if things change going forward.
Deposit stabilize and things start to come back then we'll revisit that.
Okay. Thank you.
Uh huh.
Our next question comes from Jeffrey Ellis from D. A Davidson your line is open.
Thanks, Good morning, just wanted to nail down.
Level NII and non interest income.
R 22, just to kind of.
For your guidance on growth and decline off each of those just what those figures were specifically.
So noninterest income again.
We said down low to mid single digits over last year, excluding securities losses that puts us right in the mid 40, <unk> with that building into the back half of the year. So that's.
Noninterest income.
And then on net interest income again lower single digit growth.
On a core basis operating basis.
Yes.
Okay.
Thanks, Jonathan.
Yes, Geoff it's John if you just take the reported.
FTE net interest income from last year back down purchase accounting from that Youll get a number in that call. It 90 days 95.
So thats the base got.
Got it.
Got it.
And then.
Just on the on those two migration.
Were those pretty equal share in terms of size.
Non accruals up $20 million or was it kind of piece or.
Looking for the size of those credits.
So it's kind of a one third two third split.
So at $713 million.
Okay.
The Portland warehouses the larger.
Yes.
Okay.
Got it.
And then.
Housekeeping.
Mark you just the tax rate.
Do you expect for <unk>.
The balance of the year.
Okay. So the tax rate was a little bit higher this quarter and that was really the result of an equity compensation adjustment based on the stock divested in the first quarter.
That said at a lower price than what it was issued out so that requires a one time adjustment to tax expense. So thats, hence our guidance went from 2023% to 24% to 23, 5% to 24 again, just as a result, and it's reflective of that onetime adjustment in the first quarter.
So it would go down it will go lower that go in second quarter.
Alright.
Three 5% to 24 as full year inclusive of Q1's full year inclusive, yes full year inclusive of Q1.
Okay, great. Thank you.
You bet.
This concludes our Q&A I'll now hand back to Kevin Rodney President and CEO for any final remarks.
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 in today.
Goodbye.
Ladies and gentlemen, today's call is now concluded. Thank you for your participation you may now disconnect your lines.
Yeah.
[music].