Q4 2023 First Interstate BancSystem Inc Earnings Call
Unknown Executive: Good morning, ladies and gentlemen, and welcome to the First Interstate BancSystem Inc. fourth quarter earnings call. This call was recorded on Wednesday, January 31st. I would now like to turn the conference over to Andrea Walton. Go ahead.
Good morning, ladies and gentlemen, and welcome to the first Interstate Bank system, Inc. Fourth quarter earnings call. This call is being recorded on Wednesday January 31st.
Now, let's turn the conference over to Andrea Walton. Please go ahead.
Andrea Walton: 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 states. 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.
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 then 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 forward looking statements made today a.
Andrea Walton: 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 for 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 Riley.
A copy of our earnings release, which contains non-GAAP financial measures is available on our website at <unk> Dot com.
Information regarding our use of the non-GAAP financial measures.
And 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.
This time I'll turn the call over to Kevin Riley Kevin.
Kevin P. 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 includes some additional disclosures, which we believe will be helpful. The presentation can be accessed on our investor relations website. 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 financial... Our fourth quarter performance reflected our ability to generate strong financial results in this challenging economic environment. In the fourth quarter,
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 Marcia 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 and net income.
Kevin P. Riley: You generated $61.5 million in net income, or $0.59 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.
<unk> 59 per share.
There were some moving parts on both the balance sheet and income statement that Marshall will go over in her remarks.
For the quarter, we remain disciplined in our new loan underwriting and pricing criteria.
New production rate excluding draws on construction lines.
Approximated about seven 8% during the quarter.
Kevin P. Riley: 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 declined. 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 Relationship.
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.
Well Undrawn construction lines also decline.
We also saw the expected seasonal declines in deposits in December and utilized our strong liquidity profile to selectively allowed some high cost time deposits. So leave the balance sheet, while remaining focused on retaining our relationships.
Kevin P. Riley: And lastly... You probably saw the 8K we filed in December, where we were able to repurchase 1 million shares during the quarter. Where we were able to repurchase 1 million shares during the quarter.
And lastly, you probably saw the 8-K, we filed in December.
We were able to repurchase 1 million shares during the quarter.
Kevin P. Riley: 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.
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 2020 for 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 stream line our mortgage process. We also realign operational support and line of business functions.
Kevin P. Riley: We've also realigned operational support and lines of business. 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, resulting in a reduction in the workforce in December.
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.
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.
Kevin P. Riley: 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 Marcy so she can provide some additional details around our fourth-quarter results. Go ahead, Marcy. Thanks, Kevin. And good morning, everyone.
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 Marcy. So she can provide some additional details around our fourth 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 to the third quarter of 2023, and I'll begin with our income statement.
Marcy D. Mutch: 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 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.
Marcy D. Mutch: Our reported net FTE interest margin was 3.01%, a decrease of six basis points from the prior quarter, as we continue 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 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 reported net FTE interest margin was three 1% 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 294% 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 on a.
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 noninterest 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.
Marcy D. Mutch: 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 the workforce Kevin mentioned earlier.
Moving to total noninterest expense, we had an increase of $4 $9 million from the prior quarter, but theres a lot of noise in that number salaries and employee benefits expense was lower as a result of lower incentive accruals of 11 5 billion.
Which was partially offset by higher severance costs of $3 6 million as a result of the reduction in workforce, Kevin mentioned earlier.
Marcy D. Mutch: Other expenses were higher and included a 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.
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 and our new rewards program adjust.
Adjusting for the items noted our quarterly noninterest 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 and to permanent financing.
Marcy D. Mutch: 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.
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 five 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 at both lines continue to fund up and we're seeing limited new commitments.
We had $162 million increase in the securities portfolio, which was primarily due to an increase in fair market value.
Marcy D. Mutch: 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 interest 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.
We chose to reinvest approximately $135 million of cash flows back into securities locking in a weighted average yield of five 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'd 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 interest 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.
Marcy D. Mutch: 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 health for sale loans back into the health 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.
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 noise as well, while we reported an increase in criticized and nonperforming 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 nonperforming loans. Excluding this transfer nonperforming loans declined $2 million. The transfer also accounted for most of the increase in criticized loans.
Marcy D. Mutch: 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 loans, and we anticipate the associated loans 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 loan settle for investment. Net charge-offs in the quarter remained low at $4.8 million, or 10 basis points of average 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 one 5% of total loans held for investment net charge offs in the quarter remained low at $4 8 million or 10 basis points of average loans.
Marcy D. Mutch: 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 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 during the period. And with that, I'll turn the call back over to Kevin. Kevin?
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 OCI 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 per common share, which equates to a seven 2% annualized yield on the average closing price of our stock in the period and.
And with that I'll turn the call back over to Kevin.
Kevin.
Kevin P. Riley: Thanks, Marcy. 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 of 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 expenses, which we did well. This will continue to be a focus in 2024, as mentioned. In December, we completed a reduction in the workforce and some organizational restructuring that will enhance our efficiency.
Thanks, Marcy 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 and.
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.
Kevin P. Riley: 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 improve. Given that outlook, we are expecting the 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, thank you for tuning in.
<unk> 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 balances to be flat or up.
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.
Kevin P. Riley: 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 offering.
Considering this we continue to make improvements in the delivery of our products and services.
We recently restructured our treasury solutions business, bringing in new leadership, aligning our business development efforts and expanding our offerings.
Kevin P. Riley: 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 will also continue our journey to automate mail processing to make us more efficient. While the environment is tough,
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.
Kevin P. Riley: 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 a 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.
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.
Unknown Executive: We remain focused on the long-term value of our franchise and are optimistic and confident in its future earnings power. So with that, we'll open the call up for questions. 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 number on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any key. The first question comes from Andrew Terrell at Stevenson.
We remain focused on the long term value of our franchise and are optimistic and confident in the future earnings power.
With that we'll open the call up for questions.
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 here with me Tom path acknowledging a request if you are using a speaker phone. Please lift the handset before pressing any key.
Okay.
First question comes from Andrew <unk> with Stephens. Please go ahead.
Unknown Executive: Please go ahead. Andrew? All right. Okay. Hi, Andrew. Hi, Andrew.
Okay.
Yes.
Yes.
Hey, Andrew.
Unknown Executive: Hey, maybe my first question on the margin. I mean, the Lonely Lake expansion we saw this quarter was, was good, and maybe a few parts of my question here. One, do you have the spot, Lonely Lake, at 1231?
Okay.
Hi, Andrew Andrew.
Okay.
Maybe first question.
On the margin.
I mean, the logical expansion we saw this quarter was.
It was good and maybe a few parts of my question here.
One <unk>.
Loan yields while 31.
Unknown Executive: And then can you remind us if there are any lingering headwinds kind of from the construction fund upswing and then just kind of the bigger picture and maybe holding rate moves aside? Just would you expect a similar upward trajectory in the low yields throughout 2024 as the seven basis points you saw in the fourth quarter? Yeah, so the spot loan yields were about 7.8 percent, again, the construction fundings they're happening at about $200 million a quarter, you know that weighted average yield on those is 5.7, so there will continue to be some pressure on that portfolio in the first half of the year, which should taper off as we get to the back half of the year.
And then can you remind us are there any lingering headwinds from the construction fund and then just kind of bigger picture, maybe holding rate moves aside just would you expect similar upward trajectory on the loan yields throughout 2024 seven basis points you saw in the fourth quarter.
Yes, so the spot loan yields were about seven 8% again.
Construction fundings that are happening at about $200 million a quarter.
Weighted average yield on those are five seven so there will continue to be some pressure from that portfolio in the first half of the year, which should taper off as we get to the back half of the year.
And then part of that question.
And in terms of.
Unknown Executive: In terms of loan yields going forward, there are a few basis points higher than the Q4 average. 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 pick up in loan yields per quarter? Yeah, it should be.
Loan yields going forward, we think there'll be a few basis points higher than the Q4 average.
Yes, and then I guess, just like going going throughout 2024 on a quarterly basis would you expect a similar kind of seven basis point or so pick up in loan yields per quarter.
Yes, it should be.
Unknown Executive: 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. Yeah, okay. The 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? 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. And the thing is, you know, how seasonally the deposits are in the first quarter also. So there are a couple of moving factors. There's no...
You know kind of mid single digits right in there somewhere.
Okay.
Assuming <unk> Yeah go ahead, yeah okay.
The 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 and <unk> 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.
I think Andrew we're going to work.
See what the market will give us during that period of time, and we'll make decisions accordingly, but if.
If the market gives us good rates to and reinvest in.
Might take that route but if the market has shifted dramatically then we'll probably just pay down borrowings.
It also depart the thing as well.
How seasonally the deposits are in the first quarter to also so theres a couple of moving factors there is no.
I know, it's going to be hard for you to projected but we're kind of we looked at it doesn't materially move the numbers either way that much.
Unknown Executive: I know it's going to be hard for you to project that, but we looked at it, and it doesn't materially move the numbers either way that much. NII, right? NII. Yeah, right.
NII right NII.
Yes.
Unknown Executive: 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 three rate cuts are on that forward guidance. And I know you guys are slightly liability sensitive, as we said here, but if we were to flex that and kind of assume the full forward curve or, conversely, kind of no rate cuts. I guess how big of a driver is that CNI guide and how could we see the guide change based on those varying assumptions?
Okay.
And then maybe last one on the margin I'm just trying to understand the NII guide I'm just trying to understand how influential the three rate cuts are.
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 in kind of assumed the full forward curve.
Or assume Conversely, kind of no rate cuts I guess, how big of a.
Driver is that C&I guide and how could we see the guide change based on those bearing assumptions.
Unknown Executive: 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 17% of our deposits that are in the index money market, you know, products. 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,
So if there is more than three rate cuts.
That's going to be.
A benefit to us.
We have over 50% of our CD book matures in the first half of the year and 90% by the end of the year.
Our 17% of our deposits that are in the index money market products.
Product, so that's going to reprice.
And then we will see the benefit in some of our borrowing costs.
I think theres going to be a bit of a lag.
On our deposits on the deposit side most likely so.
Yes.
Unknown Executive: You know, those deposits will set potentially a little bit slower than the rate cut that comes through on the one that the Fed would push through. 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 regard 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, 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 will kind of grow as we work throughout 2024. Is that fair?
Those those deposits will set potentially a little bit slower than the rate cut that comes through on that the fed would push through.
So.
In a flat rate environment, we still see NII growing in the back half.
Without any rate cuts at all so as the request to increase Youll see more benefit with regards to NII. So, but we have run the numbers with no rate increase at all.
NII should should grow in the back half of 2024.
Okay. That's helpful. I appreciate it and then just if I can sneak one last one and marci it sounds like.
Within your expense guidance, we should be using kind of a $161 million or so is the run rate for operating expenses.
I presume kind of grow as we work throughout 2024 is that fair.
That's fair that's.
Unknown Executive: That's fair. [inaudible] Oh, okay. Target.
Thats correct.
Oh, Okay great.
Alright.
Unknown Executive: Thank you. The next question comes from Chris McGratty at KBW. Please go ahead. Hey, how's it going? This is Andrew Liesch. You're on for Chris McGratty.
Thank you. The next question comes from Chris Mcgratty at <unk>. Please go ahead.
Hey, How's it going this is Andrew <unk> on for Chris Mcgratty.
Andrew Brian Liesch: On that mid single digit, hey, how's it going? On that mid single digit, and I declined guidance for 2024. What are you assuming for your non-expiring deposit mix and your BEDAX? NIA deposit expectations and Here are your NIB deposit expectations and your beta expectations that go into... And now I've got him. So, in the fourth quarter, our beta was 33%, and then we had a spot beta at the end of the year at 34%. We continue to believe that we'll see some migration, you know, out of non-interest bearing into higher costs, deposits, you know, as we go through the rest of the year. But that's slowing. Yeah, it is slowing, but we assume that it's going to move a couple of basis points higher into the second quarter. Okay, thank you.
On that Andrew will digit hey, how's it going.
That mid single digit decline guidance for 2024.
What are you assuming for your noninterest bearing deposit mix and your base expectations.
Okay.
NII deposit.
<unk> and <unk>.
Yes.
Apologize mutations and your bid expectations that go into the.
Got it.
So in the fourth quarter, our beta was 33% and then with the spot data at the end of the year at 34%. We continue to believe that we will see some migration out.
Out of noninterest bearing into higher cost.
Deposits as we go through the rest of the year.
But thats slowing yeah. It is slowing but we assume that's going to move a couple of basis points higher end of the second quarter.
Unknown Executive: And then just on, um... 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? We have some internal things that we don't publish or talk about, such as our internal capital levels or what we strive for. But I will tell you that our priority is to maintain a healthy dividend throughout the year and into the future.
Okay. Thank you.
And then just on.
On capital, yet that $32 million share repurchase from the state of a single stockholder.
Should we think about your capital priorities for 2024 and can you just remind us if you have any specific capital targets.
Thanks.
We have we have some internal things that we don't publish or or or.
Talk about our internal capital levels, or we strive to add but I would 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.
Listing is 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.
Okay great.
I'll step back thanks for the questions.
Thank you. The next question comes from Brody Preston at UBS. Please go ahead.
Hey, good morning, everyone.
Brody.
Hey.
Marci within the net interest income guidance did you give the down beta that you're assuming.
But the cuts that you have in the back half of.
23.
So we didn't give the down data in the back half under our assumptions.
Were assuming some lag we actually think there is.
If rates come down we think there is some potential to do better.
Then the then then we're assuming in our guidance.
So.
We assume it will go up modestly from the 34%, but it is in December.
Which if rates come down we could see some benefit there.
Okay.
The NII guide itself is that GAAP or is that FTE I just wanted to clarify.
That is GAAP.
GAAP.
Ex purchase accounting, yes.
Okay.
Okay.
The expense guidance I just wanted to go go ahead. The guide the guide Ronnie just to be clear is gap.
Which includes which includes purchase between yeah.
Thank you for the clarification.
And then on the expense I just wanted to clarify.
It says excluding the 10 million 10, 5 million FDIC youre expecting a low single digit increase.
But that includes I'm, assuming that that means you are including.
And the severance charges and stuff that you had last year. So if I kind of just took the $10 5 million.
It kind of implies that you are looking more towards like <unk> nine and expenses for next year. It kind of like the mid point of 1% to 3% up.
Is that okay, my thinking about that correctly.
That's a fair way to think about it yes, you're right on it.
Alright, cool I just wanted to make sure that I was what I was understanding it and that's really all I had guys I appreciate it.
Thanks Brody.
Thank you. The next question comes from Jeff Lewis from D. A Davidson. Please go ahead.
Thanks, Good morning.
Good morning, Jeff.
On the credit side.
Yes.
I wanted to get into that.
Loan.
Kind of group I guess first just safe to assume those were legacy great Western credits is that fair.
Are you talking about the ones that moved into nonperforming.
Great.
Okay.
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 under accounting rules before we can move them out of out of nonperforming into performance. So we believe those loans will move out of nonperforming into the third quarter of this year.
Yeah I heard it in the prepared I appreciate that that was good that was going to follow up is just it seems like moving that to held for investment that allows you to sort of move those through as that.
Messaging.
The move.
Yes, and there's also the messaging is that we were able to restructure these into performing loans. So.
That's more of the message that they're kind of cleaned up.
What is the type of <unk>.
Maybe they are pretty granular mix, but is there a <unk>.
Bag that represents.
What type of geography.
Did that come from.
Barry.
Arizona.
Arizona, California down that area.
Alright, 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 the bulk of that.
Well, we're not looking at any kind of charge offs on those those loans at this juncture, but we're talking about just broad base.
Okay. So no particular segment just you think that's where you are in the cycle of 15 to 20 basis points per quarter.
Okay.
Yes.
The thing is we haven't hit that but.
We're forecasting that.
Got it.
Okay and within the.
<unk>.
Loan growth expectations kind of.
Latter or low single digit I guess within segment would you.
Got the discussion on the construction commitments, but trying to peg what segments of growth do you see in 'twenty four versus some areas that may be flatter or maybe running off within that overall guide on growth.
Hi.
I would say the way our franchises we're kind of.
We have.
Different industry.
Vertical so.
It's hard to say at this point, we think there is pretty much going to be growth, it's going to be broad across all different verticals.
I think we will continue to focus on our small business initiative will continue to focus on C&I growth all of those things of course that but Kevin point, it's going to be pretty broad based and spread across the 14th state footprint.
Okay.
Hershey real estate growth largely from construction completion.
The timing of Q4, but the balance of 'twenty four.
Again kind of pointing to a pretty.
Mix contribution, albeit modest for the full year.
Yes, that's correct.
Okay.
Thank you I'll step back.
Hi, Jeff.
Thank you next question comes from Adam Butler from Piper Sandler. Please go ahead.
Hey, good morning, everybody. This is Adam on for Matthew Clark.
Hi, Adam first.
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.
Sure.
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 work load that people were.
We are doing and we made reductions in order to bring efficiencies to the levels. They should be at I would say that.
Debt reduction we also plan on adding as we said in our remarks.
Putting more expense been too.
I would say risk management as well as.
Okay.
So that.
The bounce up but we just really went through the company and looked at where we might have some excesses.
Those out.
Okay I appreciate the color there.
And then second.
I appreciate the guidance on the NIM and NII down.
The first quarter relative to the fourth quarter do you guys happen to have the <unk>.
Spot rate on interest bearing deposits or the NIM.
In the month of December or at the end of December I'm sure I'm sure. We have that go ahead marsh. So our net interest margin in December was 286% and so it was lower than the fourth quarter average and we saw pressure there because we had the vast majority of our early cycle Cds reprice in November and December.
<unk>.
We also that was impacted by the recovery in fair market value on our investment portfolio and then our decision to reinvest the investment portfolio of cash flows that resulted in a couple of basis point decline in NIM in December and then lower noninterest bearing deposits higher borrowings were also a factor there.
So that's where when we talk about our first quarter NIM, we expect it to be lower than the fourth quarter average and more in line with that mid <unk> number.
Okay got it.
I appreciate it I appreciate the color and thanks for the time.
Thank you John.
I just wanted to clarify that that was excluding purchase accounting.
Yes.
The NIM guidance.
Yes.
Thank you next question comes from Kim <unk> from Wells Fargo. Please go ahead.
Hi, good morning.
Good morning Timur.
Maybe looking at some of the in migration into your geographies during COVID-19.
Your construction balances doubled over that period.
No 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 and how thats trending and if there are any areas within your geographies that you feel like might.
Had been overbuilt.
Given some of that migration and over the past couple of years.
Yes.
I would say I think the migration has probably slowed a bit but there is definitely a shortage of houses in the majority of our markets. So we don't see it.
Really any markets right now having access is so.
There is a need for for housing. So we don't we're not right now seeing anything in any one of our markets that theres been any overbuilding.
The area that I would say that it might not be where everybody is flat into some of the big cities like Portland, and Seattle, but besides that I think that the rest of our areas are.
Pretty good shape.
Okay. Thanks.
Marci I guess, the four basis points of NIM pressure from from bond reinvestment at five 5% in <unk> I guess I don't understand it did I hear that correctly that as you are remixing the bond portfolio, that's driving incremental margin there may be seamless.
I think the biggest thing is just that.
Earning asset balance.
Bigger because first of all the fair market value adds more to earning assets would really not any more earnings NII and then when our forecast before we were looking at bringing down the investment portfolio and reducing.
The earning asset balances it really doesn't affect NII, but was you reinvest you not get any of that same.
Net interest margin, but NII improves but the overall margin is.
<unk> is impacted by the greater denominator.
Got it and then lastly, Kevin would love to hear your updated thoughts on M&A with some of the headwinds of 23 more or less in the rearview purchase accounting a little bit easier OCI becomes less of a headwind maybe just give us an update on where you stand with Emma.
And how that fits into the capital deployment story at first Interstate.
That's a great question.
I'd tell you that.
<unk>.
I heard from other institutions.
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 will that we believe would make our franchise better.
And we have been in touch with these banks for many many years and it's up to the seller itself. So.
There are more activities out there, but we're going to stay.
Steadfast to the institutions that we believe will make our franchise better and if they come and wanted to partner with US. Then then we'll probably put something together, but we are.
We are open to do something but we're not going to just do something for the sake of doing something.
Got it thank you for that.
Thank you next question is a follow up from Brody Preston at UBS. Please go ahead.
Hey, guys. Thanks for taking my follow up I, just had a couple of 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.
Yes.
So exactly how we look at it Brody.
Okay, and so if we're in the mid $2 <unk> ex PAA on the <unk> margin.
Our kind of guidance on NII.
Marci kind of implies like a pretty good step up in the NIM by the time, we get to <unk> and so where are you thinking about ex PAA.
Margin gets too by the fourth quarter.
We believe it could be comfortably over that 3% mark in the back half of the year, assuming stable deposits and thats, assuming the three rate cuts.
We've discussed.
Got it. Thank you very much for that I appreciate it.
Yes.
Thank you there are no further questions I will turn the call back call back for closing comments.
Okay.
Thank you all for your questions as always we welcome calls from our investors and analysts.
Please reach out to us to have any follow up if you have any follow up questions and thank.
Thanks for tuning into tuning in today.
Bye.
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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