Q2 2024 First Interstate BancSystem Inc Earnings Call
Please standby we're about to begin.
Speaker Change: Good day and welcome to the first Interstate Bank system, Inc. Second quarter earnings at this time, all participants are in a listen only mode.
Later, there will be a question and answer session.
Darcie: You may queue for question at any time I personally Miss Darcie, followed by the number one on your telephone keypad.
Be advised that today's conference is being recorded should you require operator assistance you May press Star zero.
I'd now like to turn the call over to Andrea Walton. Please go ahead.
Good morning, Thank you for joining us for our second 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.
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 FCC and in our earnings release as well as the risk factors identified in the annual report and in our most recent periodic reports filed with.
The SEC realm.
Relevant factors that could cause actual results to differ materially from any forward. Looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward looking statements made today.
A copy of our earnings release, which contains non-GAAP financial measures is available on our website at F. N B K Dot Com, Inc.
Information regarding our use of 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 is 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 Kevin.
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, and if you have not downloaded a copy yet I would encourage you to do so.
I'm going to start today by providing an overview of the major highlights of the quarter.
And then I'll turn the call over to Marcy to provide more details on our financials.
Now, let's get to our results.
We generated $60 million and net income in the second quarter or 58 per share we continue to execute well in the second quarter and our results were generally in line with our expectations.
Putting a seven basis point expansion in our net interest margin to 3%.
We were pleased to see improvements in criticized and nonperforming asset metrics, our capital and liquidity position remains strong and our allowance for credit losses is sufficient for our credit profile.
All of these factors along with our anticipation of steady expansion in our net interest margin reinforces our belief that we are well positioned for the remainder of 2024 and into 2025.
Expense control remains a key tenet for us and our expenses came in better than we expected in the second quarter. This was driven primarily by the ongoing prudent management of our base salaries are medical expenses continued to run below expectations.
As I said, our persistent focus on controllable expenses, we are managing expense reductions while at the same time continue to make internal investments into our systems and our people.
Last quarter, we said one of our focal points for internal investment is treasury solutions.
Darcie: And we are seeing early success in that area. Our Treasury service income, which is a component of our service charges on our deposit accounts increased by mid single digits in the second quarter, which helped us meet our expectations for our fee businesses overall within this line of business are enhancers are helping us.
Better serve our customers and improve our relationship banking model.
Darcie: We remain optimistic about future success in this area. We recorded 42 6 million and noninterest income in the second quarter, which is an increase of one 2% from the prior quarter.
Darcie: Our asset quality improved in the second quarter criticized classified and nonperforming loans all declined in the period and nonperforming assets declined by seven 7%.
The previous two quarters, we discussed two large nonperforming loans.
She will give you an update on those in a moment.
Speaker Change: Now on to deposits.
Our deposits increased by $67 million in the second quarter.
I want to note that this end of period figure did include one customer deposit that was larger than normal at period end, which will partially impact our seasonality and mute our third quarter growth. This impact is incorporated in both of our deposit.
NII guidance.
Asset repricing is the driver of our forward margin projections and we are not assuming any immediate material decrease in our deposit cost.
Our liquidity remains stable and healthy where our loan deposit ratio of 79, 7% at quarter end.
Before I turn the call over to Marcy I want to take the opportunity to announce that we have just added two strong talent to our risk management team.
The first is Mac cookies, who see Michael Luckily is our chief credit officer with Mike Retires in September.
<unk> has over 25 years of experience in this field most recently as the Chief credit officer of transaction banking at Goldman Sachs.
We have also hired a new director of fraud risk management.
Who brings many years of experience in this area. Most recently in creating broad programs for two fintech startups.
Both of these very accomplished individuals are a great fit for our team and now I'd like to turn the call over to Marcy for some details on our financials.
Thank you, Kevin and as I walk through our financials, unless otherwise noted all of the prior period comparisons will be with the first quarter of 2024 and I'll begin with our income statement.
Net interest income was $201 7 million in the second quarter, an increase of $1 6 million.
Our yield on interest, earning assets increased six basis points quarter over quarter, driven by an increase in loan yields and improving mix shift and a reduction in investment securities. Our total cost of funding declined by one basis point fueled by a lower average borrowing mix.
The net interest margin inflicted as we were anticipating for the second quarter as Kevin mentioned, our net FTE interest margin increased seven basis points to 3%.
Excluding purchase accounting accretion our net interest margin was 292% an increase of eight basis points from the prior quarter.
We continue to expect increases in our net interest margin of approximately the same magnitude sequentially in the third and fourth quarter, which is incorporated in our guidance.
Again this quarter, we anticipate that loss for the full year will be relatively flat and we intend to use the runoff from our investment portfolio to reduce borrowings. This suggests that our interest earning assets will decline slightly through the remainder of the year when.
Speaker Change: When we consider this alongside the trajectory, we foresee and our margin. We believe net interest income will increase 3% to 5% in the second half of the year over the first half of the year.
You should note that we have revised our rate forecast of 125 basis point rate cut in the fourth quarter. We view our balance sheet is relatively neutral moving toward a more liability sensitive position in 2025.
Our term borrowings begin to mature this gives us strong flexibility in light of current rate expectations.
For the last several quarters, we have discussed the impact of our Undrawn commercial construction lines and in particular, our belief that the negative impact on our margin will subside further in the second half of the year.
This quarter reinforce that view.
Total unfunded lines at the end of the quarter were just over $400 million.
At a weighted average rate of approximately 6%.
We do not anticipate the unfunded balance will move materially lower from this point forward as ongoing production will keep us right around this level.
As new production continues to occur at market rate the weighted average rate will continue to normalize.
Non interest income was $42 $6 million in the second quarter, an increase of one 2% over the previous quarter improvements in our fee businesses remain a priority for us So as Kevin said, we're pleased with the early positive movement in Treasury solutions.
However, mortgage remains a challenge and we are still experiencing minimal volume in our mortgage business. We expect this to continue through 2024 and that view is incorporated into our guidance.
Moving to expenses non interest expense as Kevin also mentioned declined in the second quarter by $3 3 million.
The 156.9.
$9 million, our medical insurance expense has remained consistently below our expectation so far this year contributing to the lower reported level in the quarter. We anticipate this will normalize in the third quarter, which is also incorporated into our guidance we.
We have maintained focus on managing our staffing levels, while selectively making strategic hires.
And we have reduced controllable expenses, while investing in our businesses where needed.
We also had a onetime expense reduction in the second quarter in the form of a tax credit reclassification, which is the result of a change in accounting guidance. This reduced expenses by approximately $1 million over the prior quarter, which had a net zero effect on net income as a reclassification move dollar for dollar.
From the expense line to the tax line.
On a go forward basis, this reduces noninterest expense and increases taxes by about $500000 per quarter versus prior expectations.
Our tax rate, which we are projecting to be 23, 5% to 24% incorporates this treatment moving forward.
Speaker Change: In summary, net income increased by two 7% over the prior quarter to $60 million.
Speaker Change: Moving to our balance sheet loans and deposits increased modestly in the second quarter loan balances increased by $32 2 million.
Construction loans declined several loans moved to permanent financing, but that was offset by an increase in $138 7 million and.
In our commercial and industrial balances.
This reflects our emphasis on smaller C&I and owner occupied customers, where we see the most potential to garner full customer relationships along with the seasonal increase in line draws.
Deposits increased by $67 million in the quarter as Kevin noted. This did include one larger than usual customer deposit and our ending balances. We anticipate overall deposits to be relatively flat from quarter end balances through the end of the year.
Moving to credit net charge offs for the quarter were $13 5 million about half of that amount was due to one specific metro office property credit for which we were fully reserved.
Provision expense for the quarter was $9 million and our ACL coverage increased three basis points in the quarter to $1 two 8% of total loans.
Kevin: Now for an update on the two nonperforming loans Kevin mentioned.
We disclosed in the first quarter that we had moved the C&I credit to nonperforming loans based on a third party valuation. We further increase the specific reserve for this credit in the second quarter. We are still working closely with management of this entity to resolve the situation.
Kevin: The other nonperforming loan that Kevin mentioned is an agricultural relationship that we discussed during our fourth quarter 2023 earnings call. This quarter, we received a partial pay down on this relationship and completed a restructure on the balance of the alone. This has supported our optimism about a positive resolution of this credit later in 2024.
I also wanted to touch briefly on our Metro office exposure, which we define as non owner occupied and construction office loans located within major cities.
Our exposure to this category is about 65 basis points of total loans, having declined modestly from our prior disclosure at the end of the third quarter of 2023.
During that same period, our total commercial real estate General office exposure, which we define as both non owner occupied and construction General office properties declined to under 4% of total loans.
Moving to capital we saw continued improvement in our ratios in the second quarter with our common equity tier one capital increasing 16 basis points to 11 five 3%.
Tangible common equity was slightly higher at 695% and we declared a dividend of 47 per share or a yield of seven 1% for the second quarter of 2024.
And finally I did want to comment briefly on the material weakness that was included in our 10-K, we are glad to report positive progress in this area and will include additional detail when we file our 10-Q next week.
Kevin: And with that I'll turn it back to Kevin Kevin.
Thanks Marcy.
Our quarter was characterized by stability and we are pleased that the results were in line with our expectations.
We are positioned to manage rate movements, well, we are optimistic about our ability to generate improved returns from this point forward.
Kevin: The combination of our ongoing margin inflection.
Expense discipline stability in our core asset quality and the balance of our allowance for credit losses.
Provides us with confidence in our ability to generate improving return metrics over the coming quarters.
<unk> us well as we move into 2025.
I would like to wrap up with the recent news about my intention to retire.
Speaker Change: I am deeply proud of what we have achieved during my 11 years at this great company.
I am ready to start a new chapter in my life.
<unk> has retained a leading global executive recruiting firm to conduct a thorough and comprehensive search for the next CEO.
And we will provide updates as appropriate under this transition plan I will continue to serve as president and CEO until a successor is appointed and then be available as an adviser as requested and now I would like to open the call up for questions.
Speaker Change: Okay.
Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star two.
Star one to ask a question and star to remove yourself.
We'll pause for just a moment as simple the question queue.
We will take our first question from Andrew <unk> with Stephens. Please go ahead.
Hey, good morning.
Good morning, Andrew.
Maybe just to start on the non interest bearing deposits I'm, just trying to get a sense.
Appreciate the commentary that there may be the end of period was inflated a little bit.
Trying to get a sense for what you view as maybe like the starting point for the third quarter.
How much would you characterize as being outsized in the balances we can see in this area.
Good morning.
So overall for the year, Andrew we think noninterest bearing deposits on average are going to just run in that 26% range.
Excluding the lumpiness from that deposit.
Yes.
Okay got it so just model to kind of a 26%.
Yes, okay.
And then I wanted to ask on just credit.
If I back out that $6 8 million he called it the construction.
Speaker Change: Charge offs in the quarter and still leaves gross charge offs, roughly $10 million or so what made up the rest of the gross charge offs were solid in the quarter.
It just was.
It was really just very as you know, we always have about $3 million in consumer and.
And then some bearish just very Naughty there was nothing nothing large.
Okay.
And then I mean last quarter, we talked about.
Sorry, comparability with the C&I alone obviously, you got the third party valuation that then maybe prompted the specific reserve this quarter.
Yes.
From your from your lens as the credit deteriorated at all since since we discussed last quarter and then as a follow up to that if you're looking at the charge off guidance, if you're excluding it from the charge off guidance should we assume that means you think theres at least a chance if I kind of lumpier charge offs here later this year.
What you said we agree with.
Speaker Change: Yes, I think that there is.
Pretty good chance it will end up charging off a healthy portion of that one.
That were fully reserved for.
Yes.
Speaker Change: Okay understood and can you speak to anything that.
Specific has changed the view of this credit.
Well, we just keep on getting more information as we ultimately said from beginning Andrew is that we were hoping that David right to ship and sell the company and Thats what were kind of still looking at same progression of selling the company I think what we're seeing is maybe the valuation could be a little different than we anticipated from the get go.
So that's why we're looking at probably a little bit larger maybe loss, but the same direction is happening. It's just that we're looking at trying to be more realistic and as we've proven in the past we take our lumps early we've taken quick and we tried to get things behind US we don't try to kick the can down the road so.
We're taking.
Really worst case scenario here and we hope it can be better, but we're making sure that we're well positioned.
To take care of this credit.
Understood, Okay, even with kind of a charge offs potentially later this year you do feel like you're well reserve with the reserve for this quarter yes.
Correct.
Okay I appreciate it and Kevin Congrats on.
Kevin P. Riley: The retirement hope you have a lot of fishing truss plants.
Yeah.
Hi, guys do better than the last time is that we do.
Thank you.
We'll go next to Matthew Clark with Piper Sandler.
Hey, good morning, everyone.
Good morning, Matt.
Speaker Change: Yes.
Matthew Timothy Clark: On that on that larger C&I nonperformer can you just quantify how much in reserves you have set aside against it.
We're not going to disclose that Matt.
I'm just trying to forecast the charge offs that we might see that's all which is going to come out of reserves.
Yes, the thing is.
Not going to it should not affect earnings. So I think when you are trying to look at earnings you can just say that it's not it shouldnt have an impact.
On the earning stream.
Understood just trying to forecast it.
Speaker Change: Okay.
Okay.
And then on the on the core NIM I think the.
The guide was that the reported NIM.
Spansion continues at a similar pace.
Accretion steps down.
In the second half but.
Can you just speak to the core NIM.
And maybe the June average core NIM.
So.
On the core NIM, we expect the same trajectory that we.
Speaker Change: We continue to see expansion there the June NIM.
Speaker Change: NIM was 295, the core NIM was 295.
Okay.
And in the.
And deposit cost increase was similar.
Interest bearing until last quarter do you have the spot rate on interest bearing deposits.
At the end of the quarter effort to Virginia was 197.
Okay.
Speaker Change: Sure.
Okay.
And then on.
On the <unk>.
On M&A I assume it's fair to it's fair to assume that.
There is no interest in M&A at this stage given your transition Kevin.
At this point, yes, I would say that but I would say that we're still in contact and hopefully we'll get to C O that.
It picks up a ton and move this company forward just as it has been moving forward. So I don't want to say that we're going to change our trajectory much but at this point I would say that.
If I was selling company I know, if I want to sell into a departing CEO. So.
Things are pretty much all of it on hold at this time.
<unk> made it very clear that they expect that to still be part of our strategy going forward. It would be an acquisitive company.
Speaker Change: Okay. That's helpful. Thank you.
We will hear next from Jared Shaw with Barclays.
Hey, good morning.
Kevin Thank you.
Congratulations on the next step as well looking forward to seeing.
But that looks like.
Yes, maybe just a couple a couple of follow ups here.
When you look at the deposit side, what are you expecting for CD retention and sort of what's the repricing trend there and I know you said youre not expecting to see significantly lower.
Deposit costs as rates move lower or is that mean that maybe with the DDA normalization, we should expect to see time deposits.
Turn to growth.
No I don't think youre going to see return pretty much flat Jared from this point forward, Yes, and I think we'll see CD balance is pretty stable.
Speaker Change: Okay.
Yeah.
Speaker Change: What should we expect I guess for deposit beta on the way down.
Sure.
Yeah, maybe maybe if we look at that first 25 basis point move and then and then after after that.
Aggressive do you expect to be on being able to reprice some of that.
Well first of all.
Jerry about 18% of our deposits are indexed to short term rates. So they will immediately move.
When rates come down a quarter I would say, it's probably going to be a little bit of a lag with regards to our CD repricing down even though about 90% of our Cds repricing. The 12 month period, because they're shorter term I would just say that that's going to be a little bit more of a lag of repricing down but money market will move immediately.
Again in a way up we didn't really change a lot of our rack rates a lot of our customers moved over to the index money market, which by contract. It goes down when rates go down.
Okay. Okay.
And then on that large deposit that you mentioned is the expectation that that was sort of a temporary move in in that that could move out or just that we shouldnt expect that.
Speaker Change: That level of growth again going forward.
It was a temporary moved in and it moves out.
Posit It comes and goes and it was just a little bit larger at quarter end than normal so.
It comes in and goes out periodically and we don't control the timing of it but it's it's bumpy in the bump was at quarter end okay.
Speaker Change: Okay. Okay.
Marcy: Marcy you mentioned about.
Youre not expecting to see a growth in the undrawn commitments on.
Hello, I'm, sorry growth in the Undrawn balances on construction, but pricing is going higher.
Or is pricing now on a new construction lines.
Yeah. So two on construction on average our loans around seven 5% construction is little bit higher than that.
Okay.
Okay. Thanks, and then just finally from me I guess, what's the what's the securities cash flow in the months that we should be thinking could be going towards.
Paying down the wholesale.
You know Jared that Seth.
The investor deck by.
Oh, Im sorry, I cant remember with slide 12, Okay, I see that yes, okay.
Great. Thanks, a lot.
You bet.
We'll turn now to Chris Mcgratty with BW.
Oh, great good morning.
Hey, Kevin.
And Mark a question for you on expenses.
If I take the new guide.
Roughly maps to about 160 a quarter.
If we go.
Into next year is there any reason why this isn't the right.
Run rate to jump off and maybe.
Low single digit inflation rate on that anything we would point us either way.
So I think I would go up a little bit from 160, a corner I think there'll be a little slightly higher than that but yes, then that should be a pretty good jump off rate.
Okay. Thank you.
Marcy: You bet.
And we'll go next to Timna Brasilia with Wells Fargo.
Hi, good morning.
Timur Felixovich Braziler: Good morning.
Just.
Circling up again on that on that larger C&I credit as it moves to resolution I'm just wondering if it is charged off.
Speaker Change: <unk> come down is the anticipation that those reserves are kind of backfill.
Or is it okay to see that allowance ratio, maybe trend a little bit lower is that loan is resolved.
Speaker Change: Does that ratio will come in a little bit lower as you look at our actual asset quality outside of this large C&I. It's improving every quarter criticize is down for the third straight quarter. So our asset quality continues to improve and the allowance is reflecting that as well as the specific reserve on this larger credits.
Okay, and then the linked quarter reduction in the unfunded reserves, maybe just talk to what the driver there was.
Yes.
I mean, just normal funding of that.
Speaker Change: I'm fine.
Speaker Change: I'm sorry.
Yes, Okay, yes, it was just that.
We review an annual review of our methodology and again reserve unfunded reserves came down.
Yes.
A review of our methodology is just kind of drove that change.
Speaker Change: Yes, I got it and then.
Okay, and then just maybe lastly for me just looking at balance sheet size.
Speaker Change: Pretty good opportunity.
On the bond repricing or at least the bond maturities I know you had mentioned that's going to go towards paying down of wholesale funding I guess as you're looking at overall demand on the asset side. When do you think the balance sheet is going to is going to stabilize here and start showing some inflection higher.
Well I think.
It could change congrats and show a different mix I think it is a balance sheet I think we're.
What we're hoping for is the investment portfolio, we will continue to shrink and the loan portfolio, we'd start to expand so that that would help earnings also but I think the thing is it then and deposit growth hopefully deposit stabilize and start growing a little bit. So we can pay down I think so.
I would say.
Speaker Change: Hopefully in 'twenty five inch.
Interest rates come down the economy picks up a little bit as it becomes a little bit more robust and and that start shifting.
And the first part of 'twenty five is not the second part of 'twenty five yes kind of as we talk to our bankers and one of the things I feel like people are on the sidelines as far as the election kind of a CD outcome of the election waiting for the economy to be.
The trajectory to be a little bit more clear and so I think it's kind of all of that settles out we'll begin to see some loan growth.
Great. Thanks.
Speaker Change: And as there are no additional questions at this time I'd like to hand, the floor back over to Kevin Riley for any additional or closing comments.
Wed like to thank everybody for their questions and as always we are welcome for calls from our investment in an analyst.
So please reach out to us if you have any follow up questions and I want to thank everybody for tuning in today.
Goodbye.
Once again, ladies and gentlemen that will conclude today's call. Thank you for your participation you may disconnect at this time.
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