Q1 2025 First Interstate BancSystem Inc Earnings Call

Unknown Executive: Good morning, ladies and gentlemen, and welcome to the First Interstate BancSystem Inc. First Quarter Earnings Conference Call. At this time, all lines are in listen-only mode.

Good morning, ladies and gentlemen, and welcome to the first Interstate Bank system, Inc. First quarter earnings Conference call.

At this time all lines are in listen only mode.

Unknown Executive: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.

Following the presentation, we will conduct a question and answer session.

If at any time during this call you acquire them, we'd use assistance. Please press star zero for operator.

Unknown Executive: This call is being recorded on Wednesday, April 30th, 2025.

This call is being recorded on Wednesday April 30th plus 25.

Nancy Vermeulen: I would now like to turn the conference over to Nancy Vermeulen. Please go ahead. Thanks very much. Good morning.

Speaker Change: I would now like to turn the conference over to Nancy Vermaelen. Please go ahead.

Nancy Vermaelen: Thanks very much 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.

Nancy Vermeulen: 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 report. as well as the risk factors identified in the annual report and in our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filing.

Speaker Change: The results or outcomes may differ materially from those expressed by those statements.

Speaker Change: I'd like to direct all listeners to read the cautionary notes 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.

Speaker Change: That's one of the risk factors identified in the annual report and in our more recent periodic reports filed with the SEC.

Speaker Change: 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.

Nancy Vermeulen: The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com, and 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 gap financial measures is included at the end of the earnings release for your reference. Again this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website, and if you have not downloaded a copy yet, we encourage you to do so.

Speaker Change: The company does not undertake to update any of the forward looking statements made today.

Speaker Change: A copy of our earnings release, which contains non-GAAP financial measures is available on our website at F. I B K Dot com.

Speaker Change: And information regarding our use of the non-GAAP financial measures maybe 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.

Speaker Change: Again this quarter along with our earnings release, we published an updated investor presentation that has additional disclosures that we believe will be helpful.

Speaker Change: <unk> can be accessed on our Investor Relations website, and if you have not downloaded a copy yet we encourage you to do so.

Nancy Vermeulen: Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be with the fourth quarter of 2024.

Speaker Change: Please also note that as we discuss our financials today unless otherwise noted all of the prior period comparisons will be with the fourth quarter of 'twenty 'twenty four.

Nancy Vermeulen: Joining us from management this morning are Jim Reuter, our Chief Executive Officer, Marcy Mutch, our Chief Financial Officer, and David De La Camera, our Deputy Chief Financial Officer, along with other members of our management team.

Speaker Change: Joining us from management. This morning are Jim writer, our Chief Executive Officer, Marcy Mutch, our Chief Financial Officer, and David Delek camera, our Deputy Chief Financial Officer, along with other members of our management team at this time I'll turn the call over to Jim writer Jim.

James Reuter: At this time, I'll turn the call over to Jim Reuter. Thank you, Nancy, and good morning, all, and thank you for joining us on our earnings call.

Jim Writer: Thank you Nancy and good morning, all and thank you for joining us on our earnings call before we begin let me point out the bittersweet fact that this is the last earnings call. We will have with Mercy as we announced at the end of February Marci is retiring after more than 18 years here at the bank and an accomplished career in.

James Reuter: Before we begin, let me point out the bittersweet fact that this is the last earnings call we will have with Marcy. As we announced at the end of February, Marcy is retiring after more than 18 years here at the bank and an accomplished career in finance of more than 30 years. It has been a pleasure and a privilege to work with you, Marcy. Even for the short period of time that I've had the opportunity, it is obvious that your influence on this company has been profound. You are leaving your post in great hands with David, but our future success will always be due in large part to the impact you have had in your time here.

Speaker Change: Finance of more than 30 years.

Speaker Change: It has been a pleasure and a privilege to work with you Marci even for the short period of time that I've had the opportunity. It is obvious that your influence on this company has been profound.

Speaker Change: You are leaving your post in great hands with David but our future success will always be due in large part to the impact you have had in your time here.

James Reuter: Thank you for all you have done for First Interstate and congratulations on a brilliant career.

Speaker Change: You for all you have done for first Interstate and congratulations on a brilliant career.

James Reuter: On to the business at hand. I'd like to begin by discussing our longer term strategy. As I discussed in the earnings call in the previous quarter, First Interstate is de-emphasizing large-scale M&A and refocusing on full-relationship banks. Both our near and long-term actions will be centered around reorienting the bank towards organic growth. This affects how we operate and how we evaluate every other aspect of our business.

Speaker Change: Onto the business at hand, I'd like to begin by discussing our longer term strategy.

Speaker Change: As I discussed in the earnings call in the previous quarter first Interstate is deemphasizing large scale M&A and refocusing on full relationship banking.

Speaker Change: Both our near and long term actions will be centered around reorienting the bank towards organic growth.

Speaker Change: This affects how we operate and how we evaluate every other aspect of our business.

James Reuter: While we won't be providing 2026 guidance in light of the ongoing economic uncertainty, we will provide additional color later in the call on our medium-term net interest income expectations and our longer-term branch strategy. Our overarching strategy will be to deploy capital to areas of strength. We have a valuable, low-cost, granular deposit base and strong market share in areas that are growing faster than national trends in which we intend to invest. Our capital levels and balance sheet are strong and flexible, and our underlying earnings are supported by asset repricing, which we anticipate will support meaningful earnings improvement.

Speaker Change: While we won't be providing 2026 guidance in light of the ongoing economic uncertainty we will provide additional color later in the call on our medium term net interest income expectations and our longer term branch strategy.

Speaker Change: Our overarching strategy will be to deploy capital to areas of strength, we have a valuable low cost granular deposit base and strong market share in areas that are growing faster than national trends in which we intend to invest our capital levels and balance sheet are strong and flexible and our underlying earnings are supported by.

Speaker Change: The asset repricing, which we anticipate will support meaningful earnings improvement.

James Reuter: We also acknowledge that there are opportunities in our footprint to optimize our branch network. Today, our average branch size is approximately $76 million, which is smaller than our peer average. As a result, we are evaluating our branch network and we anticipate beginning to take sequenced action to reposition, open, or consolidate branches later in 2025. With that said, due to our more rural branch network, we will always have a bit of a smaller branch size on average, but our goal is to narrow this delta.

Speaker Change: We also acknowledge that there are opportunities in our footprint to optimize our branch network today. Our average branch size is approximately $76 million, which is smaller than our peer average as a result, we are evaluating our branch network and we anticipate beginning to take sequenced action to reposition open or.

Speaker Change: Solid eight branches later in 2025.

Speaker Change: With that said due to our more rural branch network, we will always have a bit of a smaller branch size on average, but our goal is to narrow this delta.

James Reuter: As announced on Monday, we are exiting our 12 locations in the states of Arizona and Kansas. Our decision to divest is aligned with our noted strategy to shift our capital investment and drive growth in markets where we have strong market share, and we believe this transaction allows us to do so. Deposit balances associated with these markets totaled $740 million as of March 31, and about $200 million of loans will be included in the transaction, which we expect to close by the 4th.

Speaker Change: As announced on Monday, we are exiting our 12 locations in the states of Arizona and Kansas Our decision to divest its aligned with our noted strategy to shift our capital investment and drive growth in markets, where we have strong market share and we believe this transaction allows us to do so.

Speaker Change: Deposit balances associated with these markets totaled $740 million as of March 31, and about $200 million of loans will be included in the transaction, which we expect to close by the fourth quarter.

James Reuter: Moving to credit, we are taking a proactive approach to managing credit, which we believe sets the bank up to perform well in all economic cycles. We reported an increase in criticized loans in the first quarter of $252.8 million, generally concentrated within commercial real estate. Our focus on the primary source of repayment drove most of these downgrades. Downgrades in the multifamily book, which represented approximately $75 million this quarter, were mainly reflective of slower lease-up activity. Guarantors in this portfolio are generally strong, and they have shown willingness to solve property-specific challenges when asked. Outside the multi-family asset class, our commercial real estate downgrades were primarily in the industrial warehouse property type.

Speaker Change: Moving to credit we are taking a proactive approach to managing credit, which we believe sets the bank up to perform well in all economic cycles.

Speaker Change: We reported an increase in criticized loans in the first quarter of $252 8 million generally concentrated within commercial real estate.

Speaker Change: Our focus on the primary source of repayment drove most of these downgrades.

Speaker Change: Downgrades in the multifamily book, which represented approximately $75 million. This quarter were mainly reflective of slower lease up activity.

Speaker Change: Guarantors in this portfolio are generally strong and they have shown willingness to solid property specific challenges when asked.

Speaker Change: Outside the multifamily asset class or commercial real estate downgrades were primarily in the industrial warehouse property type there were customer specific and we did not see any specific trends driving this activity.

James Reuter: They were customer-specific, and we did not see any specific trends driving this activity. Overall, while our downgrades in the first quarter were not as concentrated among a few borrowers as they were in the prior quarter, we did see pressure mainly from larger credits. The top 10 downgrades in terms of size comprised about three quarters of the increase in criticized assets. On a side note, the four larger properties that migrated to criticized in the prior quarter, which we discussed in the previous earnings call, remained in the criticized bucket at the end of this quarter. Non-performing assets increased $52.8 million during the quarter.

Speaker Change: Overall, while our downgrades in the first quarter were not as concentrated among a few borrowers as they were in the prior quarter, we did see pressure mainly from larger credits.

Speaker Change: The top 10 downgrades in terms of size comprised about three quarters of the increase in criticized assets.

Speaker Change: On a side note the four larger properties that migrated to criticized in the prior quarter, which we discussed in the previous earnings call remained in the criticized bucket at the end of this quarter.

Speaker Change: Nonperforming assets increased $52 8 million during the quarter five credits comprised the majority of the increase and they include agriculture, agriculture real estate and commercial real estate properties.

James Reuter: Five credits comprised the majority of the increase, and they include agriculture, agriculture real estate, and commercial real estate property. Again, there was no specific trend among these credits. Broadly, the bank believes it is well secured in these instances.

Speaker Change: Again, there was no specific trend among these credits.

Speaker Change: Broadly the bank believes it is well secured in these instances.

James Reuter: This quarter, we completed the external credit review we discussed on the prior quarter's call. To date, we performed a detailed review comprised of both external and internal credit reviews of a good portion of the commercial book with a focus on larger credit. We do not have additional external reviews planned at this time. As we stated on our previous earnings call, credit is one of our primary areas of focus, and we have been proactive in recognizing credit concerns. Our current assessment indicates we have good collateral and strong guarantor support in most cases. We're hopeful for positive migration over time.

Speaker Change: This quarter, we completed the external credit review, we discussed on the prior quarter's call to date, we performed a detailed review comprised of both external and internal credit reviews of a good portion of the commercial book with a focus on larger credits.

Speaker Change: We do not have additional external review as planned at this time.

Speaker Change: As we stated on our previous earnings call credit is one of our primary areas of focus and we have been proactive in recognizing credit concerns are.

Speaker Change: Our current assessment indicates we have good collateral and strong guarantor support in most cases.

Speaker Change: We're hopeful for positive migration overtime.

James Reuter: You may also recall from the previous earnings caller decision to exit certain transactional credits, including large agricultural lending. Here's where we have had some success this quarter. We received approximately $40 million in an agricultural line pay down from one of the four customers we noted in the prior quarter to whom we had exposure over $50 million. Three customers now remain with outstanding balances over that level. We also exited certain transactional real estate loans, including a $40 million low-yielding multifamily property. These payoffs contributed to loan balances declining more than we previously anticipated in the first quarter.

Speaker Change: You May also recall from the previous earnings call our decision to exit certain transactional credits, including large agricultural lending here's where we have had some success this quarter.

Speaker Change: We received approximately $40 million in an agricultural line Paydown from one of the four customers. We noted in the prior quarter to whom we had exposure over $50 million.

Speaker Change: Three customers now remain with outstanding balances over that level.

Speaker Change: Also exited certain transactional real estate loans, including a $40 million low yielding multifamily property.

Speaker Change: These payoffs contributed to loan balances declining more than we previously anticipated in the first quarter.

James Reuter: We'd also note that the current economic uncertainty has resulted in limited customer demand and loan production this quarter was below expectations, especially in commercial real estate. With the combination of lower customer demand and some expected larger payoffs in the multifamily space, we expect further shrinking of the balance sheet in the second quarter, which is reflected in our loan and net interest income guidance. Again, we intentionally exited loans that exhibited credit or transactional characteristics that do not fit with our longer-term strategy, and we believe some additional activity will occur in the second quarter. This intentional activity, which is a near term reset, aligns our balance sheet with our business strategy and will position us for meaningful organic growth as we move into 2026 and drive our franchise value going forward.

Speaker Change: We'd also note that the current economic uncertainty has resulted in limited customer demand and loan production. This quarter was below expectations, especially in commercial real estate.

Speaker Change: With the combination of lower customer demand and some expected larger payoffs in the multifamily space. We expect further shrinking of the balance sheet in the second quarter, which is reflected in our loan in net interest income guidance.

Speaker Change: Again, we intentionally exited loans that exhibited credit or transactional characteristics that do not fit with our longer term strategy and we believe some additional activity will occur in the second quarter.

Speaker Change: This intentional activity, which is a near term reset aligns our balance sheet with our business strategy and will position us for meaningful organic growth as we move into 2026 and drive our franchise value going forward.

James Reuter: We are also increasing our efforts to reinvigorate our brand, and I've hired a new director of marketing and client experience. We will be highlighting our strong brand presence, community engagement, and the fact we have the services offered by a large bank with the personal touch of a community bank. This, combined with increased investment in digital delivery channels, which is included in our non-interest expense guidance, is all part of our organic growth strategy.

Speaker Change: We are also increasing our efforts to reinvigorate our brand and have hired a new director of marketing and client experience, we will be highlighting our strong brand presence community engagement and the fact, we had the services offered by our large bank with the personal touch of a community bank.

Speaker Change: This combined with increased investment in digital delivery channels, which is included in our noninterest expense guidance is all part of our organic growth strategy.

James Reuter: We have also recently hired a new Chief Risk Officer, Nathan Jones. Nathan brings with him extensive experience in credit and enterprise risk management in both large and medium-sized institutions.

Speaker Change: We have also recently hired a new chief risk Officer, Nathan Jones, Nathan brings with him extensive experience in credit and enterprise risk management in both large and medium sized institutions.

James Reuter: Before I turn the call over to Marcy, I want to touch on capital. Our capital ratios continued to improve this quarter due mostly to the reduction in our balance sheet. Our level of capital, our expectation of improving earnings, and near-term declines in loan balances create optionality in our capital. This will be strengthened further when we close on the announced branch transaction.

Speaker Change: Before I turn the call over to Marcy I want to touch on capital our capital ratios continued to improve this quarter due mostly to the reduction in our balance sheet.

Marcy Mutch: Our level of capital our expectation of improving earnings and near term declines in loan balances create optionality in our capital. This will be strengthened further when we close on the announced branch transaction.

James Reuter: Our dividend remains a key priority for us to provide shareholders with a strong yield. We actively consider our capital deployment strategy on an ongoing basis and will continue to do so.

Marcy Mutch: Our dividend remains a key priority for us to provide shareholders with a strong yield.

Marcy Mutch: We actively consider our capital deployment strategy on an ongoing basis, and we will continue to do so as.

James Reuter: As we finalize our strategic planning, we'll continue to provide more guidance over time.

Marcy Mutch: As we finalize our strategic planning will continue to provide more guidance over time.

Marcy Mutch: I will now hand the call over to Marcy to discuss our results.

Marcy Mutch: I will now hand, the call over to Marcy to discuss our results.

Marcy Mutch: Thank you, Jim, and thank you for your kind words about my retirement. It's going to be hard for me to leave First Interstate after more than 18 years, but it really helps to know that I'm leaving it in good hands. I agree that David will be an excellent successor to my role, and I already knew from experience that you two together are a superb I'm going to miss my First Interstate family very much, and I'm going to miss the analyst and investor community as well.

Marcy Mutch: Thank you Jim and thank you for your kind words about my retirement, it's going to be hard for me to leave first Interstate after more than 18 years, but it really helps to know that I'm, leaving it in good hands I agree that David will be an excellent successor to my role and I already knew from experience that Youtube together, our superb team I'm going to Miss My first.

Marcy Mutch: Interstate family very much and I'm going to Miss the analyst and Investor community as well.

Marcy Mutch: Thank you all for making my time here so fulfilling.

Marcy Mutch: Thank you all for making my time here so fulfilling.

Marcy Mutch: On to our results, and I'll start with the income statement. For the first quarter of this year, the company reported net income of $50.2 million, or 49 cents per share, compared to $52.1 million in the fourth quarter of 2024. Our fully tax-equivalent net interest margin increased two basis points in the first quarter to 3.22 percent. Our net interest margin excluding purchase accounting accretion increased six basis points to 3.14 percent. Non-interest income was $42 million, a decrease of $5 million from the prior quarter, driven by seasonality in our payment services business and lower trust fees in wealth management.

Marcy Mutch: Onto our results and I'll start with the income statement for.

Marcy Mutch: For the first quarter of this year. The company reported net income of $52 million or <unk> 49 per share compared to $52 $1 million in the fourth quarter of 2024.

Marcy Mutch: Our fully tax equivalent net interest margin increased two basis points in the first quarter to three 2% our net interest margin, excluding purchase accounting accretion increased six basis points to $3 one 4%.

Marcy Mutch: Noninterest income was $42 million, a decrease of $5 million from the prior quarter driven by seasonality in our payment services business and lower trust fees in wealth management. We also had a benefit in the prior quarter from a $2 $1 million gain on a property sale, which did not repeat this quarter.

Marcy Mutch: We also had a benefit in the prior quarter from a $2.1 million gain on a property sale, which did not repeat this quarter. Non-interest expenses were $160.6 million in the first quarter, a reduction of $0.3 million over the prior quarter. This included a $1.4 million of severance costs, which included the exit of indirect lending, and $600,000 related to indirect business termination costs. We continue to focus on controlling expenses, further complementing our balance sheet repricing.

Marcy Mutch: Noninterest expenses were $166 million in the first quarter, a reduction of <unk> $3 million over the prior quarter.

Marcy Mutch: This included a $1 $4 million of severance costs, which included the exit of indirect lending and $600000 related to indirect business termination costs.

Marcy Mutch: We continue to focus on controlling expenses further complementing our balance sheet repricing.

Marcy Mutch: Moving to our balance sheet. Loan balances declined by $467.6 million in the first quarter. The decline was driven by lower customer demand, select larger loan runoff, and the intentional runoff of the indirect lending portfolio, for which we stopped accepting applications in the first quarter. We saw the seasonal decline in deposits that we typically expect at this time of year. In the first quarter, our deposits declined by $282.8 million, which was roughly half the decline we experienced in the first quarter of 2024. Deposits were roughly flat to the same period last year, reflecting improving underlying trends we are seeing in our deposit base.

Marcy Mutch: Moving to our balance sheet loan balances declined by $467 $6 million in the first quarter. The decline was driven by lower customer demand select larger loan runoff and the intentional runoff of the indirect lending portfolio for which we stopped accepting applications in the first quarter.

Marcy Mutch: We saw the seasonal decline in deposits that we typically expect at this time of year in the first quarter, our deposits declined by $282 $8 million, which was roughly half the decline we experienced in the first quarter of 2024.

Marcy Mutch: Deposits were roughly flat to the same period last year, reflecting improving underlying trends, we are seeing in our deposit base.

Marcy Mutch: Again this quarter, we meaningfully reduced our wholesale borrowing. Borrowings declined by $607.5 million in the first quarter of 2025 and by more than $1 billion compared to the third quarter of 2024. Our loan-to-deposit ratio finished the first quarter at 76.4% and our balance sheet remains very flexible. Net charge-offs also normalized from the elevated levels we saw last quarter, totaling $9 million or 21 basis points. Provision expense totaled $20 million, which reflected higher qualitative and quantitative adjustments. The quantitative portion was influenced by a weaker economic outlook. Our total funded provision was 1.24% of total loans at the end of the quarter, an increase of 10 basis points from the prior quarter.

Marcy Mutch: Again this quarter, we meaningfully reduced our wholesale borrowings borrowings declined by $607 5 million in the first quarter of 2025 and by more than $1 billion compared to the third quarter of 2024, our loan to deposit ratio finished the first quarter at 76, 4% and our balance sheet remains very.

Marcy Mutch: Flexible.

Marcy Mutch: Net charge offs also normalize from the elevated levels, we saw last quarter totaling $9 million or 21 basis points provision expense totaled $20 million, which reflected higher qualitative and quantitative adjustments.

Marcy Mutch: The quantitative portion was influenced by a weaker economic outlook.

Marcy Mutch: Our total funded provision was $1 two 4% of total loans at the end of the quarter, an increase of 10 basis points from the prior quarter.

Marcy Mutch: And finally, we declared a dividend of $0.47 per share, or a yield of 6.1% for the first quarter of 2025. Our Common Equity Tier 1 Capital Ratio improved 37 basis points to 12.53%.

Marcy Mutch: And finally, we declared a dividend of 47 per share or a yield of six 1% for the first quarter of 2025, our common equity tier one capital ratio improved 37 basis points to 12 five 3%.

David De La Camera: And with that, I'll hand the call to David to talk about our recently announced branch sale and to review our guidance. Thank you, Marcy. You can find our guidance on page 15 of the investor presentation. On Monday, we announced the sale of 12 branches and associated deposits and certain loans in Arizona and Kansas. We expect this transaction to close by early fourth quarter. The transaction will improve capital at close and align with our strategic principle to invest and grow in markets where we have greater market share to deliver higher returns to shareholders. We anticipate tangible book value accretion of roughly 2% at close, based upon March 31 deposit and loan balances, and improvement in our common equity Tier 1 ratio of approximately 30 to 40 basis points, excluding any capital deposits.

Marcy Mutch: And with that I'll hand, the call to David to talk about our recently announced branch sale and to review our guidance.

Speaker Change: Thank you Marci you can find our guidance on page 15 of the Investor presentation.

David Delek: On Monday, we announced the sale of 12 branches and associated deposits and certain loans in Arizona and Kansas. We expect this transaction to close by early fourth quarter. The transaction will improve capital at close and align with our strategic principle to invest and grow in markets, where we have greater market share to deliver higher returns to shareholders.

David Delek: We anticipate tangible book value accretion of roughly 2% that close based upon March 31 deposit and loan balances and improvement in our common equity tier one ratio of approximately 30 to 40 basis points. Excluding any capital deployment. We are currently considering our capital deployment options and anticipate that the combination of.

David De La Camera: We are currently considering our capital deployment options and anticipate that the combination of this transaction and any associated deployment of capital would be a creative turn.

David Delek: This transaction and any associated deployment of capital would be accretive to earnings.

David De La Camera: We plan to provide further guidance later in the year. Moving to the current guidance, which excludes the impact of the branch sale. I'll start with the balance. Deposit balances declined seasonally in the first quarter, generally in line with our expectations. We continue to forecast modest deposit growth in 2025. We were pleased to see a 12-basis point decline in interest-bearing deposit costs in the first quarter, and expect a modest decline into the second quarter as well, excluding the impact of any Fed rate changes. We have two rate cuts in our guidance in the third quarter. Our balance sheet remains modestly liability sensitive, but it continues to trend towards neutral as fixed rate investment cash flows reduce variable rate borrowings.

David Delek: We plan to provide further guidance later in the year.

David Delek: Moving to the current guidance, which excludes the impact of the branch sale.

Start with the balance sheet.

David Delek: Deposit balances declined seasonally in the first quarter generally in line with our expectations. We continue to forecast modest deposit growth in 2025, we.

David Delek: We were pleased to see a 12 basis point decline in interest bearing deposit costs in the first quarter and expect a modest decline into the second quarter as well, excluding the impact of any fed rate changes.

David Delek: We have two rate cuts in our guidance in the third quarter, our balance sheet remains modestly liability sensitive, but it continues to trend towards neutral as fixed rate investment cash flows reduce variable rate borrowings. We don't believe the rate cuts included in our guidance are meaningful to the net interest income forecast, we have presented for 2025.

David De La Camera: We don't believe the rate cuts included in our guidance are meaningful to the net interest income forecast we have presented for 2025. The asset trends in our guidance imply that we will eliminate short-term borrowings in the third quarter of this year, and we expect interest-earning assets will bottom at that time. We would also note that, over time, we are comfortable with borrowings on the balance. Given our loan-to-deposit ratio and structural liquidity position, when loan demand recovers and we return to organic growth, we will have the flexibility to grow loans faster than deposits if necessary. We anticipate net interest income to increase three and a half to five and a half percent for the full year 2025 over 2024, with quarterly reported numbers improving sequentially through the year.

David Delek: The asset trends and our guidance imply that we will eliminate short term borrowings in the third quarter of this year and we expect interest earning assets will bottom at that time. We would also note that overtime, we are comfortable with borrowings on the balance sheet gives.

David Delek: Given our loan to deposit ratio and structural liquidity position when loan demand recovers and we returned to organic growth, we will have the flexibility to grow loans faster than deposits if necessary.

David Delek: Yeah.

We anticipate net interest income to increase three five to five 5% for the full year 2025 over 2024 with quarterly reported numbers improving sequentially through the year.

David De La Camera: We expect this momentum to accelerate into 2026. While we aren't providing full 2026 guidance, we expect 2026 net interest income, assuming flat loan balances in 2026, to increase in the high single digits over 2025. Again, we are confident in our ability to grow, but wanted to provide this number for context around the impact we foresee from fixed asset repricing. Through 2026, from the end of the first quarter of 2025, we anticipate approximately $1.5 billion of cash flow from our investment portfolio at about a 2.5% rate, and about $2.4 billion of fixed rate and adjustable rate loans to either mature or reprice at a weighted average rate of about 4.3%.

David Delek: We expect this momentum to accelerate into 2026.

David Delek: While we aren't providing full 2026 guidance. We expect 2026 net interest income assuming flat loan balances in 2026 to increase in the high single digits over 2025 again, we are confident in our ability to grow but wanted to provide this number for context around the impact we foresee from fixed asset repricing.

David Delek: Through 2026 from the end of the first quarter of 2025, we anticipate approximately $1 $5 billion of cash flow from our investment portfolio at about a two 5% rate and about $2 $4 billion of fixed rate and adjustable rate loans to either mature or reprice at a weighted average rate of about four 3% for <unk>.

David De La Camera: For clarity, the balance of maturing loans increases in late 2026 and into 2027. We also anticipate a meaningful step-up in the net interest margin in the second quarter, as compared to the first. With a backdrop of interest-earning assets in the $25 to $25.5 billion range, we anticipate the margin, excluding purchase accounting, to increase around 10 to 15 basis points in the second quarter, from the 3.14% figure we reported in the first quarter. Given the meaningful drop in borrowings in the first quarter, the margin is notably higher to start the second quarter. From there, we would expect the 3rd and 4th quarter margin to expand at a slightly slower pace than the 2nd quarter, with 4th quarter net interest margin, excluding purchase accounting, in the 3.4 to 3.5% range.

David Delek: <unk> the balance of maturing loans increases in late 2026 and into 2027.

David Delek: We also anticipate a meaningful step up in the net interest margin in the second quarter as compared to the first with a backdrop of interest earning assets in the 25 to $25 $5 billion range. We anticipate the margin excluding purchase accounting to increase around 10 to 15 basis points in the second quarter from the $3 one 4% figure we.

David Delek: <unk> in the first quarter.

David Delek: Given the meaningful drop in borrowings in the first quarter the margin is notably higher to start the second quarter.

David Delek: From there we would expect the third and fourth quarter margin to expand at a slightly slower pace than the second quarter with fourth quarter net interest margin, excluding purchase accounting and the three four to three 5% range.

David De La Camera: Our underlying earning asset assumption is a modest decline to the 3rd quarter and flat to slightly higher balances in the 4th quarter.

David Delek: Our underlying earning asset assumption is a modest decline into the third quarter and flat to slightly higher balances in the fourth quarter.

David De La Camera: We continue to exhibit expense dis- All investing in the future of the company. Non-interest expense guidance of a 2% to 4% increase in 2025 versus 2024 includes an increase in advertising expense as we move through the year. One of the many factors supporting growth into 2026. Expense guidance does not include any actions related to changes in the branch network. We anticipate the impact of branch-related optimization to be more meaningful in 2020.

We continue to exhibit expense discipline, while investing in the future of the company.

David Delek: Noninterest expense guidance of 2% to 4% increase in 2025 versus 2024 includes an increase in advertising expense as we move through the year one of the many factors supporting growth into 2026.

David Delek: Expense guidance does not include any actions related to changes in the branch network.

David Delek: We anticipate the impact of branch related optimization to be more meaningful in 2026.

David De La Camera: We will provide more information about these actions as we move through 2025 and complete our market-by-market analysis.

David Delek: We will provide more information about these actions as we move through 2025 and complete our market by market analysis.

James Reuter: Now, I'll turn the call back to Jim. Thanks, David.

Jim Writer: Now I'll turn the call back to Jim Jim.

David Delek: Okay.

Jim Writer: Thanks, David in closing I want to reiterate that the underlying value of the first Interstate franchise is what excited me when I joined <unk>.

James Reuter: In closing, I want to reiterate that the underlying value of the First Interstate franchise is what excited me when I joined. Now we are working diligently to unlock that value. As we move forward, our focus will be on improving our credit quality, relationship banking and organic growth. We will continue to evaluate where we can deploy capital to get the best return for our shareholders.

Jim Writer: Now we are working diligently to unlock that value as we move forward our focus will be on improving our credit quality relationship banking and organic growth. We will continue to evaluate where we can deploy capital to get the best return for our shareholders and with that I'll open up the call for questions.

James Reuter: And with that, I'll open up the call for questions. Thank you.

Jim Writer: Thank you.

Unknown Executive: 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 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys.

Jim Writer: Ladies and gentlemen, we will now begin the question and answer session.

Jim Writer: Should you have a question. Please press the star followed by the number one on your Touchtone phone.

Speaker Change: You'll hear a prompt that you haven't been raised.

Speaker Change: Should you wish to decline from the polling process. Please press the star followed by the number too.

Speaker Change: If you are using a speaker phone please lift the handset before pressing any keys.

Unknown Executive: One moment please for your first question.

Speaker Change: One moment. Please for your first question.

Matthew Clark: Your first question is from Matthew Clark from Piper Sander. Please go ahead. Hey, good morning, everyone. Morning. Just on the margin, do you have the spot rate on deposits at the end of March and the average margin in March? Yeah, sure. So, interest-bearing deposit cost in March was 1.77%. We think that's a little bit lower into April on a spot basis. Margin in March was 3.14%. There was a little bit of non-accrual impact during the month, so the actual effective margin into April is higher, and borrowings were had declined towards the end of the month, so we start into April quite a bit higher than that.

Speaker Change: Your first question is from Matthew Clark from Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone.

Speaker Change: Good morning.

Matthew Clark: <unk>.

Matthew Clark: Just on the on the margin.

Matthew Clark: Do you have the spot rate on deposits at the end of it and at the end of March and the average margin in March.

Matthew Clark: Yes, sure so interest bearing deposit cost and March was 177%, we think that's a little bit lower into April on a spot basis margin in March was $3. One 4% there was a little bit of non accrual impact during the month. So the actual effect of margin into April is higher and borrowings for.

<unk> declined towards the end of the month, so we start into April quite a bit higher than that.

Matthew Clark: Okay, great.

Speaker Change: Okay, great. Thank you and then on credit.

Unknown Executive: Thank you.

James Reuter: And then on credit, calling out industrial or some select industrial credits and ag, can you give us some better color as to the types of industrial credits and the type of ag that migrated this quarter? And I guess what gives you comfort that the, you know, the broader, those two broader portfolios are okay. Yeah, so on the non-performing side about there were five credits that represented the majority two AG credits three commercial real estate credits The AG credits were different underlying properties property types, the commercial real estate, a couple different as well. Within the criticized book, so about $75 million of multi, and then some industrial as well.

Speaker Change: Calling out industrial.

Speaker Change: Some select industrial credits and Ed can you give us some better color as to the types of industrial credits and the type of egg.

Speaker Change: That migrated this quarter and I guess what gives.

Speaker Change: As you comfort that the.

Speaker Change: The broader those two broader portfolios are okay.

Speaker Change: Yes, so on the nonperforming side about there were five credits that represented the majority to AG credits three commercial real estate credits. The AG credits were different underlying properties.

Speaker Change: Property types, the commercial real estate, a couple of different as well within the criticized book so about $75 million of quality and then some industrial as well the industrial is really general industrial warehouse there isn't a specific underlying type that represents the majority of the buckets of diversified underlying book as those loans.

James Reuter: The industrial is really general industrial warehouse. There isn't a specific underlying type that represents a majority of the book. It's a diversified underlying book. As those loans, as they were downgraded, we looked very carefully at all of them. We're comfortable with where they are based on what we and again, on the NPL side, as they move into non-performing, there's a specific collateral review that occurs to make sure we're collateralized and then any specific reserves would occur at that time, if necessary. Okay, and then the reserve to non-performing loan ratio down to 112. You know, what's the, how do you see the risk of having to, you know, build more reserves from here?

Speaker Change: <unk>.

Speaker Change: As they were downgraded we looked very carefully at all of them were comfortable with where they are based on what we know and again on the NPL side as they move into nonperforming Theres a specific collateral review that occurs to make sure were collateralized and then any specific reserves would occur at that time if necessary.

Speaker Change: Okay, and then the reserve to nonperforming loan ratio down to 112.

Speaker Change: What's the how do you see the risk of having to build more reserves from here.

James Reuter: Yeah, it's a good question. I think, again, there's a very robust process that we go through to set the reserve. We feel like we have the right number at the end of the quarter based on what we know. It's obviously a quarter by quarter analysis as we see where credit trends move. But at the end of the quarter, we felt the 1.24% was appropriate based on all the facts and circumstances.

Speaker Change: Yeah. It's a good question I think again, there's a very robust process that we go through to set the reserve we feel like we have the right number at the end of the quarter based on what we know, it's obviously a quarter by quarter analysis, as we see where our credit trends move but at the end of the quarter. We felt the $1 two 4% was appropriate based on all the <unk>.

Speaker Change: The circumstances.

James Reuter: Okay, and then just back to the migration this quarter, you know, both non-performers and criticized, is how much of that was legacy GWB versus legacy First Interstate?

Speaker Change: Okay, and then just back to the migration this quarter both non performers in criticized I guess, how much of that was legacy GWB versus legacy first Interstate.

James Reuter: Matthew, this is Jim. You know, just to kind of step back from that is, as I mentioned in the fourth quarter call, you know, we had an independent review done in the fourth quarter. We also continued that into the first quarter. And as I stated in the opening comments, credit's been an area I've spent a lot of time focusing in on. At the same time that independent review or those two independent reviews were taking place, our team was also looking at the credits, both the bankers and our credit review. And I can tell you our view of the credits was consistent, so that's a good thing.

Jim Writer: Matthew This is Jim.

Jim Writer: Just kind of step back from that as I mentioned in the fourth quarter call.

Jim Writer: We had an independent review done in the fourth quarter and we also continue that into the first quarter and as I stated in the opening comments credit's been an area of spend a lot of time focusing in on at the same time knows that independent review or are those two independent reviews. We're taking place. Our team is also looking at the.

Jim Writer: Credits, both the bankers and our credit review and I can tell you our view of the credits was consistent so.

Jim Writer: That's a good thing we also have tipped the scales to certain credits those reviews are all complete.

James Reuter: We also tipped the scales to certain credits. Those reviews are all complete. And so, you know, when I look at where they're located in different things, there are certain parts of the footprint where we see more criticized loans. But, you know, what this really is is, in my opinion, a credit reset, getting consistent across the whole footprint. And I think, you know, when you combine that with our exiting indirect, the changes we've made to the footprint, you can see we're action oriented. But it was, you know, in different parts of the footprint as well.

Jim Writer: So.

Jim Writer: When I look at where they are located in different things.

Jim Writer: There are certain parts of the footprint, where we see more criticized loans, but.

Jim Writer: What this really is in my opinion, a credit reset getting consistent across the whole footprint.

Jim Writer: When you combine that with our exiting indirect the changes we've made to the footprint you can see where action oriented but.

It was.

Jim Writer: In different parts of the footprint as well so.

Matthew Clark: Okay, and then last one for me just on. Capital Return. It sounds like you're warming up to a buyback, you know, after this branch sale. Maybe correct me if I'm wrong, if I'm reading into that. And then, you know, What are the, how should we think about, you know, the payout ratio being elevated? Obviously you're gonna grow into it here, I think in 2Q, but just trying to balance the dividend payout and a potential buyback.

Jim Writer: Okay, and then last one for me just on.

Speaker Change: Capital return it sounds like Youre warming up to a buyback after this branch sale.

Jim Writer: Maybe correct me, if I'm wrong, if I'm reading into that and then.

Jim Writer: What are the.

Jim Writer: How should we think about.

Jim Writer: The payout ratio being elevated obviously going to grow into it here I think in <unk>, but just trying to balance the dividend payout and a potential buyback.

Matthew Clark: Yeah, Matthew, that's a good question. And you know, we look at our capital every quarter, and our goal is to maximize return to shareholders. We don't have any eminent plans for a stock buyback. And, you know, dividend continues to be an important part of the return for shareholders. So I just say, you know, part of our ongoing capital planning, we look at all options. Okay, fair enough. Thank you.

Matthew Clark: Yeah, Matthew that's a good question and you know we look at our capital every quarter and our goal is to maximize return to shareholders. We don't have any imminent plans for a stock buyback and dividend continues to be an important part of the return for our shareholders. So I would just say part.

Jim Writer: Part of our ongoing capital planning, we look at all options.

Jim Writer: Okay fair enough. Thank you.

Jim Writer: Okay.

Jim Writer: Yeah.

Chris Mcgratty: Your next question is from Chris McGratty from KVW. Please go ahead. Oh, great.

Speaker Change: Your next question is from Chris Mcgratty from <unk>. Please go ahead.

Jim Writer: Okay great.

James Reuter: Jim, a question for you now that you're settled. I guess relative to when you started, maybe on either side of the ledger, positive, negative surprises. Has the credit been materially worse than you thought? Or is this just an opportunity to reset? I mean, both sides, positive, negative. Great. Yeah, Chris, that's a good question. You know, as I mentioned, it's a reset. I think, you know, it'd be remiss if I didn't say that there was a little more than I had anticipated, but I feel like we've done a great review of the majority of the portfolio, and I feel good that we have a consistent credit culture across the company.

Speaker Change: Jim a question for you now that you are.

Jim Writer: The settled.

Speaker Change: I guess relative to when you started.

Speaker Change: Maybe on either side of the ledger positive negative surprises as the credit been materially worse than you thought.

Speaker Change: Or is this just an opportunity to reset I mean, both sides positive negative would be great. Thanks.

Speaker Change: Yes, Chris that's a good question as I mentioned, it's a reset I think you know it would be remiss, if I didn't say that.

Speaker Change: There was a little more than I had anticipated but I.

Speaker Change: I feel like we've done a great review of the majority of the portfolio and I feel good that we have a consistent credit culture across the company and I mentioned this in the opening comments I'm a firm believer in proactive credit management. It's what produces the best results in all economic cycles, and so there was a little more there than I had anticipated.

James Reuter: And, you know, I mentioned this in the opening comments. I'm a firm believer in proactive credit management. It's what produces the best results in all economic cycles. And so there was a little more there than I had anticipated. I can tell you the rest of the bank is as good, if not better, than what I anticipated coming in. I mean, a really strong balance sheet in terms of low-cost granular deposits, a good mix of consumer and business. And as I've traveled the footprint and met the team, it's a really good team of bankers. I was just in eastern Iowa and Nebraska and Wyoming.

Speaker Change: <unk> I can tell you the rest of the bank is as good if not better than what I anticipated coming in I mean.

Really strong balance sheet in terms of low cost granular deposits, a good mix of consumer and business and as I've traveled the footprint and met the team. It's a really good team of bankers I was just in eastern Iowa, and Nebraska, and Wyoming and I've driven by some of the loans that we're talking about and.

James Reuter: And, you know, I've driven by some of the loans that we were talking about. And you can see why we feel good about the collateral. It's just primary source of repayment. That's a big part of it. But I would say on the deposit side, the franchise, the brand, all that feel very strong.

Speaker Change: You can see why we feel good about the collateral that's just primary source of repayment thats, a big part of it but.

Speaker Change: I would say on the.

Speaker Change: <unk> side the franchise the brand all of that feel very strong and on the credit I feel like we've done a good reset and we're positioned to go forward.

James Reuter: And on the credit, I feel like we've done a good reset and we're positioned to go forward.

Unknown Executive: Okay, thank you for that.

Speaker Change: Okay. Thank you for that and then just followed by math question and I think I asked this last quarter, but in terms of the capital is.

Chris Mcgratty: And then to follow up on Matt's question, and I think I asked this last quarter, but in terms of the capital, is the dividend preservation the number one priority? Or is there a scenario where you would adjust it to give yourself more flexibility?

Is the dividend preservation the number one priority or is that or is there a scenario, where you would adjust it to give yourself more flex.

James Reuter: Yeah, hey, Chris. So the dividends are our priority. Organic growth, obviously, is where we want to deploy capital long term, as we talked about 2025, we think the balance sheet declines a little bit. Long-term, we obviously want to deploy into organic growth. Dividends are a priority. From there, we'd look at other options, but we're focused on our dividend. Okay, I hear you.

Speaker Change: Yeah, Hey, Chris So the dividends are priority organic growth, obviously is where we wanted to play capital long term as we talked about 2025, we think the balance sheet declines a little bit.

Speaker Change: Long term.

Speaker Change: We obviously wanted to deploy into organic growth dividends, our priority from there we'd look at other options, but we're focused on our dividend.

Speaker Change: Okay.

Unknown Executive: Thanks, dude.

Speaker Change: Yes.

Speaker Change: Okay.

Jeff Rulis: Your next question is from Jeff Rulis from D.A. Davidson. Please go ahead.

Speaker Change: Your next question is from Jeff <unk> from D. A Davidson. Please go ahead.

Speaker Change: Okay.

James Reuter: Um, maybe just to Maybe circling back into credit again, I guess more of a philosophical question, if you think about some of the identifications of more problem assets. Trying to get a peg for, understand, Jim, this is a bit of a credit reset, but if you had to gauge linked quarter, you know, how much of that is macro worsening or those borrowers, or is it, like you said, a true reset of if you're a little more material change in sort of a self-directed, more critical view on existing credit. Yeah, Jeff, that's a good question. And not to give a non answer, it's some of both.

Speaker Change: Maybe just.

Speaker Change: Maybe circling back into credit again.

Speaker Change: I guess more of a philosophical question.

Speaker Change: If you think about some of the identification of more problem assets trying.

Speaker Change: I'm trying to get a peg for understand Jim This is a bit of a credit reset, but if you had to gauge.

Speaker Change: Linked quarter.

Speaker Change: How much of that is macro worsening or.

Speaker Change: Those borrowers or is it like you said a true reset of maybe youre, a little more a material change in sort of a self directed more critical view on existing credits.

Speaker Change: Yes, Jeff Thats, a good question and not to give a non answer it's some of both.

James Reuter: You know, some of the multifamily, for example, are construction loans that have come on to the market. And they've been a little slower to lease up. And I think that's definitely been driven by some of the economic factors. The good news is we have strong guarantors, and they've been supporting the product projects, but primary source of repayment matters because the guarantor doesn't build a new multifamily property with the idea that they're going to feed and care for it from a financial standpoint. So I'd say it's a combination of a reset and some things that have happened as some of those construction loans have come online.

Speaker Change: Some of the multifamily for example are construction loans that have come on to the market and they've been a little slower to lease up and I think that's definitely been driven by some of the economic factors.

Speaker Change: The good news is we have strong guarantors and they have been supporting the product projects, but primary source of repayment matters, because the guarantor doesn't build a new multifamily property with the idea that they're going to feed and care for it from a financial standpoint, So I'd say, it's a combination of a reset and some things that have happened has some.

Speaker Change: Of those construction loans have come online.

James Reuter: And Jim, you know, I guess, you know, we're all going to try to peg what inning you are in terms of credit review. It sounds like the review is complete now. It's, you know, in terms of balances going forward, I guess. You know, it seemed like in your opening comments that into 2Q, the review of credits. will continue and I suppose You know, this criticized balance, I guess you'd be surprised, would you be surprised if you continue to increase that level link order? Maybe an unfair question, but if you could provide any color about where you think you are in.

Speaker Change: And Jim.

Speaker Change: Yes, we're all going to try to peg what inning you are in terms of of credit review it sounds like the review is complete now.

Speaker Change: In terms of balances going forward.

Speaker Change: Yes.

Speaker Change: It seemed like in your opening comments that into <unk>.

Speaker Change: The review of credits.

Speaker Change: We will continue and I suppose.

Theres criticized balance I guess you'd be surprised would you be surprised if you continue to increase that level linked quarter, maybe an unfair question, but if you could provide any color about where you think you are in.

James Reuter: the identification of the problem assets as a whole. Yeah, Jeff, so there are no special reviews going on at this point in time, it'll be ongoing credit reviews that we do as a normal part of good due diligence. You're never done with credit. I mean, it's always a dynamic situation. And when you look at the economic news that came out this morning, it'd be hard for me to predict, Jeff, to be quite honest, I can tell you, like I said, good guarantors, I've been by some of the properties, they're good properties. So I'm optimistic, but you can't ignore the news that came out this morning as well.

Speaker Change: The identification of problem.

Speaker Change: Problem assets as a whole.

Jeff Thats: Yes, Jeff. So there are no special review is going on at this point in time it'll be ongoing.

Jeff Thats: Reviews that we do as a normal part of of good due diligence.

Jeff Thats: You're never done with credit I mean, it's always a dynamic situation and when you look at the economic news that came out. This morning. It would be hard for me to predict Jeff to be quite honest I can tell you like I said, good guarantors I've been by.

Jeff Thats: Some of the properties. They are good properties, so I'm optimistic, but your candidate news that came out this morning as well so.

James Reuter: So I wouldn't say it's an unfair question. It's just one I can't give you a clear answer given all those dynamics.

Jeff Thats: Wouldn't say, it's an unfair question. It's just one I can't give you a clear answer given all those dynamics.

Unknown Executive: Fair enough.

Speaker Change: Fair enough and maybe just one last one on the expense side wanted to David do you have a figure on maybe expected expense savings from from the branch sale. If you would have.

David De La Camera: And maybe just one last one on the expense side. David, do you have a figure on maybe expected expense savings from the branch sale, if you were to remove that from the run rate. Yeah at a round number the way I describe that is the non-interest expense as a percentage of the deposits in the transaction on represent call it a mid twos number is kind of how we would how we would coach that.

Jeff Thats: Remove that from a run rate.

Jeff Thats: Yes, that's a round number the way I would describe that as the noninterest expense as a percentage of the deposits and the transaction represents call. It a mid twos number is kind of how we would how we would coach that.

David De La Camera: Okay, I'll back into it. And just, could you remind us the baseline 2024 expense off of that 2-4% growth for the full year? I just reported a number, no agenda, report in 2024. Okay. And just confirming, that guide excludes the branch sale. Correct. That's correct. Yep. Our guidance in totality excludes the branch, though.

Jeff Thats: Okay.

Jeff Thats: And then just could you remind us the baseline 2024 expense off of that 2% to 4% growth for the full year.

Speaker Change: I just reported number <unk>.

Jeff Thats: Reported 2024.

Okay.

Jeff Thats: Just confirming the that guide is off of excludes the branch sale correct.

Jeff Thats: That's correct Yep, our guidance in totality excludes the branch sale.

Unknown Executive: Thank you.

Speaker Change: Okay. Thank you.

Jeff Thats: Okay.

Andrew Terrell: Your next question comes from Andrew Terrell from Stevens, please go ahead. Hey, good morning. Um, if I could just follow up on the on the last point around the branches, briefly, the expenses is helpful there. David, do you have the efficiency ratio kind of targeted for the branches? I think the way we're trying to describe it, Andrew, is just kind of the broad expense number we provided to kind of have the deposits and the loans. Nothing is too dissimilar to the rest of the bank, I would say, as it relates to the deposits. That kind of backs into that.

Speaker Change: Your next question comes from Andrew Charles from Stephens. Please go ahead.

Jeff Thats: Yeah.

Andrew Charles: Hey, good morning.

Speaker Change: If I could just follow up on the on the last point around the branches briefly that the expense is helpful. There. David do you have the efficiency ratio kind of targeted for the branches.

Andrew Charles: Okay.

Yes.

Andrew Charles: I think the way we're trying to describe it Andrew is just kind of the broad expense number. We provided is kind of half the deposits and the loans nothing is too dissimilar to the.

Andrew Charles: To the rest of the.

Andrew Charles: The bank I would say.

Andrew Charles: As it relates to the deposit so that kind of backs into that and then again with the capital brought in from the transaction we feel like it's.

David De La Camera: And then again, with the capital brought in from the transaction, we feel like it's Accretive-to-Earnings with the combination of any capital deployment and the removal of the branches. Yeah, understood. Okay, so just thinking about a 60% efficiency ratio, you know, in isolation for the branch transaction is probably fair. I'll just point back to the kind of mid-two's non-interest expense as a percentage of deposits. That's kind of the way we want to describe that. Okay, fair enough.

Andrew Charles: Accretive to earnings with a combination of any capital deployment and the removal of our hedges.

Andrew Charles: Yeah understood. Okay. So just thinking about a 60% efficiency ratio in isolation for the branch transaction is probably fair.

Andrew Charles: I'll just point back to the kind of mid twos noninterest expense as a percentage of deposits that's kind of the the way we wanted to describe that.

Andrew Charles: Yeah.

Andrew Charles: Okay fair enough.

David De La Camera: And then You know, just around the topic of capital deployment, you know, specifically the buyback was discussed, but I'm curious, is securities repositioning something that's included as kind of an arrow in the quiver of, you know, broader capital deployment? And then, you know, how should we think about the timeline of potential capital deployment, you know, given the balance sheet runoff this quarter and, you know, sounds like next quarter as well, you know, even prior to any of the branch sale or other transaction, the capital improves very nicely. Should we think about capital as, you know, a near-term, capital deployment as near-term, medium-term, long-term, just any help on timing would be helpful.

Andrew Charles: And then.

Andrew Charles: Just around the topic of capital deployment, specifically the buyback was discussed but I'm curious.

Andrew Charles: Securities repositioning something that's included as kind of an arrow in the quiver.

Andrew Charles: Of.

Andrew Charles: Broader capital deployment, and then how should we think about the timeline of potential capital deployment, given the balance sheet runoff this quarter and it sounds like next quarter as well you know even prior to any many of the branch sale or other transaction like capital improves very nicely.

Andrew Charles: Should we think about capitalized.

Andrew Charles: Our near term capital deployment as near term medium term long term just any any help on timing would be that'd be helpful.

David De La Camera: Andrew, good question. And yes, securities and balance sheet repositioning is one of the things we always consider as well with our capital. So, dividend stock buyback and organic growth, organic growth being the priority. But then repositioning is part of our conversation. As to, you know, what will be near term, medium term, long term, it's a quarter by quarter decision, Andrew. And I think that, you know, that's the best answer we can give, because we have a lot of options. As you point out, we have a strong capital ratio, and it will only continue to get stronger as we go throughout the year.

Speaker Change: Yeah, Andrew Good question, and yes securities and balance sheet repositioning as one of the things, we always consider as well with our capital so dividends stock buyback and organic growth organic growth being the priority, but then repositioning as part of our conversation as to.

Andrew Charles: What will be near term medium term long term its a quarter by quarter decision, Andrew and I think that Tom.

Andrew Charles: The best answer we can give because we have a lot of options as you point out we have a strong capital ratio and it will only continue to get stronger as we go throughout the year. So it's definitely a topic of conversation.

David De La Camera: So, it's definitely a topic of conversation. Understood.

Andrew Charles: Yeah.

Andrew Charles: Understood.

Andrew Terrell: And if I could move to just a credit, credit. Quickly, I hear you, Jim, on kind of a credit reset this quarter. You know, I think there was a bit of surprise that the charge off guidance stay the same given the the shift in, you know, non performer special mention.

Andrew Charles: And if I could move to just a great credit.

Andrew Charles: I hear you Jim on kind of a credit reset this quarter.

Andrew Charles: Yes, I think there was a bit of a surprise that the charge off guidance stay the same given the shift in nonperformer special mention.

James Reuter: You know, maybe just help us out. Why should we remain, you know, comfortable with with the stated kind of charge off band or guidance? in context of the downgrades you saw this quarter. Yeah, good question. And you know, when we look at the collateral, we look at the guarantors, and we look at the path through many of these credits, that's why we haven't changed our forward charge off guidance. You know, it's certainly something we'll take a look at. And there's macro economic impacts to that as well. But that's the reason for that position today. As David mentioned, in our CECL process, we have a very robust process, including, you know, putting in overlays, doing different things.

Andrew Charles: Maybe just.

Andrew Charles: Why should we remain comfortable with the state of kind of charge off band or guidance.

Andrew Charles: In context of the downgrades you saw this quarter.

Andrew Charles: Yes, good question and when we look at the collateral we look at the guarantors and we look at the path through many of these credits that's why we haven't changed our forward charge off guidance.

Andrew Charles: It's certainly something we'll take a look at and there's macro economic impacts to that as well but.

Andrew Charles: That's the reason for that position today, as David mentioned and our seasonal process, we have a very robust process.

Andrew Charles: Putting an overlay is doing different things in.

James Reuter: And we certainly had a conversation around this, and we feel like where we landed from a coverage standpoint is what makes sense, given what we know today.

Andrew Charles: We certainly had a conversation around this and we feel like where we landed.

Andrew Charles: From a coverage standpoint, as what makes sense given what we know today.

Andrew Charles: Yeah.

Unknown Executive: Got it.

Andrew Charles: Got it.

Unknown Executive: And just one one more, if I could, the NPL interest reversal, do you have the magnitude of how much that influenced the first quarter margin? Or dollar terms is fine? Yeah, it was a little over a million for the full quarter, Andrew. Okay.

Andrew Charles: And just one more if I got that.

Oh interest reversal do you have the magnitude of how much that influenced our.

Andrew Charles: The first quarter margin.

Andrew Charles: Or dollar terms was fine.

Andrew Charles: Yes, it was a little over $1 million for the full quarter Andrew.

Andrew Charles: Okay.

Marcy Mutch: Thank you very much. And Marcy, congratulations on on a retirement. Hey, thanks, Andrew.

Speaker Change: Thank you very much and Marcy congratulations on a on a retirement.

Marcy Mutch: Hey, Thanks, Andrew.

Timur Braziler: Your next question is from Timur Braziler from Wells Fargo. Please go ahead. Hi, good morning. Thanks for the questions. Going back to your comments on the slower lease-up activity in the multifamily construction space, can you just give us the geographies where you're seeing the most amount of stress in filling some of these vacancies? Yeah, Timur, I'm not going to get specific. I can tell you it's in a few different spots. It's not just one. So I think we don't have a large concentration of a lot of multifamily in one space. So I think that's a good thing.

Speaker Change: Your next question is from Humira Brasilia.

Speaker Change: From Wells Fargo. Please go ahead.

Speaker Change: Hi, good morning, Thanks for the questions.

Speaker Change: Just going back to your comments on the slower lease up activity in the multifamily multifamily construction space can you just give us the geographies, where you're seeing the most amount of stress and filling some of these vacancies.

Speaker Change: Yes, Tim I'm not going to get specific I can tell you. It's in a few different spots. It's not just one so I think.

Speaker Change: We don't have a large concentration of a lot of multifamily in one space. So I think that's a good thing, but we've seen it with a few different projects throughout our footprint, yes, I would just add tumor that again the largest state concentration within our commercial real estate book is under 20%. So it is a geographically diversified portfolio.

James Reuter: But we've seen it with a few different projects throughout our footprint. Yeah, I would just add, Timur, that the again, the largest state concentration within our commercial real estate book is under 20%. So it is a geographically diversified portfolio.

Speaker Change: Okay I appreciate that.

James Reuter: And then just maybe circling back on credit. You had mentioned that the downgrades were primarily from larger credits, and there's three remaining that are over that 50 million dollars. Are those all okay through this review process? Were any of those downgraded along kind of the risk migration scale? And can you just remind us what those three loans are for? Yeah. So Three that are over 50 remaining, again, none of those were downgraded this quarter, no activity within any of those. Again, the largest downgrade this quarter was a little bit over 20 million, so there were no significant downgrades this quarter of that size.

Speaker Change: And then just maybe circling back on credit.

Speaker Change: Sure.

Speaker Change: You had mentioned that the downgrades are primarily from larger credits and there's three remaining that are over that $50 million are those all okay. Through this review process, where any of those downgraded.

Speaker Change: Long kind of the risk migration scale and can you just remind us what those three loans are for.

Speaker Change: Yes so.

Speaker Change: Three three.

Speaker Change: Three that are over 50 remaining again, we none of those were downgraded this quarter or no activity within any of those again the largest downgrade this quarter was a little bit over $20 million. So there were no significant downgrades this quarter of that size.

James Reuter: We don't want to give specifics on those larger credits. We obviously have a lot of eyes on them. We talked last quarter about the four large credits that were downgraded. That's kind of the detail we kind of want to provide on those, but all three of those are currently performing loans, and we'll kind of leave it at that for those three.

Speaker Change: We don't want to give specifics on those larger credits, we obviously have a lot of eyes on them.

Speaker Change: We talked last quarter about the four large credits that were that were downgraded that's kind of the.

Speaker Change: The detail, we kind of want to provide on those but there is no all three of those are currently.

Speaker Change: Performing loans.

Speaker Change: And what kind of leave it at that for those three.

Speaker Change: Okay, Great and then just last for me.

Unknown Executive: Great.

Timur Braziler: And then just last for me, you had mentioned meaningful organic growth in 2026. Can you just help kind of ring fence that comment. Meaningful is that just, you know, balance sheet expansion at this point? And I guess, as you think about the asset classes, where you're looking to grow, can you just maybe give the composition of what future loan growth is going to look like? Yeah, so, you know, I think the way we're thinking about that is kind of on a relative basis from where the balance sheet is in 2025. I mean, at this time, we don't see a high single digit number in 2026.

Speaker Change: You had mentioned meaningful organic growth in 2026 can you just help kind of.

Speaker Change: Ring fence that comment.

Speaker Change: Meaningful is that just.

Speaker Change: Balance sheet expansion at this point and I guess as you think about all the asset classes, where you're looking to grow can you just maybe give the composition of what future loan growth is going to look like.

Speaker Change: Yes so.

Speaker Change: I think the way, we're thinking about that as.

Speaker Change: Kind of on a relative basis from where the balance sheet is in 2025 I mean at this time, we don't see a high single digit number in 2026 for organic growth its probably more in kind of low to mid <unk>. At this time, obviously as we go through the year, we'll be able to provide more clarity on that composition wise. Our focus continues to be on that small business to kind of a little bit.

James Reuter: For organic growth, it's probably more in kind of low to mid. At this time, obviously, as we go through the year, we'll be able to provide more clarity on that. Composition wise, you know, our focus continues to be on that small business to kind of a little bit larger space. So think kind of C&I, owner occupied, those type of products.

Speaker Change: Larger space, So think kind of C&I owner occupied those type of products.

James Reuter: And, Timur, I would just add that, I mean, it's a priority now, but, you know, when you see our forward projections, we do show some shrinking in the loan portfolio as we run off some of the larger credits and non-relationship loans. And so it's an intentional direction this year, but that doesn't mean underlying we are not working on growth, branding, our bankers have growth goals, all those things, because that's not something you turn on and it starts to work tomorrow. It's been turned on. But when you look at the other things that are in play, exiting indirect, as well as the things I mentioned, that's why there's a little bit of a headwind for this year.

Speaker Change: <unk> I would just add that I mean, it's a priority now, but when you see our forward.

Speaker Change: Projections, we do show some.

Speaker Change: Some shrinking in the loan portfolio as we run off some of the larger credits and non relationship loans. So it's an intentional.

Speaker Change: <unk> this year, but that doesn't mean underlying we're not working on growth branding our bankers have growth goals all of those things because that's not something you turn on and it starts to work tomorrow. It's been turned on but when you look at the other things that are in play exiting indirect.

Speaker Change: Well, it's the things I mentioned Thats, why theres, a little bit of a headwind for this year.

Speaker Change: Got it and have you guys provided the portion thats.

Unknown Executive: And have you guys provided the portion that's that's non relationship driven on the lending book? You guys provided that? No, that's not something we provide, Timur. All right, thank you for the question.

That's non relationship driven on the lending book.

Speaker Change: You guys provided on this call.

Speaker Change: No that's not something we provide tumor.

Speaker Change: Okay, Great alright, thank you for the questions.

Jared Shaw: Your next question is from Jared Shaw from Barclays Capital. Please go ahead. Hey, good morning. And Marcy, congratulations. It's been great working with you over the over the years. Thank you, Jared.

Speaker Change: Your next question is from Jared Shaw from Barclays Capital. Please go ahead.

Hey, good morning, and Marcy congratulations.

Speaker Change: It's been great working with you over the over the years.

Speaker Change: Hey, Gary.

James Reuter: Maybe on the capital question, maybe asking a little different way, you know, when you look at CET1 continuing to build here, given the risk profile of the bank, where do you think an appropriate long term CET1 ratio would be that you'd want to hold? Yeah, I think the way we think about that, Jared, is we don't have... Specific CET-1 external targets today, we're obviously very comfortable at a mid-12s number that we feel like is moving higher, and then we talked about the move higher we see At the close of the branch transaction, we're not going to provide today a CET1 target, but we're, you know, fair to say we're comfortable and we feel like we have appropriate capital to consider other options as we move through the year.

Speaker Change: Maybe on the capital question, maybe asking a little different way when you look at CET, one continuing to build here.

Speaker Change: Given the risk profile of the bank, where do you think an appropriate.

Speaker Change: Long term CET, one ratio would be that you'd want to hold.

Speaker Change: Yes, I think the way we think about that Jared is we don't have spin.

Speaker Change: Specific <unk> CET, one external targets today, we're obviously very comfortable at a mid <unk> number that we feel like is moving higher and then we talked about the move higher we see.

Speaker Change: At the close of the branch transaction, we're not going to provide today CET one target, but we're fair to say, we're comfortable and we feel like we have appropriate capital to consider other options as we move through the year.

James Reuter: Okay, and then on the deposit side, when we look at the DDA balances, whether I guess, you know, maybe on average, is that, do you feel like we're at a good floor here for average DDAs? And as a percentage of deposits, do you think that it's either stable or growing from here? Or is there still some potential pressure? Yeah, so I think on an average basis, we've been within about a percent for the last, I think, five or so quarters. We stepped down slightly in the first quarter. We think kind of that 25-26% range where we've been is probably where we end up.

Speaker Change: Okay.

Speaker Change: And then on the deposit side when we look at.

Speaker Change: The DDA.

Speaker Change: Answer is whether I guess, maybe.

Speaker Change: Maybe on average is that do you feel like you are at a good floor here.

Speaker Change: Here for average TD as and as a percentage of deposits do you think.

Speaker Change: Its either stable or growing from here or is there still some potential.

Speaker Change: Pressure.

Speaker Change: Yes, so I think on an average basis, we've been within about a percent for the last I think five or so quarters.

Speaker Change: He stepped down slightly in the first quarter, we think kind of that 25, 26% range, where we've been is probably where we end up we don't see a material shift from here.

James Reuter: We don't see a material shift from here. You know, average balances have stabilized, and the underlying trends support where we are today.

Speaker Change: Balances have stabilized and the underlying trends support where we are today.

Unknown Executive: Okay.

Speaker Change: Okay.

James Reuter: And then just a last one on credit. When you look at the warehouse and industrial book and some of the moves into criticized and classified and then some of the changes you mentioned, what other risk is there in that portfolio from tariffs? If we see significantly reduced imports and higher vacancies in some of these distribution centers, is that, how does that sort of inform your credit outlook from here? Yeah, Jared, we've actually had conversations around tariffs. And as you know, it changes daily. But our bankers are having the right conversations with our customers. We just had a loan at loan committee where they do business with China.

Speaker Change: And then just a last one on credit when you when you look at the warehouse and industrial book.

Speaker Change: And some of the moves into.

Speaker Change: Criticized and classified and then some of the changes you mentioned, what what other risk is there in that portfolio from tariffs if we.

Speaker Change: See significantly reduced imports.

Speaker Change: Higher vacancies and some of these distribution centers is that.

Speaker Change: How does that occur.

Speaker Change: Inform your your credit outlook from here.

Jared Shaw: Yes Jared.

Jared Shaw: We've actually had conversations around tariffs and as you know it changes daily but.

Jared Shaw: Our bankers are having the right conversations with our customers. We just had alone at loan Committee where.

Jared Shaw: They do business with China, and there was very robust conversation around are they prepared for that and they are.

James Reuter: And there was very robust conversation around are they prepared for that? And they are. I think probably one of the positives of COVID is customers are prepared for supply chain issues and different things because they've experienced it before. So we're having those conversations. I don't think there's an outsized impact or concern in that area would be my closing comment.

Jared Shaw: Probably one of the positives of Covid as customers are prepared for supply chain issue is in different things because they've experienced it before so.

Jared Shaw: We're having those conversations I don't think Theres an outsized.

Jared Shaw: Impact or concern in that area would be my closing comment.

Unknown Executive: Thank you.

Thank you.

Jared Shaw: Yeah.

Timothy Coffey: Your next question is from Timothy Coffey from JANI. Please go ahead. Great. Thank you.

Speaker Change: Your next question is from Timothy Coffey from Janney. Please go ahead.

Timothy Coffey: Great. Thank you good morning, everybody.

James Reuter: Good morning, everybody. Jim, do you have or can you share any color on the percentage of the construction book that is expected to be completed and enter the lease-up phase in the next 12 months? Now, I'm not going to provide color around that other than, you know, we're proactively managing those construction loans. I don't know. Yeah, David, if there's any... Tim, they kind of go through the standard process, right? So as kind of the construction loans lease up, they receive their certificate of occupancy, they move over to permanent at that time. So, you know, we don't have a specific number to share as it relates to what percentage, but there's nothing unusual that we see there.

Speaker Change: Jim do you have or can you share any color on the percentage of the construction book that is expected to be completed and entered the lease up phase in the next 12 months.

Speaker Change: No I am not going to provide color around that other than.

Speaker Change: We are proactively managing notes construction loans I don't know, yes, David if theres anything Tim they kind of go through the standard process right. So as kind of the construction loans lease up they received their certificate of occupancy they move over to permanent at that time. So we don't have a specific number to share as it relates to what percentage, but there is nothing unusual that we see there.

David De La Camera: And those are continuing to migrate to permanent over time.

Speaker Change: And those are continuing to migrate to permanent overtime.

Unknown Executive: Okay.

Speaker Change: Okay.

James Reuter: And then, Jim, you mentioned in the beginning of your prepared remarks about the average branch. I guess a while back, I thought $50 million was the right size for branches, deposits per branch, but that was when Fed funds was at zero. Now that it's at four plus, what do you think is the right number for deposits per You know, I think I mentioned, you know, we're at 76 million and our peers are higher than that. Don't have a target number, Tim, because honestly, it will depend on the trade area. But I think any good retail business out there is constantly, from a hygiene perspective, looking at their branch footprint, going where can we open, where should we consolidate, and where should we close.

And then Jim.

Speaker Change: In your prepared remarks about the average branch size.

Speaker Change: I guess, while back I thought 50 million was the right size for branch deposits per branch, but that was when the fed pauses at zero now that its at four plus.

Speaker Change: What do you think is the right number for sort of deposits per branch.

Speaker Change: I think I mentioned.

Speaker Change: We're at $76 million and our peers are higher than that.

Speaker Change: Don't have a target number Tim because honestly it will depend on the trade area, but.

Speaker Change: I think any good retail business out there is constantly.

Speaker Change: From a hygiene perspective looking at their branch footprint going where can we open where should we consolidate and where should we close and that'll be a focus the last half of the year.

James Reuter: And that will be a focus the last half of the year, because I do think our average branch size could be higher. It won't match peers because we do have a rural footprint, so on average we'll be below. But that's part of optimizing the performance of the bank and the return to shareholders. So something we'll be putting discipline and rigor around.

Speaker Change: Because I do think our average branch side could be size could be higher it wont match peers, because we do have a rural footprint. So on average will be below but.

Speaker Change: That's part of optimizing the performance of the bank and the return to shareholders, so something will be putting discipline and rigor around.

Speaker Change: Okay.

Unknown Executive: Alright, those are my questions. Thank you very much.

Speaker Change: Those are my questions. Thank you very much marci, it's been great working with you and I.

Unknown Executive: And Marcy, it's been great working with you, and I hope to stay in touch. Thanks, Tim.

Marcy Mutch: I'll just stay in touch.

Marcy Mutch: Thanks, Tim.

Marcy Mutch: Okay.

Unknown Executive: There are no further questions at this time.

Speaker Change: There are no further questions at this time Jim Rider. Please proceed with closing remarks.

James Reuter: Jim Reuter, please proceed with closing remarks. Very good. Thank you. I want, again, recognize Marcy for her great work with the bank over the years. And I can tell you personally, she's been an unbelievable partner in this transition, and I just want to say thank you. I don't enter an investor room without feeling like I'm traveling with the mayor of the banking industry, because she's very well-liked and respected by the investor community.

Speaker Change: Very good. Thank you I want again recognized Marcy for her great work with the bank over the years and I can tell you personally she has been an unbelievable partner in this transition and I just wanted to say thank you I don't enter an investor room without <unk>.

Speaker Change: Feeling like I'm traveling with the mayor of the banking industry, because she's very well liked and respected by the investor community. So thank you Marci and thank you for your questions and as always we welcome calls from our investors and analysts and please reach out to US. If you have any follow up questions and thank you for tuning into the call today.

James Reuter: So thank you, Marcy. And thank you for your questions. And as always, we welcome calls from our investors and analysts. And please reach out to us if you have any follow-up questions.

Unknown Executive: And thank you for tuning in to the call today. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Speaker Change: Okay.

Speaker Change: Ladies and gentlemen, this concludes your conference call for today.

Speaker Change: We thank you for participating and ask that you. Please disconnect your lines.