First Interstate BancSystem Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2025

There are 11 speakers on the call.

Operator

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. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, 04/30/2025.

Operator

I would now like to turn the conference over to Nancy Vermeulen. Please go ahead.

Speaker 1

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. Actual results or outcomes may differ materially from those expressed by those statements.

Speaker 1

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 ks filed with the SEC and in our earnings release 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 filings. The company does not undertake to update any of the forward looking statements made today. A copy of our earnings release, 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 GAAP 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.

Speaker 1

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. 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. Joining us from management this morning are Jim Reuter, our Chief Executive Officer Marci Much, our Chief Financial Officer and David Della 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 Reuter.

Speaker 1

Jim?

Speaker 2

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 Marci. As we announced at the February, Marci is retiring after more than eighteen years here at the bank and an accomplished career in finance of more than thirty 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.

Speaker 2

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. Thank you for all you have done for First Interstate, and congratulations on a brilliant career. Onto 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 deemphasizing large scale m and a and refocusing on full relationship banking.

Speaker 2

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. 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.

Speaker 2

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. We also acknowledge that there are opportunities in our footprint to optimize our branch network. Today, our average branch size is approximately $76,000,000, 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 2

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 $740,000,000 as of March 31, and about $200,000,000 of loans will be included in the transaction, which we expect to close by the fourth quarter. 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 February generally concentrated within commercial real estate.

Speaker 2

Our focus on the primary source of repayment drove most of these downgrades. Downgrades in the multifamily book, which represented approximately $75,000,000 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 multifamily asset class, our commercial real estate downgrades were primarily in the industrial warehouse property type. They were customer specific, and we did not see any specific trends driving this activity.

Speaker 2

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. Nonperforming assets increased $52,800,000 during the quarter. Five credits comprised the majority of the increase and they include agriculture, agriculture real estate, and commercial real estate properties.

Speaker 2

Again, there was no specific trend among these credits. Broadly, the bank believes it is well secured in these instances. 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. We do not have additional external reviews planned at this time.

Speaker 2

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. 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 2

We received approximately $40,000,000 in an agricultural line pay down from one of the four customers we noted in the prior quarter to whom we had exposure over $50,000,000 3 customers now remain with outstanding balances over that level. We also exited certain transactional real estate loans, including property. These payoffs contributed to loan balances declining more than we previously anticipated in the first quarter. We 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.

Speaker 2

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. 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 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 noninterest expense guidance, is all part of our organic growth strategy.

Speaker 2

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. Before I turn the call over to Marci, 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.

Speaker 2

This will be strengthened further when we close on the announced branch transaction. 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. As we finalize our strategic planning, we'll continue to provide more guidance over time. I will now hand the call over to Marci to discuss our results.

Speaker 1

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 eighteen 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 team. I'm going to miss my First Interstate family very much, and I'm going to miss the analyst and investor community as well. Thank you all for making my time here so fulfilling.

Speaker 1

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 $50,200,000 or $0.49 per share compared to $52,100,000 in the fourth quarter of twenty twenty four. Our fully tax equivalent net interest margin increased two basis points in the first quarter to 3.22%. Our net interest margin excluding purchase accounting accretion increased six basis points to 3.14. Non interest income was $42,000,000 a decrease of $5,000,000 from the prior quarter, driven by seasonality in our Payment Services business and lower trust fees in Wealth Management.

Speaker 1

We also had a benefit in the prior quarter from a 2,100,000 gain on a property sale, which did not repeat this quarter. Non interest expenses were $160,600,000 in the first quarter, a reduction of $300,000 over the prior quarter. This included a $1,400,000 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. Moving to our balance sheet.

Speaker 1

Loan balances declined by $467,600,000 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 $282,800,000 which was roughly half the decline we experienced in the first quarter of twenty twenty four. Deposits were roughly flat to the same period last year, reflecting improving underlying trends we are seeing in our deposit base.

Speaker 1

Again this quarter, we meaningfully reduced our wholesale borrowing. Borrowings declined by $607,500,000 in the first quarter of twenty twenty five and by more than $1,000,000,000 compared to the third quarter of twenty twenty four. 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 $9,000,000 or 21 basis points. Provision expense totaled $20,000,000 which reflected higher qualitative and quantitative adjustments.

Speaker 1

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. And finally, we declared a dividend of $0.47 per share or a yield of 6.1% for the first quarter of twenty twenty five. Our common equity Tier one capital ratio improved 37 basis points to 12.53%. And with that, I'll hand the call to David to talk about our recently announced branch sale and to review our guidance.

Speaker 3

Thank you, Marci. 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.

Speaker 3

We anticipate tangible book value accretion of roughly two percent at 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 this transaction and any associated deployment of capital would be accretive to earnings. 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 sheet.

Speaker 3

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.

Speaker 3

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 sheet. 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 3.5% to 5.5% for the full year 2025 over 2024, with quarterly reported numbers improving sequentially through the year.

Speaker 3

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 twenty twenty five, we anticipate approximately $1,500,000,000 of cash flow from our investment portfolio at about a 2.5% rate and about $2,400,000,000 of fixed rate and adjustable rate loans to either mature or reprice at a weighted average rate of about 4.3%. For clarity, the balance of maturing loans increases in late twenty twenty six and into 2027.

Speaker 3

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 $25,000,000,000 to $25,500,000,000 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 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, in the 3.4% to 3.5% range. Our underlying earning asset assumption is a modest decline to the third quarter and flat to slightly higher balances in the fourth quarter.

Speaker 3

We continue to exhibit expense discipline while investing in the future of the company. Noninterest 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 2026. We will provide more information about these actions as we move through 2025 and complete our market by market analysis.

Speaker 3

Now I'll turn the call back to Jim. Jim?

Speaker 2

Thanks, David. 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.

Speaker 2

And with that, I'll open up the call for questions.

Operator

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

Speaker 4

Hi, good morning everyone. Just on the margin, do you have the spot rate on deposits at the March and the average margin in March?

Speaker 3

Yes, sure. So interest bearing deposit cost in March was 1.77 percent. 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 nonaccrual impact during the month, so the actual effect of margin into April is higher and borrowings were had declined towards the end of the month.

Speaker 3

So we start into April quite a bit higher than that.

Speaker 4

Okay. Great. Thank you. And then on credit, calling out industrial or some select industrial credits in ag. Can you give us some better color as to the types of industrial credits and the type of ag that migrated this quarter?

Speaker 4

And I guess what gives you comfort that the broader those two broader portfolios are okay?

Speaker 3

Yeah. So on the nonperforming 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 $75,000,000 of multi and then some industrial as well.

Speaker 3

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 they were downgraded, we looked very carefully at all of them. We're comfortable with where they are based on what we know.

Speaker 3

And, again, on on the NPL side, as they move into nonperforming, there's a specific collateral review that occurs to make sure we're we're collateralized, then any specific reserves would occur at that time if necessary.

Speaker 4

Okay. And then the the, reserve to nonperforming loan ratio down to one twelve, you know, what what's the how do you see the risk of having to build more reserves from here?

Speaker 3

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.

Speaker 3

But at the end of the quarter, we felt the 1.24% was appropriate based on all the facts and circumstances.

Speaker 4

Okay. And then just back to the migration this quarter, you know, both nonperformers and criticized. I guess, how much of that was legacy GWB versus legacy First Interstate?

Speaker 2

Matthew, this is Jim. You know, just to kinda 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, those 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.

Speaker 2

And I can tell you our view of the credits was consistent, so that's a a good thing. 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.

Speaker 2

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 in different parts of the footprint as well. So

Speaker 4

Okay. And then last one for me. Just on capital return, it sounds like you're warming up to a buyback after this branch sale. Maybe correct me if I'm wrong, if I'm reading into that. And then what are the how should we think about the payout ratio being elevated?

Speaker 4

Obviously, you're going to grow into it here, I think, in 2Q, but just trying to balance the dividend payout and a potential buyback.

Speaker 2

Yes, Matthew, that's a good question. And as 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'd just say, part of our ongoing capital planning, we look at all options.

Speaker 4

Okay. Fair enough. Thank you.

Operator

Your next question is from Chris McGratty from KBW. Please go ahead.

Speaker 5

Oh, great. 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, negatives, would be great.

Speaker 5

Thanks.

Speaker 2

Yeah, Chris. That's a good question. As I mentioned, it's a reset. I think 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 2

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.

Speaker 2

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, Nebraska, and Wyoming. And, you know, I've driven by some of the loans that we're talking about and can see why we feel good about the collateral. It's just primary source of repayment.

Speaker 2

It's a big part of it. But I would say on the deposit side, the franchise, the brand, all that feel very strong. And on the credit, I feel like we've done a good reset, and we're positioned to go forward.

Speaker 5

Okay. 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? Is that or is

Speaker 6

there a scenario where you would adjust it to give yourself more flex?

Speaker 3

Yeah. Hey, Chris. So the dividends are our priority. Growth, is where we wanted to play 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.

Speaker 3

Dividends are our priority. From there, we'd look at other options, but we're we're focused on our dividend.

Speaker 7

Okay. I hear you. Thanks, Dave.

Operator

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

Speaker 7

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 it, I understand, Jim, this is a bit of a credit reset. But if you had to gauge linked quarter, how much of that is macro worsening or those borrowers? Or is it, like you said, a true reset of maybe you're a little more a material change in sort of a self directed more critical view on existing credits?

Speaker 2

Yes, Jeff, that's a good question. And not to give a non answer, it's some of both. 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 prod projects.

Speaker 2

But, primary source of repayment matters because a 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 7

And Jim, I guess, we're all gonna try to peg what inning you are in terms of credit review. It sounds like the review is complete. Now it's in terms of balances going forward. I guess it seemed like in your opening comments that into 2Q, the review of credits will continue. And I suppose this criticized balance, I guess, you'd be surprised would you be surprised if you continue to increase that level linked quarter?

Speaker 7

Maybe an unfair question, but if you could provide any color about where you think you are in the identification of the problem assets as a whole.

Speaker 2

Yes, Jeff. So there are no special reviews going on at this point in time. It will 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.

Speaker 2

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 news that came out this morning as well.

Speaker 2

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

Speaker 7

Fair enough. And maybe just one last one on the expense side. I wanted to 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?

Speaker 3

Yes. At a round number, the way I'd describe that is the noninterest expense as a percentage of the deposits in the transaction represent, call it, a mid-2s number is kind of we would coach that.

Speaker 7

Okay. I'll back into that. And then just could you remind us the baseline 2024 expense off of that 2% to 4% growth for the full year?

Speaker 3

I just reported a number. No adjustments to that. Reported 2020 Okay.

Speaker 7

And just confirming the that guide is off of excludes the branch sale, correct?

Speaker 3

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

Speaker 7

Okay. Thank you.

Operator

Your next question comes from Andrew Terrell from Stephens. Please go ahead.

Speaker 8

Hey, good morning. If I could just follow-up on the last point around the branches briefly. The expense is helpful there. David, do you have the efficiency ratio kind of targeted for the branches?

Speaker 3

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, to the rest of the bank, I would say, from as it relates to the deposits. So that kind of backs into that. 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.

Speaker 8

Yep. Understood. Okay. So just thinking about a 60% efficiency ratio in isolation for the branch transaction is probably fair?

Speaker 3

I'll just point back to the kinda mid twos non interest expense as a percentage of deposits. That's kind of the the way we wanna describe that.

Speaker 8

Okay. Fair enough. And then just around the topic of capital deployment, 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 broader capital deployment? And then how should we think about the timeline of potential capital deployment given the balance sheet runoff this quarter and sounds like next quarter as well, even prior to any the branch sale or other transaction, like capital improves very nicely.

Speaker 8

Should we think about capital as a near term capital deployment as near term, medium term, long term? Just any help on timing would be helpful.

Speaker 2

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 what will be near term, medium term, long term, it's a quarter by quarter decision, Andrew. And I think that that's the best answer we can give because we have a lot of options.

Speaker 2

As you point out, we have a strong capital ratio, and it'll only continue to get stronger as we go throughout the year. So it's definitely a topic of conversation.

Speaker 8

Understood. And if I could move to just a credit quickly. I hear you, Jim, on kind of a credit reset this quarter. I think there was a bit of surprise that the charge off guidance stayed the same given the shift in nonperformers, special mention. Maybe just help us out, why should we remain comfortable with the stated kind of charge off band or guidance in context of the downgrades you saw this quarter?

Speaker 2

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. It's certainly something we'll take a look at, and there's macroeconomic impacts to that as well. But that's the reason for that position today.

Speaker 2

As David mentioned, in our CECL process, we have a very robust process, including putting in overlays, doing different things. 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.

Speaker 8

Got it. And just one one more if I could. The NPL, interest reversal, do you have the the magnitude of how much that influenced the the first quarter margin or dollar terms is fine?

Speaker 3

Yes. It was a little over $1,000,000 for the full quarter, Andrew.

Speaker 8

Thank you very much. And Marci, congratulations on retirement.

Speaker 1

Hey, thanks, Andrew.

Operator

Your next question is from Tamir Brasilia from Wells Fargo. Just

Speaker 6

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

Speaker 2

Yeah, team. I'm not gonna 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 2

But we've seen it with a few different projects throughout our footprint.

Speaker 3

Yeah. And we'll 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 6

Okay. I appreciate that. And then just maybe circling back on credit, you had mentioned that the downgrades are primarily from larger credits, and there's three remaining that are over that $50,000,000. Are those all okay through this review process? Were any of those downgraded, along kind of the risk migration scale?

Speaker 6

And can you just remind us what those three loans are for?

Speaker 3

Yeah. So three three that are over 50 remaining again, we none of those were downgraded this quarter. No activity within any of those. Again, the largest downgrade this quarter was a little bit over $20,000,000 so there were no significant downgrades this quarter of that size. We don't want to give specifics on those larger credits.

Speaker 3

We obviously have a lot of eyes on them. We talked last quarter about the four large credits that were that were downgraded. That's kind of the detail we kinda wanna provide on those. But there there's no all three of those are currently performing loans, and we'll kinda leave edit that for those three.

Speaker 6

Okay. Great. And then just last for me. You had mentioned meaningful organic growth in in 2026. Can you just help kinda ring fence that comment meaningful?

Speaker 6

Is that just 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 gonna look like?

Speaker 3

Yeah. So, you know, I 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 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.

Speaker 3

Composition wise, our focus continues to be on that small business to to kind of a little bit larger space. So think kind of C and I, owner occupied, those type of products.

Speaker 2

And, Timur, I would just add that, I mean, it's a priority now. But, you know, when you see our our forward projections, we do show some shrinking in the loan portfolio as we run off some of the larger credits and nonrelationship loans. 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.

Speaker 2

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 6

Got it. And have you guys provided the portion that's that's nonrelationship driven on the lending book? You guys provided that

Speaker 4

in the past?

Speaker 2

No. That's not something we provide, Timur.

Speaker 6

Okay. Great. Alright. Thank you for the questions.

Operator

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

Speaker 9

Hey, good morning. And Marci, congratulations. It's been great working with you over the years.

Speaker 6

Thank you, Jared.

Speaker 9

Maybe on the capital question, maybe asking a little different way. 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?

Speaker 3

Yes. I think the way we think about that, Jared, is we don't have specific CET1 external targets today. We're obviously very comfortable at a mid-twelve 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 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 9

Okay. And then on the deposit side, when we look at the DDA balances, I guess 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?

Speaker 3

Yes. So I think on an average basis, we've been within about 1% for the last, I think, five or so quarters. We stepped down slightly in the first quarter. We think kind of that 25%, twenty six % range where we've been is probably where we end up. We don't see a material shift from here.

Speaker 3

Average balances have stabilized and the underlying trends support where we are today.

Speaker 9

Okay. 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?

Speaker 2

Yes, 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 committee where, they do business with China, and there was very robust conversation around, are they prepared for that?

Speaker 2

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.

Speaker 7

Thank you.

Operator

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

Speaker 10

Great. Thank you. 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 twelve months?

Speaker 2

No. I I I'm not gonna provide color around that other than, you know, we're proactively managing those construction loans. I don't know

Speaker 3

Yeah. David, if there's anything Tim, they kinda 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, and those are continuing to migrate to permanent over time.

Speaker 10

Okay. And then, Jim, you you mentioned in the beginning of your prepared remarks about the average branch size. You know, I guess, you know, a while back, I thought 50,000,000 was the right size for branch deposits for 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 branch?

Speaker 2

I think I mentioned we're at $76,000,000 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 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.

Speaker 2

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 10

Alright. Those are my questions. Thank you very much. And and, Marcy, it's been great working with you, I I hope to stay in touch.

Speaker 1

Thanks, Tim.

Operator

There are no further questions at this time. Jim Reuter, please proceed with closing remarks.

Speaker 2

Very good. Thank you. I want to again recognize Marci 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 wanna 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 2

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, and thank you for tuning into the call today.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
First Interstate BancSystem Q1 2025
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