First Interstate BancSystem, Inc. (NASDAQ:FIBK) Q1 2024 Earnings Call Transcript

First Interstate BancSystem, Inc. (NASDAQ:FIBK) Q1 2024 Earnings Call Transcript April 25, 2024

First Interstate BancSystem, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to today’s First Interstate BancSystem First Quarter Earnings Conference Call. [Operator Instructions] And now at this time, I’d like to turn the call over to Ms. Andrea Walton. Please go ahead ma’am.

Andrea Walton: Thanks, good morning. Thank you for joining us for our first quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed by those statements. I’d like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings.

The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release we referenced. Joining us from management this morning are Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer, along with other members of our management team. At this time, I’ll turn the call over to Kevin Riley. Kevin?

Kevin Riley: Thanks, Andrea. Good morning, and thanks again to all of you for joining us on our call today. Again, this quarter, along with our earnings release, we have published an updated investor presentation that has some additional disclosures, which we believe would be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, I would encourage you to do so. I’m going to start today by providing an overview of the major highlights of the quarter. And then I’ll turn the call over to Marcy to provide more details on our financials. We had solid performance in the first quarter, with results generally in line or exceeding expectations. We generated $58.4 million in net income or $0.57 per share.

At this point, we believe our margin has stabilized, and we anticipate that our margin will expand in the second quarter. We continue to focus on controllable expenses and remain pleased with our progress. We recorded $160.2 million in noninterest expense in the quarter, which included a couple of onetime items, and we continue to invest in our fee business and processes to generating greater efficiencies. Loan demand from our customers is still muted, particularly in our real estate. We remain disciplined in our new loan underwriting and pricing criteria. We continue to focus new production in areas where we can develop full banking relationships, which include C&I and our small business products. Our deposit performance was generally in line with expectations, with seasonal weaknesses in business deposits.

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Q&A Session

We also allowed $185 million of fully collateralized high-cost municipal deposits to lead the balance sheet. The increase in our interest-bearing deposit costs slowed materially, increasing only 6 basis points quarter-over-quarter. Total funding cost increased 15 basis points as we expected due to late fourth quarter deposit outflows. We anticipate the second quarter to reflect a flattening of our total cost of funds. During the quarter, we experienced higher cash flows from our investment portfolio due to our $300 million treasury security maturity. We reinvested some cash flows early in the quarter, but we generally utilize those funds to support the seasonal and high-cost municipal outflows I just mentioned. We also acted earlier in the quarter when the market was pricing and more to expected rate cuts to extend some of our borrowings at lower rates.

This included shifting $1 billion from the FHLB to the bank term funding program at a rate of 4.76%. This matures in January of 2025. We also extended $1 billion of our remaining FHLB advances with terms of 12 to 18 months. While we still characterize our balance sheet as modestly liability sensitive, we tilt more toward neutral considering these actions, which improved our position in a higher for longer rate environment. You’ll see that our updated guidance includes an expectation for 2 rate cuts in 2024 instead of 3. However, even considering this reduction in our rate cut expectations, we are reiterating our guidance for NII. Given our profitability and prudent balance sheet management, we continue to see increases in our capital ratios in the first quarter, while also continue to pay a healthy dividend to our shareholders.

Now I will hand the call off to Marcy to provide some additional details around our first quarter results. Go ahead, Marcy.

Marcy Mutch: Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the fourth quarter of 2023, and I’ll begin with our income statement. Our net interest income was $200.1 million in the first quarter, a decrease of $7.7 million. Our yield on interesting-bearing assets increased 5 basis points, which was more than offset by a 15 basis point increase in our funding costs. Additionally, there was 1 less accrual day in the first quarter. As Kevin noted, we repositioned our borrowings mix in the quarter, which reduced our borrowing costs by 47 basis points from the prior quarter. This also partially offset the impact of a higher average level of borrowings in the period.

Turning to our net interest margin. In the first quarter, our net interest margin on an FTE basis decreased 8 basis points to 2.93%. Excluding purchase accounting accretion, our net interest margin was 2.84%, a 10 basis point reduction from the prior quarter. Pressure on our margin softened in the period as we saw deposits increase later in the quarter as seasonally expected. As Kevin mentioned, we believe our margin bottomed in the first quarter and should expand in the second quarter. In our construction portfolio, just under $200 million of commercial construction loans funded up in the first quarter and about $500 million of commitments remain. We expect the pace of this funding to decelerate in the back half of 2024 and the drag on loan yields to lessen.

Additionally, the moderation in our interest-bearing deposit costs and the slowing mix shift out of noninterest-bearing deposits further eases margin pressure. So even with the reduction in our rate cut expectations down to 2, we reiterate our net interest income guidance we gave last quarter. This is included in the summary of our guidance that can be found in our investor presentation. Noninterest income was $42 million in the first quarter, a decrease of $2.4 million from the prior period, which was again in line with our expectations. The decline from the prior quarter was driven by a $2.9 million gain on the disposition of assets in the fourth quarter. Our lines of business performed generally in line with expectations, and we continue to make investments into areas such as our Treasury Services business, which positions us well to add customers and increase our fee-based revenues over time.

Moving to noninterest expense. We were pleased to report $160.2 million in total noninterest expenses this quarter, a decrease of $5.8 million. There were a few moving parts in that reported number, which included a $1.5 million accrual for the FDIC special assessment and $2 million of OREO expenses. These were offset by a $1.1 million reversal of our prior year incentive accrual as well as lower medical claims. While we are very pleased with our expense performance this quarter and while we maintain our discipline in this area, the reported number this quarter was marginally lower than what we expect going forward. That said, we have reduced our expense guidance modestly. This takes into consideration the positive performance from the quarter while anticipating that quarterly expenses for the remainder of the year will be slightly higher than this quarter’s figure.

Moving to the balance sheet. Loan balances declined $76.8 million in the first quarter, primarily due to expected seasonal declines in our agricultural lines, which were down $73.3 million. We also experienced positive migration out of our construction portfolio as stabilized projects moved into the commercial real estate portfolio. The construction portfolio declined $217.3 million during the quarter, and the commercial real estate portfolio increased $191.2 million. On the liability side, total deposits declined $513.1 million. Kevin already mentioned the decision we made in the quarter to allow 2 high-cost fully collateralized municipal deposits totaling $185 million to leave the balance sheet. Excluding this decline, total deposits declined about 1.4% quarter-over-quarter due to normal seasonal declines in our business portfolio.

Our seasonality assumptions include increases in business deposits toward the end of the second and into the third quarter. We expect deposits to increase from March 31 to year-end. As we noted in the investor deck, our deposit base is granular, our noninterest-bearing deposits seem to be stabilizing and we retain a steady mix of business and consumer account. Moving to asset quality. Our provision totaled $5.3 million in the first quarter. This comprised a funded provision of $8.4 million with a release of unfunded provision of $3 million. The unfunded release was driven by a continued reduction in off-balance sheet commitments. Net charge-offs were $8.4 million or 18 basis points of loans. We saw generally positive trends within the portfolio during the quarter.