8-K: First Interstate BancSystem Reports Mixed Fourth Quarter Results; Names New CEO

First Interstate BancSystem's Q4 2024 earnings reveal a slight dip in net income compared to previous periods, alongside the appointment of James A. Reuter as the new President and CEO.

Summary

• First Interstate BancSystem, Inc. reported a net income of $52.1 million, or $0.50 per diluted share, for the fourth quarter of 2024.
• This compares to $55.5 million, or $0.54 per diluted share, for the third quarter of 2024, and $61.5 million, or $0.59 per diluted share, for the fourth quarter of 2023.
• For the year ended December 31, 2024, net income was $226.0 million, or $2.19 per diluted share, compared to $257.5 million, or $2.48 per diluted share, for the year ended December 31, 2023.
• The company's net interest margin increased to 3.18% for the fourth quarter, a 17-basis point increase from the previous quarter.
• Non-performing assets decreased by $33.3 million to $145.6 million as of December 31, 2024.
• Criticized loans increased by $170.0 million to $773.3 million, driven by downgrades in the commercial real estate loan portfolio.
• Net charge-offs for the fourth quarter were $55.2 million, including a $49.3 million commercial and industrial loan.
• Total deposits increased by $151.5 million from the previous quarter.
• The board of directors declared a dividend of $0.47 per common share, payable on February 20, 2025.
• The company anticipates full-year net interest income to increase 5-7% in 2025 over 2024.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While net income is down, there are improvements in net interest margin and non-performing assets. The appointment of a new CEO adds a forward-looking element, but concerns about criticized loans and charge-offs temper the overall outlook.

Positives

• Net interest margin increased by 17 basis points from the third quarter of 2024, reaching 3.18%.
• Non-performing assets decreased by $33.3 million, or 18.6%, to $145.6 million as of December 31, 2024.
• Total deposits increased by $151.5 million from the previous quarter.
• Capital ratios continued to improve during the fourth quarter of 2024, with common equity tier 1 capital ratio increasing 0.30% to 12.16%, compared to the third quarter of 2024.
• Other borrowed funds decreased $512.5 million, or 24.6%, to $1,567.5 million as of December 31, 2024, from $2,080.0 million as of September 30, 2024.

Negatives

• Net income decreased compared to both the previous quarter and the same quarter last year.
• Criticized loans increased by $170.0 million to $773.3 million, driven by downgrades in the commercial real estate loan portfolio.
• Net charge-offs for the fourth quarter were $55.2 million, including a significant $49.3 million commercial and industrial loan charge-off.
• Total assets decreased $458.1 million, or 1.5%, to $29,137.4 million as of December 31, 2024, from $29,595.5 million as of September 30, 2024.

Risks

• The company faces lending risks and risks associated with loan sector concentrations.
• A decline in economic conditions could reduce demand for the company's products and services and negatively impact the credit quality of loans.
• The company is exposed to cybersecurity risks, including denial-of-service attacks and network intrusions.
• Changes in interest rates could affect the value of the company's investment securities.
• The company's performance could be affected by global conditions and natural catastrophic events.

Future Outlook

The company anticipates full-year net interest income to increase 5-7% in 2025 over 2024, assuming one 25 basis point rate decrease in the second quarter. Non-interest income is expected to be modestly higher, excluding gains on sale of property. Non-interest expense is anticipated to increase 3-5%. Net charge-offs are expected to be between 20 and 30 basis points for the full year 2025.

Management Comments

• We are pleased to see continued improvement in our core operating metrics.
• Net interest margin expanded for the third consecutive quarter, and the net interest margin, excluding purchase accounting, exceeded 3% in the fourth quarter.
• Growth in deposits exceeded our expectations and we were able to take advantage of the flexibility of our BTFP borrowings to reduce our funding costs.
• Charge-offs were elevated this quarter, driven by a previously reported, non-performing commercial and industrial loan.
• The team working this loan did well adhering to agreed upon resolution options, finding the best available outcome, and allowing us to move forward.
• As I approach the 90-day mark since I joined First Interstate, I have had the opportunity to visit many of our markets and am impressed to see a strong, client-centric, community Bank.
• I look forward to working with the team at First Interstate to build upon the core strengths of this institution and, ultimately, to drive long-term shareholder value.

Industry Context

The report reflects trends in the banking industry, including managing net interest margins in a fluctuating rate environment, addressing credit quality concerns in commercial real estate, and focusing on deposit growth and cost management. The appointment of a new CEO signals a strategic focus on building upon the company's strengths and driving shareholder value.

Comparison to Industry Standards

• The company's capital ratios (CET1 of 12.16% and Total RBC of 14.38%) are above regulatory requirements, indicating a strong capital position compared to many regional banks.
• The efficiency ratio of 60.2% is competitive, suggesting effective cost management relative to peers.
• The increase in criticized loans, particularly in commercial real estate, is a trend being watched across the industry, with banks like Wells Fargo and Bank of America also reporting increased scrutiny in this sector.
• The company's net interest margin of 3.18% is within the range of reported NIMs for regional banks, but the focus on increasing it further aligns with industry-wide efforts to optimize profitability in the current rate cycle.

Management Changes

Stakeholder Impact

• Shareholders will receive a dividend of $0.47 per share.
• Employees will be led by a new CEO, James A. Reuter.
• Customers will continue to receive banking products and services.
• The company's financial performance impacts its suppliers and creditors.

Next Steps

• The company will host a conference call on January 30, 2025, to discuss the results.
• The company will focus on managing credit quality, particularly in the commercial real estate portfolio.
• The company will work to increase net interest income by 5-7% in 2025.
• The company will discontinue Indirect Lending originations in the first quarter.

Key Dates