First Interstate BancSystem, Inc. (FIBK) Q4 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Interstate BancSystem Inc. Fourth 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. [Operator Instructions]. This call is being recorded on Thursday, January 30, 2025. I would now like to turn the conference over to Ms. Nancy Vermeulen. Thank you. Please go ahead.

Thanks very much. Good morning and thank you for joining us for our fourth 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 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, which has additional disclosures that we believe will be helpful. This 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 third quarter of 2024. Joining us from management this morning are Jim Reuter, our Chief Executive Officer; Marcy Mutch, 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. Jim?

Thank you, Nancy, and thank you all for joining us on our earnings call this morning. Before joining First Interstate, I was impressed by the following aspects of the bank, a low-cost granular deposit base, a strong presence brand and market share in attractive high-growth markets, a commitment of resources both people and dollars to communities, which is a differentiator as a community bank, and a client-centric approach focused on providing best-in-class service. These are the kinds of attributes that will allow us to focus on and support organic growth. But before we delve into our results for the quarter, let's widen the lens for a moment and outline what you can expect from us going forward. Full relationship banking will be our main focus. We will align incentives with deposit growth, loan pricing, and with new customer acquisition. We will focus on organic growth. And while we will always consider strategic opportunities, you can expect the pace of M&A to decline compared to the past decade or so. We will deploy capital to markets where we have the best opportunity to strengthen our position and gain market share. To that end, we made the decision to discontinue originations with the indirect lending business and will allow this portfolio to amortize over time. This portfolio represents about 4% of loan balances and approximately 30% to 40% of those balances are estimated to amortize over the next 12 months. This type of lending does not support our goals of generating organic growth through relationship banking as it is focused on originating loans without corresponding deposit relationships with limited success in cross-selling other bank services. Given the size of our indirect business, along with market pressure and the structure of indirect lending in general, the business has been dilutive to our return targets. As we look to accelerate organic growth in the second half of 2025, and into 2026, we can utilize this cash flow to grow our customer base. This is step one on our transformation journey. There are other parts of the bank we are evaluating with an eye towards a stronger focus on relationship banking, organic growth, efficiency and return to shareholders. We are excited to work to unlock the underlying value of this franchise, which will include a multi-year strategy with near-term action plans developed to drive long-term value. We will share more at the next quarterly earnings call as we complete our evaluation and obtain full leadership and Board support for the proposed changes. I will wrap up my initial comments by saying that I have traveled around our footprint, along with several members of the executive team, listening to teammates and operations and customer-facing positions to get their thoughts on how we can better serve our customers and communities. This bank is filled with community bankers who know their communities, have strong relationships and are ready to go. My first 90 days have convinced me this team has the talent, energy and work ethic to bring this franchise to its full potential. This combined with the attributes I just mentioned give me confidence the future is bright at First Interstate Bank. And with that, I will hand the call over to Marcy. Marcy?

Thank you, Jim, and I think I can speak for all of us and say that we're very excited to have you as part of the First Interstate team. I want to begin by following-up on Jim's comments about our objectives for deposit acquisition. We were pleased with our early efforts in this area, which helped drive deposit growth of $151.5 million in the fourth quarter. We saw stability in our deposit mix, and we have success in selected deposit campaigns, generally concentrating on checking and other low-cost deposits that are valuable to our franchise. We also accepted lower beta on some deposits in order to retain existing customers and attract new relationships, and I'll discuss that more in a moment. Let's turn to our income statement. For the fourth quarter, the company reported net income of $52.1 million or $0.50 per share, which compares to net income of $55.5 million or $0.54 per share for the third quarter of 2024. Our cost of interest-bearing liabilities declined in the fourth quarter, driven by a reduction in average borrowing. At year-end, other borrowed funds representing FHLB advances totaled $1.6 billion. That represents a reduction of $1 billion during 2024, with half of that reduction occurring in the fourth quarter. In December, we were able to take advantage of the flexibility provided by our BTFP borrowings and pay off the outstanding $1 billion in its entirety right after the Fed funds rate cut. We used a combination of excess cash and lower rate FHLB advances to do this. Our remaining borrowings are comprised mostly of short-term advances maturing in the first quarter, along with $250 million maturing in July. Our fully tax equivalent net interest margin increased 16 basis points in the quarter to 3.2%. Our net interest margin, excluding purchase accounting accretion, increased 11 basis points to 3.08%. We are pleased with this continued margin expansion and ongoing asset repricing, which are in line with our expectations. We expect these trends to continue sequentially going forward, along with the backdrop of modestly declining earning assets. David will discuss this along with the rest of our guidance later in the call. During the fourth quarter, we did experience higher-than-normal purchase accounting accretion, driven by the recovery of $3.4 million resulting from the payoff of the non-accrual agricultural loans. Fourth quarter results also included approximately $1.8 million in net recoveries of non-accrual interest. In response to the latest reduction in rates by the Fed, our interest-bearing deposit betas did lag as we had anticipated. We believe our ability to allow deposit rates to lag as the Fed reduces rate creates a competitive advantage. Given the asset repricing we are experiencing and which we expect to continue in the near and medium-term, our margin can continue to expand, while we can be flexible with our deposit rates to attract new and retain existing customers. Our fee businesses generally performed as we expected in the fourth quarter with modest increases in treasury management services and wealth management income. Similar to the third quarter, non-interest income this quarter includes a gain on sale of property totaling roughly $2.1 million as compared to $2.6 million last quarter. Going forward, we will continue to emphasize treasury management and card products, especially in the small business arena, where we can deepen existing relationships and garner new ones most effectively. As Jim mentioned earlier, both with existing and new customers, we will lead with deposits and services that support our goals. Non-interest expenses increased in the fourth quarter by $1.5 million, driven primarily by higher medical insurance costs, which somewhat normalized in the quarter and higher short-term incentive accruals. This was partially offset by the CEO transition costs recognized in the third quarter. Moving to our balance sheet. I've already mentioned that our deposits increased in the fourth quarter by $151.5 million, driven by a more intense focus on deposit relationships. Most encouraging, we have seen customers' average deposit balances stabilize. Conversely, loans declined in the fourth quarter by $182.2 million. No particular loan category drove this reduction. Continued movement of construction loans to permanent financing did drive an increase in commercial real estate loans, but excluding this movement, commercial real estate loans declined. Our loan-to-deposit ratio ended the quarter at 77.5%. Higher charge-offs and paydowns of non-performing loans also contributed to the reduction in loan balances as well as to the elevated level of provision we saw in the fourth quarter. Net charge-offs totaled $55.2 million, and our provision expense was $33.7 million. As you read in our press release issued on January 10, we can attribute the majority of this provision to the charge-off of the non-performing C&I credit that we've been reporting on through the past few quarters. Total funded provision ended the quarter at 1.14%, down 11 basis points versus the prior quarter due to the release of the specific reserve applicable to that large C&I credit that was partially charged off. Excluding this large release, coverage increased by 4 basis points on the remainder of the portfolio. As for the final resolution of the C&I loans, as noted in our previously filed 8-K, we continue to anticipate receiving the remaining balance of $13.5 million in the coming days. We experienced an increase in criticized assets in the fourth quarter, with most of the downgrades occurring in the commercial real estate portfolio. As noted in our investor presentation, four loans totaling about $160 million represented over 90% of the net increase. To provide a brief summary of the specific loans, the largest is a senior living facility in the Eastern part of the footprint. The property is beginning to see increased leasing activity, albeit behind initial expectations following construction delays. The second is a multi-family property in Arizona with slower absorption than projected. Guarantor support has been strong and the borrowers working towards an external refinance. The third is a construction company that is undergoing working capital challenges with balances reflecting both real estate and line of credit exposure. The bank is working closely with the entity to deleverage and collateral is generally acceptable. And the last one is a senior living facility also in the Eastern part of the footprint, but in a different market from the larger credit, we just mentioned. They are experiencing higher costs, which has challenged profitability, and they're exploring a refinance and we anticipate a takeout of the debt. Other factors contributing to the increase in criticized loans were credit policy and process changes to enhance our portfolio monitoring. This included expanding both the population and the frequency of reviews. This provided us with additional touch points across the portfolio in the back half of 2024. We are working diligently to exit certain credits and are focused on improving our asset quality metrics over time. In total, as you'll see in our guidance, we anticipate 20 basis points to 30 basis points of total net charge-offs in 2025. And finally, we declared a dividend of $0.47 per share or a yield of 5.8% for the fourth quarter of 2024. Even with the higher dividend payout ratio in the fourth quarter as a result of the higher provision level, our capital ratios continue to increase. Our common equity Tier 1 capital ratio was 12.16% at the end of the quarter. And with that, I'll hand the call to David to review our guidance. David?

Thank you, Marcy. I'll spend a moment reviewing our 2025 guidance, which can be found on Page 15 of the investor presentation. Starting with the balance sheet. We anticipate a return to organic growth in 2025, with deposits increasing in the low-single-digits with normal seasonality. As a reminder, that generally reflects declining deposits in the first quarter with balances building in the late second and into the third. On the asset side of the balance sheet, as Jim mentioned, we are discontinuing indirect lending originations and allowing that portfolio to amortize. This portfolio comprises about 4% of loans outstanding, and we anticipate amortization to be 30% to 40% of balances over the first 12 months. Excluding this, we are anticipating modest loan growth in 2025, focused in the back half of the year, noting that loans may decline in the first quarter due to anticipated payoffs, which includes one larger criticized loan. In addition to the amortization of the indirect portfolio, normal amortization of the investment portfolio will continue as displayed on Slide 12 of the investor presentation. We'll use excess amortization to continue to reduce borrowing levels in the near-term. If we choose to reinvest proceeds that will be accretive to our net interest income guidance. Moving to the income statement. To start the year, we anticipate first quarter net interest margin, excluding purchase accounting, to expand at a pace roughly similar to or slightly slower than the fourth quarter. Average interest-earning assets will decline more meaningfully in the first quarter compared to the fourth as we utilized excess cash to pay off the BTFP in December, as Marcy mentioned. We anticipate average interest-earning assets to be in the low $26 billion range for the first quarter of 2025. As a result, we expect first quarter net interest income on a reported basis to decline compared to the fourth quarter of 2024, influenced by day count and the purchase accounting and non-accrual recoveries that occurred in the fourth quarter, also as Marcy noted. In total, we anticipate net interest income to increase 5% to 7% in 2025 compared to the full year of 2024. The continued reduction in borrowings along with asset repricing will further support sequential quarterly expansion of the net interest margin through the year. There is still latent beta in our deposit book that we expect to see in our first quarter results. Our guidance does continue to assume, however, that our down beta on interest-bearing deposits will continue to lag our up beta in 2025, providing flexibility for us to maintain and grow deposits. We have one Fed rate cut of 25 basis points included in our guidance for 2025. And as we have previously communicated, our balance sheet starts out the year modestly liability sensitive, as our outstanding borrowings have shortened in duration. Due to the amount of fixed rate investment securities that will amortize in the coming year, which we will use primarily to pay down short-term borrowings, our balance sheet will neutralize as the year progresses. Consequently, rate cuts do not have a material impact on our net interest income guidance. We anticipate a modest increase in non-interest income year-over-year, excluding the $4.7 million of property sales recognized in 2024. You should note that we assume limited revenue in our mortgage business for 2025, which continues to face market challenges due to interest rates and supply. Looking to non-interest expense, we are forecasting a reset of some expense levels in 2025, which contributes to the 3% to 5% increase over 2024. For instance, we experienced low medical insurance claims in 2024 until the fourth quarter, and that expense line in addition to some others will likely normalize. We also anticipate additional advertising expense in 2025 in the second half of the year to support our organic growth goals. Finally, we'd note that we anticipate recognizing $1 million to $2 million of expenses in the first quarter related to the discontinuation of indirect lending. With that, I'll hand the call back to Jim.

Thank you, David. And before I close, one of the questions we have been asked as a result of the significant charge-off is how many relationships we have exceeding $50 million. As of December 31, there are four single borrower relationships with outstanding balances over $50 million. In the spirit of relationship banking, we have already begun to deemphasize large, non-relationship, agricultural lending and large CRE transaction lending. We will continue to focus on supporting the many small and mid-sized businesses that operate in our footprint, emphasizing full relationships, which will allow us to best serve our customers while driving deposit growth and credit stability over time. In addition, we have completed an initial engagement with a third-party consultant to review a subset of our credit relationships, focusing on larger exposures. This deep dive has confirmed the accuracy of our most recent risk ratings and general methodology. The team is keenly focused on evaluating our credit processes in the spirit of continual improvement. Now as I come to the end of my remarks, I'd like to thank you and everyone at First Interstate for the warm welcome I have received. I also appreciate the candid questions I've been asked both internally and externally. Transparency is one of the most important attributes of a management team. Throughout this earnings call, we have emphasized relationship banking and organic growth. I said in the very beginning that I've witnessed the talent and energy to execute that vision here at First Interstate. We are in the business of people, team members, clients and communities. During the past quarter, I attended my first executive retreat and first Board meeting, and we held our first analyst calls. Every moment taught me something new about our team and organization, our current strengths and our opportunities to get stronger. I'm proud to be part of this bank, not only for its exceptional potential, but for its deep commitment to going above and beyond what is expected for the communities we serve. Thank you. Now I'd like to open up the call for questions.

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Matthew Clark from Piper Sandler. Please go ahead.

Just first one around the margin. Maybe David, do you have the spot rate on deposits at year-end and also maybe the spot rate on borrowings too?

Yes. So December full month interest-bearing deposit cost was $187 million. So that's going to be a little bit higher than spot at the end of the month, but that's for the full month. Margin for the month was 310 ex-purchase accounting. That's going to include some of that non-accrual interest, so a little bit lower, but again, kind of average higher balances of borrowings in the month just due to the timing of that BTFP. And then we have some borrowings that mature in January at a higher rate. So we'll see kind of a step down in borrowing costs during January.

Okay. And then, on credit, probably, well, a multi-part question. The increase in criticized this quarter, was it a function of that third-party credit review. It sounds like they're coming from the Eastern part of the footprint, which would imply GWP. So did they have any marks on them? Or were they PCD loans? And then, also, if you could size up those four individual CRE relationships that accounted for that 90%. And then lastly, maybe isolate the remaining piece that was tied to C&I the C&I inflows, just kind of some additional color there. Sorry.

Let's see if we can get all of those things.

I'll start with the criticized and third-party. Hi, Matt. The third-party actually confirmed that our ratings were right. And they looked at a significant portion of our large loan portfolio. And so you are correct. The loans are in the Great Western Bank footprint, and there is not a mark against those loans at this point in time, but I think what was good about the third-party review is affirmation that our credit discipline is good and that we're properly grading our loans. And I think that's a foundation for us going forward as well as a real strong credit culture. Taking a look at the primary source of repayment was a big part of how we've looked at these loans. And so that's the reason for the change there.

So I'd add that, yes, you're correct. They were GWB originated loans. The $160 million that we talk about, the total of the four loans, again, the largest being $58 million and the smallest being about $30 million. So that's kind of a sizing up of those moments.

And then the remaining piece, the C&I inflows, if you could provide some color there and size of that up.

Matt, could you expand on that question? We're not sure we understand it.

There was some inflows into criticized, I think, roughly $50 million on the C&I side. Just wanted some color there, too.

That -- David, why don't you go ahead and take that?

Yes, just mostly normal activity, Matt. So kind of with those four loans, one of those had part of it was a C&I piece and then just kind of normal activity, nothing significant within there.

Okay. Okay, great.

Yes. So I would add, Matt, that, that these credits are all paying on time and that we don't anticipate any near-term performance issues. So again, the downgrades are generally reflecting just a combination of some slower lease-up or property-specific challenges.

Okay. Great. And the piece that you expect to pay off or refinance elsewhere. I think there were two of them, but it won't sounded more imminent. What's the size of that one? Is that one of the senior living facilities?

Yes, it is one of the senior living facilities and some time, I'd say, in the first half of the year.

Okay. And then, Jim, just back to being on board here a few months and kind of making the rounds throughout the organization. Any updated thoughts on kind of longer-term targets? It sounds like you might provide us some update next quarter strategically. But any kind of thoughts since you've been on Board a few months about what this bank should be able to earn in terms of returns?

Yes. Good question, Matt. And I will tell you that as I've traveled around, it's confirmed all the things I said in the opening comments about the strength of the bank. Granular deposit base, strong presence, brand, market share, and what are really exciting markets to be in. Mid-sized markets with great growth in population and opportunity. And it's a community bank, giving back in the community people volunteering. So one of the things that, that I've really liked as I've been out touring is it's confirmed all the things I saw from the outside looking in. And then one new piece of information is just the quality of the team and they're ready to go, ready to grow organically and focus on relationship banking. As far as specifics as to what's coming next, we're still working through those things. We will share it here in the near future, because we want to -- as management, we're working on the math, we're working with our Board on that strategy. But you can also see going to be action oriented by the decision today that we're announcing to exit the indirect lending because it's not a core banking business in terms of relationship banking and dilutive to our returns and what we want to produce in the future. So more to come, Matt, but continue to be very excited as I've learned more about the bank.

Great. Thanks for the color.

Thank you. And your next question comes from the line of Jeff Rulis from D.A. Davidson. Please go ahead.

Thanks. Good morning. On the reserve, perhaps, if we know loan growth expected to be moderate and net charge-offs of 20 basis points to 30 basis points. And want to check in on where you think reserves had for the year in terms of relative to year-end, I think $204 million assuming a sort of a steady macro environment, I want to get a sense for what you think you have to do with reserves.

Yes. So thanks -- thanks, Jeff. So right now, we're seeing the 4 basis point increase on our overall portfolio, we feel comfortable with reserve level where it is today, feel like it's adequately encapsulates the risk in the portfolio, assuming that the growth comes kind of in similar portfolios. So it's like the mix doesn't change substantially. We would expect the reserve level to say, to stay right around here. Again, it is -- we look at trends every quarter. We look at, I mean, it's a math equation, right? So we don't expect the reserve to change materially based on what we know today.

Okay. I think yes, the -- I guess, the question of with the credit review and the adequate reserves and no growth would mean right, sort of a flattish reserve and those charge-offs funded by the provision, I suppose, give or take. Is that fair?

Yes. That's a fair way to think about it.

Okay. And maybe just to follow-on that, the net charge-off pace for the year. Would you expect, as you've done the review that be a little heavier on the front end or pretty balanced across the year?

Yes. No, I wouldn't expect it to be heavier on the front end. I think it will be balanced throughout the year.

Great. If I could hop over to the expense side. I appreciate the detail on some of that normalization of some of those areas. I guess, any of that earmarked or thoughts maybe for Jim, on the kind of lending team hires or additional expense that may be needed there? Do you expect that, that some of that's got to be to encourage some of the internal growth or organic growth? Any thoughts expense-wise on the lending staff?

Yes, Jeff, that's a good question. There's no plans of acquiring lending teams. We've got a team that can go do this that's well ingrained in the community. So I'm confident we can use the team we have. We did increase some expenses for marketing and different things because the bank has been relatively quiet from a branding and marketing perspective. And when I look at what the bank does in the community and some of the unique attributes, not to mention significant market share in some mid-sized markets and areas. I'd like to see us lean into that a little bit more.

Great. And maybe my last one is a little higher. In terms of the morale of the staff? I mean -- and maybe bring in Marcy and David on a relative basis, any kind of temperature check on the team in terms of the change at CEO, is that any perceived change within that Group encouraged or otherwise?

Jeff, you're right. I'm going to have Marcy and David answer this because I think you know I would say it's unbelievably good right now, so.

Jeff, I would say that -- I would say it is good. I would say that some of the changes that are being made have been viewed positively. And the team, especially the team I worked with the executive team, I think everybody is rallying behind everything that we're doing, and we're very encouraged. David?

Fair enough.

Yes. Jeff, I think it's a morale is positive. People are excited to move forward, and we have a great footprint. So positive morale here.

Thank you. And your next question comes from the line of Andrew Terrell from Stephens, Inc. Please go ahead.

Good morning. I was hoping to start just on the loan growth. Could you maybe help us size up just the modest loan growth for the year. I guess, should we think about that as kind of low-single-digits, but then maybe if we include the indirect runoff, which looks like it's probably $250 million or so just at the mid-point. Is it fair to think overall for the year, loans kind of flattish? And maybe decline in the first half.

Yes, that's kind of how we're thinking about it, Andrew. So maybe a little bit down in the first half, growth in the second half and get to kind of flattish on the year with indirect. So excluding indirect a little bit of growth. So yes, I think you're thinking about it the right way.

I would say, Andrew, that that's where we're focused. We do want loan growth. We're hoping -- we hope we're under-promising and we can over deliver. But again, we would expect the growth to come in the back half of the year.

Yes. Got it. Okay. And then do you have the -- what the yield is on the indirect auto book from my memory. I think most of this was a prime credit. And then any cost saves that come as a result of exiting that business?

Yes. So all the impact is included in our guidance. So just kind of what it looks like today on the books, it's kind of a mid-6s yield is the recognized yield. New production is obviously a little bit higher, but that's kind of what it is today. So it's not materially -- it doesn't materially change the total reported portfolio yields.

Got it. Okay. And then can you talk maybe a little bit more about the -- I think you made a point in the prepared remarks around lagging a bit deposit cost wise on the way down. Can you talk about that a little bit more? And then, relative to that, I think it was about a 35%, 36% interest-bearing beta to rising rates. Kind of what's the target? Or what's the beta that kind of underpins your NII guidance kind of through the declining rate cycle?

Yes. Good question. So as you saw end of the year, right, on a spot basis, we're going to be higher than that. Through 2025 kind of just from a guidance perspective, we're expecting that to get closer to 36%, but kind of high-30s just kind of Q4. So it will -- there's going to be some move through the year, but that's kind of how we think about it. We think those couple of points higher to the number you referenced help us on both acquiring new and retaining existing.

Okay. Got it. And then, on the deposit growth guidance, any assumptions you're making in there from a mix standpoint, specifically kind of the non-interest-bearing.

No, no changes there. We think we're essentially at the mix, we'll be at. There might be a little bit of move here and there, but we're not anticipating a significant change in mix from where we ended the year.

Okay. I appreciate it. And then, just last one, the non-accrual interest recovery, I think you said $1.8 million in the fourth quarter. Is that $1.8 million elevated? Or what's kind of a typical quarter looks like there? I'm just trying to get a sense for how much it was elevated; maybe the $1.8 billion is a number.

Yes. There's always going to be some movement, right? And that's a net number. So loans move into and out of non-accrual, you get some movement. But that's the couple of larger moves in the quarter impacted that. We don't usually have that type of level. So we forecast it at 0. So that's why we wanted to note the number.

Makes sense. Okay. Thank you for the questions.

Thank you. And your next question comes from the line of Chris McGratty from KBW. Please go ahead.

Yes, great. Good morning. Jim, as a new CEO, do you have any differences in capital allocation. I guess, first comment would be on dividend. And then second, with your CET1 above 12 uses of capital, if growth isn't going to be that significant this year? Thanks.

Chris, that's a good question. There won't be a big departure and philosophy when it comes to capital. I mean, obviously, we're going to remain well capitalized. And part of what we're evaluating is how to use that capital on a go-forward basis. So I don't really have a specific guidance on that front other than to say we will make decisions that make sense for shareholder return period.

Okay. And would you be -- as kind of you're getting into the Group, would that be something you might provide an update next quarter in terms of either a thought on a buyback? You talked about M&A not being a priority. Is that a potential use of capital in the next 12 months?

We will provide guidance at the next call, Chris, because we're still working through all those plans right now. But it will be part of what we share.

Okay. All right. Great. Thank you.

Thank you. And your next question comes from the line of Samuel Varga from UBS. Please go ahead.

Hey, good morning. I just wanted to switch back to fee income for a second. Can you give any commentary around the payment volume growth that you saw last year and how you'd expect that to trend into 2025?

Yes. So the fourth quarter was some seasonality in that business. I think the -- we didn't see significant growth in the fee income line in the payment services line in 2024; we expect some growth in 2025 within our guidance. It's not a material growth number. We've talked about the consumer card in the past. That's been relatively stable business debit card or a larger portion, but there isn't a significant growth factored into our guidance there, just kind of normal year-over-year growth anticipated there.

Great. Thank you.

Thank you. And your next question comes from the line of Jared Shaw from Barclays. Please go ahead.

This is John [indiscernible] on for Jared. I guess, just starting off at a high level. Jim, you were kind of known for your tax transformation that you're your last position. I guess, what has surprised you or been a positive or negative to the First Interstate platform just as you've gotten into the weeds a little bit more in these first couple of months.

Yes, John, that's a good question. I wouldn't say there's anything negative. In fact, I'd say there's more positive than anything negative. And a couple of things I'd highlight is having been out and met the team, that's not something I could do as part of interviewing for the job, I had met some key folks at the Board in different things. But having met the team, it's built of community bankers that know how to go get full relationships. So I think that's been a positive. And then when you spend time and bend and Boise and fill in the blanks, these are great communities with good growth and being able to see that firsthand gave me more confidence. The one thing is technology. The bank has been very busy with integrations with M&A. And so I was curious to see what the technology stack look like and the capabilities. All the tools are there. The team is there. And I think with more focus on organic growth and go-forward; we can close the gap on some of our digital offerings. So I would say the surprises have been more on the positive side.

Okay. Great. Good to hear. And then just on the loan yield, even after kind of normalizing it for the incremental accretion in the fourth quarter that was still pretty stable versus third quarter. Can we expect relative stability in this line in 2025, even with a rate cut assumed? I guess, what are the puts and takes there?

Yes. So we haven't specifically discussed quarterly loan yields, but at a high level, excluding rate impacts, we, of course, expect that line to move higher over time, right? We have some fixed asset repricing that we're anticipating about 20% of the loan book is variable. So that's kind of the size the impact of a rate cut, but all else equal, we anticipate loan yields moving modestly higher through the year, and that's included in our guidance.

Okay. Thanks for that. And then just last one for me. The senior living vertical, two of the criticized inflows were within that area. What's the exposure there? And then just any underlying pressure among even the smaller credits out there? Or is the book performed pretty well.

So we don't view that as a vertical, right? It was just a couple of credits that had specific issues. We didn't view the issues specific to that industry as much as specific to the credits. On Slide 6 of our investor presentation, we display by property type. So that's going to be a subset of the medical property type. But again, not -- we don't view that as specific to the industry versus specific to the properties.

Okay. Great. Thanks for taking my questions.

Thank you. And your next question comes from the line of Timur Braziler from Wells Fargo. Please go ahead.

Hi, good morning. Turning back to credit and Jim, your comments about being generally pleased with the underwriting that's at hand. I mean, if I'm looking at the largest credits of the bank, you just had one that you charged off 80% of, another one just moved to classified. I mean, are we through the full review of the loan book? And I guess, what gives you that broader confidence in the underwriting just given some of the performance at the largest credits within the institution.

Yes, Tim, that's a good question. What I was referring to is I'm confident in our assessment of the performance of the current credit and so we obviously, there's an increase in classified and criticized, which means we graded some loans. And so I've taken a look at some of those processes with Matt, our new Chief Credit Officer. And that's where that confidence comes from. If you look at the four loans that are mentioned, they're very specific to each loan. There's no vertical. There's no trend. As far as my -- have we gotten through the whole loan book, we did the majority of the large loans. So we are doing additional review on the rest of the portfolio. But when you look at the size of those loans, our normal reserving process and different things would handle any noise in that. And based on the accuracy of our grading and work thus far, I feel confident as we go into that effort.

Okay. And then on those four loans that moved into classified, was there any reserve that was established on any of them?

No. There was no specific reserve. Again, we believe we have adequate collateral for those four loans.

Okay. Great. And then, maybe just a clarifying question to what Chris was asking on capital. Your comments on no big departure. Is that specific to the dividend? Or is the dividend part of the consideration for the capital review here?

The dividend is not something we're taking a look at, at this point in time. But as I mentioned in the previous answer, that's part of our capital planning on an ongoing basis. And as we look at what our plans will be going forward, we'll be taking a look at how we best utilize capital and provide a top return to our shareholders.

Great. And then, just last for me, just looking at the movements on the balance sheet with bonds being used to pay down some borrowings, loan growth being fairly muted. Just looking at the average earning asset base, when should we expect that to inflect? Does that inflect in the back end of the year as balance sheet growth starts to accelerate? Or does that get pushed out to 2026? Kind of how are you guys thinking about the average earning asset base here?

Yes. I think you're thinking about it the right way. So as you think about the investment portfolio and the muted loan growth in the near-term, you see those borrowings amortize relatively quickly. And then from there, you kind of hit a bottom on interest-earning assets. So specific quarter is going to depend on trends, but you're thinking about it the right way.

Great. Thanks for the questions.

Thank you. There are no further questions at this time. I would now like to hand the call back to Mr. Jim Reuter for any closing remarks.

All right. Well, thank you, everybody, for your questions today. And as always, we welcome calls from our investors and analysts. So please reach out to us if you have any follow-up questions, and thank you for tuning into the call today. Have a good day.

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.