First Interstate BancSystem Inc
NASDAQ:FIBK
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Hello and welcome to the First Interstate BancSystem, Inc. Q1 2023 Earnings Call. My name is Elliot and I will be coordinating your call today. [Operator Instructions] I would now like to hand over to Lisa Slyter-Bray. The floor is yours. Please go ahead.
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 other 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 for your reference.
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 will turn the call over to Kevin Riley. Kevin?
Thanks, Lisa. 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 that 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 am 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.
Throughout our more than 50-year history, First Interstate has prioritized prudent risk management. And as a result, we have consistently better sources of strength and stability for our clients during times of economic stress. This was the case during the pandemic, and it’s also the case now in the wake of the recent bank failures that had created stress across the broader banking system. As a result of our relationship-focused approach, which has allowed us to build a loyal client base, we have seen stability in our insured deposit base and experienced limited attrition of larger uninsured business deposits since the recent bank failures. We are seeing net growth in new deposit accounts throughout all of our markets as clients see stability in their financial partners.
Given the strength of our balance sheet and the stability of our deposit base, we did not have to take any extra or balance sheet actions to mitigate deposit outflows or to otherwise address liquidity needs. As a result, we continue to deliver strong financial performance for our shareholders, generating $56.3 million in net income or $0.54 per share while increasing our tangible book value per share by 5% from the end of the prior quarter. This includes the impact of a $23.4 million loss we incurred on the sale of investment securities in the middle of March and a $1.9 million fair value mark on loans held for sale, which lowered our earnings by $0.18.
The proceeds from the sale of investment securities were largely used to pay down higher cost borrowings, which took place in early April. This will help stabilize the net interest margin and will add to net interest income over the next 12 months. The impact from this transaction is included in our revised outlook. The volatility in the market as a result of bank failures has caused operational disruptions for many institutions. We feel very fortunate as our deposit base remains relatively stable and I personally responded to very few client concerns, leaving most communication in the hands of our very capable bankers.
Our deposit declined by 3.9% during the first quarter. The majority of the outflow occurred in the first half of the quarter when we saw anticipated seasonal activity representing approximately two-thirds of the reported decline. The additional outflows were subsequent to the bank failures in March and mainly consisted of uninsured business deposits. Throughout the quarter, we continue to see the migration of deposits from non-interest-bearing to interest-bearing accounts and saw a greater reliance on borrowed funds to cover deposit outflows. This unfavorable change in our funding mix, along with increased rates on all deposit categories, resulted in a higher average cost of funds and a decrease in our net interest margin during the first quarter.
As we indicated on our last earnings call, given the uncertainty in the macroeconomic environment and our focus on gaining full banking relationships, we were more selective in new loan production, which resulted in lower levels of loan growth as compared to the fourth quarter. As reflected in our first quarter performance, we are prioritizing C&I growth, which increased at a 20% annualized rate in the quarter. We continue to see quality lending opportunities across our footprint and increased total loans at a 3.2% annualized rate. Although the first quarter is typically slower for us, you should expect growth to remain in this low single-digit range for the full year. We feel this slower pace relative to our prior outlook is more prudent in the current environment, considering the heightened focus on C&I growth and the growth in full client relationships.
Our deposit base remains very diverse and granular. Consumer deposits make up 54% of our deposit base, with an average account balance of less than $20,000. Business and municipal deposits are 46% of the base with the average account balance of about $90,000. As of the end of the quarter, uninsured deposits, not subject to collateralization, represented about $6.2 billion, which we had immediate available liquidity of approximately $11 billion, which is over 1.7x coverage.
Moving to capital. It remains strong, and we’re pleased to announce a dividend of $0.47 per share, which is about a 7% yield on our current stock price. From a sensitivity perspective, if we were to liquidate our entire available-for-sale portfolio and held-to-maturity portfolio and realize the market losses as of March 31, we will remain well capitalized for all regulatory ratios.
And with that, I will turn the call over to Marcy to provide some additional details around our first quarter results. Go ahead, Marcy.
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 2022 and I’ll begin with our income statement. Our net interest income decreased by $19.5 million, which was primarily due to an increase in our interest expense resulting from a shift in our funding mix toward higher cost short-term borrowings and interest-bearing deposit accounts, 2 fewer days in the quarter, and $3.2 million lower purchase accounting accretion quarter-over-quarter. Our reported net interest margin decreased 25 basis points from the prior quarter to 3.36%. Excluding purchase accounting accretion, our adjusted net interest margin decreased by 20 basis points to 3.29% from the prior quarter, as the 19 basis point increase in the average yield on earning assets was more than offset by the 46 basis point increase in our total cost of funds.
Importantly, both our reported and adjusted net interest margins are still comfortably above a year ago levels by 56 and 64 basis points, respectively. Given the change in funding mix and higher deposit costs in the month of March and at quarter end, we expect our adjusted net interest margin, excluding the impact of purchase accounting accretion, to be lower in the second quarter relative to the first. While we will realize the benefit to the net interest margin in April from the deleveraging activity Kevin discussed, which will approximate $2 million in net interest income over the next 12 months, we are starting with an adjusted margin of 3.17% for the month of March.
Additionally, while we had initially believed deposit trends could remain closer to historical norms and essentially be flat year-over-year, we now believe this could be a challenge. Our current outlook assumes that deposits declined by low single digits in the second quarter, primarily related to tax payments, and then will remain relatively stable from there through the end of the year with a continued shift out of non-interest-bearing into higher cost interest-bearing accounts. When this is a baseline, which pushes our assumed deposit beta up to plus or minus 30%, we are now expecting our adjusted net interest income growth in 2023 to be in the low single-digit range, excluding purchase accounting accretion.
Scheduled purchase accounting accretion, as you can see on Slide 12 of the investor presentation, will approximate $12 million to $13 million over the remainder of 2023. Our total non-interest income decreased $25.2 million quarter-over-quarter, primarily due to the $23.4 million loss on investment securities and the $1.9 million write-down to the fair value of loans held for sale realized during the first quarter. Excluding these items, non-interest income was relatively consistent with the prior quarter. We had a small decline in payment services revenue as a result of lower levels of consumer spending, which impacted debit interchange revenue, while our wealth management revenues increased due to a combination of market performance and the seasonal benefit from annual fees.
As we look to the remainder of 2023, we’re expecting to realize the benefit from current strategic efforts around mortgage and payment services in the second half of the year. With that view, we now expect fee income for the full year 2023 to be down low to mid-single digits from 2022, excluding securities losses in both years.
Moving to total non-interest expenses, our first quarter was down $9.5 million from the prior quarter. Salaries and benefits expenses decreased primarily as a result of lower incentive compensation expenses compared to the last quarter, along with the reversal of $3.8 million of 2022 incentive compensation previously accrued. The lower salaries and benefits expense helped to offset a $1.5 million increase in our FDIC insurance due to a higher assessment rate now in place. Overall, our total operating expenses for the full year 2023 remains consistent with our initial guidance. That said, we recognize the pressure on revenues and continue to look at ways we can be more efficient and further reduce expenses.
Moving to the balance sheet. Our loans held for investment increased $146.5 million from the end of the prior quarter, with growth coming from the C&I and commercial real estate portfolios. The majority of the decline in the construction portfolio reflects projects being completed and moving into the CRE portfolio. As Kevin mentioned earlier, we’re focusing on growing the C&I book and developing full banking relationships, so we’re pleased to see the growth here. On the liability side, our total deposits decreased $966.6 million. Most of the decline came in non-interest-bearing business deposits. The decline in non-interest-bearing deposits was partially offset by increases in our balances of time deposits as we see more customers taking advantage of attractive CD rates.
Moving to asset quality. Non-performing assets increased $20.4 million, which was primarily attributable to the migration of two loans, a senior housing facility in the Midwest and a warehouse in the Pacific Northwest, so different industries and different geographies. Criticized loans increased 1.1% from the prior quarter, and total delinquencies declined by 17% or $12 million. Our loss experience continues to be very low, with net charge-offs of $6.2 million or 14 basis points of average loans in the quarter. With our loan growth and the changes in credit quality that we saw this quarter, we saw a modest increase in our ACL percentage to 1.24% of loans held for investments. Our total provision expense was $15.2 million, which included $1.6 million related to unfunded commitments and $1.4 million related to the investment securities portfolio.
Lastly, we have strong capital ratios. Our tangible capital ratio improved to 6.37% from a low of 5.9% back in September of 2022. Our regulatory capital ratio should continue to build throughout the remainder of the year. While we contemplated a share repurchase in the first quarter with the volatility in the industry, we do not believe it would be prudent at this time despite our very attractive stock price. Of course, should conditions change, we will revisit this decision.
Now I’ll turn the call back to Kevin. Kevin?
Thanks, Marcy. Now I’ll wrap up with a few comments on our outlook. On our last earnings call, we indicated our growth priorities for the year. We’re pursuing new household growth, particularly in our new markets added through the great Western merger and growing fee revenue. We have not altered any of our planned investments for the year related to these initiatives, and we believe the environment is even more conducive to adding products to allow to grow our clients and increase our share of wallet. In order to better compete in mortgage, we have recently centralized our fulfillment process with both digital and traditional applications that are now handled by a centralized team. To support this effort, we have put in a referral program in place to incent our retail staff to generate leads for this team. This will allow us to provide this basic consumer need to our clients in a more seamless and efficient manner.
We are also in the middle of strategic efforts to roll out a new suite of consumer credit cards. There will be several options for consumers to consider from a secure card all the way to an Elite card. With this, we will provide a more competitive and user-friendly reward system. We expect to again see the benefits of this relaunch in the second half of the year. As a bank that can offer the financial strength, breadth of products and services, and a robust digital platform of larger financial institutions, combined with a high level of personal service typically associated with community banks, we believe we have a compelling value proposition to offer both businesses and consumers who are reevaluating their banking relationships in light of the recent events. I mentioned earlier that we saw net growth in new deposit counts during the back half of March, and that trend has continued in April.
We will continue to be selected in new loan production. And while we’re not seeing yet a decline in loan demand, we need to be disciplined in getting paid for the loans we are booking. So we may sacrifice a little growth if we cannot get an appropriate return. With this in mind and with the focus on F&I and small business loans, both of which will contribute to our long-term profitability and further increase the value of our franchise, we may see total loan growth for the year being in the low single-digit range. Before we conclude, a few comments about credit. In short, while we are always on the lookout for the early signs of stress, we have a granular loan book, and we continue to feel positive about the stability of the portfolio.
In particular, our commercial real estate portfolio continues to perform well. This portfolio is well diversified across both industry and geography. For loans exceeding $5 million in outstanding balances, the average loan-to-value at origination was 61%, and the current average debt service coverage ratio exceeds 1.7x. Considering challenges noted in the broader office market, particularly in the major metropolitan markets, we have taken a more granular look at our general office exposure. In total, the loans exceeding $5 million in outstanding balances, the general office exposure has an average current debt service coverage ratio of 1.8x. We also did a deep dive on our metro markets and redefined Metro to include Seattle, Portland, Phoenix, Minneapolis, Denver, and Kansas City. Under this expanded definition, as you can see on Page 7 of our investor deck, we have identified 22 non-owner-occupied general office loans for a total exposure of $113 million.
Two loans make up $47 million or 42% of the total, both of which are past-rated credits. The remaining $66 million is comprised of 20 loans, two of which are criticized, totaling $7.4 million. In addition, we have two metro office construction loans totaling $37 million, and the average loan to value on these two loans is 71.3%. We have historically performed well during times of economic stress and capitalized on opportunities to increase our market share. While prudent risk management will always remain our top priority, we believe the current environment will ultimately prove favorable for us in our efforts to expand our client base. Given the strength of our balance sheet, our high level of capital liquidity, and our continued strong asset quality, we are well-positioned to grow our client base and take advantage when other banks fail to meet the needs of their customers.
So with that, I will open the call up for questions.
Thank you. [Operator Instructions] Our first question today comes from Andrew Terrell from Stephens. Your line is open.
Hey, good morning.
Good morning, Andrew.
I wanted to start out on the margin and the NII guidance. So I guess on the second quarter guide, Marcy, you mentioned the core margin would move lower. I get that it will be lower, I think, versus the reported 1Q ‘23 core margin. But do you see margin compression from that core margin for the month of March that you referenced, I think $317 million was referenced. Do you see compression from that level or just versus the full quarter average?
Andrew, good question. What we said with the $317 million and the deleverage rate, what we see with some of the deposit runoff that Martin mentioned, we have some slight deposit runoff in the first quarter. We believe with the deleverage trade and then the kind of the mix shift that should be the trough of our net interest margin going forward. And I think that we – in our forecast, we have moved from where we are at about 18% beta right now to somewhere around plus or minus 30%. So that’s moving noninterest-bearing into interest-bearing. So that’s kind of how we see it right now, but all bets are off. That’s – we’re projecting a little bit more deposit runoff, but we think it’s going to stop and slow, but that would be the only thing that would change, I think, our forecast going forward. We’re very conservative in the way we’re looking at it. So we really believe March is a trough.
Yes. So Andrew, I’ll just add a little bit to that. So again, the deleverage trade, we believe that adds about $10 million for the next 12 months. We do have a continued shift in our deposit mix out of non-interest-bearing into time in that assumption and then also out of the investment portfolio runoff, so again, $60 million to $70 million a month into the loan portfolio.
Got it. On the deleverage trade, the earn-back was on that repositioning. And then I hear you that you have some mixed shift in the deposit base that kind of underlies that guidance. Do you have the specific kind of how much NIB compression would be included within your guidance?
Yes. My simple math would be that if we’re earning $10 million a year or a little more, and we took a $23 million loss, that’s kind of the math.
Yes, a little over 2 years.
Alright. Okay. And then the non-interest-bearing mix shift.
Can you repeat that part of the question for us?
Yes, I didn’t hear that part of the question.
Apologies. Marcy, you were saying that there is some – underlying your guidance, there is some continued mix from non-interest-bearing deposits into time deposits. Do you have the specifics, like how much non-interest-bearing compression you anticipate allelic your guidance?
Andrew, it’s John. Yes. So if you look back on a pro forma combined company to pre-COVID, the non-interest-bearing was somewhere in the mid-20s, call it, 25-ish percent of total deposits. The guidance to get to that 30% beta by the end of the year assumes that we go back to that level. So it’s quite a bit of runoff in non-interest-bearing from this point forward for the balance of the year. As Marcy mentioned, into time deposits would be the mix shift that’s assumed there.
Okay. And then the last one for me. I guess I was surprised a bit to see the expectation for most single-digit deposit decline again in the second quarter, and I understand some of the macro headwinds maybe, but I was assuming a seasonal kind of rebound might be able to help. So just curious kind of how you’re tracking quarter-to-date versus that low single-digit expectation in Q2. And then if you can give any color on the new account openings. I know they were strong. Just any more color there on how strong they were on a relative basis to prior quarters?
So Andrew, most of the deposit outflow that we’ve seen so far has been largely related to tax payments. Again, deposits are the biggest question, Mark. So in our outlook, we’ve left that flow that we’re seeing from income tax payments in our forward look.
So I’ll sum up a little bit. As we always have said, deposits are usually after the tax outflow that you see in April, usually, because of normal seasonality, we start seeing deposits grow in May and June and going forward. We’re taking a more conservative look at that in our forecast, but that’s what we would expect, but we’re being a little bit more conservative in our outlook.
Yes. Understood. Okay, thank you for taking the questions.
Thanks, Andrew.
Thanks, Andrew.
Our next question comes from Chris McGratty from KBW. Your line is open.
Hi, good morning. Marcy or John, on the – just coming back to the margin for a second. The improvement in your loan yields was about half of the step-up in the deposit costs. I know you talked in prior quarters about unfunded funding. So can you just walk me through how we should think about loan yields from here?
Yes. So our new loan yields, Chris, the yield on new loans was about 6.5%, but net of that construction funding, it’s about 16%. So that’s kind of the pressure that we saw there.
And is there a lot more on that to come?
Well, the construction loan yields will put pressure all year long on our margin.
But lessen as the year goes on.
Through the rest of the year.
Yes, Chris, it’s John. So the draws will be somewhere in the range of about $75 million a month, probably for the balance of the year. As Marcy mentioned, if you strip those out, the production that came on the balance sheet was kind of mid-6s. So that’s dampened it by about 50 basis points in the first quarter. That dampening effect, that’s what Kevin was just referring to, will lessen as the year goes on. So if you sort of core out the loan yield for the first quarter, you’re at about $515. We should see that step up marginally over the balance of the year. That would be the expectation.
Okay, that’s helpful. Thanks, John. Kevin, maybe a bigger-picture question on the ROE. Obviously, you had a huge step up with the deal and rates, and you’re not alone that earnings are being pressured. How do we think about normalized ROE for the company? And then kind of a tangent to that, the dividend, obviously, you have a huge dividend. How do we think about like a targeted payout ratio?
Well, targeted payout ratio, I think some of that is a pretty good calculation based on our forecast. I mean, right now, the payout ratio is probably going to go around 65%. And we believe we’re very comfortable with that due to the fact that we’re very conservative in our forecast of where – what we believe the earnings power institution is. So we’re comfortable with that dividend payout ratio at this point in time because capital is strong and asset quality is strong, and we see nothing that would concern us in cutting the dividend due to the fact that capital will continue to grow throughout the year at that dividend payout rate.
Okay. That’s great. And then how about – kind of comment on ROE over time?
I’m going to throw that one to John about the ROE.
Yes, I just think low double digits is what we would expect.
Low double digits or total equity?
No, total equity. Low double digits return on total equity.
Okay. Got it. Thank you.
Our next question comes from Jared Shaw from Wells Fargo. Your line is open.
Hi guys. Good morning.
Hi Jared.
I guess on the deposit side, with that 30% beta, that is still lower than what we are seeing in a lot of other banks. What’s the – I guess sort of what you are thinking about being more aggressive with pricing to retain those deposits and not have to use as much wholesale funding, or is it really not so much a pricing issue in your market versus maybe a collection similar else? But I guess what would you have to do to where we are distributing data to keep those deposits from continuing go out?
It’s a good question, Jared. What we are seeing is that, quite frankly, again, most of our – or half of our deposits are pretty much consumer, and we are not seeing much change in those deposit balances at all. If you go back, we put out special products all the way back at the beginning of the third quarter of last year, indexed money market product as well as some CD rates at that point. And the migration in those accounts were quite hefty in the third quarter and fourth quarter. So, right now, those index accounts represent about 15% of our count. So, a lot of the migration of our customers, CDs represent about 8% have already migrated into some of that. Most of the deposit runoff is really on the business side, I think some of the uninsured stuff. So, it’s not really a pricing issue at this point. And we are planning on continued migration, but I will tell you the migration from the standard money market into the index and moving into the CDs has dramatically slowed from that in the third quarter and fourth quarter.
Okay. When you look at that third of the deposit flow that happened after, so I think you say that’s mostly uninsured business. Is there an opportunity to maybe bring some of those back, or those companies have made the decision to limit uninsured deposits, and it’s not likely to come back?
Well, the customers tell you that when they sit there and say we are going to move some of them, they say, well, we will bring it back. And so I don’t know. Anybody guesses that they could come back. But we are not forecasting them coming back in any big way. But they could come back. I mean the customer conversations of some of the ones that I have had have been very, very good conversations. But they got to do their own risk management, and we will see if they get comfortable with us moving forward, those deposits could come back. But I am not – we are not betting at this juncture.
Yes. But our bankers are actively pursuing those customers. And so we are optimistic that they will come back, but that’s not included in our guidance.
Okay. And then I guess shifting to credit. When you look at the office exposure and thanks for the color on that, how much of that came over from Great Western and has a credit mark on it already versus how much was originated organically through First Interstate?
Well, I don’t know that answer off the top of my head. I am looking at my credit guy. We can get you that number. But we don’t have that in front of us. Sorry, Jared.
Okay. Alright. But as we look at the allowance build, I mean you have to do that separate from the credit mark you have taken, right? So, I mean you are still looking at the total estimated losses on the gross portfolio, whether or not you have a credit mark on that or not, is that right in terms of how we saw the allowance grow at a ratio this quarter?
Yes. So, Jared, under the new accounting rules, again, that’s all in the allowance at this point. And so that full credit mark is included in the allowance.
Well, is it the credit mark included in the net balance on the – reducing the balance that you brought over separate from the allowance?
Yes. It all amortizes off. And so…
There is some there, but…
Yes. But really, you should think of the allowance as incorporating the full credit mark.
Got it. Okay. And then just finally for me, on the new card initiative that you talked about with the rewards, do you think – is that going to be profitable in ‘23, or I guess how long will that take to become profitable in terms of the rewards and the expense and the rollout versus contribution?
That’s a good question. The expense really is not that large. We are bringing in new cards and rewriting the program and rewards. So, it’s not really a large expense, and we are just looking at – our belief is that with a very competitive card, which will be competitive to the other large credit cards out there and our rewards will be similar, that our belief is that we could pretty much double our card volume with regards to the consumer over the next 3 years.
Yes. And all of that, Jared, again is baked into the guidance of what we expect the net profitability of that card to be.
Great. Thank you.
Our next question comes from Brody Preston from UBS. Your line is open.
Good morning everyone. I wanted to ask just a follow-up on that question on the card. So, if you are successful on the card as you hope to be, I guess where would the extra expenses tie to that end up showing up? Would that show up in like data processing and other expenses or something like that?
It’s going to show up in other expenses. That’s where our rewards process.
We won’t go down other expenses. But part of this whole redone is MasterCard is a great partner, and they are helping us go there. So, with that partnership, they help cover some of the cost of moving us forward there.
Got it. Okay. And then I wanted to ask on the 1-year to 3-year loan re-pricing bucket. Do you have a sense for the $5.5 billion in there? Do you have a sense for what the loan yield of that bucket is?
Yes. Brody, hey, it’s John. It’s in the low-4s, call it, 4.25%.
Okay. So, re-priced from 4.25% up to 6%, 6.5%?
On the current production levels, yes, that would be correct. Yes.
Okay. That’s helpful. And then I did want to ask on expenses. The expenses were pretty solid this quarter. And so I did want to ask, sorry, I got a new kitten, and the thing is just like going crazy right now. I did want to ask on the expenses. They came in quite a bit better than what I was looking for. And so I wanted to understand, within your guidance, what the – like what the exit run rate for the fourth quarter looked like and if there was any kind of seasonal pickup that we should expect in the back half of the year?
Yes. I think if you just take this quarter, Brody, and add back the $3.8 million incentive adjustment, that was a reversal of accrual from last year. I think you are kind of right there.
Okay. Got it. And then I did want to follow-up on the office CRE exposure. For the $280 million in total CRE exposure with yields under 5.25, I guess, would those re-price in the next 12 months up to that similar kind of 6.5% production yield, or I guess like help us think about bifurcating your CRE production yield. Just trying to get a sense if those rates reset kind of where they are resetting from and where they are going to?
Yes. This is Mike Lugli. We are anticipating and we are looking at these, and stressing them based on resetting in the 6.5% to 7% rate when they re-price and mature. And we are having those covers right now.
Understood. Alright. I think that’s all I had for you because you answer the next questions. So, I appreciate you taking my questions.
You bet. Thanks Brody.
Our next question comes from Matt Clark from Piper Sandler. Your line is open.
Hey. Good morning.
Good morning Matt.
Just a few questions and I apologize if I missed them in your prepared comments, but the uptick in commercial real estate non-performers, what drove those? And kind of what’s the situation and plan for resolution?
Yes. So, the non-performing increase, Matt, was just a couple of loans. One was a senior housing facility in the Midwest, and the other was a warehouse property in Portland. They are just working through the normal process. We believe that they are marked appropriately and fully collateralized.
Yes. Just a follow-up, one of the loans we did take a charge. The other, we have a reserve on it. So, we do think we do have those properly marked.
Okay. And I guess, were they just mismanaged, I guess what drove them into non-accrual?
So, on the – I would like to believe not. On the seniors housing, what they have been facing is higher cost and lower reimbursements for their fixed costs. That is being addressed in state legislatures across our footprint.
Is that in the healthcare?
That is in healthcare. And it’s the Medicaid reimbursement. So, this asset, in particular sits in Iowa, and they have increased their reimbursement rates. So, that should help that along. The warehouse property, I think the issue there is centered around the owner has a lot of other properties in Portland. And Portland, the real estate market is under some stress there.
Yes. Probably an understatement. Okay. And then just on your construction loan yields as these things fund, I am a little surprised at the rate – I know they were booked a while ago, but I am still surprised that those rates are kind of below portfolio yields, I guess what do you typically charge on a construction loan piece?
So, Matt, again, those were – that pricing was all put in place like 12 months ago. And so it’s just rolling forward. It’s the same thing we talked about last quarter. It is low compared to what we would do today. But that’s just going to flow through, and it’s going to impact us for the next three quarters.
And the reason why the draws are coming on now is because we make the owner put in their equity first. So, they fully use their money first before we start funding. So, that’s why it’s kind of delayed in the funding.
Yes. Just to add on to what Kevin said. We had tightened our construction lending. So, there was more equity coming in. So, that is just going to delay it even more. So, that’s what you are seeing. Some of the stuff goes back even more than 12 months.
The good news on that is that the rate, we know that at the rate that the customer is being charged, the deal works. And so we shouldn’t see asset quality issues as a result of our construction funding.
Okay. And then just any update on share repurchase and your appetite there?
Yes. So, I mean in my prepared remarks, Matt, I just said it’s kind of off the table right now. Although the stock price is very attractive and it would make sense, just in this environment, we are not going to pull that trigger at this time. If things change going forward and deposits stabilize, and things start to come back, then we will revisit that.
Okay. Thank you.
Our next question comes from Jeff Rulis from D.A. Davidson. Your line is open.
Thanks. Good morning. Just wanted to nail down the level of NII and non-interest income for ‘22, just to kind of for your guidance on growth and decline of each of those, just what those figures were specifically?
So, non-interest income, again, we have said down low to mid-single digits over last year, excluding securities losses. That puts us right in the mid-40s with that building into the back half of the year. So, that’s non-interest income. And then on net interest income, again, lower-single digit growth on a core basis, operating basis.
Yes. Jeff, it’s John. If you just take the reported non-FTE net interest income from last year, back down purchase accounting from that, you will get a number in the, call it, $890 million to $895 million, so that’s the base.
Got it. And then just on those two migration of credits, were those pretty equal share in terms of size? I think non-accrual is up $20 million. So, was it kind of piece, or just looking for the size of those credits?
So, it’s kind of a one-third, two-third split, so $7 million and $13 million.
Okay. Is the Portland warehouse the larger?
Yes.
Okay. Got it. And then if – kind of housekeeping, Marcy, just the tax rate you expect for the balance of the year?
Okay. So, the tax rate was a little bit higher this quarter, and that was really the result of an equity compensation adjustment based on the stock that vested in the first quarter, vested at a lower price than what it was issued at. So, that requires a one-time adjustment to tax expense. So, hence our guidance, it went from 23% to 24% to 23.5% to 24%, again, just as a result, and it’s reflective of that one-time adjustment in the first quarter. So, it will go down.
It will go lower second quarter.
Right. The 23.5% to 24% is full year inclusive of Q1?
Full-year inclusive, yes. Full-year inclusive of Q1.
Great. Thank you.
You bet.
This concludes our Q&A. I will now hand back to Kevin Riley, President and CEO, for any final remarks.
Thank you for your questions. And as always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thanks for tuning in today. Goodbye.
Ladies and gentlemen, today’s call has now concluded. We would like to thank you for your participation. You may now disconnect your lines.