In the latest earnings call, First Interstate BancSystem (NASDAQ: FIBK) announced a net income of $55.5 million, or $0.54 per share, for the third quarter of 2024. The company's net interest margin saw a slight improvement and is expected to exceed 3% in the next quarter. CEO Kevin Riley, who will be retiring soon, introduced Jim Reuter as the incoming CEO. Despite some credit losses, particularly in the metro-office portfolio, the overall credit quality has improved. The company also declared a dividend of $0.47 per share and expects continued margin expansion into 2025.
Key Takeaways
- First Interstate BancSystem's net income for Q3 stood at $55.5 million.
- Net interest margin increased to 2.97%, with expectations to exceed 3% in Q4.
- Noninterest expenses were better than anticipated, even with one-time costs for the CEO transition.
- Total noninterest income rose to $46.4 million, a 3% increase excluding a branch sale gain.
- The company's credit quality improved, with a decrease in criticized and classified loans.
- A dividend of $0.47 per share was declared, with a Common Equity Tier 1 capital ratio of 11.83%.
- CEO Kevin Riley announced his retirement and introduced Jim Reuter as his successor.
Company Outlook
- The company anticipates continued margin expansion into 2025.
- There is an expectation of two additional 25 basis point rate cuts by the Fed in Q4.
- First Interstate expects 20 to 25 basis points in net charge-offs in the next quarter.
- There are adequate credit reserves for a C&I relationship expected to resolve by year-end.
Bearish Highlights
- The company incurred $27.4 million in charge-offs, mainly from the metro-office portfolio.
- Deposits remained flat, with only a 1% increase when excluding a temporary outflow.
- There are concerns about two metro office loans, although proactive measures are being taken.
Bullish Highlights
- Credit quality has improved with declines in criticized and classified loans.
- The company has reduced exposure in its metro office portfolio, with only four loans exceeding $5 million.
- Fixed borrowings of $1.7 billion will start repricing, providing flexibility in funding strategies.
- The company terminated $550 million in swaps to reduce future liability sensitivity.
Misses
- The company anticipates a quarter-over-quarter decline in earning assets due to loan runoff.
Q&A Highlights
- Marcy Mutch noted that pressures on the 2% spot rates are easing, with stability or a decline in rates expected.
- In response to Nick Moutafakis's inquiry, Mutch stated that improvements in the efficiency ratio are more related to revenue growth than cost-cutting.
- Kevin Riley expressed a cautious outlook on loan demand due to uncertainty around the upcoming election and interest rates.
First Interstate BancSystem's third quarter performance reflects a company navigating through a period of transition and market uncertainty. With a stable net income and a slight increase in net interest margin, the company is poised for continued growth, albeit with caution due to external factors such as the upcoming election and interest rate environments. As First Interstate BancSystem prepares for a change in leadership, investors and analysts will be watching closely to see how the company adapts to these challenges and opportunities in the coming quarters.
InvestingPro Insights
First Interstate BancSystem's (NASDAQ: FIBK) recent earnings call paints a picture of a company navigating through challenges while maintaining a solid financial foundation. This narrative is further supported by data from InvestingPro, which offers additional context to the company's performance and outlook.
According to InvestingPro data, First Interstate BancSystem boasts a market capitalization of $3.24 billion, reflecting its substantial presence in the banking sector. The company's P/E ratio of 12.6 suggests that it's trading at a relatively modest valuation compared to earnings, which could be attractive to value-oriented investors.
One of the standout metrics is the company's impressive dividend yield of 5.87%, which aligns with the company's announcement of a $0.47 per share dividend in the earnings call. This high yield is particularly noteworthy given that, as an InvestingPro Tip points out, First Interstate BancSystem "has maintained dividend payments for 15 consecutive years." This consistency in dividend payments could be a key factor for income-focused investors.
The company's profitability, as mentioned in the earnings call, is reinforced by another InvestingPro Tip stating that First Interstate BancSystem has been "profitable over the last twelve months." This is further supported by the operating income margin of 39.56% for the last twelve months, indicating strong operational efficiency.
While the earnings call discussed some credit losses and concerns about metro office loans, it's worth noting that the company's overall financial health appears robust. The Price to Book ratio of 1.0 suggests that the stock is trading close to its book value, which could be seen as a balanced valuation in the banking sector.
Investors considering First Interstate BancSystem might be interested to know that InvestingPro offers 6 additional tips for this stock, providing a more comprehensive analysis for those looking to delve deeper into the company's prospects.
Full transcript - First Interstate BancSystem Inc (FIBK) Q3 2024:
Operator: Good morning, everyone, and welcome to the First Interstate BancSystem Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Also today's call is being recorded. [Operator Instructions] Now at this time, I'll turn things over to Nancy Vermeulen, Financial Communications and Analyst Manager. Nancy, please go ahead.
Nancy Vermeulen: Thanks very much. Good morning. Thank you for joining us for our third 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 our Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and in our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from 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 is 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, Nancy. 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 to have some additional disclosures, which we believe would be helpful. The presentation can be accessed on our Investor Relations website. And if you haven't 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 for the quarter and then I'll turn the call over to Marcy to provide more detail on our financials. Now let's get to our results. We recorded $55.5 million in net income in the third quarter, or $0.54 per share. Our net interest margin, excluding purchase accounting accretion, increased by 5 basis points to 2.97%. We believe our net interest margin ex purchase accounting will exceed 3% in the fourth quarter as it did in the month of September. Noninterest expenses in the third quarter came in better than we expected, and they included onetime costs related to my transition. As we have announced, Jim Reuter, the former CEO of FirstBank, will step into the CEO role in a week on November 1. I will say a bit more about Jim in my closing remarks. In the third quarter, we saw a modest growth in our fee business, which was enhanced by the sale of one of our branches, but excluding this sale, noninterest income increased by approximately 3%. As for our credit quality, our criticized and classified loans both declined in the period. However, we did see some charge-off noise in the third quarter that was specifically related to our metro-office portfolio. We have a large property that transitioned to nonaccruals for which we took a significant charge-off to what we estimate as a realizable value. As we've said in the past, we believe we are addressing the challenges in our metro office portfolio proactively and any significant challenges in that portfolio are now behind us. We have also included an additional slide in our investor presentation that provides further information on our metro office exposure. Finally, we are pleased with our deposits in the third quarter, as they ended essentially flat. Despite the change related to a large temporary deposit that was on the balance sheet at the end of last quarter. If we strip that effect out, our deposits increased approximately 1% during the quarter. As we look to 2025, the margin expansion that we expect to continue, coupled with our expense discipline, should lead to improved profitability. We believe the company is in a midst of an earnings inflection which we have discussed previously, and we look forward to improving results going forward. And with that, I will turn the call over to Marcy.
Marcy Mutch: Thank you, Kevin. As I walk through our financials, unless otherwise noted, all of the prior period comparisons will be with the second quarter of 2024, and I’ll begin with our income statement. Our net interest income was $205.5 million in the third quarter, an increase of $3.8 million. Our yield on interest-earning assets increased three basis points quarter-over-quarter driven again by an increase in loan yields. During the quarter, we also terminated $550 million of swaps at approximately breakeven, which mitigated the impact to net interest income during the period. Our cost of interest-bearing liabilities declined in the third quarter, driven by a $205.3 million reduction in average borrowings. Ending borrowings declined approximately $600 million quarter-over-quarter. As the September rate cut by the Fed was widely anticipated by the market, we saw some of our customers more aggressively pursue higher rates ahead of the Fed action. While this resulted in the cost of our interest-bearing deposits increasing more than we had anticipated at the beginning of the quarter, this activity has slowed significantly in the rate cut aftermath. Our fully tax equivalent net interest margin increased 4 basis points to 3.04% in the third quarter. And as Kevin stated, our net interest margin, excluding purchase accounting accretion, increased 5 basis points to 2.97%. This increase is net of a 1 basis point impact to our net interest margin from lower unrealized losses in our investment securities portfolio during the quarter, resulting in higher average balances. Overall, we continue to anticipate a sequential increase in the net interest margin in the fourth quarter and into 2025. Our balance sheet responded to the September rate cut as we expected, with similar loans and interest-bearing deposit betas. Our outlook now includes two more rate cuts by the Fed in the fourth quarter, each 25 basis points, neither of which should materially impact fourth quarter earnings results. As a result, we believe that net interest income will continue to increase sequentially in the fourth quarter, and the increase in margin will more than offset the impact of modestly declining interest-earning assets. In the fourth quarter, our balance sheet is neutral as the amount of overnight borrowings repricing this quarter is de minimis. In the first quarter of 2025, we will see $1.7 billion of borrowings repriced early in the quarter which includes both our BTFP and a portion of our term FHLB advances. Noninterest income increased to $46.4 million in the third quarter. Excluding the $2.6 million gain on the sale of one of our branches, as Kevin mentioned, we saw an increase of approximately 3% quarter-over-quarter. Noninterest expense increased in the third quarter by $2.5 million. However, a onetime expense of $3.8 million related to the CEO transition more than fully accounts for that increase. Excluding that cost, our noninterest expenses again declined compared to the prior period. As we anticipated, our medical insurance expenses normalized somewhat in the third quarter after running consistently below our expectations for the first half of the year. That moderate increase was more than offset by savings in other expense lines. As we've done all year, we remain focused internally on expense control and more effective management of our resources and branch network. Moving to our balance sheet. Loan balances decreased by $207.9 million in the third quarter. The conversion of construction loans to permanent real estate financing with typically lower risk profiles continued this quarter, which is reflected in the increase of $164.8 million in our commercial real estate loans. Construction loans declined $212 million. We did experience some seasonality in our commercial and industrial balances with utilization declining about 2%. We also saw a decline in our lower-yielding mortgage balances as a result of normal amortization and subdued production demand. Our unfunded commercial construction commitment balance stood at approximately $300 million at the end of the quarter at a weighted average rate of approximately 6%. This should now be reflective of somewhat normal levels of unfunded construction commitments and we no longer believe that funding for this portfolio will have a material drag on our loan yields going forward. With that in mind, we don't intend to continue to call out these commitments in the future. We continue to see stability in our noninterest-bearing deposits, which again averaged 26% of our total deposits in the period, roughly unchanged from the end of 2023. In the third quarter, we recorded a modest decrease of $6.6 million in deposits compared to the prior period. However, excluding the effect of the temporary outflow we've identified, our deposits increased approximately 1% as we expected. With respect to credit, as Kevin pointed out, criticized and classified loans both decreased in the third quarter. Our total provision expense was $19.8 million with our funded ACL coverage at 1.25% of total loans. As we indicated last quarter, we've been keeping our eye on the Metro office portfolio, which included higher-than-expected net charge-offs this quarter. Approximately 80% of our charge-offs were comprised of two loans in that portfolio. The smaller of the two, a construction real estate loan is fully charged off with no remaining exposure. The larger metro office loan was written down 70% this quarter, which reflects our estimated realizable value. For additional transparency, we have added a slide in our investor presentation that describes this portfolio in more granular detail. Overall, our exposure in the metro office sector is now less than $90 million, and we believe there are no more material losses in the portfolio at this time. Our total charge-offs for the quarter were $27.4 million, excluding the two metro office loans we just discussed, our charge-offs were $5.3 million or 12 basis points of average loans. We also wanted to give you an update regarding the two other significant nonperforming loans we've been reporting on in previous quarters. Regarding the agricultural credit, we anticipate a resolution in the fourth quarter. With respect to the commercial loan for which we have a specific reserve, we remain in weekly communication with the borrower who is performing as expected under our agreement. At this time, little has changed, but we anticipate additional clarity in the fourth quarter and believe this specific reserve is adequate based on what we know today. And finally, our capital continued to accrete in the third quarter, our common equity Tier 1 capital ratio increased 30 basis points to 11.83% as we continue to prudently manage risk-weighted assets. We also declared a dividend of $0.47 per share or a yield of 6.3% for the third quarter of 2024. And with that, I’ll turn it back to Kevin.
Kevin Riley: Thank you, Marcy. I would like to congratulate our Board on finding an excellent successor to me and Jim Reuter. As I had mentioned, Jim joins us from FirstBank Holding Company, one of the largest privately held banks in the nation where he served as President and CEO for the past seven years before retiring in March. Have spending a little time with Jim, I believe his leadership style is a great fit for our culture, and I’m leaving the company in good hands. When he arrives here at the beginning of next month, he will find unwavering support from a team that has the talent, the energy and a commitment to excellence that will continue to drive this company forward. Now comes the bitter sweet moment for myself. As I give my concluding remarks in my last earnings call as a CEO of First Interstate after 17 consecutive years of performing quarterly earnings calls, first at Berkshire Hills (NYSE:BHLB) and now the last 11 at First Interstate, I’m not sure what I’m going to do with myself come January. I want to wrap up by thanking my First Interstate family, our shareholders, and all of our stakeholders for their hard work and support over the last 11 years, I have served this great company. I’m very proud of all that we have achieved and how much we have grown and matured as a company during my time here. So this is goodbye, at least for now, we shall see if our paths cross again in the future. And now, I’d like to open the call up for questions.
Operator: Thank you, Mr. Riley. [Operator Instructions] We’ll go first this morning to Matthew Clark with Piper Sandler.
Matthew Clark: Hey, good morning.
Kevin Riley: Good morning, Matt.
Matthew Clark: Just wonder, can you just remind us the specific reserves you have set aside for that C&I relationship that’s expected to get resolved by year-end. Just want to make sure we’re capturing that in terms of charge-offs.
Kevin Riley: Matt, you’ve asked that question a number of times. We don’t specifically highlight with a specific reserve on a credit. But I would say at this point, it’s very adequate to what we think could be the realizable value.
Matthew Clark: Okay. And then did you have reserves previously set aside on the charge-offs on these two metro office credits? And if so, how much?
Kevin Riley: Go ahead, Marcy.
Marcy Mutch: Yes. So Matt, while there was no specific reserves set aside on that, the characteristics of those loans were considered in our overall allowance. Again, in the larger of those two loans, it was paying into the fourth quarter, but we anticipated there may be a problem. And so we ordered an appraisal and then wrote it down based on that appraisal.
Matthew Clark: Okay. And then I don't think it was in the slide deck, but the spot rate on deposits at the end of September and the average margin in the month of September.
Marcy Mutch: The spot rate on deposits was 2% and 3.03% was the margin in September.
Matthew Clark: On a reported basis or core?
Marcy Mutch: No, that's core basis ex-purchase accounting.
Matthew Clark: Okay. Great. Thank you.
Marcy Mutch: You bet.
Operator: Thank you. We'll take our next question now from Andrew Terrell at Stephens.
Andrew Terrell: Hey, good morning.
Kevin Riley: Good morning, Andrew.
Andrew Terrell: On the ag credit that you guys discussed, can you just remind us the side out loan? And I'm assuming the commentary around the expectation for some kind of resolution. Is that probably what's influencing the 20 to 25 basis point charge-off guidance for the fourth quarter?
Marcy Mutch: Yes. And so the ag loan was around $20 million. And yes, we feel comfortable with the 20 to 25 basis point guide on net charge-offs, excluding again the large C&I credit.
Kevin Riley: But we don't really anticipate taking really a loss on that ag credit specifically.
Marcy Mutch: No.
Andrew Terrell: Got it. Okay. I appreciate it. And then, Marcy, around the $1.7 billion of borrowings that are fixed currently but start to reprice earlier in the first quarter. Can you just talk through maybe some of your expectations or how we should be thinking about that? I guess should it – should we expect it just kind of flips to overnight funding and make you a little more liability sensitive or – are there any opportunities out there in the market to maybe lock in, get any kind of footable FHLB advances at kind of a more advantageous rate. I'm just curious how we should think about that?
Marcy Mutch: Yes. And so Matt, we have about $1 billion of that that's going to reset in January. And I really feel like at this point, we have ultimate flexibility with regard to how we kind of stage that out going forward. And so we're watching it now. Any rate cuts will be accretive to us as to where they're priced right now. So again, I just – we'll evaluate that as the time comes.
Andrew Terrell: Okay. Makes sense. And then could you also maybe just rehash – I missed some of the commentary around the – I think you mentioned swap termination in the third quarter. Could you just walk through maybe some of the dynamics there?
Marcy Mutch: Yes. So again, I think we’ve said before, we use those swaps as a tool to manage our balance sheet sensitivity. And at this point, we’re relatively neutral. But as we move into 2025, we become naturally more liability sensitive. And so we terminated that $550 million of swap because they were in a favorable position to do so, and that’s just going to reduce our exposure going forward into 2025.
Andrew Terrell: Did that positively contribute any level of interest income in the quarter?
Marcy Mutch: A tiny bit. Yes.
Andrew Terrell: Okay. I appreciate it. Kevin, congrats on everything and wishing the best of luck in retirement. It’s been fun working with you.
Kevin Riley: All right. Thanks, Andrew.
Operator: Thank you. We go next now to Jared Shaw with Barclays (LON:BARC).
Jared Shaw: Good morning, everybody.
Kevin Riley: Good morning, Jared.
Jared Shaw: Kevin, I got to say, I think I’m probably one of the only ones that was there 17 years ago on that first Berkshire call with you. So it’s been a great run and looking forward to staying in touch with you, but congratulations on a strong career.
Kevin Riley: It was interesting. You said I said to the team that you were the only one that probably was there 17 years ago. So I’m glad you confirmed it for the team.
Jared Shaw: Thanks. So maybe just drilling into the margin trends a little bit more and how, I guess, we should be thinking about some of the moves that you just called out with the swaps and maybe on the transition of construction to CRE. What would be sort of a good place do you think that we end fourth quarter at jumping off into next year? Are some of these moves going to continue to provide some benefit as you go through the quarter?
Marcy Mutch: Yes. So I think I just mentioned that ex purchase accounting, our margin was at $303 million in September. And so because we have no borrowings that are maturing this quarter, I don’t think it will go significantly higher than that. But we do, again, expect expansion from the $297 million where we were into the fourth quarter. And by September’s rate, you can see we’re already there.
Jared Shaw: Is there an impact on that margin from interest accrual reversals from some of the larger non-performers?
Marcy Mutch: That doesn’t anticipate interest accrual conversions.
Kevin Riley: Are you talking about this quarter, Jared?
Marcy Mutch: Yes.
Jared Shaw: Yes. Well, I'm just saying, I guess, like this quarter, was there a negative impact from that, that is going to be reversed that we should be thinking about in fourth quarter or something that may be through fourth quarter, then it gets reversed in the first quarter?
Marcy Mutch: Yes. That's included in that September number.
Jared Shaw: Okay. And then did you pay down any of the EPFP [ph] at all this quarter? And what's your outlook on that going forward?
Marcy Mutch: Yes. So we haven't paid down any of that at this point. Again, that rate is 476. And so as rate cuts happen, we'll kind of make decisions from there what our options are, again, that has no prepayment penalties. So we're extremely flexible with regard to those – that funding.
Kevin Riley: Yes. I think, Jared, we're just trying to see where the market goes from now until that period of time and keep that flexibility or optionality intact until we see clear what might be happening in the range in 2025 and 2026.
Jared Shaw: Okay. All right. Thanks. And then just, I guess, finally for me on those two office loans, that's a little bit of a different trend from what we've seen at other sort of mid-cap banks with similar type structures. Any additional color you can give us just on what was maybe unique negative about them compared to more of a traditional portfolio and why you feel comfortable with the rest of the portfolio?
Kevin Riley: Well, on the two things, the one loan, the one that we – the construction loan, we’ve looked at it in detail, and we just wanted to get it behind us, so we wrote it down to zero. And that not to have that exposure out there anymore. We'll see what happens with that. But on the larger one, I mean, it's actually still paying, but we can see that the end was coming near and the borrower probably would not be able to keep it. So even though it was still paying, it was going to come to a close. So we just want to get that loss behind us and not have it carry forward. So we were proactive, got an appraisal and brought it down to a reliable value after selling costs and just get – and so that we don't continue to have this noise in our metro office. We just wanted to get it all behind us and clean up the portfolio and not have to deal with us anymore. As you know, there's a slide in their deck that shows that we have $90 million in metro office, and there's only four loans now over $5 million of which one is – what are the ones that we whacked pretty heavily. So we don't believe there's any real loss at all left in the metro office, but we got that behind us.
Jared Shaw: Okay. Thanks for the color and congratulations again, and looking forward to staying in touch.
Kevin Riley: All right, Jared.
Operator: Thank you. We go next now to Tim Coffey with Janney.
Tim Coffey: Thank you, and thanks for the opportunity to ask the question. Marcy, did I hear you correctly, you think earning assets could come down quarter-over-quarter. And just so, by how much?
Marcy Mutch: Well, we don't really say by how much. But if you – we had some loan runoff right at the end of the quarter. And so if you just kind of look at that, that's what we think average earning assets are going to come down quarter-over-quarter. Again, I think we said in our guidance that we expect deposits to be relatively flat, loans to be relatively flat, but they'll just naturally come down because of the runoff in the bid loan [ph] portfolio that we saw at the end of the quarter.
Tim Coffey: Okay, okay. I appreciate that color. Thank you. And then, Kevin, on the metro office portfolio, if we look at the three remaining loans that are over $5 million, any or all of them in some form of rehab and transitioning to the lease-up process?
Kevin Riley: [Indiscernible]
Unidentified Company Representative: Hey, Tim. There is a – we have some notes on the metro office slide. So a couple of them are already leased up have adequate debt service coverage, one recently completed and then the remainder is the one we've discussed. So there's commentary on that slide – on Slide 7.
Tim Coffey: Okay.
Kevin Riley: Yes. And on the second largest one we took a loss on that earlier in the year in Seattle. And we have an investment-grade lessor going in there. So we feel very comfortable with that one, and that one is not a concern. So we feel pretty good at what's left there.
Tim Coffey: Okay. With kind of these – the markets where you're having – where you've seen kind of these problems, would they – those problems prevent you from continuing to do business in those markets in these type of properties?
Marcy Mutch: No, we don't anticipate that at all, Tim.
Tim Coffey: Okay. Okay. Yes. I just asked because the vacancy rates in metro office has been higher on the West Coast than probably other places I've seen. So I appreciate that. I think Kevin, yes, it's been great working with you. Yes, I hope you enjoy your retirement and happy hunting.
Kevin Riley: Thanks.
Operator: Thank you. We'll go next now to Timur Braziler at Wells Fargo (NYSE:WFC).
Timur Braziler: Hi, good morning.
Kevin Riley: Good morning.
Timur Braziler: Can you advise the locations – good morning, guys. Can you provide the locations of these two office charge-offs?
Marcy Mutch: No. Timur, it could potentially compromise our negotiating position, and so we're not providing the locations of those. But suffice it to say, we define metro office as Portland, Seattle, Denver, Phoenix and Minneapolis, St. Paul, Kansas City. It's in one of those cities.
Kevin Riley: It's in one of those cities.
Timur Braziler: Okay. Got it. And then I appreciate the color on the metro office slide. I just want to make sure does that include construction loans as well? Or is that just coming in the area?
Marcy Mutch: It does. It does.
Kevin Riley: Yes, it includes, yes.
Timur Braziler: And then, I guess, the transition from construction to permanent finance. I'm just wondering what your appetite is to continue doing finance some of your own construction projects as the construction term comes due? And then just maybe talk us through the pricing dynamics as these loans roll from construction to permanent finance?
Kevin Riley: Well, I mean, I think the dynamics of moving from construction to firm, I think that we've kind of covered that once they get finished and then they stabilize, we move them into perverse real estate. We continue to look at loans not in the metro markets, but look at loans that our customers and communities need and we look at them on an individual basis. And we're not added the construction business. We're just going to be pretty particular about what we do. So we're going to continue to stay in business, but it's just a normal transition from doing a construction loan, building this stuff up, stabilization and then move them into commercial real estate.
Marcy Mutch: And again, I think we've said all year we're really focused on making sure that we have the full relationships, so not just a transactional construction loan that we want the full relationship, and so that's where we're focusing; again, outside of the metro areas and on full relationships.
Timur Braziler: Okay. And just from a yield perspective, are those construction loans are those variable rate and then they get locked into permanent finance, it's like a 5.1 [ph] or is that coming off a lower fixed rate into a higher fixed rate on the CRE?
Marcy Mutch: So most of it is variable, but there is a portion that are the all-in-one construction loans that we talked about earlier and that's considered in that 6% number that we gave you earlier.
Kevin Riley: So the all among construction activity, just Timur, just to refresh your memory is that we do a fixed rate during the construction period and then through the stabilization period. So that rate carries on then for a short period of time after that loan is stabilized and moving to commercial real estate.
Timur Braziler: Got it. Okay. And then just last for me, just looking at the deposit rates, I appreciate the 2% spot, I think, Marcy, you had said that some of the pressures were starting to abate in the fourth quarter. I guess you guys are starting at such a low level that maybe continued mix shift just puts additional pressure on that. But how has that 2% been working through the month of October? And are you thinking that's kind of a peak there for deposit rates? Or do you think just again starting at such a low basis, maybe there's some additional pressure there?
Marcy Mutch: I think it will be stable to down going into the rest of the quarter.
Timur Braziler: Okay. Great. Thank you for the color. Kevin, congratulations on the retirement.
Kevin Riley: Thanks, Timur.
Operator: Thank you. [Operator Instructions] We'll go next now to Chris McGratty at KBW.
Nick Moutafakis: Hi, this is Nick Moutafakis on for Chris.
Marcy Mutch: Hi, Nick.
Kevin Riley: Hi, Nick.
Nick Moutafakis: Maybe just on expenses. You guys have done a nice job kind of grinding the efficiency ratio down this year, but maybe any other opportunities to work on expenses as we move into 2025.
Marcy Mutch: Nick, I think we're doing a pretty good job on our expenses right now, I really – our efficiency ratio is more of a revenue issue than it is an expense issue. So as we see our NII build going into next year and hopefully get some traction on our fee income, we should see that efficiency ratio could continue to come down.
Nick Moutafakis: Great. And then maybe just a comment on loan demand. As move into next year, do we see that picking up? Is there a rate level where you think people are waiting to pick up activity? Or is it kind of tepid in your minds as we move into 2025.
Kevin Riley: I would say there's a couple of things. I think one people are looking for what's going to happen with the election happening in the next couple of weeks, and I think also rates. So I kind of stopped looking at my crystal ball because it's very cloudy because over the last few years, we haven't really picked that. So I think we're just going to have to wait and see what the rates look like. But I think there's a pent-up demand; I just don't know when that pent-up demand is going to take hold. So we're poised and we're ready and the team is ready to go. But I don't want to pick a time when that's going to pick up because I'd probably be wrong. So let's just hope it does start early going into 2025.
Nick Moutafakis: Great. Thank you and congratulations, Kevin. We've enjoyed working with you at KBW.
Kevin Riley: Thanks Nick.
Operator: And ladies and gentlemen, it appears we have no further questions today. Mr. Riley, I'd like to turn things back to you, sir, for any closing comments.
Kevin Riley: Okay. I'd like to thank everybody for their questions. And as always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions, and thank you for tuning today, and I really appreciate working with all of you over the years. So hopefully, our paths will cross and I will see you. So thanks for all your support. Bye.
Operator: Thank you. And again, ladies and gentlemen, that will conclude the First Interstate BancSystem Third quarter earnings call. Again, thanks so much for joining us everyone and we wish you all a great day. Good bye.
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