First Interstate BancSystem Inc
NASDAQ:FIBK
First Interstate BancSystem Inc
First Interstate BancSystem Inc. has its roots deep in the American heartland, emerging as a prominent player in the regional banking scene. Headquartered in Billings, Montana, the bank's journey began as a small-town bank and has gradually expanded its footprint across the Midwest and Western United States. The bank operates more than 300 branches, serving a diverse clientele that ranges from individual consumers to large businesses. What differentiates First Interstate is its focus on community banking—an approach that blends personalized customer service with a broad array of financial products. By emphasizing local decision-making paired with strategic growth through acquisitions, the company has established a sturdy reputation in the banking sector.
The engine behind First Interstate's revenue comes from serving the needs of individuals and businesses with a wide spectrum of financial services. From traditional offerings like checking and savings accounts to more complex products like commercial loans and wealth management services, the bank generates income primarily through interest on loans and fees associated with its services. Interest income forms the backbone of its revenue, reflecting the bank’s robustness in managing a healthy balance between deposits and loans. Through this fine-tuned model, First Interstate BancSystem Inc. not only forges strong community ties but also capitalizes on the intersection of personalized banking and expansive regional growth, ensuring its profitability and resilience amidst evolving economic landscapes.
Earnings Calls
In the first quarter, First Interstate Bank reported a net income of $50.2 million, slightly down from $52.1 million in the prior quarter. The net interest margin improved to 3.22%. The bank saw a $467.6 million decline in loan balances and a seasonal drop in deposits of $282.8 million. Importantly, they plan to sell 12 branches, projected to enhance capital by 30-40 basis points. For 2025, they expect net interest income growth between 3.5% and 5.5%, with margins anticipated to rise to 3.4%-3.5% by Q4. A dividend of $0.47 per share remains a priority, yielding 6.1%.
Good morning, ladies and gentlemen, and welcome to the First Interstate Bank System Inc. First Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, April 30, 2025. I would now like to turn the conference over to Nancy Vermeulen. Please go ahead.
Thanks very much. 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 in 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 and 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.
Again, this quarter, along with our earnings release, we've published an updated investor presentation that has additional disclosures that we believe will be helpful. The 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 fourth quarter of 2024. Joining us from management this morning are Jim Reuter, our Chief Executive 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 good morning all, and thank you for joining us on our earnings call. Before we begin, let me point out the bitter sweet fact that this is the last earnings call we will have with Marcy. As we announced at the end of February, Marcy is retiring after more than 18 years here at the bank and an accomplished career in finance of more than 30 years.
It has been a pleasure and a privilege to work with you, Marcy even for the short period of time that I've had the opportunity, it is obvious that your influence on this company has been profound. You are leaving your post in great hands with David but our future success will always be due in large part to the impact you have had in your time here. Thank you for all you have done for First Interstate, and congratulations on a brilliant career.
On to the business at hand. I'd like to begin by discussing our longer-term strategy. As I discussed in the earnings call in the previous quarter, First Interstate is deemphasizing large-scale M&A and refocusing on full relationship banking. Both our near- and long-term actions will be centered around reorienting the bank towards organic growth.
This affects how we operate and how we evaluate every other aspect of our business. While we won't be providing 2026 guidance in light of the ongoing economic uncertainty, we will provide additional color later in the call on our medium-term net interest income expectations and our longer-term brand strategy.
Our overarching strategy will be to deploy capital to areas of strength. We have a valuable low-cost granular deposit base and strong market share in areas that are growing faster than national trends in which we intend to invest. Our capital levels and balance sheet are strong and flexible, and our underlying earnings are supported by asset repricing, which we anticipate will support meaningful earnings improvement.
We also acknowledge that there are opportunities in our footprint to optimize our branch network. Today, our average branch size is approximately $76 million, which is smaller than our peer average. As a result, we are evaluating our branch network, and we anticipate beginning to take sequenced action to reposition, open or consolidate branches later in 2025.
With that said, due to our more rural branch network, we will always have a bit of a smaller branch size on average, but our goal is to narrow this delta. As announced on Monday, we are exiting our 12 locations in the states of Arizona and Kansas. Our decision to divest is aligned with our noted strategy to shift our capital investment and drive growth in markets where we have strong market share and we believe this transaction allows us to do so.
Deposit balances associated with these markets totaled $740 million as of March 31 and about $200 million of loans will be included in the transaction which we expect to close by the fourth quarter. Moving to credit. We are taking a proactive approach to managing credit, which we believe sets the bank up to perform well in all economic cycles. We reported an increase in criticized loans in the first quarter of $252.8 million, generally concentrated within commercial real estate.
Our focus on the primary source of repayment drove most of these downgrades. Downgrades in the multifamily book, which represented approximately $75 million this quarter were mainly reflective of slower lease-up activity. Guarantors in this portfolio are generally strong, and they have shown willingness to solve property-specific challenges when asked. Outside the multifamily asset class, our commercial real estate downgrades were primarily in the industrial warehouse property type.
They were customer-specific, and we did not see any specific trends driving this activity. Overall, while our downgrades in the first quarter were not as concentrated among a few borrowers as they were in the prior quarter, we did see pressure mainly from larger credits. The top 10 downgrades in terms of size comprised about 3/4 of the increase in criticized assets. On a side note, the 4 larger properties that migrated to criticized in the prior quarter which we discussed in the previous earnings call, remained in the criticized bucket at the end of this quarter.
Nonperforming assets increased $52.8 million during the quarter. Five credits comprise the majority of the increase and include agriculture, agriculture real estate and commercial real estate properties. Again, there was no specific trend among these credits. Broadly, the bank believes it is well secured in these instances. This quarter, we completed the external credit review we discussed on the prior quarter's call.
To date, we performed a detailed review comprised of both external and internal credit reviews of a good portion of the commercial book with a focus on larger credits. We could have additional external reviews planned at this time. As we stated on our previous earnings call, credit is one of our primary areas of focus, and we have been proactive in recognizing credit concerns.
Our current assessment indicates we have good collateral and strong guarantor support in most cases, we're hopeful for positive migration over time. You may also recall from the previous earnings call, our decision to exit certain transactional credits, including large agricultural lending. Here's where we have had some success this quarter. We received approximately $40 million in an agricultural line paydown from 1 of the 4 customers we noted in the prior quarter to whom we had exposure over $50 million. Three customers now remain with outstanding balances over that level.
We also exited certain transactional real estate loans, including a $40 million low-yielding multifamily property. These payoffs contributed to loan balances declining more than we previously anticipated in the first quarter. I'd also note that the current economic uncertainty has resulted in limited customer demand and loan production this quarter was below expectations, especially in commercial real estate.
With the combination of lower customer demand and some expected larger payoffs in the multifamily space, we expect further shrinking of the balance sheet in the second quarter, which is reflected in our loan and net interest income guidance.
Again, we inhibited credit or transactional characteristics that do not fit with our longer-term strategy, and we believe some additional activity will occur in the second quarter. This intentional activity, which is a near-term reset aligns our balance sheet with our business strategy and will position us for meaningful organic growth as we move into 2026 and drive our franchise value going forward. We are also increasing our efforts to reinvigorate our brand and have hired a new director of marketing and client experience.
We will be highlighting our strong brand presence, community engagement and the fact we have the services offered by a large bank with the personal touch of a community bank. This, combined with increased investment in digital delivery channels, which is included in our noninterest expense guidance, is all part of our organic growth strategy.
We have also recently hired a new Chief Risk Officer, Nathan Jones. Nathan brings with him extensive experience in credit and enterprise risk management in both large- and medium-sized institutions. Before I turn the call over to Marcy, I want to touch on capital. Our capital ratios continued to improve this quarter due mostly to the reduction in our balance sheet.
Our level of capital, our expectation of improving earnings and near-term declines in loan balances create optionality in our capital. This will be strengthened further when we close on the announced branch transaction. Our dividend remains a key priority for us to provide shareholders with a strong yield. We actively consider our capital deployment strategy on an ongoing basis and will continue to do so.
As we finalize our strategic planning, we'll continue to provide more guidance over time. I will now hand the call over to Marcy to discuss our results.
Thank you, Jim, and thank you for your kind words about my retirement. It's going to be hard for me to leave First Interstate after more than 18 years, but it really helps to know that I'm leaving it in good hands. I agree that David will be an excellent successor to my role and I already knew from experience that you, too, together are a superb team.
I'm going to miss my first Interstate family very much, and I'm going to miss the analyst and investor community as well. Thank you all for making my time here so fulfilling. On to our results, and I'll start with the income statement. For the first quarter of this year, the company reported net income of $50.2 million or $0.49 per share compared to $52.1 million in the fourth quarter of 2024.
Our fully tax equivalent net interest margin increased 2 basis points in the first quarter to 3.22%. Our net interest margin, excluding purchase accounting accretion, increased 6 basis points to 3.14%. Noninterest income was $42 million, a decrease of $5 million from the prior quarter driven by seasonality in our Payment Services business and lower trust fees in wealth management.
We also had a benefit in the prior quarter from a $2.1 million gain on a property sale, which did not repeat this quarter. Noninterest expenses were $160.6 million in the first quarter, a reduction of $0.3 million over the prior quarter. This included a $1.4 million of severance costs which included the exit of indirect lending and $600,000 related to indirect business termination costs. We continue to focus on controlling expenses, further complementing our balance sheet repricing.
Moving to our balance sheet. Loan balances declined by $467.6 million in the first quarter. The decline was driven by lower customer demand, select larger loan runoff and the intentional runoff of the indirect lending portfolio for which we stopped accepting applications in the first quarter. We saw the seasonal decline in deposits that we typically expect at this time of year.
In the first quarter, our deposits declined by $282.8 million, which was roughly half the decline we experienced in the first quarter of 2024. Deposits were roughly flat to the same period last year, reflecting improving underlying trends we are seeing in our deposit base. Again, this quarter, we meaningfully reduced our wholesale borrowing. Borrowings declined by $607.5 million in the first quarter of 2025 and by more than $1 billion compared to the third quarter of 2024.
Our loan-to-deposit ratio finished the first quarter at 76.4% and our balance sheet remains very flexible. Net charge-offs also normalized from the elevated levels we saw last quarter, totaling $9 million or 21 basis points. Provision expense totaled $20 million, which reflected higher qualitative and quantitative adjustments. The quantitative portion was influenced by a weaker economic outlook.
Our total funded provision was 1.24% of total loans at the end of the quarter, an increase of 10 basis points from the prior quarter. And finally, we declared a dividend of $0.47 per share or a yield of 6.1% for the first quarter of 2025. Our common equity Tier 1 capital ratio improved 37 basis points to 12.53%. And with that, I'll hand the call to David to talk about our recently announced branch sale and to review our guidance.
Thank you, Marcy. You can find our guidance on Page 15 of the investor presentation. On Monday, we announced the sale of 12 branches and associated deposits and certain loans in Arizona and Kansas. We expect this transaction to close by early fourth quarter. The transaction will improve capital at close and align with our strategic principle to invest and grow in markets where we have greater market share to deliver higher returns to shareholders. We anticipate tangible book value accretion of roughly 2% at close based upon March 31 deposit and loan balances, an improvement in our common equity Tier 1 ratio of approximately 30 to 40 basis points, excluding any capital deployment.
We are currently considering our capital deployment options and anticipate that the combination of this transaction and any associated deployment of capital would be accretive to earnings. We plan to provide further guidance later in the year. Moving to the current guidance, which excludes the impact of the branch sale. I'll start with the balance sheet. Deposit balances declined seasonally in the first quarter, generally in line with our expectations. We continue to forecast modest deposit growth in 2025.
We were pleased to see a 12 basis point decline in interest-bearing deposit costs in the first quarter and expect a modest decline into the second quarter as well. excluding the impact of any Fed rate changes. We have 2 rate cuts in our guidance in the third quarter. Our balance sheet remains modestly liability sensitive, but it continues to trend towards neutral as fixed rate investment cash flows reduced variable rate borrowings.
We don't believe the rate cuts included in our guidance are meaningful to the net interest income forecast we have presented for 2025. The asset trends in our guidance imply that we will eliminate short-term borrowings in the third quarter of this year and we expect interest-earning assets will bottom at that time.
We would also note that over time, we are comfortable with borrowings on the balance sheet. Given our loan-to-deposit ratio and structural liquidity position, when loan demand recovers, and we returned to organic growth, we will have the flexibility to grow loans faster than deposits, if necessary. We anticipate net interest income to increase 3.5% million to 5.5% for the full year 2025 over 2024 with quarterly reported numbers improving sequentially through the year. We expect this momentum to accelerate into 2026.
While we aren't providing full 2026 guidance, we expect 2026 net interest income, assuming flat loan balances in 2026 to increase in the high single digits over 2025. Again, we are confident in our ability to grow, but wanted to provide this number for context around the impact we foresee from fixed asset repricing. Through 2026 from the end of the first quarter of 2025 we anticipate approximately $1.5 billion of cash flow from our investment portfolio at about a 2.5% rate and about 2.4% of fixed rate and adjustable rate loans to either mature or reprice at a weighted average rate of about 4.3%.
For clarity, the balance of maturing loans increases in late 2026 and into 2027. We also anticipate a meaningful step-up in the net interest margin in the second quarter as compared to the first. With a backdrop of interest-earning assets in the $25 billion to $25.5 billion range, we anticipate the margin, excluding purchase accounting, to increase around 10 to 15 basis points in the second quarter from the 3.14% figure we reported in the first quarter.
Given the meaningful drop in borrowings in the first quarter, the margin is notably higher to start the second quarter. From there, we would expect the third and fourth quarter margin to expand at a slightly slower pace than the second quarter with fourth quarter net interest margin, excluding purchase accounting, in the 3.4% to 3.5% range.
Our underlying earning asset assumption is a modest decline to the third quarter and flat to slightly higher balances in the fourth quarter. We continue to exhibit expense discipline while investing in the future of the company. Noninterest expense guidance of a 2% to 4% increase in 2025 versus 2024, and includes an increase in advertising expense as we move through the year, one of the many factors supporting growth into 2026. Expense guidance does not include any actions related to changes in the branch network. We anticipate the impact of branch-related optimization to be more meaningful in 2026.
We will provide more information about these actions as we move through 2025 and complete our market-by-market analysis. Now I'll turn the call back to Jim. Jim?
Thanks, David. In closing, I want to reiterate that the underlying value of the First Interstate franchise is what excited me when I joined. Now we are working diligently to unlock that value. As we move forward, our focus will be on improving our credit quality, relationship banking and organic growth.
We will continue to evaluate where we can deploy capital to get the best return for our shareholders. And with that, I'll open up the call for questions.
[Operator Instructions] Your first question is from Matthew Clark from Piper Sander.
Just on the margin, do you have the spot rate on deposits at the end of the end of March and the average margin in March?
Yes, sure. So interest-bearing deposit cost in March was 1.77%. We think that's a little bit lower into April on a spot basis. margin in March was 3.14%. There was a little bit of nonaccrual impact during the month. So the actual effect of margin into April is higher and borrowings were -- had declined towards the end of the month. So we start into April quite a bit higher than that.
Okay. Great. And then on credit, calling out industrial or some select industrial credits and ag. Can you give us some better color as to the types of industrial credits and the type of ag that migrated this quarter? And I guess, what gives you comfort that the broader -- those 2 broader portfolios are okay?
Yes. So on the nonperforming side, about -- there were 5 credits that represented the majority 2 ag credits, 3 commercial real estate credits. The ag credits were different underlying properties. Property types, the commercial real estate a couple different as well within the criticized book, so about $75 million of multi and then some industrial as well. The industrial is really general industrial warehouse there isn't a specific underlying type that represents a majority of the book.
It's a diversified underlying book. As those loans as they were downgraded, we looked very carefully at all of them. We're comfortable with where they are based on what we know and again, on the NPL side, as they move into nonperforming, there's a specific collateral review that occurs to make sure we're collateralized. And then any specific reserves would occur at that time, if necessary.
Okay. And then the reserve to nonperforming loan ratio down to 112 what's the how do you see the risk of having to build more reserves from here?
Yes. It's a good question. I think, again, there's a very robust process that we go through to set the reserve. We feel like we have the right number at the end of the quarter based on what we know. It's obviously a quarter-by-quarter analysis as we see where credit trends move. But at the end of the quarter, we felt the 1.24% was appropriate based on all the facts and circumstances.
Okay. And then just back to the migration this quarter, both nonperformers and criticized. I guess how much of that was legacy GWB versus legacy First Interstate?
Matthew, this is Jim. Just to kind of step back from that. As I mentioned in the fourth quarter call, we had an independent review done in the fourth quarter. We also continued that into the first quarter. And as I stated in the opening comments, credit has been an area I've spent a lot of time focusing in on.
At the same time, though, that independent review or those 2 independent reviews were taking place. Our team was also looking at the credits, both the bankers and our credit review. And I can tell you our view of the credits was consistent. So that's a good thing. We also tipped the scales to certain credits those reviews are all complete. And so when I look at where they're located in different things, there are certain parts of the footprint where we see more criticized loans.
But what this really is, is, in my opinion, a credit reset, getting consistent across the whole footprint. And I think when you combine that with our exiting indirect, the changes we've made to the footprint. You can see we're action-oriented, but it was in different parts of the footprint as well.
Okay. And then last one for me, just on capital return. It sounds like you're warming up to a buyback after this branch sale. Maybe correct me if I'm wrong, if I'm reading into that. And then -- what are the -- how should we think about the payout ratio being elevated?
Obviously, you're going to grow into it here, I think, in 2Q, but just trying to balance the dividend payout and a potential buyback.
Yes, Matthew, that's a good question. And as you know, we look at our capital every quarter, and our goal is to maximize return to shareholders. We don't have any imminent plans for a stock buyback and dividend continues to be an important part of the return for our shareholders. So I'd just say part of our ongoing capital planning, we look at all options.
Your next question is from Chris McGratty from KBW.
Great. Jim, a question for you now that you're settled. I guess relative to when you started maybe on either side of the ledger, positive negative surprises, has the credit been materially worse than you thought? Or is this just an opportunity to reset? I mean both sides positive net ties would be great.
Yes, Chris, that's a good question. As I mentioned, it's a reset. I think it'd be remiss if I didn't say that -- there was a little more than I had anticipated, but I feel like we've done a great review of the majority of the portfolio. And I feel good that we have a consistent credit culture across the company.
And I mentioned this in the opening comments, I'm a firm believer in proactive credit management. It's what produces the best results in all economic cycles. And so, there was a little more there than I had anticipated. I can tell you the rest of the bank is as good, if not better, than what I anticipated coming in. I mean, really strong balance sheet in terms of low-cost granular deposits, a good mix of consumer and business.
And as I've traveled the footprint and met the team, it's a really good team of bankers. I was just in Eastern Iowa, Nebraska and Wyoming. I have driven by some of the loans that we're talking about. And you can see why we feel good about the collateral. It's just primary source of repayment. That's a big part of it. But I would say on the deposit side, the franchise, the brand, all that feel very strong and on the credit.
I feel like we've done a good reset and we're positioned to go forward.
And then to follow up on Mat's question and I think I asked this last quarter. But in terms of the capital, is the dividend preservation the number one priority? Or is there a scenario where you would adjust it to give yourself more flex?
Yes. Chris, so the dividends are priority. Organic growth, obviously, is where we want to deploy capital long term. As we talked about 2025, we think the balance sheet declines a little bit. Long term, we obviously want to deploy into organic growth, dividends, our priority from there, we'd look at other options, but we're focused on our dividend.
Your next question is from Jeff Rulis from D.A. Davidson.
Maybe just to maybe circle back into credit again. I guess more of a philosophical question. If you think about some of the identification of more problem assets, trying to get a peg for understand, Jim, this is a bit of a credit reset. But if you had to gauge linked quarter, how much of that is macro worsening or those borrowers?
Or is it, like you said, a true reset of maybe you're a little more a material change in sort of a self-directed more critical view on existing credits.
Yes, Jeff, that's a good question and not to give a non-answer. It's some of both. Some of the multifamily, for example, are construction loans that have come on market, and they've been a little slower to lease up. And I think that's definitely been driven by some of the economic factors. The good news is we have strong guarantors and they've been supporting the projects.
But primary source of repayment matters because the guarantor doesn't build a new multifamily property with the idea that they're going to feed and care for it from a financial standpoint. So I'd say it's a combination of a reset and some things that have happened as some of those construction loans have come online.
And Jim, I guess we're all going to try to peg what inning you are in terms of credit review. It sounds like the review is complete. Now it's in terms of balances going forward. I guess, it seemed like in your opening comments that into the review of credits will continue.
And I suppose this criticized balance, I guess, you'd be surprised -- would you be surprised if you continue to increase that level linked quarter, maybe an unfair question, but if you could provide any color about where you think you are in the identification of the problem assets as a whole.
Yes, Jeff. So there are no special reviews going on at this point in time. It will be ongoing credit reviews that we do as a normal part of good due diligence. You're never done with credit. I mean it's always a dynamic situation. And when you look at the economic news that came out this morning, it would be hard for me to predict, Jeff, to be quite honest.
I can tell you, like I said, good guarantors, been by some of the properties, they're good properties. So I'm optimistic, but you [indiscernible] news that came out this morning as well. So I wouldn't say it's an unfair question. It's just one. I can't give you a clear answer given all those dynamics.
Fair enough. And maybe just one last one on the expense side. I wanted to -- David, do you have a figure on maybe expected expense savings from the branch sale if you were to remove that from the run rate?
Yes. The round number, the way I describe that is the noninterest expense as a percentage of the deposits in the transaction represent, call it, a mid-2s number is kind of how we would coach that.
Okay. I'll back into that. And then just could you remind us the baseline 2024 expense off of that 2% to 4% growth for the full year?
Just reported number, no adjust reported in 2024.
Okay. And just confirming the -- that guide is off of -- excludes the branch sale correct?
That's correct. Yes. Our guidance in totality excludes the branch.
Your next question comes from Andrew Terrell from Stephens.
If I could just follow up on the last point around the branches briefly. The expense is helpful there. David, do you have the efficiency ratio kind of targeted for the branches?
I think the way we're trying to describe it, Andrew, is just kind of the broad expense number we provided to kind of have the deposits and the loans, nothing is too dissimilar to the rest of the bank, I would say, from -- as it relates to the deposits, so that kind of backs into that. And then again, with the capital brought in from the transaction, we feel like it's accretive to earnings with the combination of any capital deployment and the removal of the branches.
Understood. Okay. So just thinking about a 60% efficiency ratio in isolation for the branch transaction is probably fair?
I'll just point back to the kind of mid-2s noninterest expense as a percentage of deposits. That's kind of the way we want to describe that.
Okay. Fair enough. And then just around the topic of capital deployment, specifically the buyback was discussed. But I'm curious is securities repositioning something that's included as kind of an arrow in the quiver of broader capital deployment?
And then how should we think about the time line of potential capital deployment given the balance sheet runoff this quarter and it sounds like next quarter as well, even prior to any the branch sale or other transaction like capital improves very nicely. Should we think about capital as a near-term capital deployment of near term, medium term, long term. Just any help on timing would be helpful.
Andrew, good question. And yes, securities and balance sheet repositioning is one of the things we always consider as well with our capital. So dividend stock buyback and organic growth -- organic growth being the priority, but then repositioning is part of our conversation. As to what will be near term, medium term, long term it's a by-quarter decision, Andrew, and I think that that's the best answer we can give because we have a lot of options.
As you point out, -- we have a strong capital ratio, and it will only continue to get stronger as we go throughout the year. So it's definitely a topic of conversation.
Understood. And if I could move to just a credit quickly. I hear you, Jim, on kind of a credit reset this quarter. I think there was a bit of surprise that the charge-off guidance stayed the same, given the shift in nonperformer, special mention -- maybe just help us out, why should we remain comfortable with the stated kind of charge-off band or guidance in context of the downgrades you saw this quarter?
Yes. Good question. And when we look at the collateral, we look at the guarantors and we look at the path through many of these credits, that's why we haven't changed our forward charge-off guidance. It's certainly something we'll take a look at. And there's macroeconomic impacts to that as well. But that's the reason for that position today.
As David mentioned, in our CECL process, we have a very robust process including putting in overlays, doing different things. And we certainly had a conversation around this, and we feel like where we landed from a coverage standpoint is what makes sense, given what we know today.
Got it. And just one more, if I could. The NPL interest reversal, do you have the magnitude of how much that influenced the first quarter margin or dollar terms is fine?
Yes. It was a little over $1 million for the full quarter, Andrew.
Okay. And Marcy, congratulations on the retirement.
Thanks, Andrew.
Your next question is from Timur Braziler from Wells Fargo.
Just going back to your comments on the slower lease-up activity in the multifamily in the multifamily construction space, can you just give us the geographies where you're seeing the most amount of stress in filling some of these vacancies?
Yes, Tim, I'm not going to get specific. I can tell you it's in a few different spots. It's not just one. So I think -- we don't have a large concentration of a lot of multifamily in one space. So I think that's a good thing. But -- we've seen it with a few different projects throughout our footprint.
Yes. I would just add, Timur, that again, the largest state concentration within our commercial real estate book is under 20%. So it is a geographically diversified portfolio.
Okay. I appreciate that. And then just maybe circling back on credit. You had mentioned that the downgrades were primarily from larger credits, and there's 3 remaining that are over that $50 million. Are those all okay through this review process? Were any of those downgraded along kind of the risk migration scale? And can you just remind us what those 3 loans are for.
Yes. So 3 that are over 50 remaining again. None of those were downgraded this quarter. No activity within any of those. Again, the largest downgrade this quarter was a little bit over $20 million. So there were no significant downgrades this quarter of that size. We don't want to give specifics on those larger credits. We obviously have a lot of eyes on them. We talked last quarter about the 4 large credits that were downgraded.
That's kind of the detail we kind of want to provide on those. But there's no -- all 3 of those are currently performing loans, and we'll kind of leave it at that for those
Okay. Great. And then just last for me. You had mentioned meaningful organic growth in 2026. Can you just help kind of ring fence that comment meaningful? Is that just balance sheet expansion at this point? And I guess, as you think about the asset classes where you're looking to grow, can you just maybe give the composition of what future loan growth is going to look like?
Yes. So I think the way we're thinking about that is kind of on a relative basis from where the balance sheet is in 2025. I mean at this time, we don't see a high single-digit number in 2026 for organic growth. It's probably more in kind of low to mid at this time. Obviously, as we go through the year, we'll be able to provide more clarity on that.
Composition wise, our focus continues to be on that small business to kind of a little bit larger space. So I think kind of C&I, owner-occupied those type of products.
And Tim, I would just add that -- I mean it's a priority now. But when you see our forward projections, we do show some shrinking in the loan portfolio as we run off some of the larger credits and non-relationship loans. So it's an intentional direction this year, but that doesn't mean underlying, we are not working on growth, branding.
Our bankers have growth goals, all those things because that's not something you turn on and it starts to work tomorrow. It's been turned on. But when you look at the other things that are in play exiting indirect as well as the things I mentioned, that's why there's a little bit of a headwind for this year.
Got it. And have you guys provided the portion that's non-relationship driven on the lending book? You guys provided that?
No, that's not something we provide, Timur.
Your next question is from Jared Shaw from Barclays Capital.
And Marcy, congratulations. It's been great working with you over the years. Maybe on the capital question, maybe asking in a little different way. When you look at CET1 continuing to build here. Given the risk profile of the bank, where do you think an appropriate long-term CET1 ratio would be that you would want to hold?
Yes. I think the way we think about that, Jared, is we don't have specific CET1 external targets today. We're obviously very comfortable at a mid-12s number that we feel like is moving higher. And then we talked about the move higher we see at the close of the branch transaction. We're not going to provide today a CET1 target, but we're fair to say we're comfortable and we feel like we have appropriate capital to consider other options as we move through the year.
Okay. And then on the deposit side, when we look at the DDA balances, whether, I guess, maybe on average, is that -- do you feel like we're at a good floor here for average DDAs and as a percentage of deposits, you think that it's either stable or growing from here? Or is there still some potential pressure?
Yes. So I think on an average basis, we've been within about 1% for the last, I think, 5 or so quarters. we stepped down slightly in the first quarter. We think kind of that 25%, 26% range where we've been is probably where we end up. We don't see a material shift from here. Average balances have stabilized and the underlying trends support where we are today.
Okay. And then just a last one on credit. When you look at the warehouse and industrial book and some of the moves into criticized and classified and then some of the changes you mentioned, what other risk is there in that portfolio from tariffs, if we see significantly reduced imports and higher vacancies in some of these distribution centers. Is that -- how does that sort of inform your credit outlook from here?
Yes, Jared. We've actually had conversations around tariffs. And as you know, it changes daily. But our bankers are having the right conversations with our customers. We just had a loan committee where -- they do business with China, and there was very robust conversation around are they prepared for that and they are.
I think probably one of the positives of COVID as customers are prepared for supply chain issues in different things because they've experienced it before. So we're having those conversations. I don't think there's an outsized impact or concern in that area would be my closing comments.
Your next question is from Timothy Coffey from Janney.
Do you have -- or can you share any color on the percentage of the construction book that is expected to be completed and enter the lease-up phase in the next 12 months?
No, I'm not going to provide color around that other than we're proactively managing those construction loans. I don't know.
And they kind of go through the standard process, right? So as kind of the construction loans lease up, they receive their certificate of occupancy, they move over to permanent at that time. So we don't have a specific number to share as it relates to what percentage, but there's nothing unusual that we see there, and those are continuing to migrate to permanent over time.
Okay. And then, Jim, you mentioned in the beginning our prepared remarks about the average branch size I guess, a while back, I thought $50 million was the right size for deposits per branch, but that was when Fed funds was at 0. Now that it's that 4 plus, what do you think is the right number for deposits per branch?
I think I mentioned we're at $76 million and our peers are higher than that. I don't have a target number, Tim, because honestly, it will depend on the trade area. But I think any good retail business out there is constantly from a hygiene perspective, looking at their branch footprint going where can we open, where should we consolidate and where should we close and that will be a focus the last half of the year because I do think our average branch side could be size could be higher.
It won't match peers because we do have a rural footprint. So on average, we'll be below. But that's part of optimizing the performance of the bank and the return to shareholders. So something we'll be putting discipline and rigor around.
There are no further questions at this time. Jim Reuter, please proceed with closing remarks.
Very good. Thank you. I want to again recognize Marcy for her great work with the bank over the years. And I can tell you personally, she's been an unbelievable partner in this transition, and I just want to say thank you I don't enter an investor room without feeling like I'm traveling with the mayor of the banking industry because she's very well-liked and respected by the investor community.
So thank you, Marcy. And thank you for your questions. And as always, we welcome calls from our investors and analysts. And please reach out to us if you have any follow-up questions, and thank you for tuning into the call today.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.