First Interstate BancSystem - Q3 2024
October 25, 2024
Transcript
Operator (participant)
Please stand by. We're about to begin. 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. You may register to ask a question at any time by pressing star one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Also, today's call is being recorded, and if anyone should need any operator assistance during the call today, please press star zero. Now, at this time, I'll turn things over to Nancy Vermeulen, Financial Communications and Analyst Manager. Nancy, please go ahead.
Nancy Vermeulen (Financial Communications and Analyst Manager)
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?
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 that has 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 of 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 five 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. Non-interest expenses in the third quarter came in better than we expected, and they included one-time 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 first. I will say a bit more about Jim in my closing remarks. In the third quarter, we saw modest growth in our fee business, which was enhanced by the sale of one of our branches. But excluding this sale, non-interest income increased by approximately 3%. As for our credit quality, our criticized and classified loans both declined in the period.
Kevin Riley (President and CEO)
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 non-accrual, 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 the midst of an earnings inflection, which we have discussed previously, and we look forward to improving results going forward. And with that, I'll turn the call over to Marcy.
Marcy Mutch (CFO)
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 break even, 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 four basis points to 3.04% in the third quarter, and as Kevin stated, our net interest margin, excluding purchase accounting accretion, increased five basis points to 2.97%. This increase is net of a one 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 loan 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 the 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 reprice early in the quarter, which includes both our BTFP and a portion of our term FHLB advances. Non-interest 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. Non-interest expense increased in the third quarter by $2.5 million. However, a one-time expense of $3.8 million related to the CEO transition more than fully accounts for that increase. Excluding that cost, our non-interest 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 amortizations 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 non-interest 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 non-performing 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 (President and CEO)
Thank you, Marcy. I would like to congratulate our board on finding an excellent successor to me in 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. After 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 bittersweet moment for myself.
As I give my concluding remarks in my last earnings call as the CEO of First Interstate, after 17 consecutive years of performing quarterly earnings calls, first at Berkshire Hills 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 (participant)
Thank you, Mr. Riley. Ladies and gentlemen, at this time, if you do have any questions, please press star one. If you find your question has already been addressed, you may remove yourself from the queue by pressing star two. Once again, star one for questions. We'll go first this morning to Matthew Clark with Piper Sandler.
Matthew Clark (Managing Director)
Hey, good morning.
Kevin Riley (President and CEO)
Good morning, Matt.
Matthew Clark (Managing Director)
I just wanted to. 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.
Matt, you've asked that question a number of times. We don't specifically highlight with a specific reserve on that credit, but I would say at this point, it's very adequate to what we think could be the realizable value.
Okay. And then did you have reserves previously set aside on the charge-offs on those two metro office credits? And if so, how much?
Kevin Riley (President and CEO)
Go ahead, Marcy.
Marcy Mutch (CFO)
Yeah, so Matt, while there was no specific reserve set aside on that, the characteristics of those loans were considered in our overall allowance. Again, in the larger of those two loans, you know, 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 (Managing Director)
Okay. 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 (CFO)
The spot rate on deposits was 2%, and 303 was the margin in September.
Matthew Clark (Managing Director)
On a reported basis or a core?
Marcy Mutch (CFO)
Oh, that's core basis, ex purchase accounting.
Matthew Clark (Managing Director)
Okay, great. Thank you.
Marcy Mutch (CFO)
You bet.
Operator (participant)
Thank you. We'll take our next question now from Andrew Terrell at Stephens.
Andrew Terrell (Managing Director)
Hey, good morning.
Kevin Riley (President and CEO)
Good morning, Andrew.
Andrew Terrell (Managing Director)
On the ag credit that you guys discussed, can you just remind us the size of that loan? And then I'm assuming, you know, 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 (CFO)
Yeah. And so, the ag loan was around $20 million. And, yeah, we feel comfortable with the 20-25 basis points guide on net charge-offs, excluding, again, the large C&I credit.
Kevin Riley (President and CEO)
But we don't really anticipate taking a loss on that ag credit specifically.
Marcy Mutch (CFO)
No. No.
Andrew Terrell (Managing Director)
Got it. Okay. I appreciate it, and then Marcy, around the one point seven 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 we expect it just kind of flips to overnight funding and makes you a little more liability sensitive? Or, you know, are there any opportunities out there in the market to maybe lock in, you know, get any kind of puttable FHLB advances at kind of a more advantageous rate? Just be curious how we should think about that?
Marcy Mutch (CFO)
Yeah. And so, Matt, we have, you know, about $1 billion of that that's gonna reset in January. And I really feel like at this point, we have ultimate flexibility, you know, with regard to how we kind of stage that out going forward. And so, you know, we're watching it now. Any rate cuts will be accretive, you know, to us, you know, as to where they're priced right now. So again, I just, we'll evaluate that as the time comes.
Andrew Terrell (Managing Director)
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 (CFO)
Yeah. So again, you know, I think we've said before, we use those swaps as a tool to manage our balance sheet sensitivity. And, you know, at this point, we're relatively neutral, but as we move into 2025, we become, you know, naturally more liability sensitive. And so we terminated that $550 million of swaps, you know, because they were in a favorable position to do so. And, you know, that's just gonna reduce our exposure, going forward into 2025.
Andrew Terrell (Managing Director)
Did that positively contribute any level of interest income in the quarter?
Marcy Mutch (CFO)
A tiny bit. Yeah.
Andrew Terrell (Managing Director)
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 (President and CEO)
All right. Thanks. Thanks, Andrew.
Operator (participant)
Thank you. We go next now to Jared Shaw with Barclays.
Jared Shaw (Senior Equity Research Analyst)
Hey, good morning, everybody.
Kevin Riley (President and CEO)
Morning, Jared.
Jared Shaw (Senior Equity Research Analyst)
Kevin, I gotta say, you know, I think I'm probably one of the only ones that was there seventeen years ago on that first Berkshire call with you. So it's been, you know, it's been a great, great run, and looking forward to staying in touch with you. But congratulations on a strong career.
Kevin Riley (President and CEO)
Yeah. Well, it's interesting you said that. 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 (Senior Equity Research Analyst)
Thanks. You know, so maybe just drilling into the margin trends a little bit more, you know, and how, I guess, we should be thinking about, you know, 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? You know, are some of these moves going to continue to provide some benefit as you go through the quarter?
Marcy Mutch (CFO)
Yeah. So, you know, I think I just mentioned that, you know, ex purchase accounting, our margin was at 303 in September. And so because we have no borrowings, you know, that are maturing this quarter, you know, I don't think it'll go, you know, significantly higher than that. But we do, again, expect expansion from the 297, where we were, into the fourth quarter. And, you know, by September's rate, you can see we're already there.
Jared Shaw (Senior Equity Research Analyst)
Is there an impact on that margin from interest accrual reversals from some of the larger non-performers?
Marcy Mutch (CFO)
That doesn't anticipate interest accrual conversions.
Kevin Riley (President and CEO)
Are you talking about this quarter, Jared?
Marcy Mutch (CFO)
Yeah.
Jared Shaw (Senior Equity Research Analyst)
Yeah. Well, I'm just saying, I guess, like, this quarter, was there a negative impact from that that is gonna be reversed, that we should be thinking about in fourth quarter, or something that, you know, maybe through fourth quarter, then it gets reversed in first quarter?
Marcy Mutch (CFO)
Yeah, that's included in that September number.
Jared Shaw (Senior Equity Research Analyst)
Okay. And then did you pay down any of the BTFP at all this quarter, and what's your outlook on that going forward?
Marcy Mutch (CFO)
Yeah. So we haven't paid down any of that at this point. Again, that rate's 4.76, and so, you know, as rate cuts happen, we can you know 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 (President and CEO)
Yeah. 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 clearer what might be happening in the rates in 2025 and 2026.
Jared Shaw (Senior Equity Research Analyst)
Okay. All right. Thanks. And then just, I guess, finally for me on those two office loans, you know, that's a little bit of a different trend from what we've seen at other sort of midcap banks with similar type structures. Any additional color you can give us just on, you know, what was maybe uniquely negative about them compared to more of a traditional portfolio and why you feel comfortable with the rest of the portfolio?
Kevin Riley (President and CEO)
Well, on the two things, the one loan, the one that we the construction loan, you know, 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, you know, 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 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 gonna come to a close. So we just want to get that loss behind us and not have it carry forward.
We were proactive, got an appraisal, and wrote it down to a realizable value after selling costs to 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 this anymore. As you know, there's a slide in our deck that shows that we have $90 million in metro office, and there's only 4 loans now, over $5 million, of which one of the ones that we whacked pretty heavily. We don't believe there's any real loss at all left in the metro office, but, you know, we got that behind us.
Jared Shaw (Senior Equity Research Analyst)
Okay. Thanks for the color and congratulations again, and looking forward to staying in touch.
Kevin Riley (President and CEO)
All right, Jared.
Operator (participant)
Thank you. We go next now to Tim Coffey with Janney.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Thank you, and thanks for the opportunity to ask a question. Marcy, did I hear you correctly? You think earning assets could come down quarter over quarter? If so, by how much?
Marcy Mutch (CFO)
We don't really say by how much, but if you, you know, we had some loan runoff right at the end of the quarter, and so if you just kind of look at that, that's why we think average earning assets are gonna come down, you know, 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 loan portfolio we saw at the end of the quarter.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
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, are any or all of them in some form of rehab and transitioning to the lease-up process?
Kevin Riley (President and CEO)
Hold on. Go ahead, David.
Hey, Tim. 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. It's slide seven.
Yeah, and in the-
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay
Kevin Riley (President and CEO)
... in the one, the second largest one, we took a loss on that earlier in the year. That's in Seattle. And we have an investment grade, you know, lessor going in there. So we feel very comfortable with that one, and that one's not a concern. So we feel pretty good with what's left there.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay. Would kind of these, the markets 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 (CFO)
No, we don't anticipate that at all, Tim.
Kevin Riley (President and CEO)
No, we're not doing, no.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay. Okay. Yeah, I just asked because the vacancy rates in off-metro office have been higher on the West Coast than probably other places I've seen, so I appreciate that. And then, Kevin, yeah, it's been great working with you. Yeah, I hope you enjoy your retirement. Happy hunting.
Kevin Riley (President and CEO)
Thanks.
Operator (participant)
Thank you. We'll go next now to Timur Braziler at Wells Fargo.
Hi, good morning.
Kevin Riley (President and CEO)
Good morning to you.
Can you provide the location - Hi, good morning, guys. Can you provide the locations of these two office charge-offs?
The, well-
Marcy Mutch (CFO)
No, you know, Timur, it could potentially compromise our negotiating position, and so we're not providing the locations of those. But, you know, 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 locations.
Kevin Riley (President and CEO)
It's in one of those cities.
Okay. Got it, and then appreciate the color on the metro office slide. I just wanna make sure, does that include construction loans as well, or is that-
Marcy Mutch (CFO)
It does
... just permanent CRE?
It does.
Okay.
Yeah.
Kevin Riley (President and CEO)
It includes, yep.
Okay. And then, I guess, the transition from construction to permanent finance, I'm just wondering what your appetite is to continue doing finance and 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.
I mean, I think the dynamics of moving from construction to perm, I think that we've kind of covered that. Once they get, you know, finished and then they stabilize, we move them into, you know, permanent commercial real estate. We, you know, we continue to look at loans, not in the metro markets, but look at loans that, you know, our customers and communities need, and we look at them on an individual basis. And we're not, we're not out of the construction business. We're just gonna be pretty particular about what we do. So we're gonna continue to stay in business, but, you know, it's just a normal transition from, you know, doing a construction loan, building the stuff up, stabilization, and then moving into commercial real estate.
Marcy Mutch (CFO)
And again, I think we said, you know, all year, we're really focused on making sure that we have the full relationship. 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.
Okay. And just from a yield perspective, are those construction loans variable rate, and then they get locked into permanent finance, that's like a five one, or is that coming off a lower fixed rate into a higher fixed rate?
Yeah
... on the CRE permanent rate?
So most of it's variable, but there is a portion that are those all-in-one construction loans that we talked about earlier, and that's, you know, considered in that 6% number that we gave you earlier.
Kevin Riley (President and CEO)
The all-in-one construction loan, Timur, just, you know, 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.
Got it
... that loan is stabilized and moved into commercial real estate.
Got it. Okay. And then just last for me, just looking at the deposit rates, 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 know, 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 (CFO)
You know, I think it will be stable to down, you know, going into the rest of the quarter.
... Great. Thank you for the call, and Kevin, congratulations on the retirement.
Kevin Riley (President and CEO)
Thanks, Hubert.
Operator (participant)
Thank you. And ladies and gentlemen, just a quick reminder, star one, please, for any further questions today, and we'll pause for just one moment. We'll go next now to Chris McGratty at KBW.
Christopher McGratty (Managing Director)
Hi, this is Nick Matafekis on for Chris.
Marcy Mutch (CFO)
Hi, Nick.
Kevin Riley (President and CEO)
Hi, Nick.
Christopher McGratty (Managing Director)
Maybe just on expenses, you guys have done a nice job kind of grinding that efficiency ratio down this year, but maybe any other opportunities to work on expenses as we move into 2025?
Marcy Mutch (CFO)
You know, Nick, I think we're doing a pretty good job on our expenses. You know, right now, our efficiency ratio is more of a revenue issue than it is a expense issue. So as we see our NII, you know, build going into next year and, you know, hopefully get some traction on our fee income, we should see that efficiency ratio continue to come down.
Christopher McGratty (Managing Director)
Great. And then, you know, maybe just a comment on, you know, loan demand as we move into next year. Do we see that, you know, 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 mind as we move into 2025?
Kevin Riley (President and CEO)
You know, I would say, Nick, there's a couple things. I think one, people are looking for what's going to happen with the election happening in the next couple weeks, and I think, you know, also rates. So I kind of stopped looking at my crystal ball because it's very cloudy, 'cause over the last few years, we haven't really picked that. So I think we're just gonna have to wait and see, you know, what the rates look like. But I, you know, I think there's a pent-up demand. I just don't know when that pent-up demand is gonna take hold.
So, you know, we're poised, and we're ready, and the team's ready to go, but I don't want to pick a time when that's gonna pick up, 'cause I'll probably be wrong. So, let's just hope it does start early, going into 2025.
Christopher McGratty (Managing Director)
Great. Thank you, and congratulations, Kevin. We've enjoyed working with you at KBW.
Kevin Riley (President and CEO)
Thanks. Thanks, Nick.
Operator (participant)
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 (President and CEO)
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 or if you have any follow-up questions, and thank you for tuning in 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 (participant)
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.