First Weekly BancSystem: Doesn’t bode well for 2024. (NASDAQ:FIBK)

First Weekly BancSystem (NASDAQ:FIBK) is a bank headquartered in Billings, Montana. At first glance, what catches the eye the most is the high dividend yield of 7.10%. Anyway, after the launch in the 4th quarter 2023 I personally started to have doubts about sustainability. This quarter’s performance was poor due to the continued decline in net interest margin (NIM) and sluggish credit demand. At the same time, upward pressure on deposit costs continues.

I already pointed out all these issues in my Q3 2023 article and they are not fully resolved at this point. But unlike last quarter, today there seems to be at least some light for the second half of 2024. Nonetheless, the 2024 guidance remains negative, suggesting that the first half of 2024 will be somewhat disappointing.

Loan and Securities Portfolio

The loan portfolio reached $18.3 billion, up $66.3 million from the previous quarter. The decline in construction lending was offset by increases in commercial real estate and agricultural lending. Compared to 2022, the loan portfolio increased by only 1%, highlighting a somewhat problematic situation regarding credit demand.

As evidenced by its low LTD ratio, FIBK has financial flexibility and resources for new lending, but demand is still very weak. The new production rate is quite good at 7.80%, but it will be difficult to improve the average loan yield if there are no households/companies to take on the debt. This stalemate could continue throughout 2024.

In the short term, there is still some resistance from potential borrowers, but this is expected to change as economic conditions and weather improve. Given that outlook, we expect total loan balances to be flat or increase in the low single digits in 2024. However, given the strength of our balance sheet, we will be able to respond quickly to additional growth opportunities as market demand increases.

CEO Kevin Riley

In other words, banks have the liquidity to take advantage of opportunities; the problem is finding them. Since nothing is likely to change in terms of loan growth, banks are shifting their focus to their investment portfolios. Ultimately, locking in current market interest rates by purchasing fixed rate securities may be a good way to benefit from future declines in the federal funds rate.

Cash inflows generated by this portfolio in the next quarter will reach $470.7 million, making it the most profitable quarter until mid-2025. Management’s expectations are that the proceeds will likely be reinvested in fixed rate securities, but much will depend on macroeconomic conditions in the coming quarters. If interest rates fall sharply, some of the proceeds are used to reduce lending or are kept on the balance sheet to account for the seasonality of deposits. That said, there is a desire to increase this portfolio, but a lot will depend on how things unfold with respect to market expectations about interest rates.

In the fourth quarter of 2023, the securities portfolio increased by $162 million, primarily due to improvements in fair value resulting from lower Treasury yields. Approximately $135 million of cash flow was reinvested in marketable securities, generating a weighted average return of 5.50%.

Therefore, average earning assets will also remain stagnant in 2024 as lending at current market rates stagnates and is reinvested in securities. That is, on the asset side the situation is somewhat stagnant, but as can be seen on the liability side there is more dynamism. .

Deposits and NIM

The overall average deposit was $23.32 billion, a whopping $356.4 million decrease from the previous quarter. Total deposit costs have increased but are still very low at 1.36%. Their composition has not changed significantly, and this decline has been attributed to two factors:

• The first is seasonal, with checking account balances decreasing during the fourth quarter.
• The second involves the leak of expensive retail CDs.

Regarding the latter, I think I rather agree with management’s choice. After all, FIBK is highly liquid and does not require paying high interest rates on deposits. The low LTD ratio allows the bank to withdraw more expensive deposits.

Continued upward pressure on deposit costs is likely to continue in the coming quarters, pushing NII and NIM further down. A turning point awaits in the second half of 2024, when profitability may begin to improve.

These improvements will likely depend on reductions in deposit costs rather than improvements in return on assets. After all, term deposits have already been refinanced at current market rates and the shift in customer mix to higher cost deposits has slowed.

CDs will play an important role here. In fact, 50% of CDs will mature by the first half of 2024 and 90% by the end of 2024. Additionally, 17% of deposits have a rate of return linked to money market rates. As soon as the Fed starts cutting interest rates, the pressure on deposit costs will gradually fade.

Regarding monetary policy expectations, management expects three cuts of 25 basis points in 2024. Since FIBK is sensitive to debt, the more cuts there are, the more likely it is that NIM will recover. This is especially true if you purchase fixed-rate securities this month. Without a cut in 2024 (which is highly unlikely), profitability will return to growth from the second half of 2024 anyway, as deposit costs cannot rise any further.

Nonetheless, a recovery after mid-2024 alone is unlikely to be sufficient to offset the decline in the first half of 2024. In fact, NII is expected to decline by mid-single digits and NIM is also unlikely to improve. So, for the time being at least, issues related to stagnant profitability and performance remain.

Since this bank issues huge dividends, I have some doubts about its sustainability.

Dividends keep growing, but EPS can’t keep up. With NII declining in 2024, EPS could barely cover the dividend. This is not an optimal situation for those looking for a company that is growing and providing a broadly sustainable dividend.

conclusion

FIBK is a bank with a rather dynamic financial structure, given the high liquidity on its balance sheet. However, sluggish credit demand poses quite a problem to management, which is still hesitant about allocating available capital.

Deposit costs are still hindering the growth of both NII and NIM, but something could change from the second half of 2024.

The bank is still fully capitalized and TVB per share reached $31.05, up 5.50% from last year. Finally, 2024 EPS could slightly exceed the issued dividend, which is not an ideal situation for those looking for a dividend growth company. The current dividend yield is high as the risk is high.