Transcript
Coming up, we’re bringing a return visitor to Plugged In. Only the second time we’ve invited one of our friends back to the show. The first was Tom Michaud, CEO of Keefe, Bruyette & Woods, who always reminds me that KBW is a Stifel company.
Today we’re going in a different direction. Our guest previously joined us as CEO of FirstBank in Colorado. He retired, we gave him a GonzoBanker award, we were happy for him, and then he surprised us. He put the gold watch down and decided he needed to get back into the jungle.
Maybe they gave him a silver watch, and that’s why he came back for the gold one.
Now we’re talking with Jim Reuter, president and CEO of First Interstate Bank, headquartered in Billings, Montana, and operating across roughly 14 states. It’s a great regional banking story.
I love stories like this. Homer Scott Sr., a rancher who owned one of the largest ranches in the country, bought a small community bank in Wyoming in 1968, and that eventually became part of this much larger regional franchise. It’s a fun example of the kinds of people who have built banking in this country.
Absolutely. Jim, welcome back.
I’m honored to be back. You can rest assured there’s snow in Montana. It’s wintertime.
We don’t have a timestamp, so we could pretend it’s late July and there’s snow on the ground.
We’re actually recording in December. Holiday season is here, so we’re going to have a spirited conversation over the next 20 minutes or so. Jim knows the Plugged In format, which means there’s music coming.
I went into the vinyl vault. Not streaming, actual vinyl. You have to pull it out and physically put it on. I’m more of a wine guy than a vinyl guy, so I can talk Bordeaux, Pinot and Cabernet more fluently than I can records. Steve has a pretty epic collection, and our colleague Sam Kilmer keeps us honest about what belongs in the vinyl library.
I wanted a mix of recognizable artists and a few bands people may not know. The first one is The War on Drugs, and they have an album called Lost in the Dream.
That seemed appropriate because you had a retirement dream going, and then suddenly an opportunity came along that brought you back. Walk us through what happened, what made you say yes and whether you decided to change anything about your leadership style this time around.
There is a saying that musicians don’t retire until there’s no music left in them. There was still some music left in me.
Part of why I left FirstBank was that it was a hire-and-promote-from-within organization. Succession and talent development have always been priorities for me. I’m a firm believer that when the team you’ve built is ready, you get out of the way and let them take the reins.
Succession is a major issue in banking. My personal view is that a CEO’s tenure is often seven to 10 years, and then it may be time to go do the next thing. This is my next thing.
When I got the phone call to look at First Interstate, I was intrigued by the franchise. It had great core funding, low-cost granular deposits, an attractive trade area across fast-growing midsized markets in what I call the rodeo region, primarily the West and Northwest, and a strong brand.
The First Interstate name itself has an interesting history. It was once a much larger regional banking brand before Wells Fargo acquired the old First Interstate system. This bank retained the name in its markets, which gives it a recognizable and distinctive identity.
When you came in, were there lessons from your earlier CEO experience that made you think, “If I do this again, I’m going to tweak a few things”?
It sounds cliché, but you cannot succeed without the right people in the right seats. That was priority number one when I entered the organization, along with succession planning.
People often say they try not to be the smartest person in the room. That’s actually a very good strategy. Surround yourself with talented, empowered people. That’s how you win.
I’ve gone after that approach even more aggressively this time than I did the first time.
The War on Drugs also has a song called “Pain” on an album titled A Deeper Understanding. That’s one of my lock-in albums when I need to get something done. Mellow, soulful music, turn the lights down and focus.
“Pain” is also a useful transition because you’ve seen a lot over your banking career. Steve and I spend a lot of time talking about deposit displacement and what it’s doing to the banking model, but there are broader barriers to growth, too.
You’ve already mentioned succession and talent. What else could prevent First Interstate from continuing its expansion journey?
One challenge the whole industry is facing is economic uncertainty. Tariffs are on again, off again, and that has made a lot of customers hesitant to start new construction projects or make big investments.
One thing that has improved is the regulatory environment. We’re seeing more tailoring based on the size and complexity of the bank.
But competition is greater than ever. Fintechs have been here for a while, and now stablecoins are becoming a bigger conversation with legislation such as the GENIUS Act.
Even with all that, I still believe you build a bank one customer at a time. That’s one of the things I found so attractive about First Interstate. We have low-cost granular deposits and a strong consumer and small-business base. A foundation like that helps you weather different cycles and competitive environments.
Branches still matter, but one thing I noticed when I came in was that we needed to improve our digital game. We were opening about 2% of our accounts online. I came from a bank where that number was closer to 25% or 30%. Last month we were around 11%, so we’re making progress.
Payments matter, too. All of those things matter because there is more competition than ever.
A regional bank like First Interstate may have a mix that’s roughly half commercial deposits and half consumer deposits. Even if your primary go-to-market strategy is commercial, you still have to understand fintech, payments and digital because you need those consumer deposits.
I completely agree. Another thing that doesn’t get talked about enough is brand recognition and brand density.
If you’re competing in a digital environment and somebody pulls out a phone, tablet or laptop to decide where to do business, your brand needs to be top of mind.
First Interstate had completed eight or nine acquisitions before I arrived, and there hadn’t been enough focus on densifying the brand across those markets. That’s something I’m leaning into because brand strength is an important part of winning in a digital era.
You can see that in the investor materials, too, with the bank aligning the footprint, divesting in some places and investing in others. I like that term, brand density.
It also connects to something Brad Elliott from Equity Bank talked about when he joined us earlier this year. He described marrying the physical branch footprint with digital expansion. A branch may traditionally draw from a five-mile radius, but with a strong digital experience, can you effectively expand that relationship radius to 10 or 15 miles while still using the physical location as an anchor?
Marketing is becoming a more important executive topic because that physical-plus-digital balance requires brand recognition.
There’s also a shareholder-perception issue. If I look at your commercial real estate portfolio, roughly 87% is in non-metro markets and only about 10% is office. The market can paint CRE with a very broad brush, especially for a regional bank, when the underlying risks can be quite different.
Exactly. We recently renewed a commercial real estate property in Bend, Oregon, where many of the tenants in the building also bank with us. Even though it isn’t technically owner-occupied, we know a tremendous amount about the people sitting inside that building.
That is a very different commercial real estate risk profile from a large office tower in a major metro market.
All right, I’m going to bring in another band. Have you heard of Goose?
No, I haven’t.
Neither had I until recently. They’re a jam band, which Steve apparently hates, but Ron Shevlin loves them. They have a song called “Hungersite” on the album Dripfield. I’ve listened to it, and it’s pretty great.
The reason I’m bringing something new into the conversation is that we haven’t really talked about deposit displacement on Plugged In, and we should have because it’s a major issue.
Jim, how is that showing up in your markets, and what are you hearing from peers at other regional and midsize banks?
Deposits are the most important part of building a profitable bank. We all want more fee income, but the lion’s share of banking economics still comes from net interest margin. The lower-cost and more granular the deposits, the better.
Some banks and credit unions have tight loan-to-deposit ratios, so they’re continuing to pay up for deposits even as rates come down. That’s one form of competition.
Then you have fintechs, stablecoins and other alternatives. The way you combat that is still partly traditional: strong branch locations, a presence in the community and brand density. But you also have to offer the digital tools customers expect.
Zelle is a good example. A bank might look at it and ask, “What’s my direct return? I’m paying to process those transactions.”
My response is that the more you make a customer’s account the center of their financial world, the more likely you are to retain idle funds there.
Starbucks is a good example outside banking. It has an enormous amount of stored value because it made payments easy inside its ecosystem.
If we can make the bank account the easiest place to move money in and out, whether through Zelle, FedNow, RTP or open banking, we become more central to the customer’s financial life.
I love the idea of letting other companies plug products into the bank account. In a sense, you become the Intel Inside of somebody’s finances, or maybe Nvidia is the better modern analogy.
The result is what banks ultimately want: stable, low-cost deposits.
We’re also in a different rate cycle. We went a long time when people didn’t care much about what they earned on deposits. They care now.
This is a time for patience, not panic. Keep making the core investments in technology and branding. Cycles happen. Run the bank with a sensible loan-to-deposit ratio and a fortress balance sheet so you have the ability to make smart, calculated decisions through different cycles.
I think we’re in a deposit cycle right now, and the key is not to panic. Keep doing the things that work.
One observation I’d make is that First Interstate appears to have meaningful net interest margin upside from where it is today, around the low 3% range.
A lot of assets that were put on the books in 2021 and early 2022 are finally starting to roll off. You have several billion dollars of securities yielding around 2.5% coming off over the next couple of years, along with several billion dollars of loans in the 3.5% to 4% range.
If you fund that correctly, the reinvestment opportunity could support meaningful margin expansion, potentially into the mid-3% range.
I agree, and that’s why I keep coming back to the fortress-balance-sheet concept. Give yourself liquidity and flexibility so you can work through cycles without making short-term decisions. You can make long-term decisions instead.
You’re creating optionality.
Exactly.
That’s an important theme for a team to anchor behavior around. You don’t want all your eggs in one basket.
Steve, I love that you’re looking ahead like this. We may have to clip that prediction and bring Jim back for a third appearance in a few years so we can see whether you were right.
You two were in Chicago recently with Tom Brown at the Second Curve conference. If you know Tom, he’s skeptical of the conventional scale and M&A argument. He wrote about it again last week.
He did. Great newsletter.
The scale question is fascinating for a bank like First Interstate. You have banks below $10 billion pressing upward, while larger players such as Fifth Third and PNC are making significant acquisitions. There’s pressure from above and below.
Investment bankers keep saying you have to size up and spread costs over a wider base, but we’re not sure the data always proves that scale alone creates the expected advantage.
At roughly $30 billion, you also don’t want to lose your entrepreneurial edge for a little operating leverage. That entrepreneurial energy is what drives margin and growth.
If Fleetwood Mac’s Rumours is playing in the background, help us sort through one of banking’s longest-running rumors: how much does scale really matter?
I happen to agree with Tom that scale is somewhat overplayed. I’ve been in banking for 38 years, and we’ve talked about scale that entire time, yet I don’t see a dramatic efficiency advantage simply because institutions become larger.
The efficiency ratio isn’t a perfect measure, and ours is higher than we’d like right now because net interest margin is compressed. But when banks get bigger, their efficiency ratios don’t suddenly become radically better than everybody else’s.
Technology is also reducing the need for scale. In the past, you had to buy a mainframe, sign a massive software contract, depreciate it over several years and pay ongoing maintenance.
Today you rent technology. You rent computing power from the cloud and subscribe to software. Yes, larger companies may negotiate a better unit price, but the enormous upfront technology investment isn’t what it once was.
I think AI could reduce that scale requirement even further.
Where scale matters more, in my view, is brand density, clarity of mission and your ability to gather low-cost deposits because you’re doing those things well. That’s more important than technology scale by itself.
That’s a really good point, and it leads directly to return on technology.
Boards and CFOs keep asking how to connect technology spending to franchise value and shareholder return. We’ve heard the question repeatedly in strategic planning sessions: We’ve made the commitment and the investment. How do we know we’re actually getting the return?
CEOs also keep getting requests for more technology and automation. You can’t commoditize yourself, but you have to stay competitive and differentiated. Used well, some of these tools let your people move with speed and purpose in ways smaller competitors can’t and larger competitors may overlook.
If we’re staying in the vinyl vault, Pink Floyd has to show up somewhere. Let’s put The Dark Side of the Moon on in the background and ask the question directly. How do you think about return on technology?
I always find that conversation interesting. I’ll ask the CFO or the board, “When you decided to start the call center, what was the ROI? What’s your ROI on the teller line?”
Modern technology that meets customer expectations is like a teller line or a call center. It’s part of operating the bank.
You still need discipline when selecting and prioritizing projects. You should understand what return you expect. Where many organizations fall down is that they don’t come back one, two or three years later to determine whether they actually got the result.
A lot of the problem is follow-through in promotion and adoption.
At FirstBank, we were one of the earliest banks in the country to participate in Zelle. Last year, that bank handled something on the order of 13.5 million Zelle transactions. First Interstate, a similarly sized bank, had about 400,000.
We had the service. We simply weren’t promoting it or driving adoption. We weren’t getting the return because we didn’t follow through.
In today’s world, you can become overly focused on measuring every single technology investment in isolation. We didn’t historically do that with every other part of the bank.
You also need to look at macro outcomes such as growth, return on equity and the efficiency ratio rather than evaluating every technology tool without reference to the broader vision.
I don’t think Apple sat down and separately asked, “What’s the ROI on putting a camera in the phone?” Yet I went to a jazz concert in New York recently and spent half the night trying to see the stage through everybody else’s phones as they recorded it.
Banking needs to see around corners, make some calculated leaps and then follow through. Otherwise, we’ll get left behind.
That’s a good example because the capability has to stick with the end customer. Chime doesn’t necessarily do something magical, but it communicates its capabilities effectively.
Bankers often see a Chase or Bank of America commercial and say, “We can do that too.” Maybe you can, but they have made that capability part of their brand.
A regional bank can’t advertise only the local branch and community connection. The brand also has to signal technology and convenience. Otherwise, customers may not realize the bank can punch above its weight against much larger institutions.
First Interstate is in an interesting position because the decision layers aren’t nearly as complex as at the biggest banks. Chime has a different business model and valuation story, but the trust you’ve earned over time can be leveraged creatively through digital tools.
Leadership has to say, “This is where we’re going to focus. This is where we’re going to compete. This is how we earn the right to win.” Then you do the blocking and tackling.
One thing I’d add about the rodeo region is that there are many towns and cities that aren’t Seattle or Denver but are still meaningful growth markets. A bank can be both digital and physical in those places and create a very attractive source of growth.
First Interstate’s investor materials show population growth in its markets running above the national average. These are places people don’t always think about until they realize there may be 80,000 or 100,000 people there and a lot of economic momentum.
Bozeman is a great example. People jokingly call it “Boz Angeles” because of the number of people who have moved there from California and elsewhere. They move because they want the community feel, but they still expect great technology and convenience.
Since it’s the holiday season, let’s wrap with a quick prediction round for the start of 2026. What’s going to be the buzzword in conference hallways, podcasts and newsletters in the first quarter?
For me, it’s the programmability of money. That connects stablecoins, tokenization and the broader movement of money. I think we’ll hear more about the programmability of just about everything.
Steve, what’s your bet?
I think traditional bankers are going to be watching the pace at which private equity, fintech and embedded-finance players use legislation such as the GENIUS Act, the CLARITY Act and the broader regulatory environment to move quickly.
Those players are going to be off to the races. Investment bankers will be talking about the deals, and traditional institutions will be asking how they avoid being out-innovated by faster companies that understand how to operate in the new regulatory environment.
Jim, what about you?
I think it’s the same basic conversation around programmability, but it’s less about simple money movement.
People say stablecoins are better because they offer 24/7 settlement, but we already have 24/7 capabilities through FedNow and RTP. The more interesting difference is programmability.
Imagine closing a real estate transaction and, the moment you execute the closing, the system automatically distributes funds to all the necessary parties and executes the associated instructions.
That’s where I think the real lift is. There’s still a lot of confusion, including among bankers, where people think the whole opportunity is just faster movement of money. I don’t think that’s the biggest part.
Traditional payment networks have friction, interchange economics and dispute processes. New systems may challenge some of that. But if you look at something like Zelle, it began without all the robust dispute rules and protections, and over time many of those structures had to be added back in.
The bigger opportunity is in the executable logic around the transaction itself, the new intelligence of commerce.
I love it. I’m glad we were able to get you back on Plugged In. This has been a lot of fun, and I hope the dive into the vinyl vault was acceptable.
You got through to me.
I’m hoping I got through to you at some point this year.
Jim, thank you. It’s great to have you leading that team. I know you’re looking for great bankers across the rodeo region, so keep doing your thing.
Good luck, and thanks to you and everyone listening for getting Plugged In with Cornerstone.
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