Q3 2019 Earnings Call
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First name David.
Last name Brown.
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Hi, Yara.
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Going into the call quarter would io being the strongest at nearly 4% growth over the prior quarter.
Idaho continues to have a very strong economy.
And our large presence there is definitely helping us to capitalize on the more business development opportunities in that region.
We continue to see runoff from both our snic portfolio and the purchase residential loans that we acquired from the bank of the Cascades. These pay downs <unk> accounted for about 25 million in declines in loan balances this quarter.
While low interest rates, which impacted the growth in our retained mortgage portfolio. We were able to have a very strong quarter of mortgage banking activity in our revenue in this business was up 25% over the prior quarter.
In addition to the low interest rates that increased the demand for refinancing. We're also benefiting from our larger market footprint as.
As well as as more opportunities being generated from our new digital mortgage application portal that we've introduced this year.
This quarter, we closed $10 million, an origination through digital channel and we have 23 million more in the pipeline.
Another key to our strong results this quarter was our success in controlling expense levels.
Excluding merger related expenses, our total noninterest expense declined by 3.1 million from the prior quarter.
We've done a outstanding job and creating the two most recent acquisitions, Idaho independent and community first bank.
And we're ahead of schedule in terms of recognizing the cost savings that we projected.
So with those comments I'm going to turn the call over to Marci for a little more detail behind the numbers you'll have marci.
Thanks, Kevin and good morning, everyone as I walk through our financials unless otherwise noted all other prior period comparisons will be with the second quarter 2019, and I'll begin with our income statement.
Our net interest income was essentially flat to prior quarter, primarily as a result of a 1.1 million dollar decline in recoveries of previously charged off interest any 1.2 million decline in accretion income this quarter.
On a reported basis, our net interest margin decreased 15 basis points to 3.93% in the third quarter.
Excluding the impact of interest recoveries and loan accretion our operating net interest margin decreased six basis points this quarter to 3.8%.
The impact of the excess liquidity, we had an overnight funding in the quarter with three basis points dilutive to our net interest margin.
The remaining three basis point decline was primarily due to the fed rate.
As a result of the cuts we saw a five basis point decline in our operating loan yield which include the impact of interest recoveries and accretion, which was partially offset by lower funding costs.
Our total cost of funds declined five basis points in the quarter to 51 basis point.
As we passed through the fed rate cuts are depositors, we saw steady decline in our cost of interest bearing liabilities throughout the third quarter.
Our total cost of interest bearing liabilities was 75 basis points in July decreasing to 71 basis points in August and down to 67 basis points in September .
Since we need the largest rate adjustment in mid September we should continue to see the benefit from this heading into the fourth quarter and with a focus on reinvesting our excess liquidity and higher yielding investments or loan pressure on our operating net interest margin should be mitigated.
Moving to noninterest income, we saw an increase of $1.4 million quarter over quarter to 48.8 million to $40.8 million.
The increase was almost entirely due to higher mortgage banking revenue as our other major fee generating areas were relatively consistent with the prior quarter.
Mortgage banking revenue increased $2.1 billion or 25% from the prior quarter.
In addition to the factors that Kevin discussed, we're seeing increased refinance activity due to lower interest rate refinancing increased to 34% of our total production in the third quarter up from approximately 19% in the second quarter.
The increase in our fee generating areas was partially offset by decline in other income of $1.1 million, which was due to normal fluctuations that we see in this line item.
Moving to total noninterest expense.
We incurred $3.8 million and acquisition related expenses this quarter.
Excluding acquisition related expense, our total noninterest expense came in at $95.5 million or $3.1 million lower than the prior quarter.
The primary driver of the decline with lower employee benefits expenses due to lower payroll tax expense lower health insurance costs, and lower director stock compensation expense.
We also recognized a $1.3 million credit from the FDIC that reduced our assessment expense this quarter heading into 2019, we were fairly confident we see this benefit sometime in the second half of this year.
We expect to have another 1.5 million dollar dollars in credit to be recognized that the timing will be determined by the FDIC. So when this will occur is still uncertain at this point.
We were able to keep our other major expense areas relatively consistent with the prior quarter at the continued investments we're making in the business were offset by the savings we've seen from our two recent acquisitions.
As Kevin indicated we're ahead of schedule and realizing Mr. These cost savings. So there won't be any meaningful decline in expenses in the fourth quarter, excluding acquisition related expenses, which should be behind us. We expect operating expenses in the fourth quarter to be right around $96 million.
Moving to the balance sheet, our total loans increased $42 million from the end of the prior quarter with the strongest growth coming in the commercial construction portfolio.
This was offset by a 44 million dollar decline in our commercial portfolio, which was partially attributable to $20 million of early payoff in the syndicated national credit portfolio.
Our total deposits increased $310 million or 2.7% from the end of the prior quarter all of the growth came in noninterest bearing savings.
Non interest bearing and savings deposits, which more than offset a decline in time deposits.
As a result, yet even stronger growth in total core deposits, which were up 3% in the quarter.
Looking at asset quality, we saw small bump in nonperforming assets of $1.3 million. This was due to an increase in nonaccrual loans driven by the addition of two commercial loan.
This was partially offset by the disposition of other real estate property as a percentage of total assets are non performing assets were unchanged at 51 basis point.
Outside of the nonperforming asset category, we saw stability in the rest of the portfolio. Our criticized loans increased $2.1 million, but remained consistent at 4.6% of total loans at the end of the quarter.
We had a 1.8 million dot we had $1.8 million of net charge offs during the quarter or eight basis points of average loans on an annualized basis, which was down one basis point from last quarter.
We recorded $2.6 million in provision expense, which more than covered our net charge offs.
A portion of our provision expense continues to be related to the acquired portfolios that refinance and migrate over to our originated portfolio.
The reserves against these loans accounted for approximately $1.3 million of the provision expense this quarter.
Our allowance for loan losses was unchanged from the end of the per quarter at 82 basis points, a total loan while our coverage of nonperforming loans was 131%.
As you know the allowance does not take acquired loans into consideration, but the combination of the allowance with remaining loan discount on acquired portfolios represents 1.25% of total loan.
And with that I'll turn the call back over to Kevin.
Kevin.
Thanks Marci nice.
Im going to wrap up with a few comments about our outlook.
We are expecting to deliver another strong quarter to finish out 2019.
As I mentioned earlier, we believe we should see more positive trends in loan production.
As fears of the recession abate and we're hopeful that our commercial clients will feel more positive about making investments in their company as they gain more confidence and the outlook for the economy.
This could result in increased credit line usage, which would be an additional catalyst for our loan growth going forward.
We expect another strong quarter of mortgage banking activity, we have seen steady increase in production over the past months and October is trending well.
We would typically see seasonality in November December due to weather and holiday that impact originations home purchases, but with a higher demand for refinancing we may have a better chance the unusual boss letting some of this seasonality this year.
I talked earlier about the positive results, we have seen launch of our digital mortgage application portal. It within the next month, we're launching a new digital credit card application portal and by the end the year, a small business lending application portal.
By offering clients and easier and more convenient way to interface would first Interstate we believe we will see higher volumes of applications that will positively impact our credit card growth and our small business lending in the future.
All three of these new portals or part of the significant technology investments that we've been meeting over to making over the past couple of years.
And as we've talked about the number times these investments in technology designed to enhance our infrastructure.
Improve our ability to offer client products services and features and improve our efficiencies.
As a result of these investments we haven't proved our business development capabilities and also to build that infrastructure that will be.
Able to support the continued growth of our friendship franchise.
At least for the foreseeable future as we make additional acquisitions, we will not need to ramp up our spending on technology to support a larger bank.
As I wrap up I want to make a few comments about our recent conducted employee engagement survey.
We were very pleased with the result, and response that our employees gave us across the company.
Whatever you do acquisitions is always a concern about how the cultures will mesh and if you'll be able to retain the employees that you acquired the survey showed that employee satisfaction in or West Division was high which indicates that we've done a great job of identify a compatible merger partners and effectively integrating their operation.
And making sure that our new employees feel valued and appreciated throughout their transition into first Interstate.
The expansion of our footprint in the West Division has been a critical step in our plan to enhance the value of our franchise and we cannot be happier to know that our new team members have found their experience with first interstate to be very rewarding satisfying and beneficial to the advancement of their career in banking, so with that I'd like to open the call.
Up for questions.
Thank you we will now begin the question answer session to ask a question. Your press Star then one on your Touchtone phone.
Good morning isn't the speaker phone, we ask you please pick up for handset before addressing the keys.
A question. Please press Star then too.
Today's first question comes from Jackie Bohlen KBW. Please go ahead.
Oh, Kevin Hi, Marty good morning, Jackie.
I will touch on those and I am senior loan bucket for Threeq versus Fourq he'll I, just understanding that you're more optimistic than you are in the third quarter is more driven by movements and rate or is it more driven by a shift and customer confidence in the economy.
I would say is a little of both I think the the rates guys. So low during the third quarter some of the.
Pricing got so ridiculous that we stepped away we think the pricing has come back so we won't be stepping away from as many deals and also we believed that the economy could make our customers feel a bit better about the future. So they might invest more.
And is there anything specific that happened within local economies, but improving customer confidence.
So I just think we're just hoping that some of this tariff stuff will be resolved and the you know I think there's a lot of concern out there and what's really happening in the world than I think if we can just get some of these things behind us.
Bill more positive about the future I think there's I think people are sitting waiting to see some alternative for the economies and in our markets are strong and people are just hesitant to invest into it.
Okay. Okay fair enough and you had mentioned the strength that you had in the West Division, particularly in Idaho, How did the mountain Division bear.
Well not so well because you saw the overall growth in loans.
I would say that the Wyoming declined.
Montana was pretty flat to slightly down and I would say that the rapid city South Dakota was slightly up so.
It was really most of the growth came from the West and then there was a detractors in the legacy markets.
Okay, and I I would guess that your comments surrounding I'm confident have more to do with the west market that with the mountain market is that fair assessment.
Yes.
Okay.
And then just one last one and I'll step back in terms of the refi demand I you know I understand the effects that has on mortgage banking, but how do you see that playing out within the loan portfolio and potential index to pre payments understanding that there.
Well to predict.
I would say that customers are pushing on us.
Reductions.
It's it's a never ending story. So it's mainly the larger customers that are coming in for rate reductions the small customers don't.
Really pushes that hard but it's a.
It's the larger customers and the good news is that our average loan is like about $300000 and or 90% or another reason million dollar. So theres a handful of customers that are putting pressure on us with regards rate reduction, but majority our portfolio, we're not seeing that pressure.
Okay, great. Thank you that's up off the back.
Thank you.
And on this question today comes from Jared Shaw of Wells Fargo Securities. Please go ahead.
Hi, good morning.
Morning merger.
So to say a little bit of time on the margin great color on the the trend in beta is on the deposit side. If we see an October cut do you think that that deposit beta can go higher or is 55 sort of.
Fully.
Fully locked in there.
With with the right.
Right.
Well for personal it was 35 on the enjoyable individual wanted and 55 and the second one individually. So you know we honor because we understand a little bit on the first one we had room, but we thought the 39% beta cut with it would have a cap our margin flat we were a little shy I do we think the 55 might be a little aggressive.
And my pushes the other way so we're prepared to meet the next cut with the same type of activity.
Then on the lending side.
How especially on the commercial side are you able to put in floors or I guess as we as you look at continuing a continual low rate environment anything you can do on the on the loan side to protect against continued lower rates.
Well Mark is going to go over that detailed on floors, because I don't know and so we are trying to put in floors on our loans as we go forward right now we have about $729 million.
That would still repricing that in a down interest rate environment.
Okay, and then apart from that though you have some protection.
On the other parts of the loan book.
Yes.
Okay.
And then on the mortgage banking side, great quarter for that.
As you look going into fourth quarter with the likely slowdown on the purchase side, you think that the refinery could it could it stay stable from what we saw in third quarter overall or do you actually think that you know maybe see a little bit of growth from here or how should we.
Her size going into the end of the year.
I would say that October is probably going to be strong are you going to see it tail off and November December just because were normally seasonal during that time of year, you know and so.
Even with refinance activity I think we'll see a little bit of a pullback.
Okay and then finally just for me on the Securities portfolio can you give them a little color on on what that 450 million.
Was and then.
As we look at this cash is that the excess liquidity is that all going to go into loans or would there be some potential continued expansion the security side.
Some of owning security, but Marcia and give some color, but the interesting thing is as you see refinancing in the mortgage business. So does mortgage backed securities pay down. So that's part of the reason why we've been trying to invest a lot of because just the cash flows coming in but you have MRC yeah. No. Good portion of that went back into mortgage backed securities and then.
Little bit and government and a little bit you know a little bit immunity to open in corporate so you know kind of but but a good deal that went in that kind of mortgage backed securities.
In terms of yield in duration.
Golly I don't have that with me you know the duration of our coal investment portfolio extended slightly it's now at.
2.2, a years I don't have it broken out by what we put on this quarter with me right now Jerry but I could get back with you on that.
Okay, great. Thank you if we didn't put any really long dated stuffed your no. It's you know I would say, it's a duration of right around five years or less.
Great. Thanks.
You bet.
Our next question comes from Andrew Lloyd is Oh Sandler O'neil. Please go ahead.
Good morning.
We're Andrew Andrew.
I appreciate the guidance on expenses here in the fourth quarter, but looking into next year.
Recognizing there could be some seasonality in the first quarter. This.
$96 million, a good run rate to build off of a and 2020.
Let's build off or you can use that but I think the thing is is that we see expenses kind of net going up somewhere around one of the half 2% you know over the year over year.
Most of our expenses I mean, the bulk of it in salaries and so you know just normal salary increases will drive that up a little bit though.
Okay.
And then just on the other loan growth here in <unk>.
You mentioned that they're difficult rate environment, how much was it driven just by.
Hi, My competition offering rates and terms that you guys were not just not comfortable playing with or was it really just driven by.
By what the yield curve was doing what what rates were doing.
Mostly by what some of the rates of being offered by competition I mean, there one of our one of our large customer was it was actually offered 85 basis points over cost of funds.
Yeah, you just can't compete with that and we won't can be with that so good for them and Ah. So I mean, there's still a customer us on the deposit side, but if they get their love your borrowing needs net but you know met by somebody else at that that level, we're not we're not going there.
Gotcha.
That's a that's very helpful. All you've covered all my other question.
Oh, that's Watson today comes from just rules of D.A. Davidson. Please go ahead.
Hello, Mr. rules. Your line is open <unk> are you all know perhaps.
As I apologize [laughter] actually on for for Jeff How's everyone doing.
Good how are you getting good if it I'm just kind of trying to get a better sense for the run rate on the core NIM.
Can you break out the impact between the charge off or rather the recovery that got accreted back into the yield.
So the impact to that the NIM, if he was one basis points from interest recoveries.
Four basis points from early pay off.
And eight basis points from regular accretion.
To get us down to the core NIM evthree.
Awesome. Thank you that's.
Hello Battle and then.
And then.
Can you remind us what or how many cuts are you kind of baking into your assumptions right now.
Oh really hoping for one more at the most you know because we believe the economy is strong.
I think you're taking a pause it some rate cuts here, but I don't.
The economy's not inquiry into continued to cut rates or we're looking at maybe one more at the most.
Okay perfect.
HM Okay, Great and then and then maybe lastly, just on on M&A. You know it has you know opportunities talks is that increasing decreasing since your last couple of ER announcement.
I would say, it's increasing a little you know we're out you know talking to people.
But I would not say is robust we have pass on a couple of smaller deals that we just didn't believe would add any value to our franchise probably could have gone met a good price, but they just didn't look like they're gonna be meaningful for us. So we passed on them. So theres some deals out there, but we're being very selective too about the deals that were going to.
Perfect Awesome things. So that's that's all my questions appreciate it.
Thank you you enter next questions when it comes from Gordon Maguire of Stephens. Please go ahead.
Good morning.
Good morning word.
Kevin I appreciate the commentary on a feeling a little bit better about production in the fourth quarter, but if I recall fourth quarter, usually seasonally weaker from utilization standpoint.
With the stronger feelings about the production would you expect a little bit stronger growth or is it just still gonna be you're still going to see the seasonal impacts and it's more flattish.
Well you you've been follows for awhile. So you understand the seasonal impact was mainly we have a pay downs on agricultural lines in the fourth quarter. So there are some seasonal headwinds out there, but we we believed that the production could offset that and you. So we're looking at loan growth for the four quarters would be somewhere around half a percent to pursue.
Set so not really flat to down and like we normally see in the fourth quarter, but slightly up in the fourth quarter.
Got it and then anything in your Crystal ball for what we can think about for maybe going forward 2020, or some of these headwinds you saw this past quarter or alleviated.
No I mean, there's so much stuff going I I.
We're hoping to continue to grow at a two to a low to mid single digits in loan growth next year, but you know every day you opened a newspaper turn on the news something else is out there. So I my Crystal ball is pretty cloudy.
Yeah.
And then maybe just trying to size of the balance sheet size.
The deposit growth was really really strong this quarter.
Do you feel like any of that we might have been transitory and could fall out or do you feel pretty good about the stickiness of the balance sheet saws heading into the fourth quarter.
Well you know there's.
We think its sticky the thing is normally if you look at our past history deposits kinda are flat to down a first words typically down into second quarter. They start rebuilding in the third quarter strong and then they continue to build throughout the fourth quarter. So we believe that that trend.
Nothing show tells us that that trend should be any different this year actually you have little bit stronger you're in a minimal in total on deposit growth, but again most of you know almost 50%. He's a pause as I mentioned my remarks were from new clients. So we feel that this could be sticky and also we're feeling good ever we're booking that may new deposit.
Clients, mainly in the in the corporate side that that could land also to some loan growth development as we move forward. So so I think its sticky and I think it's falling into the trends of the past, but actually this year is a little stronger than the prior few years with regards to deposit growth.
Good that's all I had thank you.
Thanks. Good. Thanks enter next question today comes from Gert Holland of Baird. Please go ahead.
Good morning, Hey, Kevin Hey, Mark Thanks for taking the questions.
All right there I just the one more follow up on on the margin in the fourth quarter or do you feel good about defending that 380 <unk>.
Core NIM level as that drag from excess liquidity reverses a bit.
I will say one more time, we feel good we are we had a little bit of a mess and then in the third quarter. When we did the 39% beta, but we're a were swinging harder and faster to make sure that we protect that margin from going anywhere.
Though.
Oh, that's helpful. And then on the purchase accounting run rate should that continue to grow quite a bit lower premier fair assumption.
It'll be the accretion of scheduled accretion Garrett should be about $2.8 million to similar to this quarter. There was about $2.8 million and then it'll go a little bit down in 2020 to about $2.3 million average per quarter.
I really appreciate that detail and then maybe one follow up on capital.
Very strong metrics increased nicely, obviously some of that it's going to get put to work.
Funded loan growth, but if loan growth remains muted can you review the capital deployment priorities and your thoughts on dividends and buybacks here.
Well you if you pull at our Investor deck, you have kind of the capital priorities first we want to deploy capital through organic loan growth.
And then through strategic acquisitions.
Acquisitions, though you know ROE thing up then through.
Reashure your share repurchase share repurchase was right now our sugar prices too high so that's really not an opportunity because the paybacks more five years, even though we have a share repurchase program. In place next was did you know dividends, which we provide right now some between 35 and 40% five per cent dividend payout ratio when I think were.
Near the higher ended that payout ratio right now and then lastly, if we can't do anything effective on the first for than we would or look at doing a special dividend to reduce total equity.
[laughter] that I appreciate that said it doesn't sound like hey, meaningful change in a steady as it goes on an organic growth and hopefully some M&A.
Yes.
Thank you.
I don't know next question today comes from Matthew Clark with Piper Jaffray. Please go ahead.
Hi, good morning.
Uh huh.
Yeah first one for me can you just quantify the production and pay offs and the third quarter and maybe the second quarter as well just have the comparison.
Oh production.
Yes.
Yeah I'm, Matt can we can we get back with you we don't have out at our fingertips.
No no worse.
And then just commentary on the pipeline in terms of its size, maybe just relative to your ago or or from last quarter.
Whatever day Newman kind of take that she's our chief banking officer.
Yeah, we continue to see strong activity. So our pipeline is over 600 million its trending up along the same lines as previous quarter.
Okay.
Great and then.
Just any updated thoughts on.
The efficiency ratio outlook.
No the margin, obviously as part of that equations, which makes a little more difficult but.
So maybe you could.
Also speak to the expense to average asset ratio just taking the margin out of the equation as we look into next year.
And that our goal on that is you know to eventually get down to 2.65% expense ratio. The average assets, we won't get there probably next year, but well get much closer I think we can get to between 56 and 57% <unk> efficiency ratio probably on the lower end of that next year, even if you look at this quarter.
You know when you back out the acquisition expenses, we were you know 56 and a half fish.
On a on a you know without without the acquisition expenses. So we're continuing to work toward that 55.
Present bogey.
Okay, great. Thank you.
That.
Ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the management team for any final remarks.
Hi, Thank you for your questions as always we welcome calls for investors and analysts. Please reach out just if you have any follow up questions. Thanks for tuning today Goodbye.
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