Q3 2020 First Interstate BancSystem Inc Earnings Call

For the quarter, we generate a net income of 48.3 million or $0.76 per share.

And pre-tax pre-provision income of 68.2 million.

Unemployment rates within our football footprint continue to show notable improvements in the corner, but unemployment levels in line with or better than National figures facts West Division, Oregon witnessed the largest recovery with unemployment dropping 3.6% to 8% since June while I picked up it runs slow relative to the nation at 6.1% in the market division, South Dakota. Saw the greatest Improvement in labor. Trends would unemployment rate now at 5.1% which is the second lowest of the nation.

It all jobs appear to be coming back and we're optimistic about our footprint.

Looking at the seven main State and national parks in our footprint once again through June to teach these are showing strong year-over-year momentum and tourism took the one exception of Glacier National Park.

This aligns with all the anecdotal information. We are hearing from our clients and our communities.

We're seeing these positive economic Trends flow through our financial performance of our clients many of which are having record years. This strong performance is coming from a wide variety of businesses auto dealers auto repair shops Architects and contractors landscape or small manufacturers Just to name a few as a result. We continue to see very strong inflows of commercial deposits during the third quarter. We had any nice deposit growth of 16.3% But most of the growth coming in non-interest bearing deposits down $372 million in the quarter.

also encouraging

Was that 9% of the demand deposits and almost 7% of the savings growth came from new clients. These positive economic Trends are also reflected in the hell of a sequential.

We had the clients in both non-performing loans and non-performing assets as of October 16th. We had only 77.1 million of loans and deferral status and 6.1 million of Residential Mortgages and for Baron's together. This is less than 1% of our outstanding loan balances these positive Trends and asset-quality along with the boss Reserve Bill. We had earlier in a year resulted in a modest provision requirement for this court.

We also had solid quarter of bone growth considering the macro-environment our total loans increased $120 million or 4.7% Annualized we continue to be very conservative in our underwriting. But one thing we have noticed is that the current environment is a little bit less competitive many of the banks in our Market appears to be in a defensible right now and are having to devote most of their focus to credit issues. So we are benefiting from the strong position we have built and we continue to pursue quality learning opportunities would have without having to deal as often with irrational competitors.

In terms of our Market. We saw the strongest loan growth coming in our West Division which was up more than 3% compared to the end of the prior quarter.

Mortgage Banking continues to be strong contributor and our revenues were up 38% over the prior-year.

158 million of are closed loans or 27% of the loans refunded were originated in our online application process.

During the summer months. We saw more demand from purchasing construction loans, which accounted for almost 50% of our production in the third quarter. So it's just not refinancing Boom. The increase production the increase of purchase and construction loans reflects the trends we have talked about previously where we continue to see a steady inflow of people relocating 2018 in Idaho.

We should be in a good position to continue to benefit from this trend for years to come.

Well our Focus this year has currently been on managing through the pandemic the performance and trans. We have seen reinforce the vision we have for our franchise when we entered the faster growing division South Western Division, Mark, Marcus, Idaho, Oregon and Washington our Market division consisting of our historical markets of Montana South Dakota and Wyoming continue to provide a stable low-cost deposit base while our West Division provides us the opportunity to deploy that liquidity into areas where loan demand is higher the combination of these markets create a platform that is conducive to generating strong returns for our shareholders while maintaining a fortress balance sheet from the perspective of a capital liquidity asset-quality office hours.

given our strong financial performance and

Risk profile. We continue to have the ability to return return a significant amount of capital to our shareholders during the third quarter. We repurchased 1.4 million shares of our common stock and our board of directors just approved a 12-point the 12% increase in our quarterly dividend. We are very pleased that we are able to increase the amount of capital that we return to our shareholders money while still being well-positioned to manage through the duration of this pandemic, but that I'd like to turn the call over to Marcy so she could probably provide a little bit more detail around the financial numbers Marcy. Thanks Kevin and good morning. Everyone as I walk through our financial results unless otherwise noted all of the prior. Comparisons will be with the second quarter of 2020 and I'll begin with our income statement.

Holding true to our expectations. We saw an increase in our net interest income for the quarter but with the growth and the balance sheet there was additional pressure on our net interest. Margin our net interest income increased by $500,000 from the prior quarter due to higher average balances of interest-earning assets a portion of the higher average balances was attributable to a full quarter of the people with loans on our balance sheet which contributed to million dollars more in interest income in the third quarter than they did in the prior quarter.

On a reported basis our net interest margin decreased 23 basis points to 3.29% in the third quarter which continues to be impacted by the strong influence of deposit. We've seen this year. This is increased our excess liquidity and the percentage of earning assets invested in the Securities portfolio.

Breaking down the major components of the change in our net interest. Margin 18 basis points was attributable to the decline and earning asset yields, which was partially offset by a 2 basis-point deadline in deposit costs and 7 basis points of the decline was related to the dilutive effect of our growth and deposits being deployed in lower-yielding cash and investment securities.

Excluding the impact of Interest recoveries and Loan accretion our operating net interest margin declined 24 basis points to 3.2%

Although we don't have much more room to bring down rates on our interest bearing deposits. We continue to benefit from declines in our higher price CD balances and the positive makeshift resulting from the strong influx of non interest-bearing deposit. This should help us to continue to bring down our cost of funds and partially offset the declines. We're seeing and yields on earning assets.

With modest levels of loan growth. We have a focus on building the Investment Portfolio to be a larger percentage of the balance sheet, but depending on the pace of growth in our deposits. We may continue to see some margin pressure.

Our non-interest income increased $5 million dollars quarter-over-quarter to forty four point seven million dollars.

Mortgage Banking Revenue with comparable to the prior quarter while we had increases in all of our other major fee generating areas payment services and service charges on deposit accounts increased as we took more transactions and economic activity in our markets. Well wealth management revenues increased largely as a result of the market recovery coupled with strong client retention strong investment results from a team and growth in our retirement plan relationships. We also had a 1.9 million dollar increase in swop fees that contributed to the higher non-interest income this course.

our pipeline

Fine for both refinance and purchase Residential Mortgage Loans remains strong. We should have another good quarter of Mortgage Banking Revenue, although not quite at the level. We've seen over the past two quarters as we anticipate the seasonally slower activity in the winter months.

Moving to non-interest expense we had an increase of 3.9 million dollars from the prior quarter. This was primarily due to higher salaries and wages largely resulting from three items off.

First we had a lower level of deferred lung caused primarily due to the PPP loans that were originated last quarter second. We had a one-time one point six million dollar adjustments to our mortgage commission and third we had a one-time point six million dollar adjustment related to an employment agreement excluding these items are expenses were well controlled could still expect our run rate to be in the $96 to $97 range going forward.

Moving to the balance sheet our total loans increased a hundred and twenty million dollars from the end of the prior quarter with a growth coming from our commercial real estate commercial construction residential real estate an indirect consumer portfolios, as of September 30th. We had not been funded for any PPP loan forgiveness and still had one point two billion dollars a PPP loans remaining balance sheet as you'll see in our investor deck. We've submitted forgiveness applications for about 1,400 loan for a total principal balance of $219 since the end of the quarter we've received funding for a hundred nineteen loans for a total of 3.6 million dollars.

Our total deposits increased $542 from the end of the prior quarter with most of the growth coming in non-interest bearing and interest-bearing demand deposits. This has resulted in continued improvement in our mix of deposits with demand deposits now comprising 62% of our total deposit.

Looking at asset quality we saw decreases in most problematic categories. Our non-accrual loans declined 5.1 million dollars while our non-performing assets declined four million dollars off. We did see an increase in special mention loans primarily due to downgrades in the hospitality industry as we continue to keep a close watch on that portfolio. Our credit losses can't seem to be very manageable with four point six million dollars of net charge-off representing just 18 basis points of average loans in the quarter. We had special reserves of two million dollars allocated wage against these credits.

We recorded a provision for credit losses of 5.2 million dollars which covered net charge-off a 1.1 million dollar increase to the unfunded loan loan reserve and reflects a small decline in allowance for credit losses with the economic forecast stabilizing this quarter this component of our allowance methodology did not result in a material impact to the provision expense at the end of the third quarter. Our allowance for credit losses was 1.43% of total loans, including PPP loans or 1.63% when PPP loans are excluded.

and with that

heard back to Kevin

Thanks Marcia. Nice job as we head into the end of the year. We believe we are in a good position to continue delivering consistent strong financial results. Most of the positive Trends. We have that experience over the past few quarters should continue. We expect continued balance sheet growth, excluding the impact of any runoff another good quarter of Mortgage Banking. Well controlled expenses and a relatively stable level of provision expense.

Operational perspective we continue to make progress with our efforts to modernize the bank and get more leverage from our court system upgrade. We made last year that will allow us to add more features and capabilities. We expect to introduce a new digital small business banking platform in the coming months, which is fully automated process, which is a fully automated process from application through approval and funding this new platform should help us improve our ability to better service our existing clients and add small business relationships and twenty twenty one month will also add a new loan origination system design for the more complex commercial loans that will strengthen our ability to understand our loan pipeline track the performance of borrowers off share information between departments and which would enhance our efficiencies and productivity.

At the bridge level we continue to to make improvements to our operations to be more efficient. We see a lot of banks making announcements about significant Branch consolidation, but for us, it's just been an ongoing process for a number of years. We have continually been moving branches out of older larger buildings and less desirable locations into smaller more efficient more modern facilities and in 2021, we will have fully implemented our new tolerant platform that will help us to be more efficient in servicing our clients just as we have modernized infrastructure of the bank to support the growth into a much larger institution. We've also been modernizing our Branch Network to enhance efficiency and ensure that we are well-positioned to offer our clients a superior in person bath experience.

I am very proud of the way. Our team has responded to the challenges this year and has demonstrated to our markets and our customers at first Senators. Say is a bank that they can count on in good times and in bad. It's an opportunity to strengthen our existing relationship form new ones that will help us continue to grow our franchise well into the future. So with that I will life open the call up for questions. Thank you. Well now begin the question-and-answer session to ask a question you may I speak up your handset before pressing the keys to enjoy your question, please press * 2.

Today's first question comes from Jeff Lewis with d a Davidson, please go ahead.

Thanks. Good morning morning, Jeff Gordon Jeff.

His first question is just want to get your sense on the the housing market in in Montana in a lotta indications of out-of-state buyers kind of swoop it in sight seeing on properties. Uh, I imagine sort of a limited Supply offers some some confidence of of continued support, but just wanted to get your sense for us the the level of what do you think housing is and and where it could go sort of the balance into 21.

Jeff I I wish I had a crystal ball I could tell me exactly what's going on. But all received right now is that housing? We have a kind of a shortage of Housing and most of our markets has people are moving into a more rural markets are smaller towns. So I don't know exactly where it's going to go. It really depends how this pandemic really plays out and what people do but I'm working from home cuz people are feeling that they seem to work for my pin as well as they can work work from home in Manhattan, but anecdotally I think the builders that we know are all very busy and scheduled out into next year, you know real phone numbers are busy, you know still I mean, it's it doesn't look like it's letting out know it Jeff. I would say it's in Rapid City South Dakota. They're saying that they're going to be short eight thousand houses over next 6 years because a new bomber unit got put to that Air Force Base as well as some environmental companies hiring a bunch of people. So they're they're projecting to be eight thousand houses short.

Yeah, good backdrop. I think I saw it start of 9,000 new drivers license applications in Montana through the summer months alone. So I can guess you're getting only you know, part time buyers but some some current or permanent residents. Um, maybe maybe jump into the express. Go ahead. I'm sorry the expense side Marcy got your comments on the what you think we revert to Encore had someone timers in there. Just trying to think about the month, you know, if it's a 96 to 97 quarterly run-rate, how much is is variable? If if we think you know, they're the mortgage book slows down a little bit life and particularly into 21, maybe not by a ton and certainly not maybe by NBA forecasts, but should we take a leg back? Does that alter the Dead?

That that run rate expectation to the downside and and you know any other I think you talked about some Investments Kevin on the loan origination program, but we're not curb cost. I guess overall expense expectation run right for for twenty one would be helpful. Thanks, you know, we're right in the middle Jeff of our budget process. So I'll be able to give a little bit more clarity next quarter, but I I we've been pretty good at managing our expenses this year. So I don't anticipate, you know expenses coming down much below that that rate going forward again. I'll give you a little bit more color next quarter, but but I wouldn't put that in a forecast but I would say that they talk about some you know, technology investment or or changes but really, you know, as we have done in the past as we have improved our infrastructure with technology. It really hasn't been an incremental increase in expense. We get rid of an odd.

System that go on to a new system. So it's kind of a push as we actually when we

Upgrade systems here. So we haven't been really being burdened by real increase in technology expense. We just have benefited getting off a bunch of systems that costs a lot of money and moving on to a more efficient system.

Thanks. I'll set back.

We're supposed to play Matthew Clark Sandler, please. Go ahead.

Hey, good morning morning. Matt start on the deposit growth this quarter very strong. Wondering where you're seeing. I'm coming from how much of its existing customers how much of his new and and we're throughout your Footprints might you be seen it.

Well, it's actually pretty strong and as I've been mentioning those remarks, you know, we do have some new customers both on the commercial and in the consumer side, but it's you know, seasonally our divorce just grow in the third and fourth quarter. So it really plays into the seasonality that we normally see but it's we're getting more than we normally see it's easily so it's I believe it's going to continue going through the fourth quarter again, but then in the first quarter as always easily we see, you know, come down a little bit. So we think we're going to continue to follow that kind of trend and it's pretty broad-based. Yeah. Yep across the footprint Mount and I think actually Wyoming had our strongest deposit growth this quarter.

Okay, great. And then just on the on the the loan growth, you know also kind of solid and you know a little bit better. I think than it's been running his you know last couple of years. I think you've talked about low to mid-single digits historically, but I guess how how much is that pipeline up year-over-year? And do you think you know, you know low single-digits is no longer, you know, do you think you can do better than low single-digits at this stage given what you're saying?

Well, you know, you know and everyone predicted. I'm going to grow. It's any kind of hide, you know double digits or something, but I think the thing is is we're seeing as a positive Trends regards to loan growth. So we think that we you know, even the same time, you know, we're we feel mid-single digits or lower single digits is probably feeling good to replace for remainder of this year.

Okay, and just the you know uptick in classified. I know it's down your year, but it only up I think seven basis points linked quarter, but is that kind of related to some fouls that have just migrated or is there anything specific that you could speak to?

Really? It's it. It has a some Hospitality loans go in there and we're being altered conservative when we were looking at these things. We're going to go through a deep dive exam soon. And we're going to really look at the hospitality, but we're just being conservative. So we're not overly concerned at this juncture cuz it's a they've moved in there, but we're home monitoring that that industry.

Okay.

And just lastly on the capital return a lot more proactive of late. Is that kind of suggest that you know, m&a is still fairly quiet how would those conversations dead-ended bleep we're staying close to to one another, you know, we're talking to people but I would say that everybody's kind of on the sidelines at this juncture wage and you know time will tell what happens. I think everybody is trying to see if valuations will come back and and also how people are going to survive through their asset quality as this Panthers, you know persist. So I think everybody just kind of wait and playing the wait-and-see game, but we're still staying close to the people who we like

Thanks.

Another question today comes from Wells Fargo, please go ahead.

Hey, good morning, guys, Lauren Jared. I guess maybe starting with with you know, sort of broadly COVID-19. It seemed that your markets had really avoid any of the the the big issues for a long time. Now, it seems like some of the the numbers are increasing. Um, you know, are we still is that still relatively low impact do you think that is you're going to Winter that an increase in coverage could actually put any pressure on on the loan growth Outlook at this point.

I'm Jerry, you know wish I had a crystal ball it could but I will tell you I don't think anybody has to stomach to shut down the economy again, I think that's what they're going to deal with it. And I know the cases are increasing outer but I don't I don't know what the outcome is going to be of this pandemic. But right now it appears that these are going to continue to just keep moving forward operating as though they're just dealing with the pandemic.

Okay, you know you sounded pretty optimistic in terms of the you know, the the current allowance level given the the broader credit backdrop, you know, if we start seeing a credit losses increase then do you think that that the existing allowance is sufficient for that that you know, you'd be able to just you know cover those losses out of the existing leadership. We expected any charge us in the future really so provided and we keep the the allow several flat.

You know, as you know change in the broader economic model, yeah, no broader changes in what we see in our markets. The the the lounge is going to be adequate wage. You know right now, you don't see any increase in charge us in the future this this quarter. We had a little bit of increase but it was really two credits one was totally expected and I had reserved for it specifically and actually we had a larger specific reserve on it. Then when we actually took us a charge off and another one was a surprise. Somebody got was doing creating doing fraud and got thrown pretty much in jail. So we ended up with an aircraft that we had to take a loss on but it was just that was a surprise but nothing that is out there that is really concerning that we see.

and then just finally for me, you know with the

You talk about any success, you've had cross-selling those new PPP clients that that may have come from other Banks is that too early to to see results there or you actually turning some of those into the office customers, you know, Jared we have seen an info on the deposit side. I don't have the info they were they were trying to get that for me. I don't have the inflow on the loan side. But we are we are seeing some some positive client generation as a result of the PPP process.

Great. Thanks a lot.

Thanks Sharon. Hey, there's a reminder ladies and gentlemen. If you'd like to ask a question, please press * then 1 today is next question comes from Jackie Boone with KBW, please go ahead.

Hi. Good morning. Everyone. Good morning, Jackie. Hi Jackie.

So just thinking about the size of the balance sheet and understanding that it's obviously heavily dependent on customer liquidity. So that's kind of where my questions are coming from. What is the Tipping Point? I think you mentioned in your prepared remarks that businesses are doing really well and it's driving strong deposit. What's the Tipping Point where they start reinvesting some of those deposits into their businesses? And so you get the growth but maybe a little bit of balance can track. Yeah. That's an interesting question. I think everybody's kind of playing it safe right now. I think I think maybe when the vaccine comes out and the virus slows down a little bit people will reassess what they're going to do with their business, but I think a lot of people are really being conservative right now and just stacks these like, they're just storing up their their acorns for a harsh winter, but I don't know it's a it's an interesting thing because we don't see a lot of companies going out and doing big mass of, you know editions or something at this juncture, which I think is The Prudent thing.

anyway

Yeah, yeah. Okay, that's good to know. Thank you. And do you know to the extent if ski resorts are planning to open this winter?

Yes, actually we received some anecdotal information is that you have to do like a reservation to get the thing and it seems like some of the ski resorts things are going to have a better year this year than they had last year off with a number of people it's kind of interesting because you latches are going to be closer pretty much saying that your car is going to be your Lodge but they're they're they're really putting in together some ways too long to keep the mouths open and right now they're anticipating they're going to have a great year and if our snowfall recent snowfalls any indication they are going to have a good yeah, we already have a ton of snow out here. I'm already got snow. Wow. Okay, so it's it sounds like the the tourism that you saw in the summertime could continue into the winter and my thought is that just you know with with your Market behaved well situated in terms of the virus, you know, there's there's probably going to be an influx of people and there's a place for them to go into, you know, hang out in a socially distant way. Is that fair?

Experience a that's what it appears to be looking like time will tell as as we moved through the through the months. Yeah. Yeah. No.

Obviously lots of unknown and then just one last one for me. Just as you know, you're getting all these new customers in terms of deposits and maybe some loan opportunities in the future. Are you getting any new customers in the office management area?

You know, we haven't seen new clients at this point, you know substantial number of new clients, but it really is an area that we're focused on and so, you know, I would expect to going forward.

Okay. Okay. Great. Thank you.

Thanks, Jackie. Thank you, This includes the question answer session. How do I return the call us back over to the manager $25 box?

Thank you for your questions today guys, as always we welcome calls from our investors and analysts and you can please please reach out to us if you have any follow-up questions. Thanks for tuning in today. Goodbye.

Thank you. This includes today's conference call. We thank you all for attending today's presentation that you may not have met your lines and have a wonderful day.