Q4 2020 First Interstate BancSystem Inc Earnings Call
Yeah.
Good morning, and welcome to the first Interstate Bank system incorporated first quarter earnings Conference call.
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After today's presentation there'll be an opportunity to ask questions.
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Please note today's event is being reported on.
I'd now like to turn the conference over to Lisa Slyter Bray. Please go ahead ma'am.
Thanks Rocco good morning, Thank you for joining us for our fourth 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 and factors that could affect future results contained in our most recent annual report on form 10-K filed with the SEC and in our earnings release as well as the risk factors identified.
In the annual report and our more recent periodic reports filed with the SEC relevant factors that could cause actual results to differ materially from any 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.
Non.
GAAP financial measures is available on our website and F. I B K dot com information.
Our use of the non-GAAP financial measures may be found in the body of the earnings release and reconciliation to their most directly comparable.
GAAP financial measure is included at the end of the earnings release for your reference joining us from management. This morning are Kevin Riley, Our Chief Executive Officer, and Marcy Mutch, Our Chief Financial Officer, along with other members from our management team at this time I'll turn the call over to Kevin Riley Kevin.
Thanks, Lisa good morning, and thanks again to all of you for joining us on the call today.
Again this quarter along with our earnings release, we have published an updated investor presentation that has some additional disclosures that we believe will be helpful. The presentation can be accessed on our investor Relations website, and if you haven't download a copy yet I encourage you to do so.
I'm going to start off today by providing an overview of the major highlights of the quarter and then I'll turn the call over to Marcia to provide more details on our financial results.
During the fourth quarter, we continue to see economic strength strength throughout our markets that resulted in a high quality lending opportunities significant inflows of core deposits.
On a reduction of our problem loan categories.
As a result, we delivered another strong quarter of earnings and pretax pre provision net income.
For the quarter, we generated net income of $46 9 million or <unk> 76 cents per share and a pre tax pre provision income of $64 9 million.
Across our markets employment levels are increasing.
Many of the commodity prices are at near all time highs, providing a boon for our AG borrowers.
Winter has been a positive for the construction industry, but we have still we see some snow in the mountains and the ski season has gone well, helping our tourist industry.
As a result, we continue to see many of our commercial clients performing at record levels and our retail clients, having a lot of money in their pockets, which is generating strong inflows of core deposits.
Total deposits increased at an annualized rate of nine 5% in the fourth quarter.
With all the growth coming in our lower cost deposit categories.
The one drawback to this is that companies are doing so well that they are awash in liquidity.
They don't have to need to utilize their credit lines or take on new debt.
Excluding PPP loans, we started to run off in a material way in the fourth quarter, our loans held for investment balances increased at an annualized rate of three 6% with a broad growth across our residential and commercial real estate portfolios.
We made the decision to put more of our liquidity to work by retaining a greater portion of our residential mortgage loan production.
By retaining these mortgage loans.
Also adding to our investment portfolio.
We are able to utilize the strong deposit growth to increase our net interest income and positively impact earnings.
In the current environment. We believe this is the right strategy.
We're willing to trade off a lower net interest margin to generate higher net interest income dollars.
We have the view that deposits are raw materials, and we're not going to journal way.
Even though these low cost funds are invested in the security portfolio of residential mortgages at a relatively low rate.
We will take those incremental.
Interest income dollars all day long.
The positive economic trends, we are seeing in our markets are also driving improvements in our asset quality.
For the third consecutive quarter, we had declines in both nonperforming loans and nonperforming assets.
And also the fourth quarter on criticized loans were down in the quarter.
We also continue to see more of our loan deferrals returned to regular scheduled payments.
At December 31st.
We only had 23.7 million of loans on deferral status and $9 million of our residential mortgages in forbearance.
Together this is less than a quarter of a percent of outstanding loan balances.
These positive trends in asset quality.
Along with a significant reserve build we had earlier in the year resulted in a small provision requirement this quarter.
Our allowance coverage is relatively consistent with that of the prior quarter.
Given our strong financial performance.
Low risk profile.
We continue to have the ability to return a significant amount of capital to our shareholders.
During the fourth quarter, we repurchased over 1 million shares of our common stock.
And today, we declared an increase in our quarterly dividend to <unk> 41 per share, which is almost an 8% increase from last quarter's dividend and a 21% increase from the third quarter of last year.
We are committed to a balanced approach to capital deployment.
Just thinking on organic growth acquisitions stock repurchases and quarterly dividends. We believe this will continue to have a positive impact to the total return that we generate for our shareholders.
With that I'll turn the call over to Marcy. So she can provide a little more detail on our fourth quarter results go ahead Marcy.
Thanks, Kevin and good morning, everyone.
I walked through our financial results unless otherwise noted all of the prior period comparisons will be with the third quarter of 2020, I'll begin with our income statement.
As with last quarter, we once again saw an increase in our net interest income, but the excess liquidity. We continue to carry put additional pressure on our net interest margin.
Our net interest income increased by $5 $4 million from their first quarter as a result of the acceleration of fee income related to PPP loan forgiveness.
P. P. P contributed $16 $7 million of interest income in the fourth quarter free.
From $10 $6 million in the prior quarter.
On a reported basis, our net interest margin decreased four basis points to 3.25% in the fourth quarter.
A decline of 17 basis points was the result of our continued deposit growth, which was deployed at lower yields in the securities portfolio and holding cash.
This was offset by the impact of PPP loan fee acceleration.
Taking all the noise out from both accretion and the all in impact of the PPP loans. The yield on loans went down about nine basis points, which was offset by a drop in deposit costs, a four basis point.
In the near term will be focused on putting a significant portion of our excess liquidity to work in the investment portfolio by the end of the first quarter, where we're getting average rates of around one 1% on new purchases without significantly extending our duration, which is currently at about three three years.
As a result, we'll likely see some continued modest pressure on our net interest margin and so we see stronger loan growth.
Our non interest income decreased 10 $8 million quarter over quarter to $33 $9 million. This was primarily due to lower mortgage banking revenues, resulting from normal seasonal decline coupled with our decision to retain a greater portion of our loan production and are on portfolio.
The decision to retain these mortgages on our balance sheet had an impact of about $4 $3 million to revenue or after tax about five cents per share, but it has provided us with an earning assets that will benefit us for years to come.
Aside from the decline in mortgage banking revenue the two other significant contributors to the decline in noninterest income were a decrease of $2 $3 million on swap fees and a decrease of $2 $4 million related to reimbursement for taxes on our bank on life insurance policy that was rewritten last quarter.
These declines were partially offset by higher payment services revenue as we continue to see a rebound in transaction volume and from higher wealth management revenue due to improved market performance.
Looking at 2021, we're expecting refinancing volumes in the mortgage business to decline about 50% and total production to decline about 30%, we're still projecting 2021 to be our second best year. It would be hard to beat 2020, but we do expect the gain on sale margins to decline from last year's record levels.
On lessons.
With the growth expected in other fee generating areas. We believe our total non interest income in 2021 [laughter] Inc.
'twenty 'twenty, one will be at or modestly down from 2020 record levels.
Moving to total noninterest expense, we had a decrease of $2 $1 billion from the prior quarter.
This was primarily due to lower salaries and wage expense, resulting from the one time items that we discussed last quarter, leaving our normal run rate flat quarter over quarter.
Looking at 2021, we continue to invest in initiatives that will support a growing company identifying areas to reduce cost as an offset as a result, we expect total expenses to be right at 1% higher in 2021.
Moving to the balance sheet, our loan held for investment decreased $345 million from the end of the prior quarter, primarily due to the forgiveness of approximately $425 million of P. P. P M on during the fourth quarter.
The PPP loan forgiveness resulted in a decline in our commercial loan portfolio, which was partially offset by modest growth in our commercial real estate portfolio and the increase we saw on the residential real estate loans due to our decision to retain more of our production.
We saw modest declines this quarter in a number of other portfolios, including our indirect portfolio.
After the indirect portfolio decline in 2019, we focused on expanding our dealer network across our footprint in 2020, we saw good results from this effort as our indirect balances increased by three 6% through the first nine months of the year.
While we typically see declining indirect balances in the fourth quarter inventory shortages also impacted our production levels. This year.
As inventory begins to build again, we should see improved loan volumes and expect similar growth in 2021 as we saw in 2020.
Credit performance on the indirect portfolio was good with a delinquency rate declining from 2019 levels and remaining below industry averages.
As of December 31st we had approximately $740 million of PPP loans remaining on our balance sheet and our expectation is that the majority of these loans will receive forgiveness during the first quarter of 2021.
On the liability side, our deposits increased $335 million from the end of the prior quarter with most of the growth coming in interest bearing demand and savings deposits.
Moving to asset quality, we saw decreases in all of our problem asset categories relative to the end of the third quarter, our nonperforming loans declined $6 4 million, our nonperforming assets declined $9 six.
$6 million and our criticized loans declined $37 $2 million.
Our credit losses continued to be very manageable with just $4 $2 million of net charge offs, representing just 16 basis points on average loans in the quarter.
We recorded a provision for credit losses of $3 $2 million, which reflects our improved asset quality.
Although this did not cover on net charge offs from the quarter, our allowance as a percentage of loans held for investment increased to 147% when PPP loans are excluded our allowance coverage was 159%.
As of December 31st.
So after discussing our strong quarter I'll turn the call back over to Kevin.
Thanks Marcy.
I'm going to wrap up on a few comments about our outlook and priorities for 2021.
We feel good about how we're positioned and our opportunities to continue enhancing the value of our franchise going forward.
As a starting point.
When we look across our operations, we feel confident on our position and we are grateful not to have any significant legacy issues that we need to do to address that would distract us from our focus on driving profitable growth.
Our credit is strong so we don't need to resolve a bunch of problem loans.
Aren't looking to run off any portfolios of any meaningful size, we are looking to exit any business or lending areas.
We have great leadership in place and a solid organizational structure.
We feel good about our technology platform and we're thankful, we're not facing a massive investment of time and money to get that up to speed.
We are confident in the foundation, we have put in place and now it's just about executing and capitalizing on our growth opportunities like I always tell my executive team just don't screw it up we.
We see positive trends in many of our markets in terms of population and employment growth with Idaho, and Oregon, among the fastest growing states in the country.
We believe the environment and the lifestyle footprint offers is driving people on company to relocate to our markets on.
All of this growth provides more opportunity.
In this COVID-19 environment, our bankers are finding creative ways to connect with clients. We are making sure. We have the right resources in place to meet their financial needs and are putting more focus on cross selling effort should demonstrate the advantage of our broad offering of products and services.
We will continue to leverage the robust technology platform, we have built to refine our current digital capabilities and add new products.
This will help us increase productivity and enhance efficiencies and improved revenue generation.
We're happy with the digital application portals that we introduced in 2020 for business and consumer credit card and residential mortgage loans.
Digital channel will continue to generate a higher percentage of our overall production as time goes on and then 2021, we will be.
The initiating some digital marketing campaigns to attract additional volume through these channels.
In May we will watch a digital small business lending portal we.
We believe the ability to offer online small business lending has become table stakes and will improve our ability to add small business customers.
As I've talked about in the past.
We're able to offer a highly automated PPP application process with banker interaction at key points, which led to our success in the first round of stimulus.
Now, we're using that portal to efficiently managed loan forgiveness process.
For the new PPP program this year.
We will have the same process in place. So as this program is targeted at companies that had been a little bit more severely impacted by the pandemic.
We don't have a lot of us in our markets, we expect only a modest volumes that we saw a.
Compared to the first program.
Excluding the impact of PPP, both in terms of loans for the first program running off in loans from the second program coming on the books, we expect loan growth for the year to be in the mid single digit range.
That's been the case in the past few years most of the growth is coming from the West Division, while we expect the mountain division to be slightly up for the year.
As Marty has said, we expect operating expenses to be relatively flat. So we should have good operating leverage as we continue growing the balance sheet and generating higher net interest income.
This should translate into a solid year of earnings growth.
If the vaccine rollout and the stimulus continues to have a positive impact and drives continued economic recover from covering.
It's likely that we'll be in a position to release reserves this year, which will be another driver of earnings growth.
With another strong year expected, we believe that we'll be able to generate solid returns to our shareholders.
As we return to a more normalized environment, we're starting to see M&A discussions pick up and we'll continue to look for opportunities to enhance our franchise value.
We have built a highly scalable platform that can support a much larger bank and we wanted to take advantage of that and continue using acquisitions to complement our organic growth and further increase our earnings power.
In closing, we believe you're on a really good spot.
With good credit quality.
Good capital good liquidity.
A good technology platform.
Good product development, our branch network and our personnel.
And as a result, we're confident it will continue we continue to execute well on our strategy.
On a higher level of earnings return on average you are shareholders and further enhance the value of our franchise in the years to come.
So with that we'll open the call up for questions.
Thank you.
Uh huh.
Sure.
A question. Please press Star then one on your books.
If you're using a speaker phone please.
Okay.
First the heat.
We withdraw your question. Please press Star then two.
Today's first question comes from Jared Shaw at Wells Fargo Securities.
Hi, guys good morning.
Good morning tier.
Yeah, I guess first maybe just on the mortgages that you're retaining what's the are.
Are those are those 30 year fixed debt.
Great.
There are those in the the yield.
Go.
Go ahead Marcy.
So it's a mix we're retaining some 10 and 15, but were also retained from 30 and the duration I mean, the yield on that 30 year loans is about three 6%.
Okay, and then it should should that growth.
Should we expect to that growth or mimics what we saw this quarter or is that actually you know should not accelerate as.
Yeah, there is an opportunity for them.
Portfolio.
Yeah. So we will continue this at about the same pace as long as we have the excess liquidity that we have we expect to continue this at the same pace in the next quarter or two.
Okay.
And then you know just looking at the at the allowance I mean your credit is really strong you did a you know you you've obviously built up.
Wrong, a strong reserve.
What's going to be the main drivers for you is to look to get back towards that you know maybe seasonal day one.
Or is it just going to be.
The strength of the broader economy as we go through 'twenty, one or is it really going to be maybe longer than 2021 before we get back to.
You know maybe a day one level.
Well no no Joe we're gonna look at you know how.
How is the vaccine rollout happening is this virus get really campaign I think some people might be a little you know aggressive in their early stages. We don't know how this is all going to play out. So we're just being cautious as the vaccine works and the buyers they're kind of dissipates, then we'll feel more confident to see.
As economies grow on an in and feel confident about our AR reserve levels that can be come down.
Okay, and then I guess, just finally from me looking at the commercial lending.
What would have to happen to you know maybe potentially see upside too to that growth target is it just you know customers.
I have a lot of liquidity themselves and there's just not a lot of demand or is it again more of the broader economic backdrop, what could what could drive that potentially higher throughout the year.
Well, Jerry we're seeing a lot of economic growth as you know I think when we will know more as the weather kind of clears, but we're already seeing signs we have a lot of people moving into our markets and we have a lot of companies relocate so yeah.
I think it's going to it's going to pick up.
The debt continue so it.
It could be better if theres more in migration than we anticipated. So we're.
We're feeling good at it and we will know more and more as the weather kind of gets better.
Great. Thanks for thanks for taking the questions.
And our next question today comes from Jackie Bohlen with <unk>.
Yeah.
Hi, good morning, I'm pretty mortgage battery.
Just curious about your thoughts on.
You know as you're obviously, having fantastic surprised it grows on.
Yeah from preliminary to me and say you might be getting from your customers. How does it seem like your appetite is for P. P. P. And then as I said have a lay up to that you know what that means on.
Additional deposit growth on the early part of this year.
Yeah, that's a good question Jackie.
I think that debt is going to.
Bring us more deposit growth I would say that we're.
It's interesting because while we're monitoring the number of people that are applying for the second round of PPP and I would say on the numbers of loans were running right around 15%, but I think the dollar from a little bit lighter than that so it will provide us some deposit growth you know as as the government gives us.
Consumers you know extra money through stimulus and gives it to the business. This should have a positive impact on our deposit growth.
Okay, and I mean, I would guess other factors from 'twenty 'twenty just given the economic comments you had carried on into 'twenty one.
Allen business remaining strong and continuing to drive deposit growth from that too is that your assumption.
Yes, and you know I'll go out on a limb here, a little bit and say aye.
I think.
From there.
We had a pretty strong tourist season last summer and a lot of our companies did a lot of debt.
Record sales in a number of the industries because of the pent up demand.
Thank the tourist season is going to set a record this summer that will won't be bad again for years to come I, just think it's gonna be a big year for our markets.
And that could have a tremendous impact to our to our performance.
Okay. Okay. That's good color. Thank you and then just one last one I know I know that loan purchases or not in your wheelhouse, you actually spent a long time zone.
First thing our acquired loan purchases from caffeine just wanted to double check that that still remains the case and youre going to your securities purchases maintaining mortgage assets liquidity deployment.
Yeah, you know Jackie we really don't look at purchasing land as kind of part of our core business. I mean, we would look at something if it came across our desk, we're never going to not look at anything, but I don't see us doing that.
Continuing to retain mortgages and put the money to work on the investment portfolio.
Yeah, the likelihood of that Jackie is slim to none.
Okay, I figured, but just wanted to double check.
Yeah.
Okay.
And our next question today comes from B Riley.
Uh huh.
Hey, Good morning. This is Levi Posen on for Jeff.
You bet 90 day.
Hi, I was wondering if you guys had quantified the.
Basis point impact to margin.
P P P forgiveness in the quarter.
So that's the basis point impact on margin of the accelerated fees was about 19 basis points.
Okay. Thank you.
And then.
Could you also speak to your loan pipelines now versus a quarter ago and with in your loan growth outlook.
Maybe the segments that are that are driving that thanks.
Yeah.
We see the pipeline similar to what we saw in the fourth quarter.
It's about the same rate you know and you know I think some of the growth also in the fourth quarter, our AG borrowers pay down their lines of win to harvest their crops. So that's gonna come back they'll start utilizing those lines as they plan their crops and stuff. So we see that utilized the utilization go up so it is it's pretty.
Right now, but again, so that's why we're pretty we feel good about for the last two quarters. We did about mid single digit growth. So that's why we feel good that our debt.
Persist going into 2021 again, all bets are off of how how robust the economy starts growing in our markets, but that's kind of what we're seeing right now.
Okay. Thank you for the color that's it from me I'll step back.
Yeah.
And our next question today comes from Andrew Perlman.
Please go ahead.
Hey, good morning.
Can you just remind us how much in shares you have remaining under the current repurchase authorization and then maybe just any updates on kind of the appetite of how youre looking to do repurchases going forward I guess, particularly given the growth outlook.
You know Theres about 540000 shares remaining under the current.
Marci.
Yeah.
Can you hear me now.
Yeah.
Okay. Okay.
Hum.
Well, we're looking at repurchases.
I don't know exact revenue to remain.
Okay.
Our repurchase is assessed where we always book.
That period.
We will take.
Yeah.
Oh yeah.
Okay.
From off.
I am too.
Okay.
Hey, Marci I can I can here both of you guys.
Okay, you can hear both of us so.
It's about 540000 shares remaining under the existing plan and so on and not much and so again.
We look at our.
Five year payback period, and we repurchase shares accordingly.
Okay.
One last housekeeping one can you remind us how many or how much left you have and remaining PPP round, one fees left to accrete through interest income.
It's about $15 million.
Okay.
Perfect. Thanks for taking the questions I'll step back.
And our next question today comes from Matthew Florida from Piper Sandler.
Hey, good morning.
Yeah.
Marcy can you confirm day on your fee income related guidance, what the base is that you're using for 2020, because I think you said flat to up but I have 169 million net wood.
Suggest you know a nice step up from this latest quarter.
On the fee income.
Yeah, I just wanted to clarify your fee income guidance and kind of the base revenue that you were using for 2020 and just to confirm it.
So Matt we believe our mortgage banking revenue will be down.
But at the other areas wealth management payment services will be up and kind of mitigate the decline in.
And mortgage banking revenues and so we really do think it'll be closer to flat.
Quarter over quarter on a year.
Year over year.
Okay, Okay got it.
And then.
Could you give us the weighted average rate on new loans I know you gave us gave us the new securities 1.1 per cent, but just wanted to get the.
The rate on new production as well.
That so here's this was encouraging because it was actually up from last quarter and it was 4.04%. So it was up about eight basis points from fourth quarter from third quarter.
Okay.
And then the mid single digit loan growth guidance is that X P. P. P.
Yes.
Okay.
And then can you just confirm the remaining net.
Revenues, you expect to realize from P. P T.
The remaining fees on the book are about $15 million.
Okay.
And then lastly, just on M&A I mean, you've seen our U R.
You see any opportunities or are you looking to consider.
Acquiring a bank that has a much higher loan to deposit ratio.
Blend the two and help your excess liquidity position.
So I'm gonna see Kevin can talk are you on Kevin, we're having a little bit of a connection problems.
I'm on.
Did you hear the question.
No I just got on.
Okay.
Can you repeat your question for Kevin Sure sure. Yeah, I was just asking if you were.
If you were considering or had an appetite to acquire a bank debt loan.
<unk> got a high loan to deposit ratio that could help kind of.
Rightsize your excess liquidity position.
Oh.
Oh, Yeah, well, we will look at banks are alone up the question is what day, what what would they loaned up with Jurassic quality goods. So we will look at all opportunities to see what they have but if we have a bank that has.
Bigger growth market debt, you know could put those these funds to work a lot better on weekends of our markets. We will surely look at debt acquisition as a possibility.
Okay, and then do you have a limit on her.
How large you'd like yours. Thank you.
Family residence mortgage portfolio together I think it's around 15% today.
Yeah. It was just 20, the Max or you don't feel like you'll even get that close yeah.
Yeah, you know, we're looking at up to another 300 million, but you know kind of based on where on liquidity Lance.
That's kind of up to 300 million additional but not over that.
Got it thank you.
Got it.
Thank you ladies and gentlemen. This concludes the question and answer session I would like to turn this on.
That goes with momentum.
Was any of ours.
Thank you for your question sorry for the disruption on my connection, but as always we welcome calls from our investors and analysts.
Please reach out to us if you have any follow up questions and thanks for tuning in today and goodbye.
Thank you Sir This concludes today's conference call. Thank you all for attending today's presentation you may now.
Now disconnect your lines and have a wonderful day.