Q1 2021 First Interstate BancSystem Inc Earnings Call
Good day and welcome for the first time.
Thanks for some first quarter, 2020, one and earnings conference call.
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And I'd like to turn the conference over to Lisa Slyter Bray. Please go ahead Matt.
Thanks, Rocco and good morning.
Thank you for joining us for our first 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 and on form 10-K filed with the SEC and and our earnings release as well as the risk factors identified in the and.
And we'll report and our more recent periodic reports filed with the SEC Roslyn and 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 forward looking statements made today a copy of our earnings release, which contains non-GAAP.
GAAP financial measures is available on our website and if I became dot com information regarding our use of non-GAAP financial measures may be found in the body of the earnings release and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference joining us for management. This morning are Kevin Riley.
Our Chief Executive Officer, and Marcy Mutch, our Chief Financial Officer, along with other members of 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.
And again this quarter along with our earnings release, we have published an updated investor presentation and it has some additional disclosures that we believe will be helpful. The presentation can be accessed on our investor website, and if you haven't downloaded a copy yet I would 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 detail on our financials.
The first quarter came in largely consistent where our expectations.
We continue to see healthy economic activity throughout our markets, which resulted in strong deposit inflows.
A positive impact on our fee generating businesses and further reduction and all of our problem loan categories.
We executed well on our near term strategy to support our net interest income by utilizing some of our excess liquidity to retain.
More of our residential mortgage production and increased purchases of securities and our investment portfolio.
The additional revenue generated through this strategy combined with the stable expense levels helped us to deliver another strong quarter of earnings for our shareholders.
For the quarter, we generated net income of $51 4 million or 83 cents per share.
Loan balances were essentially flat to year and whereas most years, we've seen declines and balances during the first quarter. We believe this reflects the health of our markets and the increasing confidence that our clients have and the strength and sustainability of the broader economic recovery.
Across our footprint, our clients are looking to invest and projects and put money to work that will help them capitalize on the improving economic environment.
We will continue to see this most notably impacting our commercial construction loan balances along with modest growth and commercial loans, excluding PPP loans and growth and our residential real estate portfolio.
Heading into the second quarter, we already seeing promising growth and we are focused on ensuring our speed to the final credit decision allows us to get deals done.
We have adjusted to become more efficient and our underwriting and approval process and are winning deals without compromising on price for quality.
We were also pleased with the execution of another successful round of PPP loan originations and the first quarter.
The automated process for utilizing the first round continues to provide a very efficient access to this funding for existing and new clients and.
And we funded an additional $437 million and loans throughout the end through the end of March.
We continue to be surprised at the pace of our deposit growth, which was over 25% on an annualized basis and the period, where we typically see balances decline well.
While some of this growth can be attributed to PPP loans and stimulus payments. We believe this continuous historical high level of growth reflects the health of our clients.
While we're able to put a substantial amount of liquidity to work in the first quarter strong deposit inflows continues to leave us with high cash balances consistent with our approach and the first quarter, we expect to retain more of our residential mortgage production and in the second quarter and will continue to add to the investment portfolio although at.
And much more modest pace.
The health of our markets is also reflected and our asset quality.
Across the board, we saw improvements and all of our problem loan categories nonperforming assets nonperforming loans criticized loans and.
And delinquent loans were all down for me ended the prior quarter.
Improved economic forecast, along with positive trends and asset quality resulted in a negative provision for credit losses, and the quarter and a small reserve release.
Although with an allowance of $1 three 8% of total loans or $1 five 1% when people and PPP loans are excluded.
We still have a very high level of reserves that should enable us to keep our provision expense relatively low as we add to our loan balances and the future.
I'd like to add a little color about our footprint.
Over the last few weeks I've had the opportunity to once again and get out and visit some of our communities and our employees.
What I've seen is that theres and overall optimism about the local economies and that the outlook for continued recovery throughout the summer.
Notably the expectation of record tourism across our footprint continues to point towards increased revenues for sectors that were hit hard by the pandemic.
Unemployment and the northwest continues to be below national averages.
And average wages show signs of growth.
Our states continued to benefit from positive in migration with some of our mid sized markets like rapid city, showing hot residential housing trends with notable those will increases and building permits to dress growing inventory shortages.
Building billings quarter Lane, and Spokane, all made a national news as they were in the top five metro market areas for homebuyers.
Montana saw its population grow by nine 6% and picked up a house sheet based on the recent census data, Oregon picked up his seat as well and fact based on our results for the last sensors all of our states saw positive growth with Idaho reporting the strongest increase of over 18%.
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They are also showing 6% annualized gross so far and 2021.
The near term future for the agriculture, and Jesse always also looks positive federal programs provided substantial relief from the effects of the pandemic and it allows farmers and ranchers to weather the effects of commodity prices and export tariffs hiring.
Higher income levels and resulted in increased liquidity and capacity to pay down existing lines and lastly, our state and local governments.
Have not experienced a severe shortfall in revenue that were predicted at the height of the pandemic.
And or in some cases seeing benefits from increase in gross sales and additional tax revenues and summary of the strength of our markets and the momentum of our core business trends and set us up well for accelerated and core pre provision net revenue growth for the rest of the year now I'm going to go off script for a second because I just wanted to say that.
I am more bullish about the future of the bank and I ever had been since I joined the company and with that I'm going to turn the call over to Marcia to provide some additional detail and our financial results for Marcy. Thanks, Kevin and good morning, everyone as I walk through our financial results unless otherwise noted all of the prior period comparisons will be with the fourth quarter of 2002.
And I'll begin with our income statement.
Our strong deposit inflows continued to generate excess liquidity that impacted our net interest margin. However, the increased retention of mortgage production and and growth and our investment portfolio helped us keep our net interest income, excluding PPP and accretion income relatively consistent quarter over quarter.
On a GAAP basis, our net interest income decreased by $7 $7 million all of which can be attributed to lower PPP fee income lower accretion income on acquired loans and two fewer days and a quarter.
Relative to last quarter, PPP income was $4 $4 million lower accretion income was $800000 lower and two fewer days in the quarter equated to $2 $4 million on and operating basis.
Looking ahead on and operating basis, excluding PPP income. We believe this quarter was the low watermark for net interest income and we should see sequential improvement from here for the rest of the year.
On a reported basis, our net interest margin decreased 21 basis points to three 4% and the first quarter, primarily due to less income derived from our PPP loans and a mix shift from loans to bonds invested at lower rate exacerbated by the significant increase in earning assets as a result of our rapid deposit growth.
Taking out all the noise from both the accretion and the all and impact of the PPP loans. The yield on loans went down by approximately 10 basis points, which was partially offset by a two basis point drop and our average cost of funds.
The weighted average rate of new purchases and the investment portfolio was $1, one 9% and the first quarter.
While the securities we purchased and the first quarter have first.
Our duration to slightly over four years as of the end of the quarter, we have a bias towards higher rates going forward and so incremental purchases and the investment portfolio will be made with the goal of keeping our overall duration under for years.
Our non interest income increased $4 $2 million quarter over quarter to $38 $1 million. This was primarily due to a $5 $9 million and mortgage servicing rights impairment recovery.
Excluding this recovery noninterest income was down from the prior quarter due to the typical seasonality, we see and payment services revenue.
Service charges on deposit accounts written attributable to fee waivers and healthy accounts balances and lower gains on the sale of mortgage loans as a result of our decision to retain more of our production, which you can see very clearly on page 45 of the investor presentation.
At the beginning of the year, we indicated that we expected our total GAAP noninterest income to be at or modestly down from 2020, which assumed a modest MSR impairment recapture over the course of the year as a result of the decisions, we made and the first quarter around fee waivers and home loan sales. We now expect our total full year.
GAAP noninterest income to be down low to mid single digits year over year.
Going forward, we are seeing strong momentum and payments and wealth businesses, both of which should now outperform our original expectations. We also expect to return to more normal levels and mortgage production stalled toward the end of the second quarter, which should generate a nice lift and mortgage banking revenue from first quarter levels.
And as such the first quarter should be the low point for fee income and we're still anticipating our total fee income for the remainder of the year to be consistent with our initial forecast and January notably this revised outlook assumes no further MSR recovery for the balance of the year.
Moving to noninterest expense, we had an increase of $1 million from the prior quarter and this was primarily due to higher employee benefits expenses, resulting from the seasonal impact of higher payroll taxes. This was partially offset by lower salaries and wages expenses due to lower commission expenses and short term incentive accruals.
While we had a large volume of PPP originations and the quarter, we allocate a very small amount of loan origination cost per loan and this program the impact of the deferred loan costs related to PPP loans on our first quarter expenses was immaterial.
For the full year, we continue to expect our initial guidance to hold true and for total noninterest expense to be approximately 1% higher than last year.
Moving to the balance sheet, our loans held for investment increased $56 million from the end of the prior quarter, we had $372 million at PPP loans, forgiven and funded $437 million of PPP loans and the quarter with the remaining loans held for investment essentially flat quarter over quarter.
Growth in our residential real estate construction and commercial portfolio was partially offset by declines and our commercial real estate and consumer portfolios. The.
The decline in the indirect consumer portfolio continues to reflect the elevated levels of payoffs and pay downs related to stimulus payments and new production has been dampened by inventory shortages at dealers the.
And the demand for autos or vs and other recreational vehicles was definitely strong and when interest inventory shortages are resolved. The large dealer network. We've built should turn this area into another source of growth in the portfolio.
As of March 31st we had approximately $804 million of PPP loans on our balance sheet with $29 million of associated deferred loan fees.
On the liability side, our total deposits increased $877 million from the end of the prior quarter with most of the growth coming and noninterest bearing commercial deposits interest bearing demand deposits and savings deposits.
Moving to asset quality as Kevin mentioned, we saw decreases in all of our problem loan asset categories relative to the end of the fourth quarter, our nonperforming loans declined $6 6 million or.
Our nonperforming assets declined $6 9 million and our criticized loans declined $37 million, our remaining loan deferrals are de minimus.
Our credit losses continued to be very low with $2 9 million and net charge offs, representing just 12 basis points of average loans on an annualized basis.
Following the significant build and our reserves during 2020, the improving economic forecast improved asset quality and the low level of losses and the portfolio resulted in a reversal of provision expenses $5 $1 million. This brought our allowance as a percentage of loans held for investment to 138% as of March 31.
Or 151% when PPP loans are excluded.
And now I'll turn the call back over to Kevin.
Thanks, Marcy nice job.
And I'm going to wrap up a few comments about the remainder of 2021 and how it's shaping up.
For two focus will be continue to support our net interest income by retaining mortgages and increasing our security portfolio where.
But we are becoming increasingly confident that we will see stronger loan growth for the remainder of the year, which will give us more opportunity to increase net interest income and further improve profitability.
Credit line utilization is at historic low levels, we will see construction lines fund throughout the rest of the year and we expect both consumer and commercial lines of credit to return to a more normalized level, which will reduce our debt reduce excess.
Why is about 9% if this materialize this will resolve about $200 million and increased outstanding balances.
Our loan pipeline is steady and signs are pointing to higher demand and in the coming months.
We are seeing good opportunities across a variety of asset classes, both and the west and Mountain Division.
We believe commercial construction will be and area of strength and we're also seeing opportunities and residential construction as homebuilders book to satisfy the strong demand for housing, resulting from the population growth and our markets.
This also extends to multifamily lending, which is benefiting from the same in migration trends.
The outlook for commercial real estate lending looks positive.
We don't have much exposure to office the office market and has some people concerned about the long term impact of work from home and we're seeing good opportunities across other property types that continued to perform well.
We fully expect a very strong tourism season. This year, given the pent up demand is.
It's very difficult to book, a room and many tourist destinations and our markets right now.
This is this only bodes well for fee income, we generate from increased economic activity and our markets, but also for loan demand from a larger ecosystem of small businesses that serve the tourist market.
And in May we are launching our small business digital lending platform, which will improve our ability to serve small businesses and efficiently originate loans and this area.
This is just one of the technology Rollouts. This year, we just completed the installation of our integrated teller platform and our branches and later this year, we will upgrade our debit card processing system and implement a new commercial loan origination system.
All of these technologies enhancements are driving improved efficiencies and providing more opportunity for revenue generation and improving our client experience.
This is a continuation of our efforts to consistently enhance our people processes and technology and do it without having a material impact on expense levels.
And the people front, we have Jon Stewart joined the team as Deputy CFO and head of IR.
We know many of you know John and we're excited that he has chosen to crossover to the bright side of the business.
So you will see him around as he will be joined and Marcy and me and many of the upcoming investor events.
The investments we have made in prior years and processes and technology to build a robust scalable technology platform are enabling us to consistently add new features and tools that will improve our operation without much incremental expense.
We believe this positions us very well to realize more operating leverage and.
As we continue to grow the company, both organically and through additional acquisitions before I wrap up today.
Want to note that we recently published our 2021 community responsibility report, which is available on our website and I encourage anyone who is interested in understanding our company's company better from an ESG perspective to download a copy.
We've been publishing a similar report for several years and our commitment to corporate social responsibility is just something that is and our DNA.
A good corporate citizen and a value partner to our communities has been a core value of first interstate for decades, and taken care of our employees clients and neighbors will continue to be and integral part to the success and the growth of our future.
So with that I'll open the call up to questions.
Thank you Sir we will now begin the question and answer session for asking question and you May Press Star then one on your Touchtone phone.
We're using a speaker phone we ask for you. Please pickup your handset before pressing the keys.
And that's all your question. Please press Star then two.
Today's first question comes from Jared Shaw at Wells Fargo Securities. Please go ahead.
Hey, good morning, everybody.
Good morning Jared.
Kevin maybe just starting with the some of those tech investments and especially the small business lending portal is how will that be how do you see that helping to drive additional business and all that.
Enable you I guess to take some of the leads from the P. P. P. Maybe for my other.
Other banks customers and do you expect it to have that helped develop them into full service customers and SaaS.
As for pace and before.
Yes, there's two things that we see benefit Gerard.
One that people can go online and apply for a loan themselves and be immediately approved and funded because it has automatic scoring process so far.
SaaS efficient way for them to do it themselves or we're also training our fsrus, which are not commercial lenders ssrs financial service reps to be able to walk customers through this digital application within our somebody locations that might not have commercial lenders to quickly get loans approved and funded.
Okay, Great and then on the on the mortgage side are you retaining everything that you're.
Producing at this point or are you trying to keep a shorter you're doing looking at 15 year are you you're holding onto 30 years as well and I guess, how will that impact mortgage banking revenue going forward in terms of.
Volume retained versus sold.
Our margin is going to answer that question Jared in the first quarter, we retain about 58% of our production and the portfolio and some of that did include 30 debt 30 year mortgage product going forward will begin to phase out of that headed into the end of the second quarter. So again, we had a.
A certain amount that we were going to retain and around $400 million throughout this whole process since we started retaining mortgages and.
In the fourth quarter and we're about at that threshold that will begin to sell mortgages.
So more of our production as we head into the end of the second quarter.
Okay and then just finally for me on credit I guess, there are two things one should we expect that the negative provision this quarter or sort of got you to where you know.
Where are the current economic environment is reflective of and and any reduction of the ACL will be more a function of loan growth at this point or could there be another.
And negative provision and then just sort of tying into slide 21, and your slide deck.
There was a construction loan.
You highlight them.
And as management attention and doesn't look like there was a net.
Reserve against that could you just give a little color on that.
And so I'm going to let Michael Luckily ask answer that last question, but.
I'm, hoping that we grow into that.
Is there a balance where it is right now with loan growth and I'm not anticipating any substantial change and our economic outlook until we are you know and love.
We are to continue to see things markedly improve from here.
And then does that answer that question Jared.
Thanks, Okay, and then Michael.
Oh.
Okay.
Michael for migraine.
Hi, Jared it's Michael Luckily.
And what you're referring to is the I.
And I believe it's a.
Commercial and institutional building and construction.
And the management attention piece.
That's primarily driven by a couple of hospitality loans that we are doing and.
And it's really not has nothing to do with the actual project, but a weakness of the guarantor from other assets that they own which has drained and their liquidity. So given the uncertainty. That's why that was moved over to management attention and does that make sense, Steve for answering your question yes.
Okay, and then and then is there a specific reserve associated with that because of that risk.
The risk rating or not necessarily.
Management attention is about as low as we get and criticize so now there is not and we feel we feel very good about the project. It is really just looking and we're looking at that hospitality book and office book closely. It's just looking at debt guarantor that out of caution of abundance of caution we move that to a special mention.
Great. Thank you.
Thanks for listening today.
And I'll leave a puzzle with D. A Davidson. Please go ahead.
Kevin Marcy and good morning. This is levi on for Jeff <unk>.
Good morning, reunite and good morning Levi.
If I could just start with a housekeeping question.
On the tax rate is it fair to assume that the seasonality we've seen in the past couple of years.
Repeat this year and we land towards the 23% for the full year.
Yeah, I think it will be between 22, and a half and 23% we always have some benefit that we see and the first quarter from <unk>.
The tax benefit associated with option exercises and so that's what happens and the first quarter to drive that rate down a little bit.
Got it okay. Thank you.
And then I apologize if I missed it.
I missed it earlier, but was there and our expense run rate going forward.
And 1% increase year over year.
Great. Thank you and.
And then last one for me.
On the capital side of things you guys have been active with the buybacks.
Buybacks and and the dividend.
What are what are your thoughts on on M&A coming up here.
Okay.
Well and we're always as you know and as in the past, we're always talking to people about a doing a possible acquisition and those conversations continues to be have had.
But we're being pretty picky.
Picky like if you have and the past I mean, theres a lot more coming to market right now are being.
And you know called on but we're not jumping to somebody else because we have certain acquisitions that we believe will enhance the franchise value.
And.
We believe just being patient as the position we're going to take at this at this juncture.
Understood. Okay. Thank you I'll step back now.
And our next question today comes from Matthew Clark of Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Matt Good morning, Matt.
Marcy do you have the weighted average rate on new loans this quarter.
And the PPP yeah for 25.
Okay.
Okay.
And.
And that's what I'm getting at is kind of the incremental core margin.
Based on new business, New Securities and 119, new loans, and four and a quarter maybe some.
And the additional securities from here might be a little bit lower and that 119.
Assuming kind of a similar mix of assets I mean, do you feel like where what kind of.
Near the bottom here on the core NIM.
So to say, but I know it is difficult to say so just based on where we ended the quarter and then with the expectation that we're going into our stronger season, where we could see some additional modest deposit growth I think that we could possibly see a little bit more pressure on our on our core NIM, just resulting from that mix shift.
So again, if we see folks.
And are.
And spending money and and deposits don't grow and we see higher loan growth that could change that but just on a core basis I think we could see a little bit more pressure not substantial but a little bit.
Okay.
Okay.
And then can you quantify the gain and other income I'm, assuming that's about $2 million, but just wanted to double check.
Other fee income.
Say that again sorry.
Just looking to quantify the gain and other noninterest income this quarter I think is correct.
Yeah, and so the only.
Non I guess non core gain that I'd see and areas, we had about $750 million $750000 gain on the deposit premium when we sold that Lynnwood branch other than that it's just the normal ins and outs of what we usually see and that that line item.
Okay, and then just on the service.
Service charges and the fee waivers I guess I would've thought we kind of come.
For the end of that book.
At this point.
And any change and.
Strategy their rationale on waiving fees.
So again, when we had stimulus payments come into those.
Those accounts, we waived fees again this quarter back, but we're no longer doing that.
So going into the second quarter, and we should see that return to more normalized levels.
Okay, and then just lastly on the.
DRAM to a PTP are you using as a five year amortization.
And our life for something shorter okay and.
And we were using cash.
Okay. Thanks.
Yep.
And as a reminder, ladies and gentlemen.
And please first.
Our next question today comes from Jackie Bohlen with CBW. Please go ahead.
Hi, good morning.
Alright.
Good morning, I wanted to pick up a little bit on Matthew's question, just in terms of service charges and thinking about seasonality.
And you had a strong tourism season last year.
And we're equally strong if not more so I would guess so just.
It's hard to tell the trends because of the pandemic and how would that influence activity. So I'm wondering what your expectations are for the pick up that we might see this summer if it's a more normalized trajectory then.
And from here understanding that your fee waivers are stopping and Theres a couple of things at play and there.
So I think it's really hard to say Jackie I agree with you because clients have more cash in their accounts as well and so you know NSF charges are down and we I wouldn't expect the trend to be too much different than what we saw last year. At this point you know time will tell you now.
Thank you.
For.
Lending becomes more robust, but I would I would expect it to be close to what we saw last year.
Okay. Okay.
And then just in terms of the strength of your customers and how that's driving some deposit volume and.
And no kidding extend debt net migration continues I would expect economic activities.
Hi.
Is there anything that would stop that flow and I know that this quarter had to deal with and everything involved too, but just thinking about it outside of that.
No.
I don't think there's anything that would stop that I mean, we're not trying to actively exit deposits from the bank and Jackie where we're where we usually decline and deposits and the first part of the year and and our growth of deposits starts and.
The mid second quarter, and and remainder yet so we believe with the increase and economic activity deposits should grow. The question is how fast do they grow and it and then do they grow at the pace. They had been growing but theres all anticipation that deposits will continue to grow we just don't know how fast because we're entering to the normalized.
Season, where deposits grow and then we don't know how fast spending will pick up as well so.
Kind of a new okay.
Environment.
Yeah, no I get it and I myself and just trying to wrap my arms around it and so your thoughts on that are helpful.
Thank you and everything else I had was already covered.
Thanks, Jackie Thanks, Jack and.
Our next question comes from Tim Coffey with Jamie.
Please go ahead.
Thank you for everybody.
Good morning, Tim.
Hey, Kevin and kind of follow up on your comments about the long grass and and and you can't you you're more bullish expectation going forward is for the outlook. What do you think that translates and can you say loan growth for the rest of this year.
Hello, and we're hoping that a well we believe definitely will meet the mid single digit level depends that we're now kind of moving toward maybe upper single digits and our expectations of growth.
For this year.
Okay. Okay, and then just on the MSR recovery and the quarter.
Can you provide any color with that is that just kind of your expectation for a one time thing or is it a built up from previous impairments.
Well I think the thing is is that we had previous impairments of last year due to the speed of prepayments and we had to write down our MSR and <unk> and we did give the highlights that are this year that we'd probably see a recovery of that so that's just a.
Part of writing them up and running them down. So the thing is is that we don't see any more really large recoveries of impairments for the remainder of the year, but.
It's just.
And accounting thing you have to go through where you write them down and you're buying them back up so it just puts noise and our numbers, which we don't like.
And so but.
And our prepared comments.
We didn't factor any additional recovery into.
Our debt the run rate of noninterest income going forward.
Okay, Great and just wanted to clear that up thanks, a lot and those are my questions no problem Tim.
And ladies and gentlemen, and that concludes our question and answer session and I'd like to turn the conference back over to the management team for me.
And final remarks.
Well I want to thank everybody for your questions as always we welcome calls from our investment and analysts. Please reach out to US. If you have any follow up questions again, thank you for tuning in today and goodbye.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.