Q2 2021 First Interstate BancSystem Inc Earnings Call
At this time I'll turn the call over to Kevin Riley Kevin.
Thanks, Lisa good morning, and thanks again for all you for joining us on our 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 present.
And can be accessed on our Investor Relations website.
And then if you have not downloaded and at a coffee yet I encourage you to do so.
I'm going to start today by providing an overview of the major highlights for the quarter and then I'll turn the call over to Marcy. So she can provide more details on our financials.
During the second quarter, we generated net income of $42.5 million or <unk> 69 per diluted shares while delivering on everything we discussed last quarter.
Excluding PPP loans, we generated upper single digits annualized loan growth higher levels of net interest.
<unk> com and fee income on a run rate basis, well controlled expenses.
And excellent credit metrics, we saw and acceleration of positive trends, we experienced earlier in the year driven by healthy economic activity throughout our markets.
This resulted in.
And yet another quarter of strong deposit inflows, which grew by 12, 4% annualized and the quarter.
Noninterest bearing deposits alone grew $413 million or 33% on an annualized basis.
We continue to utilize the strong.
Interest and it inflows to grow earning assets both in loans and investment securities, which produced an unexpected increase and our net interest income excluding the impact of P. P. P fees.
Across our footprint, we have been able to effectively capitalize on high higher loan demand we are.
We're now seeing and grew our total loan balances, excluding PPP and an annualized rate of approximately 9%, which is consistent with the outlook, we provided last quarter.
Notably we are seeing balanced contributions to growth across almost all of our portfolios and markets as our clients continued.
For you to look for attractive opportunities to invest into this robust economic environment and the states we serve.
Our western markets continued to produce our strongest growth rates, but we are now seeing real improvement and our eastern markets as well incur.
Encouragingly, we saw our commercial portfolio excluding P P.
And just increased at an annualized rate of approximately 3%, which is the first quarter of substantial growth. We have experienced in this portfolio since the pandemic started.
This growth came despite line utilization remaining relatively unchanged and still well below historic norms.
Heading into the second half.
Half of the year.
We are continuing to focus around speed to market more efficient underwriting.
And we are expecting the recent growth trends to continue allowing us to come in at or above mid single digit range. We originally expected for the year.
Our continued deposit growth should enable us to put more liquids.
Liquidity to work and our investment portfolio than we initially expected that.
And the details of which Marshall will discuss later.
We will do this however at a much shorter durations to retain our asset sensitivity position.
The health of our markets is evident also evident in the continued.
Across the board improvement and our asset quality nonperforming assets nonperforming loans delinquent loans and criticized loans were all down net charge offs annualized at a percentage of average loans was only 4 basis points.
Nevertheless, we continue to take a cautious approach and retained a healthy.
And reserve, which remains at 1.38 per cent of loans held for investment and is at 1 point for 6% excluding PPP loans.
And as I, usually do I would like to add some additional color about our footprint and.
The local optimism I noted last quarter continues to be evident across our footprint.
Tours.
Is having a record season as we expected to see the parks and the surrounding hotels are full and the business are seeing activity also follow.
And April I noted the positive and migration trends across our states, which was confirmed and the last sensus and <unk>.
However, just last week and the Wall Street Journal.
Listed billings, Montana, Yes, billings, Montana, the new number 1 market on the emerging housing market index, which rates for the markets by low unemployment affordability and attractiveness for the outdoor lifestyle.
It continues to attract new residents from all over the country and in fact, we serve 3.
And of the top 5 markets on a Lynch billings, Montana number 1 quarterly and Idaho number 2 and rapid city, South Dakota number 4 and short the bullishness I expressed and April about our markets and the future of the company has been solidified over the last 3 months and the momentum of our business and sets us up for a strong.
And second half for the year we.
We are expecting solid loan growth and solid operating pre provision net revenue improvement and strong credit results to drive further improvements and our profitability metrics and with that I'll turn the call over to Marcy. So she can provide more details on the quarter go ahead and Marcy. Thanks.
Thanks, Kevin and good morning, everyone.
<unk> as I walk through our financial results unless otherwise noted all other prior period comparisons will be with the first quarter of 2020 mind and I'll begin with our income statement.
As previously stated our priority and the current operating environment is to utilize our strong deposit inflows to grow earning assets and support net interest income.
And excluding PPP impact our second quarter results reflect our execution on this strategy, which generated the growth and net interest income. We told you to expect last quarter on.
On a GAAP basis, our net interest income decreased by $1.9 million as a result of low or P. P. P fee income, which declined by $4.5 million for.
And last quarter.
Accretion income was just $200000 higher on a linked quarter basis.
Excluding the impact of the P. P. P. Our net interest income increased by 2.4% or 9.5% annualized the increase was attributable to growth and both average loans and investment securities during the quarter.
Looking ahead on and operating basis, Excluding PPP, Inc.
We would expect to see even more improvement in net interest income heading into the second half of the year.
With the continued robust growth and deposits. The net interest margin continues to be a challenge on.
On reported basis our.
Interest margin decreased 22 basis points to 8.2% and the second quarter. This was primarily due to less income derived from our P. P. P loans, which was about half of the decline and a mix shift toward investment securities at lower rates.
And the lower rates on the investment Securities reflects a full quarter impact of investments made and the first quarter.
Our net and average yield of 1.9% and then new securities added during the second quarter and an average yield of 93 basis points.
At $4, 2.6% our average loan yields excluding PPP impacts were essentially unchanged from the first quarter, although the spread between our book yield and new production.
Ordered and continued to narrow and we did benefit this quarter from an adjustment to our indirect auto dealer reserved which added a few basis points to our average yield that's not expected to carry forward.
With a continued inflow of non interest bearing deposits. Our total cost of funds declined by 1 basis points to 11 basis points and the second quarter.
As you can see on page 27 of the Investor presentation. The duration of the securities portfolio was shortened to 4 years from for 3 years at the end of the first quarter.
With the increase we've had and the size of the investment portfolio. We've taken a few actions designed to minimize the potential impact to our capital ratios and increased.
The earnings power of our cash position, which puts the effective duration at the end of the second quarter at 3.7 and 5 years.
In early June we move securities of approximately $670 million to the held to maturity portfolio.
This has the effect of eliminating a significant portion of our estimated.
Downside risks to tangible book value should rates begin to rise.
Additionally, in mid June we purchased $500 million of 5 year Treasury bonds, yielding 87 basis points, and then simultaneously initiated a $500 million 2 year forward, starting 3 year pay fixed swap at 1.1 and 9%.
We will begin receiving effective funds. In addition to our original yield when the swap goes live on June 32023.
As a result of these actions we've been able to execute our excess liquidity deployment strategy, while protecting our capital and maintaining our targeted level of asset sensitivity.
Our non interest income decreased by $2.8.
$8 million quarter over quarter to $35.3 million. This was due to the $5.9 million mortgage servicing rights impairment recovery that we recorded last quarter.
Excluding the recovery our quarter over quarter operating noninterest income increased primarily due.
<unk> are production related revenue and the mortgage banking business as a retention program came to an and and the percentage of production sold increased you can see this on page 36 of the investor deck.
In addition payment services revenue continues to outperform our expectations as a result of the increased economic activity and higher business.
Due to high credit card volume.
Consistent with last quarter's guide we continue to look for a strong second half of the year and expect our total full year GAAP noninterest income to be down low to mid single digits year over year, excluding any additional impact to the fair value of our mortgage servicing rights.
Moving to total.
Total noninterest expense, we had an increase of approximately $600000 from the prior quarter of note during the quarter. We did experience about $1 million of expenses that we do not anticipate carrying forward into the run rate for the second half of the year.
Despite those added expenses this quarter, we still.
Still expect our GAAP expenses for the full year to be approximately 1% higher than last year.
Moving to the balance sheet, our loans held for investment decreased $29 million from the end of the prior quarter due to a net decline and PPP loans of approximately $230 million, excluding PPP loans and deferred fees total.
And held for investment were up about $200 million from and ended the prior quarter or 9% annualized most of the growth came and commercial real estate construction residential real estate and and some non PPP related commercial loans.
<unk> loans continue to lag due to ongoing inventory shortages and higher than normal levels of pay offs impact.
Total our indirect portfolio.
As of June 30, we had approximately $572 million and P. P. P loans on our balance sheet with $26.5 million of associated deferred loan fees.
On the liability side, our total deposits increased $472 million from the end of the prior quarter with 4.
Packed and $13 million of growth coming and noninterest bearing deposits.
And moving to asset quality again, we saw decreases and all of our problem asset categories relative to the end of the first quarter, our nonperforming loans declined $5.8 million or nonperforming.
Farming assets declined $6 million and our criticized loans declined $38 million.
As a result of several upgrades and the AG and commercial real estate portfolios as well as payoffs on other criticized loans.
Our credit losses continued to be very low with $1.1 million and net charge offs, representing just 4 basis points annualized of average loans and the quarter.
And then following the significant build and our reserves during 2000.
20.
The improving economic forecast improved asset quality and low levels of losses, and the portfolio offset the provision requirement attributable to growth and the loan portfolio this quarter.
As a result, we did not record any provision expense and the quarter. This kept our allowance as a percentage of loans held for investment at 1.3.
At June 30 unchanged from the end of the prior quarter when P. P. P loans are excluded for allowance represented 1 point for 6% at June 30.
With that I'll turn the call back over to Kevin.
Thanks Marcy.
Nice job on.
We're up over a few comments about our outlook.
And for some further euros on bullet pretty much as we expected if not a little bit more favorable, particularly and in terms of loan growth.
As we look at the second half of the year, we expect a continuation of many positive trends.
And our markets are performing well.
And particularly on why the strong tourist season.
They are generating strong cash flow and and growing.
Growing their deposit balances, which gives us the opportunity to continue to grow earning assets and.
And to generate higher net interest income.
We are seeing good loan growth opportunities and almost all of our markets and we feel good.
The better.
So about the outlook for loan growth that we did 3 months ago.
Real estate related lending continues to see strong the strongest demand, but commercial loan demand is starting to pick up as well.
Excluding PPP loans, we think our full year loan growth will exceed our original expectations with less growth from our and the.
And second half of the year coming from a residential real estate portfolio.
In terms of fee income.
As our guidance would suggest we expect to have a good second half of the year residential mortgage demand remains strong and we were getting back to selling more of our production and we expect to see a lift in our mortgage banking revenue.
Revenue Meanwhile, payment services and wealth management continues to deliver strong results.
Expenses remain well controlled which should result in a nice improvement and our efficiency ratio and the second half for the year and credit and should continue to be very strong collectively we believe these trends should position.
And as well to see solid earnings growth and a novel a notable increase and pre provision net revenue and the back half of the year.
And with the foundation of the company being extremely strong from a capital liquidity and credit perspective, we remain well positioned to execute on any attractive M&A transaction.
And that we believe can further enhance the value of our franchise and so with that I will open it up for the call for questions.
Thank you we will now begin the question and answer session.
And question. Please first of all is on 1 on you touched on.
Wow.
And speaker phone please pickup your handset before pressing.
Yes.
And to your question. Please press Star then 2.
Good day for something and it sounds from Jared Shaw at Wells Fargo Securities. Please go ahead.
Hey, good morning, everybody.
Good morning Jared.
Maybe starting with on the on the <unk>.
Phone outlook side.
And again with mortgages.
And you're going to retain less sell more should we be thinking about residential mortgages staying flat as a percentage of the total portfolio from here or.
More from a from a dollar balance and then and when you look at the overall mortgage market expectations.
And I guess, just maybe comment on on the strength of the purchase market and and inventory and things like that and your your market.
While we are on a dollar since it bounces should remain relatively flat for the rest for the rest of the year with regards to the actual volume of purchased inventories.
And our low but.
As the house comes on the market and is sold and and the purchase volume actually is is increasing as the refinance volume is going down and so it's pretty robust here.
Okay.
And then.
Marci and maybe can you just comment on what the expectation is for us for.
Tourism of P. P P.
The fees.
At this point going forward.
You bet and so on.
We have about 26, and a half a million dollars and deferred fees at this point with about $1.1 million remaining from that 2020 originations. So that's going to come into income before.
They ended the year.
The balance of it I would guess.
And now on the end of the year, 60%, you know 50% to 60%.
I think that's where.
Reasonable to expect that to come in.
In addition to the normal amortization.
Okay, great. Thanks, and then finally.
Only.
And maybe Kevin just you know the.
Have you changed any expectations around what the deposit duration could be and I know a lot of people and we're focusing on the strength of.
The growth and the really low cost that everyone's been able to generate on deposits, but whats your expectation.
Vacation for duration is low rates start to move I know, you're clearly keeping the asset side.
Really short duration do you think that we've seen a change and what could be sort of day.
The traditional understanding of deposit attrition.
Yeah, It's a great question, Joe and I wish I had a crystal ball.
Tell me exactly what's going to happen with deposits.
Right now our expectation and I would say is that deposits were and our deposit growing season right now and so we were expecting those deposits to continue to grow.
And I think some of the growth and we've looked and it's interesting.
We grew.
About 3100, new deposit relationships.
During the quarter and the net those new deposit rate and she has brought us about $110 million. So.
I don't know I think deposit growth from this point are going to continue to grow on that.
Not sure exactly when that growth will slow down.
But right now we are at our traditional seasonal deposit growth season.
Okay, great. Thanks for the color.
And our next question today comes from Jeff Lewis with D. A Davidson. Please go ahead.
Hi, good morning.
Good morning.
First.
And I guess.
Kind of NII to continue to increase and in the second half I guess sort of begs the question on the 2 components about margin and earning asset balances and.
Is the confidence more on and you think you can keep earning asset balances up.
We're growing.
And and margin flat and just wanted to kind of understand the components of a.
Bad debt.
Yeah, and so you know if you look at what we expect for loan and deposit growth we would expect.
The second quarter.
Net new.
Jim to be to be near the bottom, excluding PPP impacts with only a little bit of run rate impact as a result of the investment investments we made late in the second quarter.
But we do believe.
And you know, we're going to see a nice lift and our net interest income.
From going into the second half of the year again, because earning asset balances are going to be up and.
Right, that's going to drive net interest income growth all bets are off with regards to net interest margin because if deposits continue to be robust growth that we're seeing it's still going to continue to put pressure on our net interest margin margin.
But net interest income we feel very strong net will increase for throughout.
And throughout the rest of the year.
Ex PPP on it.
Okay. So it sounds like more of a confidence on the earning asset balance then margin is going to do what it's going to do but.
Okay fair enough that's.
That's correct that's correct okay.
The I wanted to talk about the just the decline and and Nonperformer shipbuilding anything specific for those credits.
Yes, those were on a pandemic related or what was kind of cleaning up and the portfolio there.
Yes.
Yes, we're gonna have a chief credit officer answer that question, Mike, Yes, So as Mike Ludwig.
Lee.
The decline really was a result of payoffs and.
And a large charge off of $2.2 million associated with 1 loan so that really kind of drove that number down.
Charge offs themselves gross for relatively flat and recoveries for continued.
To be very robust and strong.
Okay, great. Thanks, Mike I'll step back.
And our next question today comes from Jackie Bohlen with <unk>. Please go ahead.
Hi, good morning.
Hi, Jackie.
I wanted to start with the mountain.
Mountain decision they know the west hub and yeah.
It's been out pacing it and I feel like that's easily I just question, but why don't you sounded more optimistic on the mountain and vision and then I saw the article you were referencing about billing and I just wanted to see how you were thinking about growth and what it was last quarter.
Well first of all.
Good positive growth is better and what we've seen for a for a period of time so.
On the West has been really holding us up so it's really nice to see real positive growth and it's kind of it's really true Montana is doing is doing really well and.
And the interesting thing is bozeman used to be.
A hot market, but now spreading throughout and Missoula, and Helena and billings and on all the different and so that growth is not only what we have which we continue to see and always saw growth and say the Bozeman area. If now spring throughout like Montana, and even in Wyoming, and we're seeing some growth for the.
And first time, South Dakota has been you know as we've been.
And always kind of strong, but and it's even stronger now so that's kind of what we're talking about but we used to see a draw.
Draw on some markets were actually.
<unk> so the growth was harder to offset but it's we don't see any real contraction of any of the markets for all.
Yeah, I think last year, Jackie we talked a lot about how we were exiting credit in the mountain portfolio debt that we didn't feel were.
And we're good credit for carry on our balance sheet and so we just don't have that headwind. This year, we feel like we have a pretty clean book, we don't have the headwind of exiting some of those credits.
What kind of exited the last actually couple of years and the Mountain Division.
Okay.
And I think about the interplay of the west and the mountain and just you know the growth optimism you, obviously had a great quarter for growth might be stronger growth and you even anticipated later in the year. It sounds like is that more.
And a reflection of favorable trends in the mountain division or is it favorable all across the board, meaning the west is growing faster than you would have expected as well.
I would say favorable across the board yeah.
Okay.
And then in terms of bad C&I growth.
I think T. P. P that was great to see is that day is that new customer related or is there something else at play. There you mentioned line utilization was fairly flat.
New customer related.
Okay.
And then just 1 last 1 and I'll step back when I think about and I know that this is more and extra central.
Question, and when I think about deposits and I understand what's going on with strong customers are bringing deposits into the bank.
I guess, what what in your mind do you think it will take for line utilization to come up from where it's at given the trends that you're seeing with you know maybe customers are using some other deposits that are coming.
And again as quickly as they're using them.
Yes.
Sometimes you want why do your utilization and sometimes you don't for Sun life and line utilization they don't can't pay it back, but I don't know I think they are flushed with cash right. Now so we're not really anticipating my utilization to pick up too fast we'd like to see it pick up and I.
I think that a lot of these customers are flushed with cash and Tonight.
And with some of the line utilization is in construction lending.
And see some of that.
And increase as we move throughout the rest of the year and Jackie I don't have the exact numbers in front of me, but we did look at kind of what our clients average balances trends were.
You know from 2019 into the current environment and they have gone up substantially.
And I agree with what Kevin said, it's just that folks have a lot of cash on hand, right now and so they're not feeling a need to borrow.
Okay.
Thanks for the extra color I appreciate it.
First question it comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Matt.
Maybe first 1 just on I know, it's not that significant.
Significant but the million dollars of unusual expenses this quarter, what did that relate to and where does that show up.
And the P&L.
Yeah, so about half of that amount and that was in salaries and wages and then the balance was split evenly between benefits and other expenses.
Okay.
Okay.
And then just on the <unk>.
Improvement and criticized loans I know you.
Kevin you've been working hard and.
Getting.
Those numbers down since you arrived and they've come down more meaningfully this quarter I guess you know what.
What changed this.
This quarter I guess, how much of that was upgrades versus.
Moving credits out of the bank and so forth.
I'm going to have our chief credit Officer, Jay again.
The answer to that question go ahead Michael.
Yeah. So.
You saw on and the reduction quarter over quarter about $13.8 million.
It was reduction and balances either.
On a line utilization coming down or just regular amortization also and our AG book, where you saw.
A fair amount come down that was just from the strong year that they had in 2020. It was an exceptional year for those those folks.
There was about of the.
The 37 and about $6 million was upgraded and then the balance are around 18 million was payoffs.
Okay.
Got it.
And then just on the <unk>.
The reserve.
<unk>.
It continues to migrate lower I guess can you give me your updated thoughts on where.
That ratio could bottom music is day, 1 still where you think it'll eventually shake out or do you feel like.
You know based on.
The current mix and.
Better macro factors you could fall below that.
You know at this point and you know just getting back to the day, 1 and around 1 point to or maybe a few basis, My Florida and that I think that I think it will get to that point over the next year.
Yes.
On the first though.
And then we'll kind of see where it goes from there.
A lot can change and a year as we know.
Yes.
Okay, and then any.
Any material shift in your M&A conversations and lift.
And since we last spoke and the last few.
Great.
Yeah.
I knew I would not get off the phone to answering some questions on M&A, but.
We continue to be very selective on what we're going to do so I mean, there's a lot of banks out there and looking for partners, but and.
And we're gonna be picky, and and if and when we do announce a transaction you can.
Rest assured and it will be a good transaction for our shareholders a good franchise builder and go for us. So we're being patient which is not normally my forte, but.
And just in time and the consolidation thing we have to do the right deal and order for us to be a consolidator.
Salary and way out into the future.
Understood. Thank you.
And our next question today comes from Andrew Shapiro with Stephens. Please go ahead.
Hey, good morning.
Good morning, Andrew Good morning.
And I hear you on the residential mortgage expectations, but just trying to maybe ring.
And now with some on the deposit commentary I guess, if deposit growth continues coming on and it just such a strong pace and above expectations would that potentially increase the appetite and.
And retaining more resi mortgage on the back half of the year or does it make more sense just to put cash to work and security interest for you can better manage the overall.
For all kind of duration.
Yeah, absolutely the second and the second comment I think putting it.
<unk> investment portfolio, where we can match duration like you just stated that would be our focus and the second half for the year.
Okay got it thank you.
And then maybe just.
And migration trends across your markets have clearly been awesome as you've noted and I picked up over the past year or so I know that drives kind of home purchases and everything near term, but have you seen those migration trends began to impact new business formation and.
And commercial loan demand, yet and or is that something that you didn't carry as kind of a longer tail.
Well I think we're seeing some right now, but I think it is a longer tail I think it's going to continue to pick up as people believe these are markets that they shouldnt invest and because of the economic growth. So that's going to continue to build.
And bill as yours.
Goodbye.
Okay and maybe.
Dale just 1 for me, Kevin and since we since we last spoke multiples kind of across the group have come on a decent amount can you just remind us how much you currently have outstanding under our buyback authorization and then any update on the appetite for repurchases.
Uh huh.
And about 400000.
And shares.
Remaining and there.
Well actually 1.9 and it's 1 thing and under the current.
Uh huh.
Current authorized buyback onetime $9 million and Andrew as we always have stated.
Really diligent on that.
And back and tangible book value dilution and so we're very cautious.
As of when we buy back our stock so that we don't dilute tangible book and and.
Kevin.
And that timeline and so we continue to monitor that and when.
And then the wind is a good time to do it and we will and if it's not we won't.
And that's just the principles that we have here and I think we feel really.
And about our organic growth opportunities and potential M&A opportunities and so you know, we probably choose to use our capital to do that first.
Hello, and understood. Thanks for the color on and I appreciate you taking my questions.
Mhm.
Ladies and gentlemen, I was reminded us and question. Please.
On 1.
Next question comes from Tim Coffey of Janney. Please go ahead.
Thank you good morning, everybody.
Good morning, Tim.
Hey, Kevin and Marcy.
I appreciate your comments on margin and I think you're spot on there. So the I guess the derivative of that question is the.
And the growth.
And we saw on net interest income this quarter, our core I think it was around 2.4%.
Is that repeatable.
Yes.
Is it low.
It could just pencil and then maybe that is that area and and I think it would be good.
Right.
No I totally and so I think it was raw condition to talk about margin when we shouldn't be really talking about spread income at this point.
And then.
And you look at your deposits deposit accounts and receive PPP funds.
Has there been a material change and those balances and last year.
Yeah.
And our deposit balances increase.
Over the last year and I don't have the numbers in front of me, but we have seen a pretty substantial increase in deposit balance.
The carrying balance in account.
Okay.
Its still sitting there.
Yes, so Tim what I think what happened is that.
Through a lot of money into some of.
These seats and and some of these businesses.
They were they were still operating and they were still making money and we're still paying their employees, but they they received excess funds. So I think there's a lot of it just was excess for them.
And it wasn't like they really needed the money to survive and and they had to utilize those funds to pay their employees and I think a lot.
<unk>, we didn't shut down and as hard as somebody other.
Markets across the country, so a lot and ladies.
No.
Lawyers benefited from it and I think they're just holding on to that excess liquidity well. We can talk on why we're not seeing language.
Got that.
Okay.
Well, that's really good to see that you're putting the money to work and the investment.
A R Mark Julio and committed to that.
And then just 1 last thing for me.
I think billings is a great town and toy deserving of that recognition so I'll step back there.
Thanks, Tim and it was a bad picture and Wall Street, though they had wells fargo's picture there instead of us.
So this is our headquarters.
And for <unk>.
Thank you ladies and gentlemen. This concludes the question answer session and I'd like to turn it back over to the management team in place on Walmart.
I want to thank everybody for their questions and as always we welcome calls from our investors and analysts. Please reach out to US if you have any follow up questions and thanks.
Thanks for tuning in today.
Goodbye.
Thank you Sir This concludes today's conference call and we thank you all for attending today's presentation. You may now disconnect your lines and there are a wonderful day.