Q4 2021 First Interstate BancSystem Inc Earnings Call
Thanks, Dave and good morning. Thank.
Thank you for joining us.
Yeah.
Our fourth quarter earnings conference call.
Yes.
Please note that the information provided during this call will contain forward looking statements.
Actual results or outcomes may differ materially from those expressed.
Thank you.
Any forward looking statements contained in our most recent.
Rob Lynch.
Wow.
Yes.
And our most recent periodic reports filed with SEC.
D C.
After this call.
Any forward.
Are included in the earnings release.
Yes.
Yeah.
Forward looking statements.
Good day.
<unk> already.
Yes.
On our website.
Yeah.
Regarding.
Yes.
Okay.
Thank you.
Comparable yes.
Okay.
Great.
Joining us from management.
Okay.
Thank you officer, and Marcy Mutch, our Chief Financial Officer, along with members of our management team.
At this time I'll turn the call.
Kevin.
Thanks, Lisa good morning, and thanks again to all of 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 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 for the quarter and then I'll turn the call over to Marcy to provide more details on our financials.
We delivered another strong quarter as healthy economic conditions across our markets resulted in strong deposit inflows.
Our strong level of new loan production and further improvement in asset quality.
Combined with our discipline expense management. This produced a strong quarter of earnings with net income coming in at <unk>.
$51 2 million or <unk> 83 cents.
Per diluted shares.
<unk> six.
Per share of merger related expenses earnings.
Earnings per share was <unk> <unk> higher than the operating earnings per share in the prior quarter.
While we're disappointed with our net loan growth in the quarter.
The highlight was exceptional levels of loan production that we had.
Although we are still seeing some impact from supply chain disruption and labor shortages, causing projects and investments to be delayed we had a strong level of new loan production with all of our markets, making strong contributions.
We are particularly pleased with the positive trends, we are seeing in the mountain division as Martina, let all of the markets.
This is indicative of both increasing demand and our improved business development efforts.
While we had an extremely productive quarter of new business development. This was offset by an unusually high level of loan payoffs.
Which impacted our total loan growth some of the payoffs were result of sales of companies prior to year end, while others were related to both banks and non banks offering low long term fixed rate pricing, where we made our balance sheet management decision not to compete.
As always we balanced growth with risk management in this case, we are not going to take on in its unnecessary interest rate risk just to show loan growth, particularly ahead of potential rising a rise in interest rates.
This long term approach has enabled us to grow the company, while maintaining exceptional asset quality and our targeted level of interest rate sensitivity producing results that consistently created long term value for our shareholders.
As a result of the elevated payoffs into continued strong deposit growth our cash position grew by nearly $600 million on average during the quarter to $2 3 billion or approximately 13% of earning assets. This leaves us a lot of room to optimize our balance sheet mix over time.
As we announced earlier this month.
We have received all regulatory and shareholder approvals for the merger with great Western Bancorp, which is expected to be completed on or about February one.
We are very pleased that we are on track to complete this merger just four and a half months. After announcement. This is a testament to our acquisition experience efficiencies and strong regulatory standings.
Over that time, we have made great progress in our integration planning and continue to feel good about our ability to meet our announced financial targets for the merger.
The system conversion is scheduled for the weekend of May 20th.
With great Western branches to open under the first Interstate brand.
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We expect full realization of cost.
Cost synergies shortly thereafter.
As you may have seen great Western announced its fourth quarter results last night as well showing tremendous progress working through its problem loan portfolio.
Nonperforming assets declined 13%, while criticized loans declined by nearly $150 million, excluding the loans held for sale.
On that point the team did a great job, reaching an agreement to sell $75 million of mostly criticized hotel loans and a 12% discount which is below the marks we disclose on hospitality loans designated as PCB and our initial due diligence.
Great Western has consistently resolving problem loans inside of our original estimate for PCT loan marks which may lead to a lower level of loan marks assumed in the transaction than initially projected.
Great Western also had a good quarter of loan production with total loans, increasing over $100 million adjusted for a $122 million impact on PPP loans and $36 million related to the disposition of nonperforming loans.
With a strong progress week Western has made on working through its problem loans. The frontline has been able to shift its focus.
Back to business development and capitalizing on the strong growth in many of its markets, which is a trend we expect to continue.
And lastly, we hope you saw that earlier this week, we announced significant changes in our consumer overdraft practices, including the elimination of NSF fees and a significant reduction in overdraft fees.
We're also introducing a check this account that has no ability to be overdrawn and includes debit and online banking access that will allow us to expand our product set and better serve the underbanked and our community.
As a regional bank it is important for us to be setting. The example in our market. This front.
It is the right thing to do and we hope other local market participants will follow our lead.
With an effective date of April <unk>, we estimate this change will reduce first interstate's NSF OD fees by around $5 million in 2022 .
Helping your neighbor and being a good corporate citizen.
Those are the core values of first Interstate was founded.
And they will not change as we grow they will only get stronger and with that I'll turn the call over to Marcy. So she can provide some additional details on our fourth quarter results go ahead 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 third quarter of 2021, and I'll begin with our income statement.
On a GAAP basis, our net interest income decreased by $5 $1 million, which was primarily.
Merely due to $4 $5 million decrease in PPP loan income.
Accretion income was also $400000 lower on a linked quarter basis.
Excluding the impact of PPP and accretion income our net interest income was relatively flat compared with the prior quarter.
Our net interest margin declined 22 basis points from the prior quarter to $2 six 9%, partially attributable to the lower level of Pvp and Ken.
Excluding pvp from both periods, our net interest margin decreased by 15 basis points, primarily due to shifts in the mix of our earning assets toward investment securities and cash along with modestly lower loan yields.
This offset a one basis point decline in our cost of funds.
Yields on new loan production were about 20 basis points lower than the prior quarter, but still in the very high 3% range. This decline is attributable to an intentional shift in the mix of new production toward variable rate loans, which were about 54% of the total production in the quarter.
Our noninterest income decreased $2 $3 million quarter over quarter to $37 4 million.
Primarily due to lower mortgage banking revenues, which was partially offset by higher wealth management and slot revenues.
Moving to total noninterest expense, we recorded $5 million in acquisition related expense in the fourth quarter.
Excluding acquisition.
Acquisition related expense in both periods and the litigation accrual last quarter, we were pleased with our expense management in the quarter with noninterest expense declining by $900000.
Moving to the balance sheet, our loans held for investment decreased $291 million from the end of the prior quarter, which included a net decline in PPP loans of approximately $190 million excluding.
Excluding PPP loans and deferred fees total loans held for investment declined by approximately $107 million from the end of the prior quarter, primarily due to declines in the construction and consumer loan portfolios.
This was partially offset by an increase in our commercial real estate portfolio.
The commercial portfolio was essentially unchanged from the prior quarter, excluding the PPP loan impact.
As of December 31, we had approximately $96 million.
The PPP loans on our balance sheet net of $3 8 million of remaining associated deferred loan fees.
On the liability side, our deposits continue to increase and were up 261 $262 million from the end of the prior quarter with most of the growth coming in interest bearing demand deposits.
Maybe to asset quality, our portfolio continued to perform exceptionally well nonperforming assets declined by 16% in the quarter and criticized loans declined by another 14% upgrades and pay downs.
Our credit losses continued to be low with $2 7 million of net charge offs, which on an annualized basis represented only 11 basis points of average loans in the quarter.
Given the improvement in asset quality and a strong macroeconomic backdrop, we had a negative provision for credit losses of $9 $5 million. This reduced our allowance as a percentage of loans held for investment to $1, 331% at December 31, while our coverage of non accrual loans increased to 491 person.
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Excluding the $96 million of remaining PPP loans, our allowance represented 132% of loans held for investment at the end of the quarter.
I'll wrap up with a few comments about our outlook for 2022, which at this point our first Interstate on a standalone basis.
We will provide additional color on the combined company once we have a clear understanding of the purchase accounting impact at the end of the first quarter.
Our outlook assumes 325 basis point fed hikes, beginning at the beginning of April August and November .
Excluding pvp.
<unk> mid single digit loan growth.
And for deposit balances to be relatively flat for the year.
Excluding PPP income, we expect mid single digit net interest income growth.
We would expect the net interest margin to be relatively flat in the first quarter again, excluding PPP and for the first quarter to be the low point of the year.
Excluding the MSR impairment recoveries in securities gains we saw in 2021, we expect total fee income to be down mid single digits, which conserves, which includes a conservative outlook for our mortgage banking revenue and fully considered as the roughly $5 million impact we discussed earlier related to <unk>.
Consumer NSF and overdraft fees.
This also assumes no MSR impact in 2022.
Excluding the merger charges and litigation accruals that were incurred in 2021, we expect our operating noninterest expense growth to be in the low single digits.
This is a great result, considering the inflationary pressures in the market today and as a result of the scale of efficiencies. We have worked so hard to put in place over the last few years.
Of course, we know we won't be operating on a standalone basis, but we thought it was important to provide a sense for the positive trends, we expect in our historical business.
In regard to the acquisition.
A lot of moving pieces, but at this point, we feel good about our ability to deliver the earnings and performance metrics, we projected at the time of deal announcement.
So with that I'll turn it back to Kevin.
Nice job margins.
On top of our priority list.
This year is executing a smooth and efficient integration of great Western's operation.
After the system conversion is complete in May.
We should realize most of the cost savings projected for the transaction starting in the third quarter.
As our franchise grows to more than $32 billion in assets with more than 300 branches across 14 States. We believe it is important that we continue to maintain the culture that has led to a long track record of success.
That culture includes our strong commitment to making our communities that we live and work positive.
We are excited to support the effort.
Of the $20 million contribution to the first Interstate foundation that we announced with the deal. These funds will allow us to continue to make.
Impact in our legacy communities and immediately provide support across our expanded footprint.
As I mentioned earlier.
We're already seeing great westerns commercial banking teams shift its focus back towards business development, which we expect to continue after the merger.
With the progress that great west resume working down its problem loans prior to the closing we should have fewer headwinds to our total loan growth that we expect at the time, we announced the deal.
Bind with strong levels of loan production that we're currently seeing at both first Interstate and great Western we believe our original pro forma growth expectations.
May prove conservative.
As we look ahead to the year, we're excited by a number of catalysts that we have in place to deliver strong performance.
Economic conditions in our markets are fundamentally healthy.
We are seeing increasing loan demand.
We will increase our exposure to faster growing markets following the closure of the merger.
Both first understanding great western and have good momentum in business development that should only accelerate as we leverage the combined strength of each organization.
We will start seeing the accretive benefits of the transaction in a more meaningful way during the second half of the year filing the system conversion.
Our balance sheet is very well positioned to benefit from rising interest rates and we have the technology and the products to stay relevant in this highly competitive marketplace. So with that I'll open the call up for questions.
Thank you.
You bet.
Please press star followed by one on your telephone keypad.
Any reason you would like to turn that question. Please press star followed by Kate again to ask a question that is star followed by one.
Okay. Our first question comes from Jared Shaw of Wells Fargo. Jared. Please go ahead.
Hey, good morning, guys.
Good morning, Gerrick Thanks Darren.
I guess, maybe starting with loan growth.
Your tone sounds optimistic, but then when we look at the the original.
Your announcement guide of 3% to 4% that seems pretty pretty light compared to the optimism that we are seeing some from peers with growth I guess with great western being able to disclose some more of those troubled loans earlier why aren't you more aggressive in looking at your your loan growth or setting your loan growth targets for the year is it still seems pretty low.
Yes.
Well as John as you know in the past we were always conservative with our estimates of where we can do we feel good about it but we don't want to get out over our skis with regards to projecting.
More than what we have already projected.
And I think we do feel optimistic about great western but theyre resolved their problem loans at a pretty good pace. So we just still look at that at this point at a net zero.
Okay.
If we if we didn't see growth come in better than expected what would be what would be driving that would that be.
Lower paydowns higher utilization and new customer acquisition, I guess, where do you see the most optimism.
I see most often is if the if the marketplace hopefully get some rational thought process and what they're doing with regards to loans I mean, I think in the fourth quarter people believe that interest rates are going to be zero for a long extended period of time and they were doing things that I would say that.
Pretty risky to put on their balance sheet and people put a lot of loan growth on at rates that I am sure. They probably have a little bit of an adjustment on right now.
Okay.
Okay, and then can you just give us an update or a reminder of what happens at the B shares and how much of that is automatic versus something needing to happen and.
So when you think those can be gone in.
The stock potentially it could be included in some indexes.
Right now my belief is that they will be.
They go away at the end of March.
Is that the record date of the annual shareholder meeting.
Automatic and sorry, Matt.
At the end of March.
Okay. So theres no no vote required no procedural just no no no.
No.
No no.
And I guess, just finally for me.
At announcement it sounded like Mark was going to be staying on as is.
As far as the management.
He is not on this list I guess.
Any update on.
On what is going on there and any other thoughts on who from great western could be.
<unk> going forward.
Well, we have two people from great Western that we announced they're moving forward as the CIO, Scott and are cheaper as their chief risk officer, Carla will be moving on with us to take over those positions at the combined institution Mark has decided to move on and pursue other interests.
Okay. Thanks, so much for taking the questions.
Thank you Jared.
Your next question comes from Matthew Clark of Piper Sandler Matthew. Please go ahead.
Yes.
Hey, good morning.
Good morning Martin.
Yes.
Maybe getting back to the payoff activity.
It sounds like it's.
A function of a number of things, but do you have a sense for how much of that might have been unusual or outsized were there any lumpy.
Pay offs I'm trying to get a sense for your payoff expectations going forward.
And whether or not you need that.
Does that phenomenon may not necessarily changed.
In the near term and kind of what you are.
Embedded assumptions are for.
Growth that drives that mid single digit NII growth.
Yes.
Does it just yeah.
Can't just totally predict embargoed I'll give you my own opinion on what's going to happen, where we're seeing right. Now is that people were forcing growth in their balance sheet in the fourth quarter and they were doing stuff. I think people are are not in the mood of forcing that activity as much I think paydowns were seeing might subside a little bit due to the fact that the.
The aggressiveness of people trying to book low rate deals.
Is slowing.
Okay. Okay.
And then on.
On the core NIM outlook being relatively stable here in the first quarter that's encouraging.
But also a little surprising to me.
Given that you had deposits up and loans down this quarter and what that.
Can do to your average earning assets in the upcoming quarter. So I guess.
What are there.
What's also helping to kind of stabilize your view there.
Yes.
Again, I think the first quarter will be the low point for next year, but that said we are seeing some better yields on the investment portfolio.
We've seen in the past and so that's going to help drive that to be a little bit better than you might expect.
Okay.
And then just on the excess cash continues to build and I know you guys are keeping your powder dry with rates expected to go up but how quickly might we see you.
Redeploy that.
Excess cash here this year.
Well, we're going to be diligent on that we're going to continue to deploy it.
<unk>.
I wouldn't make a projection that we will not have this much cash on the balance sheet as we go from quarter to quarter. It will continue to.
Move down.
As we go out throughout the year as we invest either in the security portfolio or into loans.
Okay, and then just the.
Timing of the.
The $5 million coming out of revenue from the <unk> overdraft, one when does that start.
And as it starts April 1st yes.
Okay. Thank you.
Yes.
Yes.
Thank you Matthew.
The next question comes from Jeff Lewis D. A Davidson Jeff. Please go ahead.
Thank you good morning.
Good morning, Jeff.
So this is actually on Jeff's associate on for Jeff. This morning can you speak up I can't we can't hear you.
Yes. This is Andrew <unk> on for Jeff.
Davidson.
First question.
Does the fact that great Western had net loan growth in Q4 change your outlook for consolidated growth in 2022.
Thank you guys.
Did not expect any net growth out of great western through 2023.
Okay.
As I would say one quarter doesn't make a trend do we feel better about the future absolutely.
And we're hoping that continues so it could change our outlook, but I don't want to have one quarter change the whole view of what might happen. So it makes us feel that we.
We were conservative at this juncture and we hope to see better results moving forward.
Okay. Thank you very much that is fit for me I will step away.
Thank you Jeff.
Our final question comes from Andrew <unk> from Stephens Andre. Please go ahead.
Hey, good morning.
Good morning.
And maybe just to start Marci I was a little bit surprised to hear the guidance for I think it was relatively flat deposit growth in 2022 on an organic basis.
Was hoping you could just provide some more context there.
Is there any kind of intentional runoff youre anticipating kind of improved deposit mix or just can you maybe just talk to the drivers behind that.
I just think.
The PPP loan impact on the stimulus impact gone and just what the markets are seeing just with just.
Muni it could be some fluctuations in muni deposits and things like that we just don't expect it'll be.
Flat year over year is what the expectation is following our normal seasonal trend. So again down in the first quarter and then building back up as we go through the year, but relatively flat year over year.
Andrew as you move through the year.
If we don't have the normal.
The run down of deposits that we normally see in the first quarter over the history of this company outside of the PPP process.
We could have positive loan growth positive deposit growth.
The question is when does it when does it stop it and a lot of our customers have higher than average balances deposits when do they start utilizing that.
And do we see a rundown if we don't see a normal seasonal rundown in the first quarter our deposits normally grow starting in the second quarter through.
Third quarter, and then kind of slowdown in the fourth.
So.
We don't know when theyre going to start utilizing those deposits, maybe it's a new new.
Place in banking, where people keep higher balances but.
We just don't want to over forecast deposits continue to grow when we.
We're kind of charting new territory here with regards to how consumers are behaving.
But so far the indications are that we follow historical trends.
Yes.
Okay.
Sure.
Got it and we will know at the end and we'll know more at the end of the first quarter because our deposits will grow in the second and third because we are as you know we arent tourist industry kind of we have a big tourist industry here and Thats brings a lot of extra money into our markets, which causes our deposits to grow.
Yes, okay.
Really helpful color I appreciate it.
And then maybe on I heard your point on kind of a full realization of cost synergies.
The conversion process.
I was curious I appreciate your guide on low single digit expense growth.
Just thinking about kind of a $56 million in cost saves coming from great Western.
Any reason to think that number might have potentially changed just given any.
Potential wage inflation pressures that great western or should we still kind of view that $56 million a good kind of knocked off that number.
I think if you should feel good about that.
We already have plans in place so we feel good about it so you should feel good about it.
Okay.
And just last one for me.
I think we've generally seen a dividend increase in the first quarter I think it's the same here at <unk> 41 per share or is it more just related to kind of pending merger anything changed with dividend strategy and then can you just remind us how youre thinking about potential for a buyback at these levels.
Well I would tell you that buybacks would probably not going to happen at this level.
The dividend payout ratio might be a little higher this year, just due to purchase accounting and stuff like that but we're going to maintain.
What we can with regards to the dividend and.
Next year hopefully.
Pans out the way, we think it's going to be with the success of great Western integration dividends should increase from there.
Okay.
Thanks for taking my questions.
Thanks, Andrew.
Thank you Andrew.
There are currently no further questions registered so as a reminder, staff followed by one on your telephone keypad.
There are no additional questions waiting at this time, so I'll pass the conference over to the management team for closing remarks.
Thank you all for your questions as always we welcome calls from our investors and analysts.
Please reach out to us if you have any follow up questions. Thanks for tuning in today and goodbye.
Okay.
That concludes the first Interstate bank system incorporated fourth quarter earnings Conference call. Thank you for your participation you may now disconnect your lines.
Yes.