First Interstate Bancsystem Inc (FIBK) 2016 Q1 法說會逐字稿

Good morning, and welcome to the First Interstate BancSystem first-quarter 2016 earnings call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Kenzie Lawson. Please go ahead.

Thanks, Ed. Good morning. Thank you for joining us for our first-quarter earnings conference call.

As we begin, I'd like to direct all listeners to the cautionary note regarding forward-looking statements and factors that could affect future results in our most recently filed Form10-K. Relevant factors that would cause actual results to differ materially from any forward-looking statements are listed in the earnings release and in our SEC filings. The Company does not intend to correct or update any of the forward-looking statements made today.

Joining us from 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, Lindsay. Good morning, and thank you all for joining us on our call.

Yesterday, we reported $20.1 million or $0.45 per diluted shares for the first quarter. This compared with $21 million or $0.46 per share for the same period last year. The lower earnings was mainly attributed to higher provision expense, which I will discuss in a few minutes. Outside of our provision expense, on a year-over-year basis, we saw positive trends in virtually all of our key metrics, including both our spread and fee-based income, our net interest margin, and our efficiency ratio. As a result of these positive trends, our core pre-tax, pre-provision net income increased 5.4% over the first quarter of 2015.

Overall, our first-quarter results were generally in line with our expectations, and are reflective of the seasonably slow revenue generation we see at the start of the year, particularly in our fee-generating areas. Loan and deposit trends were fairly typical for what we see in the first quarter. And as a result, there's not much change in the balance sheet from that of the end of the year.

Let's talk about credit quality. Since that is on the top of your mind, with all the focus these days on the energy sector and we live in that part of the country. We saw general improvements across most areas of the portfolio, and our net charge-offs continue to be very low. We continue to closely monitor the trends in the energy sector, the health of our borrowers directly involved in the industry, and the impact to our larger regional economies.

The $4 million provision expense for the first quarter was primarily the result of the continued challenges in the energy market. We are actively managing down our exposure to the energy market. Our total outstanding loans to customers directly involved in the oil and gas industry declined to $69 million at March 31, down from $75 million at the end of the prior quarter. As a percentage of our total loan portfolio, oil and gas declined to just 1.3%, down from 1.4% at the end of 2015.

We had a slight increase in criticized loans in this portfolio, which totaled $40 million at March 31, as compared to $36.4 million at the end of last quarter. However, credit migration trends in the rest of the portfolio asset categories were relatively stable, with no new oil and gas credits downgraded to nonperforming status in the quarter.

As we previously discussed, we updated the collateral valuations underlying the oil and gas credit using the prevailing pricing within the energy market. Our first quarter valuations were estimated using oil price forecast based on what was happening in industry in late January or early February. As you would expect, the outlook at that time was very grim. So this resulted in a very conservative assumptions used in our impairment analysis and drove the majority of the elevated provision expense we recorded in the first quarter.

Since that time, the actual price per barrel has increased about $10. And we expect this increase will partially be reflected in our May pricing forecast. So for our customers involved directly in production, this small bump in oil prices allows wells to become more economically viable.

We have about 14% of our portfolio in Gillette, Riverton, and the Castro markets, which are those markets most heavily impacted by the energy sector. And 27% of our total loan portfolio is in Wyoming. So we are closely monitoring the entire region for softening, considering the impact, not only from the oil and gas but from the most recent announcements of the coal companies in this region.

That said, at this time, we are not seeing any significant changes in delinquencies in these markets. As we indicated in our last call, we have added a new qualitative factor in our allowance methodology related to the potential impact of the slowdown in the energy products on Wyoming market. During the first quarter, we increased the allocation to this qualitative factor, which totaled $1.5 million at the end of the quarter.

The additional reserve built this quarter brought our allowance for loan losses to 11.7% of the oil and gas portfolio, up from 7.8% at the end of last quarter. Given this significant reserve, the conservative assumptions we have used in our collateral evaluation, and our relatively low overall exposure to the oil and gas industry, we believe that this portfolio will have limited impact on our future financial performance.

As I mentioned on our last call, we have been able to successfully recruit several highly experienced bankers to strengthen our senior management team over the past few months. Our most recent addition is Steve Yost, as our new Chief Credit Officer. Steve has more than 30 years of banking experience and comes to us from KeyBanc, where he served as an executive vice president and credit executive.

Steve's responsibility include overseeing credit administration, credit approval, underwriting, portfolio management and credit quality for the Rocky Mountain and Pacific regions, along with overseeing the Native American and agro business lending for the entire Key franchise. Steve is a native of Wyoming, and we're glad he has chosen come back to this area of the country and work with us at First Interstate. As we continue to grow our first loan portfolio and strengthen our credit administration.

So with those comments, I'd like to turn the call over to Marcy, for a little more detail behind the numbers. Go ahead, Marcy.

Thanks, Kevin. 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 2015. And I'll begin with our income statement.

Net interest income decreased $480,000 on linked-quarter basis. The decrease was mainly due to a decline in previously charged-off interest recoveries. We had $1 million in interest recoveries in the fourth quarter, compared with just $265,000 in the first quarter. Our reported net interest margin was 3.54%, up 5 basis points from last quarter.

Although when you exclude the impact of the accretion of interest on the early payoffs of acquired loans and recoveries of charged-off interest, our core net interest margin increased 11 basis points from the prior quarter. This improvement in our core margin was primarily attributable to an increase in the yield on our investment securities and a decline in our funding costs.

Our non-interest income decreased $3.7 million from the fourth quarter, due to seasonal declines in most of our fee-based revenues and, in particular, the mortgage banking business. Changes in the valuation of the deferred compensation plans always creates a little noise in total non-interest income, but this is fully offset within employee benefits and has zero impact to our financial statements.

On a year-over-year basis, our fee-based revenues increased 4.6%, which is consistent with the overall growth of the Bank over the past year. Mortgage revenue was relatively stable compared to the first quarter of 2015. Payment service revenues and service charges on deposit accounts are always lower in the first quarter, as consumers recuperate from the holidays, and so we're encouraged to see the continued growth in those two lines of revenue on a year-over-year basis.

Wealth management revenues declined from last quarter, and from last year, mainly due to the volatility in the market and the timing of the fee assessments. However, we do continue to grow assets under management, which are now at $4.6 billion.

Our non-interest expense is unchanged from the level we reported last quarter. The most notable variation from the prior quarter was in our occupancy and equipment expense, which is attributable to change in geography on the income statement.

Starting in 2016, we began capturing expenses related to software separately from equipment costs and reclassifying them to our other expense lines. This resulted in a decline in our occupancy and equipment expense and an increase in our other expense. You should also know that in the first quarter, we recorded a $1.2 million in one-time and separation and special bonus expenses, a portion of which related to the retirement of our former CEO, Ed Garding.

Let's move to our balance sheet. Our total loans were unchanged from the end of the prior quarter. The most significant areas of growth within the portfolio were an increase of $29 million in our indirect consumer loans, and an increase of $33 million in commercial loans. The decrease in commercial real estate loans was mainly due to the repayment of one large loan and an increase in loan participation.

Ag loans declined $16 million, which is consistent with the seasonal pay downs in these lines of credit. Kevin mentioned that 27% of the loan portfolio purple is attributable to the Wyoming market. To provide a little more transparency, 54% of the portfolio is attributable to Montana and 13% to South Dakota. The remaining 6% is made up of loans throughout our footprint where we don't track the particular state of origin, such as credit cards, mortgage servicing and real estate loans held in operation.

Our total deposits were also unchanged from the end of the prior quarter. However, we did see improvement in the deposit mix, as increases in our demands and savings accounts offset a decline in time deposits.

Moving to asset quality. Our nonperforming assets declined by $800,000, and our nonaccrual loans declined by $2.5 million from the end of the prior quarter. Our criticized loans increased by $27 million, primarily due to the downgrade of borrowers within the energy sector. Our loans past due 30 to 89 days declined by $18 million, or 42%, during the quarter. This significant decline was attributable to a concerted effort to complete loan renewals within 30 days and prevent current loans from falling into the past-due category during the renewal process.

Our net loan charge-offs remain low at an annualized rate of 7 basis points of total loans. We recorded a $4 million provision expense, which increased our allowance for loan losses to 1.52% of total loans and increased our coverage of nonperforming assets to more than 100%.

And finally we repurchased 948,000 shares of our common stock during in the first quarter at a weighted average price of $26.15 per share. We have a 10b5-1 plan in place to administer the stock repurchase program, and it became more attractive to buy back shares during the weakness in the stock market in the early part of the year.

With that, I'll turn it back to Kevin Riley.

Thanks, Marcy, nice job. As we look to the remainder of 2016, our new business pipeline, we feel comfortable that we will see greater balance sheet growth and increasing revenue as we enter the seasonally strong period of the year. Despite the well-publicized challenges in the energy industry, we continue to see generally healthy economic conditions throughout our footprint.

Given the diversity of our markets, we certainly have stronger markets such as Bozeman, Montana where we will probably see double-digit loan growth this year, which balances out some of the weaker markets, like Casper, Wyoming, that are impacted by the slowdown in oil production.

As we near to $9 billion in total assets, we continue to think and act like a larger financial institution that we are destined to become. We continue to invest in people, processes, and technology systems that will enable us to effectively manage our growth.

We are implementing a new general ledger and financial reporting system, which will improve our scalability. We are adding resources required to prepare for the eventual stress testing we'll be subject to, once we cross the $10 billion threshold. And we continue to move forward with our new digital banking platform, which is on track for the fourth-quarter release.

We have an intense focus throughout the organization on enhancing efficiencies as we make these investments in our infrastructure. In many cases, we are able to retire older systems, as we adopt newer, more robust technology, which minimizes the impact to our overall cost structure. Accordingly, we believe that we can continue to enhance our infrastructure while maintaining a consistent efficiency ratio.

Gaining scale is certainly a key factor in this effort. We are pleased to take another step in our M&A strategy with the announcement of our acquisition of Flathead Bank. This is the type of smaller, easy, digestible, in-market acquisition that typically proves to be an excellent use of capital. Flathead has a good cultural fit, provides synergy as we deepen our penetration of the Gallatin and Flathead markets.

We expect the acquisition to be immediately accretive and to be a nice incremental source of earnings going forward. We are looking forward to welcoming Flathead's customers and employees to the First Interstate Bank later this year.

With this acquisition, we continue to focus on deploying capital in line with our four legs of our strategy: organic growth. M&A, stock repurchases and dividends to our shareholders. We believe will begin to see organic growth in the second quarter. Marcy already mentioned the 948,000 shares we were able to repurchase in the first quarter, and we recently announced a second-quarter dividend of $0.22 per share.

So in summary, we feel good about where we are. We continue to have top-line revenue growth on a seasonal basis, and that is building. We have adequate reserves against our loan book. We are maintaining our expenses levels while we're building our infrastructure for the future.

So with that, we'll open the call to questions.

Thank you.

(Operator Instructions)

Jackie Chimera, KBW.

Good morning, everyone.

Good morning, Jackie.

Just looking at Wyoming a little bit more, how does looking at the economy compare now versus where it was a quarter ago? Are you seeing any meaningful changes? Or is it just kind of the same caution you had on last quarter's call?

We see the unemployment rate increasing slightly since the last call, due to the fact that some of the layoffs in the coal industry. We're starting to see a little bit of increase in unemployment, but still not to a level of major concern.

Okay. Are there other areas-- I know in the past, Billings was in desperate need-- maybe not desperate need, but in need for builders and other people to help develop infrastructure and everything that's going on there. And that some could be people that could move into jobs over there. Is that the same case in Wyoming?

No because part of the unemployment and the growth aspect is slowing down in Wyoming. So I don't think they're going to be able to be put back to work.

Okay. Looking to the CRE loan payoffs in the quarter, did that have anything to do with energy? Was it an intentional payoff?

No.

Okay. And also, just on that note, as you're working through some of the energy exposure that you have in looking to reduce that, do you see that as being any sort of a headwind to loan growth throughout the year?

No, I think we will be slowly working out of it in bite-size pieces. So I don't think it's really going to affect -- since the whole portfolio is only less than $70 million outstanding.

Yes. That is true.

And then just my last question. Reconciling the criticized assets, and I may have misheard in your prepared remarks. Criticized moved from 36 to 40 in direct exposure. But then you had said that total criticized assets, the majority of the movement, was because of oil and gas -- that it was up much more than $4 million? Can you just reconcile that for me?

Hold on. I think that the whole total criticized assets were only up $27 million in total. But the oil and gas was only up $4 million.

It's just a migration within the portfolio. No specific industry.

So was a majority of the $27 million not related to oil and gas, then? Or to energy? Or are they more, not direct, but related to energy?

It's not related directly to energy, no.

Okay. I had thought you said in your prepared remarks that most of the increase in criticized was related to energy. And that's why was I confused because the dollar value was so small with the $4 million. Okay. Thank you for clearing that up. I'll step back now.

Matthew Forgotson, Sandler O'Neill & Partners.

Hello, good morning, Kevin and Marcy.

Good morning, Matt.

Just continuing on with the $27 million uptick in criticized loans. Was there any specific geography, any theme, to that increase?

No, there was no real theme to that increase. It was just a bump up, so it wasn't something that is really highlighted by any one major event.

Okay. And then the provision build this quarter, I guess I'm just looking at the qualitative factor associated with softening in the Wyoming market. Did you say that the reserve allocation there is now $1.5 million at March 31, 2016?

That's correct.

Okay. So quarter to quarter, it looks like $100,000 incremental increase; is that right?

That's correct.

Okay. I'm sorry.

No because we added so much on an individual loan basis. So that's why we only increased that one about $100,000.

Got it. Okay.

As you look at margin as we move across the year, can you talk to us as little bit about your expectations relative to the reported 3.54% this quarter?

I'll take it, even though the Chief Financial Officer probably should take that question. I'll take it. I think the margin is going to hang around in this kind of area throughout the remainder of the year.

You might see it, in a quarter, go up a basis point or two or go down a basis point or two. But our margin has been pretty stable, and I think it's going to hang around here. Part of the increase was due to really the Fed increase in the fourth quarter, as it helped our short-term investments to yield a little more and, thus, our total investment portfolio. I think it's just going to reset itself, and I think it's going to hang around here for the remainder of the year.

Great.

Unless we see a real change in rates.

Okay. And last question. Can you remind us what the unfunded direct energy loans -- what the balance was at quarter-end?

One second.

I have that right here. $26.5 million.

$26.5 million.

Thanks very much.

Yes.

Jared Shaw, Wells Fargo.

Hello, good morning, this is actually Timur Braziler filling in for Jared.

I guess my first question circles again to the reserve established on the energy book. Any of that increase tied to any specific credits, or was it all broad-based?

Most of it was tied to specific credits through the pricing deck. The only reserve that wasn't was tied to a specific credit was that general reserve on the energy book due to the qualitative factor, which was $1.5 million.

Okay. And given that much of this reserve was established when oil prices were $10 lower, like you said, should we expect to see some fluctuation in this reserve level from quarter to quarter? Or are you going to keep this more conservative reserve on for at least the next quarter or two here?

Well, the thing is, it might free up some stuff. I think it's probably going to stay. It might not require reserving in the future as much as we saw in the first quarter. The thing is, when we talked about the $10 price differential, when it was down that low, some of the wells literally were valued at zero because they were not economically viable. But $10 makes those wells actually have a value. We believe that most of the significant reserving is behind us, and hopefully we won't need that need going forward.

So we still believe the 20 basis points that we gave as guidance of the overall provisioning for the year, we still feel comfortable that could be a good number.

Okay. That's good color there.

And then just looking at capital management. You have one deal in the pipe right now, slated to close later this year. Are you looking at other transactions while closing the current one?

And what's the appetite for these smaller deals versus maybe doing something a little bit larger to ramp up growth a bit?

There's a pipeline of deals. As you saw, Glacier just closed on a small deal. There are a number of those.

We believe that there could be a small deal once a year. But the thing is, we're trying to keep the pipeline open so that if a larger deal does come around, we have the bandwidth in order to do it. You might see us do one a year of these smaller deals or skip one. But the fact of the matter is there are a lot of those little deals out there. We passed on a number of them.

So we're just trying to manage our pipeline accordingly to make sure it doesn't get too filled up with small deals, which will keep us out of doing a larger deal.

Okay. And just one more for me.

You are sitting here at $8.7 billion in assets right now. Would you be looking to do a deal that crosses you over that $10 billion threshold at some point this year if the right deal came along? Or another way of asking is: are the systems in place right now to kind of have you across that $10 billion threshold? Or is there still more work to do before you're comfortable crossing it?

If a deal comes around by the end of this year, we probably will do it because we hope to be totally prepared with our stress testing methodology by the end of this year, as well as have all the systems in place. We feel good that we would be able to digest an acquisition that would be closing in 2017.

Okay, perfect. Thanks, Kevin.

Tim Coffey, FIG Partners.

Good morning, everybody.

Good morning, Tim.

Kevin, I think it was in the last conference call, you talked about lowering some of the lines of credit outstanding to the oil and gas company clients as they came up for renewal. What is the timeline for renewing some of those loans?

I don't have a specific timeline. But you can see that this quarter, we actually reduced that portfolio by about $5 million. We will continue to look at that when they come up. But I don't have an actual duration schedule on me with regards to when they're coming due.

Okay. The criticized oil and gas loans in the quarter, was that just more loans moving into special mention? Or was it the amounts outstanding on those loans increased?

It was more loans moving into special mention.

And when we talked about -- kind of to circle back to Jackie's question -- the loans primarily being a downgraded borrowers in the energy sector, we were really referring to the Wyoming footprint. Over half of the downgrades were in the Wyoming footprint.

Okay. That's helpful. Thanks, Marcy.

And then on the 27% of the portfolio that's in Wyoming, what is the kind of loan concentrations in that market?

We'll have to get back to you on that, Tim.

I don't have the breakdown.

Okay. No problem.

Did you have any charge-offs in the oil and gas portfolio this quarter?

No.

No charge-offs.

Okay. Those are my questions. The rest of them have been answered. Thank you.

Jeff Rulis, D.A. Davidson.

Hello, this is Matt Yamamoto covering for Jeff. I just had one question.

In terms of loan composition, you experienced the highest level of growth in consumer and commercial loans. How do you feel about these two segments for the rest of the year?

Consumer -- we believe that will continue to grow because we have a major focus on that. And we feel that will continue to push forward at about the same growth rates. On the commercial side, I think it was a--

No, commercial is just general expansion of our customers in the business market. So we feel good about that. I don't think we'll see anything different next quarter than we've seen this quarter.

Okay. Thank you.

Yes.

(Operator Instructions).

I'm not showing any further questions, so this concludes our question-and-answer session. I would like to turn the conference back over to Kevin Riley for any closing remarks.

Thank you.

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. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.