First Interstate Bancsystem Inc (FIBK) 2017 Q4 法說會逐字稿

Good morning, and welcome to the First Interstate BancSystem's Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please also note, today's event is being recorded.

I would now like to turn the conference over to Margie Morse.

Please go ahead, ma'am.

Thanks, Rocco.

Good morning.

Thank you for joining us for our fourth quarter earnings conference call.

As we begin, it is worth noting that the information provided during this call will contain forward-looking statements.

Actual results or outcomes may differ materially from those expressed by those statements.

I'd like to direct all listeners to read the cautionary note regarding forward-looking statements and factors that could affect future results contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release, as well as the risk factors identified in the annual report and our most recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings.

The company does not undertake to update any of the forward-looking statements made today.

A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com.

Information regarding our use of the 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 from management this morning are Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer; along with other members of the management team.

At this time, I'll turn the call over to Kevin Riley.

Kevin?

Thanks, Margie.

Good morning, and thanks, again, to all of you for joining us on the call today.

I'm going to provide an overview of the major highlights of the quarter and then have Marcy provide more detail on our financials.

Marcy and I are traveling for an investor conference and members of our team are calling from around the country, so please be patient if we suffer any technical difficulties.

We're not expecting any, but we could have some.

In the fourth quarter, we saw a continuation of the positive trends in our earning power.

Most notably, we saw solid loan growth, stable deposit costs and improved asset quality.

On a reported basis, we had earnings per share $0.61 this quarter, with merger-related expenses having about a $0.04 negative impact.

I'm most pleased with the improvement that we had in organic loan growth.

In which is typically in a seasonally slow quarter for us, in the fourth quarter, we grew loans by $62 million or 3.3% on an annualized basis, as compared to the fourth quarter of 2016 when loans declined $52 million.

The 2 strongest areas of growth were commercial loans, which were up 2.5% for the quarter; and commercial real estate loans, which were up 2.3%.

From a geography perspective, both our Mountain and West division made meaningful contributions to our loan growth this quarter.

The improved loan production reflects our renewed focus on business development, including increasing our calling efforts and doing a better job of capturing high-quality lending opportunities in our markets.

Our pipeline is strong, which gives us great optimism for 2018.

Turning to the liability side of the balance sheet.

Deposits remained stable, and we had another very good quarter in terms of managing our deposit costs.

Our total cost of funds was flat for the quarter at 29 basis points.

We have been able to keep our deposit costs stable over the second half of 2017 while still paying a very competitive rate within our markets.

This has been a key factor in the margin expansion we saw in the second half of the year.

We certainly expect to see more pricing pressure as rates continue to rise in the future, but we anticipate our deposit beta will remain at a lower level than what we had beginning of this tightening cycle.

I'm also excited about the restructuring we've done within our executive leadership team.

As you may have seen last week, we announced some significant changes, including Jodi Delahunt Hubbell, who will now serve as our Chief Operating Officer, with the formal responsibilities of overseeing our company's operational functions.

Renee Newman, who has been appointed our Chief Banking Officer, her full responsibility is for managing all of our client-facing channels.

And Bill Gottwals will have an expanded role as Director of Banking, with responsibility of overseeing our branch network across our entire footprint, allowing us to provide clarity and consistency across the company.

One of the encouraging things about this realignment is that it started from the ground up, with the executive team discussing how we can make this company better.

We believe this new structure provides additional clarity around roles and responsibilities and captures on individual strengths of team members, enables us to align and focus of our 2 divisions and improve our business development capabilities.

I'm incredibly optimistic about this team and our future.

I am confident we have the right people in the right roles focused on the right priorities.

Throughout our organization, we have some of the best people in banking, and we're starting off the year strong.

Lastly, before I turn the call over to Marcy, I want to talk about the recent tax reform and the commentary you've been seeing about how banks and other companies are spending some of the benefits from tax reform.

Because we've always invested in these areas, we plan on the tax benefit to increase earnings.

Let me spend a couple of minutes on my soapbox.

We operate the company based on the value of putting people first.

This is exemplified by the value chain in which we believe that engaged employees make happy customers, which create a healthy community, of which, ultimately, our shareholders will benefit.

We believe our employees are the most important asset we have.

We have always provided them with great benefits.

For instance, all of our employees participate in and receive incentive compensation.

All of our employees participate in profit-sharing.

All of our employees participate in a robust 401(k) plan, in which the company matches 1.25% for employees' contributions up to 4%.

All of our employees get up to $300 in fitness membership reimbursement annually.

In addition, we provide great health care benefits to both -- not only our employees but their whole family at a reasonable cost.

We contribute up to $1,500 per child up to a maximum of $5,000 per family for child care for working parents who earn under $60,000.

We provide 100% short-term disability for new moms for the first 6 weeks and up to 80% for the next 6 weeks.

And in 2017, we redesigned and enhanced our health care benefits.

The new plan, which went into effect in January, improves the offerings, reduces employees out-of-pocket health care costs and prefunds HSA accounts, $500 per individual and $1,000 per family.

We take care of our employees.

Respect to the community, for years, we have been committed to giving back at least 2% of our pretax earnings to our communities, with last year's contributions being 2.1%.

In addition, we match employees' contributions dollar-for-dollar up to $5,000 per year.

We also support our employee volunteerism by matching hours worked at $10 an hour to any charitable agency.

And now, let's talk about investment in our company.

As we have discussed in the past, we have been replacing systems.

We had invested in our digital platform, with more investment being planned for this year.

All to say our commitment has been -- to putting all of our stakeholders first has been how we do business, and these costs have already been baked into our normal operating expenses, regardless of and well before the tax reform announcement.

As a result, we'll be able to use the tax savings to build up our capital levels and flow benefits through to our shareholders.

Accordingly, we announced a 70% increase in our quarterly dividend in yesterday's earnings release.

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

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 2017.

I'll begin with our income statement and our net interest margin.

On a reported basis, our net interest margin remained consistent at 3.71% in the fourth quarter.

Excluding the impact of charged-off interest and loan accretion income, our operating net interest margin increased 3 basis points to 3.52%.

The expansion in our margin is attributable to the stability in our deposit costs and improvement in our yield on our investment portfolio.

Total accretion income on the acquired portfolios was $3.8 million this quarter, which was $200,000 less than the third quarter; and early payoffs contributed $2 million to accretion income this quarter, about $100,000 less than last quarter.

While the predictability of early payoffs will continue to cause volatility in our accretion income, we anticipate that scheduled accretion will contribute an average of $1.6 million per quarter in 2018.

Looking forward, given the success we're having in managing our deposit costs, we would anticipate seeing a stable to improving operating net interest margin if the Fed continues to raise rates.

Moving to noninterest income.

We saw a decline of about $1 million quarter-over-quarter to $37.2 million.

Most of our major fee-generating areas were relatively consistent with the prior quarter with the exception of mortgage banking.

Our mortgage banking revenues declined about $1.8 million, which, along with rate pressure, reflects the seasonal decline we typically see in mortgage loan demand in the fourth quarter.

This was partially offset by smaller securities losses and an increase in other income.

Our noninterest income to total revenue ratio remains high at 27% for the quarter.

For modeling purposes, I'll give my annual reminder that, headed into 2018, we expect to see a lighter first quarter for noninterest income as many of our fee-generating areas are impacted by seasonality, and this revenue stream is typically down 10% to 12% in the first quarter.

And just a reminder, the Durbin Amendment will negatively impact us by approximately $6 million in the second half of the year.

Moving to noninterest expense.

We had a decline of $9.6 million from the prior quarter as a result of lower acquisition-related expenses.

Outside of acquisition-related expense, the most significant variance was a $2.3 million increase in the other expense category as we made the decision to be more aggressive with our initial advertising campaign and increased promotional expenses in our West division to support our branding in that new footprint.

Additionally, we incurred professional fees related to our client experience initiative that will not be repeated in 2018.

Backing out our acquisition expenses, our normal operating efficiency ratio this quarter was 57.89%.

As we start 2018, we would expect our quarterly expense run rate to increase to $80 million to $81 million per quarter, with the increase primarily driven by upward pressure on salary and wage expense.

Kevin mentioned the restructuring of our leadership team earlier, and we've also restructured a couple of our holding company departments as of the beginning of 2018.

The departmental restructure will result in higher compensation expense in the first quarter due to severance costs of about $1 million, which we will recoup as we go throughout the remainder of the year.

Lastly, as a result of tax reform, we recorded a $2.2 million benefit in our income tax expense.

Going forward, we'd expect our effective tax rate to be between 23% and 23.5%.

Looking at the balance sheet.

Kevin already discussed our loan growth in the quarter, so I'll start with our deposits.

Our total deposits were essentially unchanged from the end of the prior quarter.

Another deposit metric that we keep our eye on is our mix of deposits between consumer and business, which remains steady at 53% and 47%, respectively.

Our loan-to-deposit ratio remains strong at 76.64%.

In terms of asset quality, we saw improvement across the portfolio, with decreases in nonperforming assets, nonperforming loans, past due loans and criticized loans.

For the quarter, we had net charge-offs of $6 million or 31 basis points on an annualized basis of average loans.

This is similar to the fourth quarter of last year as there's a concentrated effort to clean up lingering issues at the end of each year.

Our charge-offs this quarter were comprised of several loans for which $3.1 million of specific reserve had been established in prior quarters.

With the improvement in overall credit quality and because most of the charge-offs came out of specific reserves, the higher level of charge-offs this quarter didn't drive a commensurate increase in our provision expense, which was $3.5 million for the quarter.

And with that, I'll turn the call back over to Kevin.

Kevin?

Thanks, Marcy.

Nice job as always.

I'm going to wrap up with a few comments about our outlook.

We anticipate that 2018 will be a very positive year for First Interstate, driven by the continued benefits of the Bank of the Cascades acquisition and a higher level of organic balance sheet growth than we have experienced in recent years.

One of our key opportunities this year is to capitalize on the cross-selling opportunities we have from the merger.

In particular, we are focused on expanding our indirect auto lending and commercial credit card business into the West division.

We plan to add people to help build out these areas in the West, which is one of the reasons we'll see modest growth in our operating expenses.

We will also continue to invest in our digital platform to remain competitive and offer our clients a more convenient way to engage with the bank.

In 2018, we plan to begin offering online application for both residential mortgage loans, small -- and small business loans, as well as introducing a robo wealth management product, which should provide us with greater efficiencies in the long run.

With the increased earning power resulting from the Bank of the Cascades acquisition and the lowering of our effective tax rate, we'll have more capital available for deployment.

Additionally, we intend to continue to use this capital to support organic growth of the company as well as to fund additional acquisitions that can further enhance the value of our franchise.

So with that, we'd like to open the call up for questions.

(Operator Instructions) Today's first question comes from Jeff Rulis with D.A. Davidson.

Just a question on the core expenses.

I think in the Q3 call, you talked about core expenses for Q4 being in the $78 million range.

Just wanted to kind of see was it sort of growth of the bank or other initiatives, as you kind of touched, that are leading to a little higher run rate?

Most of it, Jeff, was other initiatives.

We had -- we made the decision proactively to increase our advertising promotional expenses in the West, and that was a little bit over $1 million.

And then we had a consultant in that was helping us with some of our client experience initiatives, and that was about $0.5 million as well.

And we're done with that.

Yes, and we're done with that, that won't continue on to 2018.

So we just had extra -- some kind of extra kind of one-off things this quarter.

And really, the -- really, Jeff, also the 2018 run rate, they were talking about increase -- a lot of it just merit increases going forward.

Yes.

And if I caught you right, was that -- you started at kind of 81-ish level and maybe that can trend lower as that -- the comp piece falls off over the balance?

Yes.

That's correct.

That's correct.

And then any thoughts on the provisioning level?

You talked about a lot of those charge-offs were allocated reserves.

And just trying to get a sense for -- also, you do a lot of year-end cleanup in the portfolio.

How does that balance for the provision for '18 in your view?

Jeff, we look at about 20 basis points of average loans is what we'd expect.

Fair enough.

And then I just -- the last one, just to confirm, the Durbin impact.

So that's a $12 million annualized impact and it's a true, call it, $6 million in the back half.

Or does it sort of feather in, in Q3 where it's not a full impact or...

No, it's a full impact for Q3 and Q4.

And our next question comes from Jared Shaw of Wells Fargo Securities.

Looking at the loan growth and the optimism you're hearing there, is that more utilization driven?

Are you seeing your customers be more optimistic and looking to do more?

Or is it really starting to get the benefit of the expanded footprint?

And last quarter, you were talking about best practices moving from market to market.

Are we seeing more, I guess, business efficiency on the part of the bank?

Or is it more optimism on the part of customers and potential customers?

I would say it's probably we're doing better banking.

We have stronger sales price.

And we talked about instituting that last quarter, and I think they've really started taken hold.

Actually, it's interesting, we had more growth on a percentage basis in the Mountain legacy portfolio than we did in the new portfolio, so -- or the new markets.

So we're pretty excited about that.

We have weekly sales meetings where the salespeople get together, talk about loan prospects.

And we're having credit actually go to those sales meetings sort of working together as a team to make sure that we know the credit issues upfront.

And they're just doing a better job hitting the road, trying to get business.

Do you think that, that loan growth rate could accelerate as we go through 2018 as you start getting the traction -- operational traction plus the sentiment?

Yes, we're feeling better about the upper-single digit kind of loan growth for the year than the past, because it seems like we've got the Mountain division's engine starting to run a little bit smoother.

Okay.

And then on M&A, what's the opportunity for timing there?

I mean, that's -- you have this deal closed now.

Are you back in the market looking at opportunities?

Or is there anything that you're waiting for to happen first?

No, we're always in the market looking.

We continue to talk to management teams about how they see the future lined up for themselves.

And we're just taking our time to make sure that when we do something, it's going to be well thought out and something really good for our franchise.

And then just finally for me, on the indirect space, you're seeing other banks step back from that, just talking about tighter spreads and it seems like a less-attractive opportunity.

What are you seeing, I guess, that gives you optimism that this is something you still want to grow?

Well, we're being cautious.

As you saw this quarter, our indirect portfolio actually shrank a little bit, so we're being very cautious on how we're pricing this stuff.

And we're picking spots where we believe we can make profitable loans.

In areas that the loan volume is not profitable, we're stepping away from that ourselves.

So we're being far more thoughtful exactly what type of product we're putting on the books.

And ladies and gentlemen, our next question comes from Matthew Clark of Piper Jaffray.

You touched on kind of your loan growth outlook, a little more optimistic, maybe getting to the high single digits from the mid, but you also talked about stronger balance sheet growth this year in general.

I guess, how should we think about the pace of growth in the securities portfolio relative to loans?

I mean, assuming you'll continue to have some remix out of securities in the loans, but just want to get a good sense for the pace of growth in securities as well.

I mean, we use securities really as a kind of a balancing factor.

So we're going to focus on the growth of loans, and hopefully, we'll get the growth of deposits so that, hopefully, the investment portfolio will stay similar.

But if the growth of deposit doesn't stay in lockstep with loan growth, then probably some of that remix will occur.

But we're focused on loan growth.

And really, the investment portfolio is just kind of a balancing factor.

Okay.

And then just switching to fee revenue.

Curious what your thoughts on are as to whether or not you think can outperform the broader industry in mortgage this year given I think some -- what is still somewhat an underpenetrated footprint.

And then as you think about the other products that you intend to kind of overlay with Cascade, whether it be commercial credit card, SBA.

I guess how do you think about the overall fee revenue contribution relative to the total coming off 27% in the fourth quarter and how that might look in 2018 given all the puts and takes?

Well, I'll give you kind of a rundown.

Mortgage, we believe, that'll be slightly up in '18 over '17 with the expanded footprint and some of the headwinds with regards to rate.

With regards to card business or payments, we believe that will continue to increase as we've seen in the past years, continual basis.

Maybe it can pick up a little bit since we have a new expanded market out in the West.

With regards to wealth management, I think we're going to get some growth in wealth management fees due to better just pricing and managing of accounts.

We've gone through a lot of restructuring in our wealth management group to become more efficient and to make sure that we're getting the right fees that are due to us.

So what other areas?

SBA?

Service charge revenue should be probably the same.

The interesting thing about service charge revenue, I think, was the whole age of technology and digital.

We're seeing kind of overdraft income coming down a little bit.

And part of it is, I think, people are more attuned with what they have in their accounts, so they're more cautious in overdrawing their accounts.

So I think the thing is that technology has put a little pressure on that.

But I think the service charge will kind of hang in there flattish year-over-year.

So that's kind of my own.

Anything, Marcy, you'd want to add?

Yes.

I think the mix will stay pretty similar.

I would expect it will have 27%, 28% ratio going into next year as well.

And I guess, where does the SBA stand at this stage?

SBA, we're not really looking -- we don't -- we put SBA, we put it on the books more of a -- is hold on to them.

We don't have the practice of turn it around, selling it for a fee like the Bank of the Cascades.

And so we're -- we do SBA lending, we're actually trying to push it onto our balance sheet.

Okay.

And then just last one from me, just on the efficiency ratio.

Wondering what your goal might be for the year on an operating basis.

Lower is better.

We're going to continue to try to rationalize all of our expenses and start pushing it down.

We like to get down closer to 55%, so we're going to continue to focus on growing revenues and controlling expenses.

Yes.

I don't know if we'll get to 55% this year, but I think we'll be around 57% this year.

Yes.

(Operator Instructions) Today's next question comes from Jackie Bohlen of KBW.

Just want to retouch on expenses quickly to make sure I understood.

So it's an $80 million to $81 million run rate in 1Q, and that's inclusive of roughly $1 million in severance and then the seasonality of higher payroll and everything.

And then that'll trend down through the year with -- but also knowing that there'll be some additional hires as you expand on some of the products offered in the West division.

Is that a fair way to characterize it?

Yes, you should trade there.

When we talk about hires in the West division, hopefully, we're going to have some reductions in the other division.

We keep on just reallocating staff.

We add some and we subtract some, so it's -- we're not seeing that really to push too much pressure on salary expense, but it will pick up a little bit.

Okay.

So outside of unforeseen items, that $80 million to $81 million probably serves as the peak for the year?

Yes.

Yes.

Okay.

And then just a bit of clarification.

I'm not -- I can't recall who made the comment, but you'd mentioned with the additional rate hikes and the December hikes that we saw, that -- deposit cost increases in the quarter, you're expecting betas to be lower than what they were earlier in rate increases.

Did I hear that correctly?

That's correct.

And is that just more seeing what's going on in the market rather than being the proactive one within the market?

That's correct.

And we were very proactive, as you know, in the first half of last year.

But the thing is, we still remain pretty high in the market, so the market really hasn't come up and has put much pressure on us.

So we're just kind of hanging tight until other people put more pressure on us.

Okay.

And then just one last one.

Where did you see your new loan production at in the quarter?

We saw most of it in the legacy footprint, our legacy footprint.

In both divisions, if you have it -- I'm sorry, the rate on new loan production, not the loan...

Oh, the rate.

Okay.

Oh, the rate, the rate.

4.8 -- hold on, 4.87%.

Okay.

And that's for the overall...

That's overall weighted average, yes.

Okay.

And since most of the production was in the Mountain, that was the bigger determinant of that?

Yes.

That's correct.

And the next question today comes from Andrew Liesch of Sandler O'Neill.

You actually covered nearly all my questions, except for one.

Just curious, just more of a housekeeping, just the basis point impact you expect from the lower tax rate on the margin.

It will be, I think, right around 4 or 5 basis points.

And our next question today comes from Gordon Jenkins, a private investor.

You've covered part of this, but S&P Global holds a sell recommendation on First Interstate, and their report says that that's based on weak organic growth, which you've addressed some improvement on, and key financial ratios versus peers.

And those financial ratios largely compare disfavorably to peers by more than 20% on 1-, 3- and 5-year timelines.

So my question is what time line do you anticipate relative performance might justify an upgrade of the overall recommendation?

The thing is, is that it depends what ratios they're looking at.

Because sometimes, when they look at ratios, they're looking at ratio...

They're looking at all of the normal -- what are considered common financial ratios.

But the acquisition cost -- and when you add an acquisition cost, you return equity and you returned assets, it will be dampened.

So as we did a large acquisition last year, that dampened all of our financial ratios.

But if you exclude some of those acquisition costs, which is better for the shareholders, our financial ratios are in line with peers or actually stronger than most peers.

Okay.

So are you having conversations with those analysts specific to that rating?

I don't -- we don't deal with those analysts.

We deal with the analysts that have been answering -- asking questions today on the call.

Those are the analysts that we work with.

Our next question comes from Tim Coffey of FIG Partners.

Most of my questions have been answered, but I do want to touch -- ask about this.

The beginning part of 2017, we -- you were seeing some increased price competition from in-market legacy competitors.

And I was wondering, did that abate throughout the year?

Or has it remained?

No, it pretty much abated.

I think they woke up.

I think they felt that doing 20- and 30-year 4.25% fixed rate loans was not a good business decision.

So a lot of that stuff has abated in our markets.

Okay.

And if I remember correctly, that was mostly on commercial real estate loans, right?

That's correct.

And ladies and gentlemen, this concludes our question-and-answer session.

I'd like to turn the conference back over to Kevin Riley for any closing remarks.

Thanks.

As always, we welcome calls from investors and analysts.

Please reach out to us if you have any follow-up questions.

And again, thank you for turning into our -- tuning into our call today.

Goodbye.

And thank you, sir.

Today's conference has now concluded.

And we thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.