First Interstate Bancsystem Inc (FIBK) 2011 Q4 法說會逐字稿

Good morning and welcome to the First Interstate BancSystem's Inc. fourth-quarter 2011 earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Marcy Mutch, Investor Relations officer. Please go ahead.

Thanks, Laura. Good morning. Welcome and thank you for joining us for our fourth-quarter investor conference call. Before we begin, I would 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 10-Q and 10-K.

Joining us from management this morning are Lyle Knight, our Chief Executive Officer; Terry Moore, our Chief Financial Officer; and Ed Garding, our Chief Operations Officer. Lyle will begin by giving you a general overview of this quarter's results and review economic conditions within our footprint. Terry will follow up with more specific information behind the quarterly results and provide a general review of credit quality information. Ed will also make a few comments about his transition to CEO and his plans for the Company.

Bob Cerkovnik, our Chief Credit Officer, is also with us this morning. Bob will be available during the question-and-answer time to address specific questions regarding our loans and asset quality.

At this time I would like to turn the call over to Lyle Knight. Lyle.

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

Well, this is my last call and my last chance to speak with all of you. On future calls I will be a listener rather than a participant; so I am delighted to tell you this morning that last night we reported earnings for the fourth quarter of $12.4 million, which equates to $0.29 per diluted share. This represents an increase of 12% on a linked quarter basis and 24% year over year.

Now we are all aware of the historically low valuations for banks over the past few months and we were no exception. As a result, we are currently in the process of evaluating the Company's goodwill for possible impairment.

As you may be aware this is a two-step process. We have hired the accounting firm of Deloitte, who is in the process of conducting step one. Should we not pass step one, the firm would then proceed to step two to determine the magnitude of the impairment, if any. When the process is complete, we will alert you through an 8-K whether or not impairment has occurred and the extent of the impairment, if any.

Well, let's talk about the business. On the economic front, we are optimistic. As you are all aware, on a national level we are seeing some upward movement in GDP and existing home sales. Consumer confidence is seemingly being restored. Even globally, the outlook isn't as bleak as it was just a few months ago.

For 2011, our local economist in Montana described our growth as painfully slow. And we would agree with them. While slow growth is predicted to continue for 2012 we believe there are now some positive indicators that forecast upward momentum.

Our unemployment rate in Montana dropped from 7.7% in September to 6.8% in December. Billings, home of our headquarters and our largest market, is a bright spot. Billings is benefiting from the energy industry, particularly the Bakken oil field. We are seeing increased activity for businesses such as manufactured home sales, equipment repair, oilfield-related product fabrication, and general services.

Was about a year ago we indicated the Gallatin Valley was one of our stressed markets. Well, Montana State University along with the technology industry in Bozeman is helping stabilize that area. We have seen a drop in unemployment rates in Gallatin County from 6.7% a year ago to 6.2% at the end of 2011. Over the winter we continue to see sales of OREO properties in this market and are seeing stabilization in real estate prices.

The further west you go in Montana the slower the recovery. The Flathead market struggled last year with high unemployment, declining real estate prices, and a late tourism season. While unemployment rates in the area have improved from over 12% a year ago to 10.6% at the end of 2011 they are still far higher than the national or state averages.

Glacier National Park visitations were down 16% in 2011. However, at Whitefish Mountain Ski Resort, 2011 was a record-breaking year. And based on season passes sold they anticipate the 2012 ski season to be strong as well. Looking forward tourism experts are considering a new niche segment of sustainable tourism called geotourism.

Geotourism focuses on preserving and sustaining the geographical character of an area and would highlight the natural resources of the Flathead Valley, along with providing visitors with the distinct flavor of our small western communities. Additionally with low real estate prices and a strong Canadian dollar, the Canadian influence in the Flathead should remain strong.

We would not define Jackson, Wyoming as recovered. However we are seeing some improvement in the economy. The Jackson Chamber of Commerce visitor inquiries in 2011 were up by 9% compared to the prior year. Lodging occupancy rates were stable during 2011 and 2010. For the year, Yellowstone National Park visitations were down by 6%. But remember, 2010 was a record year so the 2011 visitations were still very high.

Construction permits were up by 18% last year. While we are still waiting for fourth-quarter data, we know that third-quarter real estate sales were up by 25% in terms of the number of sales and 8% in dollar volume as compared to third quarter a year ago. Interestingly, of the residential sales under $0.5 million during the first three quarters 68% of the buyers were local residents and 43% of the sales were for cash.

We are seeing the gap between listing prices and selling prices begin to narrow but would still consider the real estate market there to be stressed because we have yet to see any upward movement in prices, based on new appraisals that we are receiving.

In the rest of Wyoming, energy activity and job growth are the bright spots and unemployment remains low at 5.8%. Jobless rates improved in every county in November. All sectors with the exception of hospitality and the education health area experienced year-over-year job growth through November. Sales and use tax collection for most counties were ahead of last year. Overall, state housing prices in Wyoming improved by almost 3% over 2010.

In South Dakota, unemployment rates are still among the lowest in the nation at 4.2% as of December. While the overall South Dakota economy is strong, the gaming industry in Deadwood is facing challenges with revenues being down from prior years. Within our entire three state footprint agriculture and commodity prices and production remain strong and our ag customers had another good year.

Although we are encouraged by the positive signs within our markets, in particular the unemployment rates, we do think the economy remains challenged and that net new loan growth will be slow. We remain focused on growing loans but in order to enhance revenue growth, our attention is also on non-interest income. We are putting additional emphasis on the sale of fee-based cash management products because our customers are very liquid these days.

Also, our strategy surrounding debit and credit cards continue to generate additional profitability in spite of the Card Act and the Durbin Amendment. All of this should help us offset weaknesses in spread income until loan demand picks up as economic recovery gains strength.

We were pleased that total revenues for the fourth quarter were up 4% over last quarter. This was largely driven by income from the origination of sale of loans and net gain on disposal of investment securities.

Like most in the industry we continue to look at meaningful opportunities to become more efficient. We continue to develop strategies to reduce non-interest expense which decreased $3 million year over year. However, I think the clearest impact that we saw from the positive data points I discussed earlier was in our level of problem loans. We experienced a 10% decline in total criticized loans during the fourth quarter. We communicated all of last year that we expected non performing assets to peak midsummer 2011. Well, this occurred and we continue to see modest improvements in our credit metrics.

Today, we will be issuing a press release announcing the appointment of Teresa Taylor to our Board. Teresa Taylor has most recently served as the Chief Operating Officer of Qwest in Denver, Colorado.

With that let's turn it over to Terry to drill down into the specifics for the quarter.

Thanks, Lyle. I would like to start with the net interest margin. We saw a continued reduction in cost of funds of 6 basis points on a linked quarter basis. With a slight decline in average loans along with a reduction in the yield on our investment portfolio, this resulted in a 5 basis point decline in our net interest margin to 3.79%.

While average loans declined $55 million this quarter, much of the decline was due to movement of lower quality loans out of the portfolio. So the average yield on loans remains stable.

We will remain focused on keeping funding costs low but we will need to experience loan growth in order to see any meaningful improvements in net interest margin. It is worth noting, however, on a year-over-year basis our net interest margin has actually improved. A decline in short-term liquidity along with a $265 million decline in average interest-bearing deposits year over year combined with a significant decrease in funding costs resulted in our net interest margin improving from fourth-quarter 2010.

In the investment portfolio, we made nearly $500 million in purchases with a current yield of 1.35% with 75% of these purchases being callable agencies all during the fourth quarter of 2010 or, excuse me, 2011. In this kind of rate environment with such a large portion of our earning assets and investments it is going to be difficult to maintain net interest margin. Therefore we will likely see a few more quarters of net interest margin compression.

Now onto non-interest income. With mortgage interest rates at historical lows, income from the origination and sale of loans continues to be strong. 68% of this quarter's activity was from refinancing activity. Purchased activity remains stable as well with around $100 million in originations generated in each of the fourth quarters for the last three years.

Heading into 2012 our origination pipeline is full. While we expect the level of refinance activity to decrease we see the revenue stream from purchased activity remaining consistent with opportunities for growth.

We reported a $1.5 million investment security gain due to the recognition of unamortized discounts on investments which were called by the issuing agencies during the fourth quarter to. And as mentioned in the release even though the Durbin Amendment doesn't apply directly to us, rate changes from our service providers have resulted in slightly decreased fees on debit card transactions with the change being offset by increased volume and transactions.

At this time, we anticipate interchange income to remain stable for 2012 with an opportunity to grow as a result of additional customer penetration and utilization.

As we stated in the earnings release, salaries and benefits were up during the quarter due to higher levels of bonus accruals, increases to our group health insurance, and market value adjustments related to investments in the deferred comp plans. OREO expense of $2 million consisted primarily of valuation adjustments to properties within our stressed markets and we would anticipate continued elevated OREO expenses for the next few quarters.

Now to the balance sheet and overall credit quality. Growth in net loans continues to be a challenge as we saw a decline in outstanding balances of $89 million during the fourth quarter. For this past quarter, 30% of the decline was in construction loans and within those construction loans, $11 million due to charge-offs and transfers to other real estate.

Our construction portfolio continues to shrink and we expect this to decline yet further, perhaps to around $300 million over the next several quarters. We say this because just looking at the land acquisition and development bucket we are already down to $279 million with $108 million of that classified as criticized assets.

However if we look back year over year, 87% of the decline in loan balances is attributable to the stressed markets. And more positively year over year we did see net growth, loan growth in several of our Wyoming markets. As Lyle mentioned, we are seeing positive economic developments in our area and although the first quarter of a calendar year is not a period of time when we would generally experience loan growth, we are hopeful that 2012 will generate more activity than the past couple of years.

As economic conditions improve, we intend to continue to be a leader in our markets and are ready to make loans as expansion opportunities occur. It is just a little early to predict when that might occur.

We continue to see improvement in both non-performing loan and nonperforming asset metrics. Most encouraging is the $70 million linked quarter decline in criticized loans. $21 million of the decline was due to charge-off of nonaccrual loans and $17 million was transferred to OREO. This was partially offset by $21 million of inflow related to three borrowers in our Jackson market. The balance of this meaningful decline was due to either normal paydowns or upgrades in loan ratings.

We saw an increase in the accruing loans 30 to 89 days past due with the majority of the increase related to one $8 million commercial credit that is in the process of extension.

As we said last quarter, we expect to see increases in OREO inventory which grew at $12 million for the latest quarter. Additions consisted of 25 properties, 17 of which were in our stressed markets. While there are several smaller properties that create a lot of noise in the equation, the bulk of the increase consists of two residential properties valued at a total of $9 million and a land development property valued at $3 million.

We are pleased with the Q4 sales activity with gross sales of $4 million consisting of 25 properties which were sold at a net slight gain. Still, we expect to continue to see increases in OREO over the next couple of quarters as we work through nonperforming loans. We anticipate around $10 million to $15 million of additional transfers to OREO in this first quarter.

Net charge-offs for the quarter were $21 million and over half of the charge-offs related to five borrowers which included one commercial, one residential real estate and three construction real estate borrowers. As far as the run rate for 2012, we will continue to work down problem loans and expect charge-off levels to remain high, perhaps a bit choppy but at lower levels than reported in Q4 for the next few quarters.

Capital remains healthy and we reported continued improvement in our capital ratios this quarter. In late December we announced an increase in our dividend of almost 7% to total of $0.12 per share per quarter as a result of our improved earnings and high capital levels. Based on our current stock prices, the dividend yield is a healthy 3.4%. As profits continue to improve and capital levels increase further, we will implement strategies to deploy capital in ways that we believe will create the most value for our shareholders.

With that I'll turn it back to Lyle.

At this point I would like to introduce Ed Garding. As you know, Ed has been named the new CEO effective upon my retirement on April 1. Ed has been with the Company for many years and has been an integral part of its growth and success.

Within the past decade, he has served as Chief Credit Officer and Chief Operating Officer and is fully prepared to assume the role as Chief Executive Officer. Many of you met Ed almost two years ago when we were on the road during the IPO. We've spent our time during the last few months developing strategies to provide for a seamless transition from me to Ed.

So Ed, would you say a few words?

Thanks, Lyle. I'll start by saying I am also looking forward to Lyle's retirement so that I can finally straighten this place out. (laughter). Just kidding.

But seriously, Lyle and I have worked closely and for 14 years and become good friends and we really do think that the transition will be seamless in many ways. We do have a formal transition plan that we have worked on, along with help from our directors and support from our directors to make sure that our customers, our employees and our stockholders aren't surprised by anything.

Along with that, we are also working on a strategic plan and this is not the type of the typical strategic planning process where you take a two-day retreat over a weekend and come back with five or six action items. We have actually been working on this with some intensity for eight months now. And we started by studying our Company internally so to speak, studying our customers, studying the area that we do business in and the banking industry, and then making conclusions that we think are good for the Company based on what we found.

And interestingly, every time we opened a door we found an opportunity. And we found opportunity to serve existing customers better than we are and with more products. We found opportunity to gain more customers. We found some opportunity to expand our territory over the long term and we found opportunity to operate more efficiently, mostly through more standardization of some of our processes and some consolidation of what we did.

We know that no business model works forever; and so we think that the timing matches up perfectly for us to change our business model especially in respect to how we deliver product and service to the customer.

Now at the same time, as the former Chief Credit Officer I will work closely with the credit department on their focus to continue to reduce levels of nonperforming assets. We will continue to do business with the long-term perspective in mind and I am ready to lead us through the steps that are necessary to help us perform today and tomorrow.

Thanks, Lyle.

Well, thank you, Ed.

Listen, in conclusion, let me say I have enjoyed so many of you that listen in on this call and I want you to know that I have appreciated your advice and I have certainly appreciated your friendship. You need to know that First Interstate will remain as a leader within our marketplaces. We will emerge, we will embrace the changes coming our way and we will seize the opportunities that are in front of us.

I have enjoyed my 14 years with this Company and look forward to seeing it continue to grow and to prosper.

Having said that, let's open it up for questions.

(Operator Instructions). Brad Milsaps of Sandler O'Neill.

Good morning. Just maybe a quick question on the expenses. You guys did a nice job controlling expenses this year. I think they were down about 2% year over year. The number jumped up in the fourth quarter and you guys alluded to some of those items.

I am just kind of curious how you are thinking about that in 2012. I know in the last couple of quarters you have outlined trying to take advantage of some low-hanging fruit that is out there and maybe some larger wholesale expense reductions. Can you talk about that a little bit and how you feel about controlling the expenses in this type of revenue environment as you move into this year?

Thanks, Brad. Certainly, it has been a focus for us in the past and it will be in the future and it is yet today. We've made great strides in progress on a number of expensive areas. Obviously we've reported improvement from an efficiency viewpoint just in efficiency ratio, but efficiency is measured by operating our business with fewer employees as well.

From an expectation of 2012, we have a focus -- or maybe an expectation would be a way to put it -- that our run rate in the quarter 2011 as it relates to salaries and benefits in particular is a little high as we made some adjustments to bonus accruals and health insurance-related activities and just the variances in deferred income. And so as you would try to project forward or estimate where will salary and benefits go, we think that the Q4 area is a little high for ongoing run rate.

But we continue to have a tremendous focus around just general operations and improvement. We have a business process improvement division and process and focus, and we continue to look for opportunities to streamline and enhance our customer service to our customers and do it more efficiently.

Have you got some more specific questions you would like to delve into there, Brad?

No. That was helpful. Just in terms of the credit cost, you talked about another $10 million or $15 million of NPLs that would flow into OREO in the first quarter yet you expect charge-offs to be down. Do you expect a larger hit in the OREO cost bucket versus net charge-offs? Or how do you see that playing out throughout the year?

To the extent that things progress and we are optimistic and hopeful, given the economic climate we're in that we will see progress on our criticized loans and our charge-offs would decline over time and that our provisions would decline over time as well. But I would say as it relates to other real estate we do see additional other real estate coming into our books as we work through these credit issues to the extent that there are operating costs to hold those. Those will increase some but, frankly, that has been a smaller portion of our total other real estate expense in the past than especially impairment and write-downs of other real estate.

So we would not, in spite of other real estate increasing some this year from where we were in the low marks of this past year, we would not expect that the impairment would increase and in part because we are not seeing continued deterioration of underlying values of the assets that we are holding and not expecting a significant decline in the underlying appraisals of the OREO.

So perhaps we will continue to have a meaningful amount of other real estate impairment as we have in the last couple of years. But I don't see it increasing by any meaningful amount anyway. It might be bumpy from quarter to quarter but as we would look for a whole year's timeframe I don't see a lot of more impairment than what we had last year which I think was in the $7 million range.

Okay. Thanks, Terry, and, Lyle, just want to say this luck in retirement. It has been a pleasure working with you. Thanks.

Thanks, Brad.

Matthew Clark of KBW.

Good morning. With the -- Terry, you gave us some comments on the margin. It sounds like some modest pressure to continue here until loan balances stabilize. But can you give us a sense for how you might be thinking about things since the Fed suggested they might be on hold for another year into late 2014? Any increased appetite to take -- reach for some -- not reach but just get some additional yield there or anything you might reconsider on the funding side too?

You know, Matthew, that is a great question but I would say as it relates to particularly the investment portfolio, we are not expecting to change our investment philosophy and our basic structure of the investments. So, it may change a little over time but it is not by an intent to respond to the current extended low yield environment.

Our portfolio, just for a little more color on that, is computed at year end to have an effective duration of about two years and some day rates will increase. There was some Fed [governance] this morning indicating that it -- the recommended increases should perhaps occur earlier than was communicated a week ago by Bernanke.

So who knows when that will occur? But there is certainly a sensitivity that we would be prepared from not only liquidity but a yield perspective -- or a risk perspective.

Our investment portfolio as structured at the end of December would show that even if we had a 300 basis point shock in rates, the whole yield curve moving up 300 basis points we would be -- have a duration extension to about 3.4 years. And that seems like an appropriate measure for us. We want to keep as -- we want to keep a good deal of liquidity at hand as we do expect to be prepared for the option to grow our loan portfolio.

We do still see some opportunity and cost of funds although, obviously, as we get closer and closer to zero, the opportunities are a bit narrow. But as we have demonstrated over the last several quarters, we are able to still see our cost of funds decline and we still see some opportunities there.

Not directly related to margin but indirectly as we have certainly a thrust as Lyle mentioned about cash management services, we have had cash management services for a long time. We are enhancing our cash management services to commercial and consumer depositors and we do think that will make our deposit side stickier, and as you saw in the numbers we have had just tremendous growth in the non-interest-bearing area which has helped us in our overall cost of funds as well.

And your borrowing costs are around 1% now. I assume there's not much to do there.

That would be correct and, in fact, there's very few dollars outstanding there. So those are just going away. I'm not sure what the numbers are but they are pretty nominal on just the borrowing side.

Okay. And then as you guys continue to work through the criticized assets and can you give us a sense for --? I know you guys have taken I think a more measured approach to making sure you can get out of these things and maximize value but just trying to get a sense for whether or not you have any targets, as to how much you might want to bring down your nonperformers, say in the next year or so?

Yes, thank you. That is a great question and what we try and do is on every piece of OREO or non-performing loan is try to optimize the best we can get from our shareholder standpoint. We continue to look at each piece and work towards that to evaluate that we are going to optimize our returns on each one of those deals. To put a target out there is very difficult right now. (multiple speakers). We aggressively book it at every deal.

We are not going to be patient with problem loans but we are also going to be very direct in our strategies on how to address each one of those things but, again, to optimize our return to our shareholders.

Okay and then just lastly on the inflows into non-accrual I think the $21 million, can you give us -- sounded like 3 might have been in Jackson if I got the numbers right, but can you just give us a sense for, break that $20 million -- $1 million down in terms of the types of situations they are in and where they might be located.

Of the 3, a large one was a large presidential home on Flathead Lake up in the Northwest part of our state (technical difficulty). And of those, that is one large one that we had that went in there. And then if I can get my notes up here real quick.

And then we had a residential development over in South Dakota that went into there and then again in our -- another up in the northwest part of the state we also at Montana, we had a condo development going to [Oregon].

And the aggregate amount of those 3, let's say?

The aggregate would be let's see here approximately be about, I believe it would be about about $13 million roughly.

Okay. That's awful. Thanks, guys. And good luck to you, Lyle. Appreciate it.

Thanks, Matthew.

Jeff Rulis of D.A. Davidson.

Good morning. Couple of questions. Had been asked but just sort of some follow-ups on the -- what was the inflow of NPLs last quarter? Versus the 21-ness?

I will have to get that information for you in both last quarter and then (technical difficulties) get that real quickly.

Okay. The general trend is slowing on that front?

Yes. We are actually seeing the velocity coming into our inflows is slowing, based on quarter-over-quarter basis looking over the last four quarters. We are encouraged by that inflow. In the outflow we are starting to see an uptick in that and that is very encouraging along with the decline as Lyle pointed out in our [criticized in] classified numbers.

Okay and then just a clarification on the net charge-off expectations for 2012. You know that add increased by quarter throughout the year. Just trying to fill out the confidence of that being down year over year. Was there anything of kind of a year-end cleanup as it was the largest number of the year in Q4, was it anything lumpy this quarter?

Yes and that would be an accurate statement. We had some, as we came into the last the final quarter we had some credits that through the workout process we identified that we are in foreclosure at that point in time and we were required to take the loss at that time or negotiations with the borrowers but it really came in at that particular time of the year is the negotiations to a point where we thought we should take the loss and move on. Or we've done a discount or anything. In most of those cases the larger ones were, I would say, that really get down to the fact that we as far as foreclosure we negotiated a settlement with them.

Okay. Appreciate it. And thanks for your efforts, Lyle.

Thank you, Jeff.

Tim Coffey of FIG Partners.

Good morning, everyone. Lyle or Bob, were you at all disappointed not to see problem credits decline faster than they did in 2011?

No, Tim. This is exactly what we predicted back in 2010 that things would level off at midyear. We weren't sure we would see a reduction when we made that prediction. The fact that we have seen some modest improvement feels pretty good to us. So no, I wouldn't say we were disappointed.

What are some of the holdups on greater declines and nonperformers? Is it land values, lack of sales, lack of confidence in the general economy?

Oh, I think I would like to limit on Greece. Every time that we begin to get some wind in our sails regarding real estate prices then something happens on the international front and it sort of dries up sales. So we had a pretty strong winter. We entered the selling season optimistic that we would have a strong selling season and it got real flat on us this summer.

And I think people are beginning to regain confidence again now. And as we talk, we are seeing more Canadians come back down over the border looking at properties and we are seeing a lot more activity in Jackson than we have seen in the past. And it is mainly from people that live there. So we think that is a pretty solid trend rather than the second home market.

So I think it is just a matter of confidence nationally and it will spill over into Montana and Wyoming, when that gets traction.

And Tim, I would just add that some of our yields that land subdivisions is where we are having slow movement on those is where we've taken a look at them and can we sell these out over time or can we sell them on a book sale? And that has been slower than we anticipated but as Lyle pointed out we are encouraged by what's happening in Jackson and the Flathead where we seek most of our land subdivision and larger land deals.

Okay. That's helpful. And then, Bob, do you have -- does the Company have a predetermined schedule for appraisals on OREO that could create some lumpiness in the next couple of quarters?

Yes. We do have a policy on that and once a loan becomes substandard or doubtful it requires an immediate appraisal and then, thereafter, there is no deterioration in the market. So it is determined based upon what their loan officer or with the individuals are talking -- individuals dealing with the credit they are seeing deterioration, they will order appraisal more frequently. But 18 months is the maximum you can go without an appraisal on a substandard or doubtful credit.

Okay. Do you have -- are we hitting up against that 18 months or will we see more of reappraisals of these properties in the next couple of quarters than we would in the rest of the year?

No. Nothing that would stand out, Tim. Again, that is -- a schedule of appraisals will depend upon when was the last appraisal done and deterioration in the market. So that is really how we look at it but I don't see a huge big reappraisal on a bunch of properties over the next two or three quarters.

That's helpful. Thanks. And then, Terry, with the goodwill impairment evaluation, given that so much of your goodwill is tax-deductible, what kind of impact is this going to have?

Well, first of all, Tim, there is a question whether there will be any impairment but we still are working towards step one and we will have that concluded over the next week or so. To the extent that we move to step two and there would be in fact an impairment, the tax benefit associated with any impairment would be approximately 30% of that impaired value which adds back the tangible equity and impacting tangible book value as well to the positive.

Okay so walk me through that again. So 30% adds back to your capital and your potential the value does that mean an impairment -- if there is an impairment -- would actually increase your capital levels?

It would to the extent of the tax benefit, which would be 30% of whatever the impaired amount would be. And the 30% is an estimate but that is a pretty good estimate.

Okay. So just to reiterate -- if there is an impairment charge, it actually increases your capital levels to a certain extent?

It does tangible capital. Yes.

Yes. Okay. Maybe do you have a target payout ratio on your dividend?

(laughter). You know, we have been -- you know, long term it is probably an area around 35%, Tim, and certainly could work its way a little higher. But today we are at a higher level than that, but we expect earnings to increase and for us to be able to increase dividends in the coming years.

Okay. Great. Thanks. So those are all my questions. And, Lyle, it's been great working with you. Thanks a lot.

Thank you, Tim.

Brett Rabatin of Sterne, Agee.

Good morning. Wanted to ask two things. One is, I was hoping to get a little color around or maybe an update on just the Bakken opportunity and if you guys think you'll be able to get some penetration into energy lending in the next year or two and then how you see the C&I growth playing out over the next couple of years?

And then also was just curious you mentioned loan portfolio yields were flat. Linked quarter, was just curious if you were being able to originate new loans at similar rates and if or if you were seeing pricing pressure from some of the larger competitors in the market?

This is Ed, Brett. I will answer the Bakken portion of that, at least. That oil field is about 250 miles from Billings and the Billings economy is seeing a boost because of it, because we have many manufacturers, suppliers, and trucking companies that are based in Billings that have taken advantage of all that is going on over there in that oil field. In addition we have a branch in Miles City, Montana, which is another 100 miles closer than we are. And we have actually seen a boost in housing values, a minor boost in housing values over there just because there are more, far more oil workers than there are living quarters over there in that North Dakota area.

So we are seeing that. And many of those suppliers and manufacturers in Billings are our customers. We also have quite a few oil and gas people who are based in Billings that are our customers, and they are involved over there. We have right now about $90 million in loans to the oil and gas industry. Now that is not all over in the Bakken, that is spread out throughout Wyoming. And then with the remainder being over in the Bakken we have two energy lenders on staff both of which are -- their formal training is in geology and/or engineering, and they have become bank loan officers. And so, we have got a connection there.

And we also have a few customers who are developing real estate over in the town of Williston, North Dakota, and we are helping them with that. So it is not a runaway by any means but we are certainly seeing some business as a result.

And then we as you know or may know that we have advisory Board members in all of our communities and we have some advisory Board members that have expertise in oil and gas and some with the legal portion of that on the land leases and so on.

I will add --

What's the rest of the question, Bob, go ahead.

Yields you are talking about, Brett, and one of the things that we are seeing from pricing pressure out in the marketplace is very stiff. We continue to compete very well on pricing but we are seeing a lot of pricing pressure especially on the top-tier credits and if it is over several million dollar deal, there is going to be a lot of pricing pressure on that. But we continue to you to work towards we think that we can price with anybody and we will look at each deal and depending on what the deal is and what the risk is and the credit will price for risk, and -- but we are seeing a lot of pricing pressure out there in the marketplace.

Okay. Great. Thanks. It has been a pleasure working with you, Lyle.

Thanks, Brett.

Matthew Keating of Barclays Capital.

Thanks, guys. Good morning. Most of my questions have been answered but I do have a few quick questions for you. First off, it appears you were originally profiled in The Wall Street Journal as one of the banks that nationally benefit in somewhat of a way from the Durbin Amendment, you know the small -- given those small issuer exemption and it certainly appears from your 4Q results that you didn't see much of an impact to this point. Do you expect this trend to be sustainable in a sense that merchants in your footprint haven't implement -- will not implement much in the way of changing the way their card acceptance for small issuer of debit cards?

We think we need fewer Wall Street Journal articles pointing that out. We would not give them an interview as you noticed, so they showed a picture of our building instead. It doesn't seem logical that we can sustain the high level of interchange income on the debit card. But yet no one knows yet just how far it will drift down. We have seen it pull off a $0.03 to $0.05 this year per transaction yet we made it up in volume and had increases in general revenue because of the volume.

So we are still seeing it as a growth product. I think for the next at least foreseeable future, we will probably continue to see upward movement in our revenue rather than downward pressure. But I don't know how long that will be sustainable.

The other area that we mentioned, Matthew, was on the credit card side. I mean, we faced the Card Act along with everyone else. We didn't get the pass because we are less than $10 billion but yet, again, because of a change in the mix of our credit card business going more to commercial, less to consumer, and with some intelligence that our credit card people applied to the portfolio, we had a pretty good year and expect that to continue to be a growing profit center for us, too.

Thanks, that's helpful. And then my last question would be, last quarter you gave us an update on potential M&A opportunity. I'm just wondering if your thoughts have changed there at all to the extent if you are seeing anything in the environment that makes you more or less interested in pursuing discussions on the M&A front? Thanks.

That is really a great question, Matthew, and I will take you back to almost two years ago when Terry and Ed and I were first introducing our Company. We said then that we did not want to raise excess capital because we did not see M&A opportunities in our space. And looking back now, that has proven to be true.

I believe personally what will take place is 2012 is going to be a benign year. 2013, we are going to begin to see the impact of the Financial Reform Act, but we will fill the full brunt of it in 2014. So I think that smaller banks, particularly, will have difficulty on the compliance side with these new regs and, as they begin to see some cost pressure in 2013, they may begin to look for merger partners. I believe in 2014 there will be a lot of M&A opportunity because they will feel the full impact of trying to comply with the regs.

But still, there's too much price expectation difference between sellers and buyers in 2012. And so, I don't see anything in the near horizon. It may pick up toward the end of the year, but I sure wouldn't see much right now. I think most smaller banks are hoping to clean up their portfolios, increase their profits, and get a better price and their challenge is to get that done before they fully feel the impact of compliance regulation.

I should add that our Company is -- I have got to be able to say this without breaking the rules, but we are one of a handful of companies that has a very strong compliance program rated by our regulators as very strong. They won't let me give you the number, but you can read between the lines.

So we are really prepared for the changes. I think companies that aren't at the top of their game in compliance are going to struggle, I think we are going to feel the impact and our knees will buckle a little bit ourselves. But because we are at the very top of the pack right now I think we will assimilate the changes easier than most. I think it has been discounted about just how much M&A will result from these changes.

So I think we are prepared to take advantage when ever the marketplace gives us that opportunity.

Thanks very much. Lyle, best of luck in your retirement.

Thanks, Matthew.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, this is a record-breaking earnings call for us. We are 56 minutes into it. So thank you. I have really enjoyed learning from you that are on the call, particularly the analysts. You ask the right questions. We keep copious notes of these questions and go back and talk about them as the calls are over. So you have been very helpful to our Company and especially helpful to me.

So this is one of the parts of my job and there are many, but this is one of the parts that I am going to miss. So thanks again to all of you and here's to a good 2012. Thank you.

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