First Interstate Bancsystem Inc (FIBK) 2012 Q1 法說會逐字稿

Good day and welcome to the First Interstate BancSystem Q1 earnings conference call and webcast. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ms. Marcy Mutch, Investor Relations Officer. Ms. Mutch, the floor is yours, ma'am.

Thanks, Mike. Good morning. Thank you for joining us for our earnings conference call for the first quarter of 2012.

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 Forms 10-Q and 10-K.

Joining us from management this morning are Ed Garding, our Chief Executive Officer, and Terry Moore, our Chief Financial Officer. Ed will begin by giving you a general overview of this quarter's results, along with a review of credit quality information. Terry will follow up with more specific information behind the quarterly results. Bob Cerkovnik, our Chief Credit Officer, will also be available during the Q&A time to address specific questions regarding asset quality.

At this time I would like to turn the call over to Ed Garding. Ed?

Thanks, Marcy, and good morning and thanks again to all of you for joining us.

Since this is my first call, I would not feel right without mentioning Lyle Knight's retirement. Lyle, who most of you know, was our CEO who retired at the end of the first quarter. In case you are wondering, Lyle worked long and productive days right up to the -- (technical difficulty). We will always remember him as an outstanding leader. So, if you are out there, Lyle, hello and we miss you.

So let's move on to this quarter's results. Last night we reported (technical difficulty)--

Ed, Mike?

Okay, ma'am, you have been reconnected. It sounds like we have a better connection.

Okay. Thank you. I think I will start in with this quarter's results. Last night we reported earnings for the first quarter of $11.4 million, which equates to diluted earnings per share of $0.26. Earnings were down 8% from last quarter, largely due to a $3 million expense we recorded during the quarter related to the settlement of a dispute with a borrower.

In spite of that, earnings increased 30% from first quarter of last year. While it continues to be a challenging environment for any loan growth, we were encouraged that the level of outstanding loans was fairly stable for this quarter. The $28 million decline in outstanding balances was mainly a result of $14 million of transfers to other real estate and $9 million in charge-offs. Because this is a quarter in which we don't typically see loan growth, we are happy that outstanding balances remain steady, particularly after last year where we experienced over $100 million decline in loan balances during the first quarter.

As most of you know, I spent 11 years as our Chief Credit Officer, and I continue to be very involved in all aspects of our credit administration. So you will probably find that I talk more about our credit quality and handle more of the credit-related questions than Lyle used to do.

That said, we are pleased with the improvement in our asset quality ratios this past quarter, including the 21 basis point decline in the ratio of nonperforming assets to total assets. Our net charge-offs to average loans declined to 0.76% on an annualized level; however, we would not expect that ratio to stay at this low level for the rest of the year as we historically tend to see lower charge-off levels during the first quarter.

The $7 million net increase to OREO reflects our commitment to continue focusing on resolving problem loans, and we expect to see other real estate continue to increase during the second quarter. This net increase was a result of $14 million of property flowing into other real estate, offset by $6 million in sales. Considering this was the winter quarter, which is typically a slow period for property sales, we were glad to say a relatively healthy volume of properties that sold. We are hopeful that this increased activity is an indication that properties may cycle through other real estate at a more accelerated pace than we have experienced over the last couple of years.

Our construction real estate loan portfolio continues to be an area of focus. Outstanding balances in that portfolio have declined by 35% over the past two years. As of the end of the first quarter, 22% of the construction portfolio is in nonperforming status with over half of that amount or $61 million in land, acquisition and development. Overall total criticized loans continue to trend downward and are down $19 million since year-end. The pace of inflow into nonperforming loans has diminished substantially with the level of inflows this quarter declining to less than one third of the dollar volume of inflows at the peak of this credit cycle.

So to recap that a little bit, nonperforming is down and criticized is down which causes us to feel cautiously optimistic about continuing that trend going forward this year.

You may have noticed in our press release yesterday that we are no longer pointing out specific credit information related to the three stressed resort markets we have discussed over the past couple of years. While those markets have not magically improved overnight, we are making progress working through the problem loans in those areas, and as the inflow into nonperforming loans slows, we don't believe those markets warrant special mention on an ongoing basis.

The economy and our footprint appears to be gaining some traction. The unemployment rates across our footprint continue to decline and are well below the national average.

Plus, in 2011 compared to 2010, we saw a 24% decline in total bankruptcy filings in Montana and Wyoming and an 18% decline in South Dakota. Our indirect automobile loan portfolio is performing very well with a 30-day past-due rate at 53 basis points, which is half the national average.

Right now gas prices in Montana and Wyoming are among the lowest in the nation, and we do not anticipate that the tourism industry will feel a huge impact from rising gasoline prices this summer. Today gasoline here is actually $3.75 a gallon, and in speaking to one of our distributors, he does not feel it is going to go above $4 a gallon this summer. So, if you are planning a vacation to Yellowstone or Glacier, come on out. It would be a good time to do it, and we will buy lunch. So between that and gas prices, the vacation is practically free.

We have customers across our footprint that are doing business in the Williston basin area in North Dakota. While some are directly involved in oil exploration, other lines of business that are also benefiting are real estate development, hotels, trucking and retail clothing. Right now we have $75 million loaned out specifically for oil and gas production across our territory and estimate another $20 million loaned to customers doing business in the Williston area. So our credit exposure in that area is not huge, but it is turning into a nice book of business. I bring this up because the Bakken oil boom gets so much publicity that I'm anticipating questions on that.

With that overview, let me turn over to Terry for more financial details.

Thanks, Ed, and thanks to all of you for joining us this morning.

I would like to start with the interest margin, which was reported at 3.72% for the first quarter, which is down 7 basis points from Q4 2011. A driver in the compression of the margin quarter over quarter was a lack of new loan demand, which caused a further shift in our earning asset mix from loans to investments. This, combined with slightly lower yields on loans and securities, resulted in the yield on earning assets declining at a faster pace than cost of funds.

It was just a year or so ago when cost of funds was at 73 basis points, and we were not sure how lower it could go. But today we are at 52 basis points, a 29% decrease from first quarter last year, and we still expect to see a bit more opportunity for improvement even from this low point. However, the decline in cost of funds is not expected to keep pace with declining earning asset yields in this interest rate environment.

As far as the investment portfolio goes, we don't expect to realize improvement in yield in the next few quarters as new purchases are typically priced at lower yields than what is maturing or paying down. However, we do expect or anticipate operating with less interest-bearing deposits, which are principally funds held at the Federal Reserve Bank by deploying funds toward loan growth and the purchase of more investments, both of which will offset margin compression.

Well, I hate to sound like a broken record, but loan growth remains the biggest driver in any substantial improvement in net interest margin. While we are seeing positive signs with loan requests in the pipeline, this has yet to translate into balance sheet growth. Competition for loans remains fierce and, therefore, pricing remains challenging, but we intend to obtain our share of any new business in our marketplaces while still maintaining discipline in our loan underwriting standards.

Going forward we anticipate continued net interest margin compression of a few basis points each quarter until we begin to see some meaningful loan growth.

We continue to see declines in our provision expense, accompanied by lower charge-offs, which are both reflective of lower levels of criticized loans. As we process through the later stages of this credit cycle and see reduced inflows of problem loans entering the classified asset categories, we are also seeing a smaller portion of our provision allocated to specific reserves. Only 47% of our first-quarter provision of $11 million was attributable to specific reserves. And while credit costs remain elevated, we are pleased to see the continued decrease from the high levels we experienced in 2010 and 2011.

As we look out over the rest of the year, we expect charge-offs to approximate 2011 levels and provisions to be less than last year. As usual, results can move around from quarter to quarter, but we generally expect net charge-offs to be at or exceed provision for the next several quarters.

In the first quarter, non-interest income was $26 million, a decrease of 2% on a linked quarterly basis but a significant 31% improvement from same quarter last year. The quarter to quarter decline was mainly due to $1.5 million of security gains recognized during the fourth quarter last year. A significant contributor to the increase in non-interest income from a year ago was income from the origination of residential real estate loans. Refinancing activity was exceptional and made up 71% of our activity for the quarter. Even though we have been blessed with a string of revenue year after year, as a result of declining interest rates and high levels of refinance activity, we know this is not sustainable.

Good news, however, is that purchased home activity is an area that is indicative of potential sustainability and growth for the Company. In this quarter, we had $84 million of volume attributable to purchased activity. This volume of purchased activity is a 39% increase over the same quarter last year and is an economic indicator that is quite encouraging.

Non-interest expense was $57 million, an increase of 2% on a linked quarterly basis. There was one unusual large item related to a settlement cost, which Ed referred to earlier, that was included in other expenses this quarter. I hope you can appreciate that we cannot go into much detail regarding this particular expense. Suffice it to say, that while collection and legal costs have certainly been elevated throughout this credit cycle, we don't anticipate single adjustments of this magnitude in future quarters.

OREO expense for this quarter was $1.1 million with half of that amount due to valuation write-downs, principally on one property. Right now a little less than half of the OREO book is in construction and vacant land and development with the largest land development property in that bucket written down to about $0.25 on the dollar. In general, we are not seeing the rapid decline in appraised values that we had seen over the past two years, but with an increase in the OREO inventory, we know we will have higher carrying costs.

So, as we stated last quarter, we do anticipate OREO expenses to remain elevated for the year and at similar levels to what we experienced last year.

We had $6 million in OREO sales this quarter, which consisted of 29 individual properties, resulting in only a small net loss of $74,000. Our mild winter appears to have helped in creating some momentum in property sales, which we are hopeful will carry into the spring and summer months.

On a final note, we issued an 8-K last evening indicating our intent to redeem $40 million of TruPS before the end of the second quarter. This redemption will result in a $0.02 improvement in earnings per share on an annualized basis.

Net tangible book value continues to increase and is at $13.87 per share, which is up more than 6% from a year ago. Overall our capital remains strong, and we continue to increase capital levels through retaining net earnings. We continue to maintain a substantial amount of liquidity, even following the redemption of the $40 million of TruPS, which allows us the flexibility to address opportunities in the future.

With those remarks, I will return it back to Ed.

Thanks, Terry. I want to mention that also in relation to Lyle's retirement and my change from Chief Operating Officer to CEO, we announced last month that Mike Huston was appointed Chief Banking Officer. Mike was previously a Regional President in our Casper, Wyoming market and has been with the bank for 22 years. Mike has recently relocated to Billings, and we are excited to have him as part of our executive team.

So, with that, we are ready to open up for questions.

(Operator Instructions). Brett Rabatin, Sterne, Agee.

I wanted to first ask, Terry, I think you mentioned that you expected the provision to be similar or higher than charge-offs going forward. I guess I am just curious with the improvement that you have had in the credit quality metrics the past two quarters, I'm curious as to why you would be reaching somewhat of an inflection point where maybe you would be similar to charge-offs or potentially lower given the reserve levels?

Yes, just to follow-up on that, we would expect as we get in the later stages of the credit cycle that charge-offs would exceed provisions, and the overall reserve levels as measured as a percentage of outstanding loans would decline. So we would just have fewer outstanding classified assets. So I think they may teeter back and forth a little bit and approximate the same number, but we would expect over the next several quarters that generally speaking we would see charge-offs being a bit higher relative to provisions.

Okay. So the other way around, so charge-offs higher than provision in the next few quarters?

That is correct. I may have misstated that, and if I did, I apologize.

No, it is probably me. Okay. And then, as it relates to credit, I'm curious, the special mention loans did not really change much this quarter. Was there anything underlying the trends there that was notable? Obviously you had a decline in overall NPAs, but I guess I am just curious about the level of criticized assets this quarter.

I think I'm going to have Bob Cerkovnik answer that with some more specifics. Go ahead, Bob.

Really there is nothing significant that we can point to, a trend or pattern that we see. The decline in substandard -- or increase in substandard, excuse me, was really related to two credits. But overall we did not see a significant trend or pattern there.

Okay. And then just one last point of clarification. I assume, Terry, that the guidance that you gave for the margin to be at a few basis point decline excluded the trust preferred prepay?

That is correct. And, of course, that will not occur until the latter part of the second quarter. So it will not have an impact of any consequence in the second quarter, but for future quarters that could be factored in as well. And, as I mentioned, to the extent that we actually have some real loan growth, that could also stem that decline.

[Simonis Monteleonis], D.A. Davidson.

I just had a question about the June debt redemption. Could you shed some color on why now and what financial impact the decision could have for the P&L going forward?

This is Terry. And this -- we have a number of different layers of trust preferred, a total of $120 million outstanding. This is the oldest issuance that we have and the most costly issuance that we have. And so, as we look at our capital position and what we see for the future, that this hybrid capital instrument would not be necessary for the long-term. So, as we look at the realm of hybrid debt securities or hybrid capital securities, this seemed like the prudent one to pick off.

In terms of financial impact, we have indicated approximately a $0.02 per share EPS impact following redemption, and that should just a flow through the earnings statement on about $0.005 per share each quarter. Obviously it will have an impact on a couple of other financial measures, a little bit on the margin, and a little bit in that our assets are down $40 million but pretty inconsequential.

Did you have further specific questions there?

Not concerning to that. I expect that you can't comment on the $3 million expense, but I just wanted to know if there are any more further charges that could be associated with that expense going forward?

No, there are not.

(Operator Instructions). Brett Rabatin, Sterne, Agee.

I was just hoping to get some commentary around everyone has complained about the obvious competition and rates we are seeing from larger competitors. I know you have a few in your markets, but you make smaller loans than maybe some of your competitors. Can you talk about 564 loan yield in 1Q? Are you seeing much pressure to originate below 5%, and would that be a decent guesstimate for where you are originating new production?

I will start and then I'm going to have Bob finish that answer. We are seeing some pressure. It certainly depends on loan size and loan quality because we are still able to price for risk to some extent and price for efficiency. So overall I would say it is somewhat rare that we are seeing pressure to price below 5%. But on very large high-quality requests, then yes, we are.

Bob, do you want to add to that?

Ed's comments are pretty much what I would have to say. I would just add that a lot of the competition comes in from extending terms, so going out fixed 10 years and then fixed five years in those rate categories that are sometimes very difficult to match for us. And the bigger banks we get the pressure from and the smaller banks are starting to see some stretching out in their terms.

Okay. And then just going to the loan pipeline and utilization rates, there is obviously some positives on C&I, but can you talk about the rest of the portfolio? Was the utilization rate any different than maybe the prior quarters, and generally speaking does the pipeline suggests you are going to have loan growth in the next few quarters, aside from -- including payoffs in construction?

Bob, go ahead.

The loan pipeline, as it has been in past quarters, has been good, but we continue to see the level of competition. So it has been difficult for us to -- we get looks at deals, and we are getting our share of them. But, again, there is a lot of our customers just are not borrowing, too, and that has created a little bit of a lack of demand out there, too. And then the good high quality credit continues to see the price pressure.

So the loan pipeline, we think as we come into the summer months, we will see some growth in there.

The usage on the lines of credit are the same. We have been very consistent quarter over quarter and year over year.

Okay. And then I wanted to ask a question around expenses. I know last year there was maybe a big initiative on becoming more efficient, and obviously ORE costs affected this quarter somewhat. But can you talk about any potential impacts in the latter part of this year on efficiency based on what you guys have been trying to get done since last year?

Terry, do you want to address that?

We did launch an initiative early last year and have set some internal goals and targets which we have fulfilled. So those goals and initiatives have been fully implemented during this quarter to the extent that they had not already been. So we do not have a specific goal or initiative over the next quarter or two that is specific in the financial metric.

Obviously we are interested in becoming more efficient and continue to strive toward looking at improving our revenue sources as the first line and secondly to look at every opportunity to manage expenses and look at different workflows in order to become more efficient in the way we process work internally.

I think that we will see continued progress in this regard, but that it will be incremental on any one quarter, and it would be over a period -- a number of quarters and perhaps even years before you see the consistent trend of improvement in the efficiency ratio as an example.

Okay. And was there any seasonality in personnel line the with the usual first-quarter either increases in merit or FICA expenses?

You know, there are. The salaries are up a little bit just from normal early in the year increases in most employee salaries. The employee benefits in particular spiked with Social Security taxes and some adjustment with valuation on deferred income. And perhaps that was nearly $9 million for the first quarter, but that would be more likely to be around $7.5 million to $8 million on an average quarterly basis for the rest of the year.

It appears that there are no further questions at this time. We will go ahead and conclude our question and answer session.

I would now like to turn the conference back over to management for any closing remarks. Gentleman?

I don't have any closing remarks. It sounds like we have answered what questions there are, and so I move for adjournment.

All right. Thank you, sir. We thank you for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you.