First Interstate Bancsystem Inc (FIBK) 2013 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning and welcome to the First Interstate third quarter 2013 conference call. 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. Please go ahead.

  • Marcy Mutch - IR Officer

  • Thank you, Maureen. Good morning. Thank you for joining us for our third quarter earnings conference call.

  • As 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. Relevant factors that would cause those actual results to differ materially from any forward-looking statements are listed in the earnings release and in our SEC filings. The Company does not intend to correct or update any of the forward-looking statements made today.

  • Joining us from management this morning are Ed Garding, our Chief Executive Officer, and Kevin Riley, our Chief Financial Officer, along with other members of our management team. At this time, I'll turn the call over to Ed Garding. Ed?

  • Ed Garding - President & CEO

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

  • Yesterday, we reported one of the highest quarterly earnings levels in the history of our Company at $23.8 million or $0.54 per share. Our increase in quarterly earnings is reflective of the continued progress we have made in improving credit quality and reducing other real estate holdings.

  • During the recession we took a pretty conservative approach to identifying problem loans and valuing collateral. So this has allowed us to record a $3 million reversal in loan loss provision this quarter.

  • While our level of nonperforming assets is still higher than we are comfortable with, it continues to decline at about the pace we expected for the year. Nonperforming assets, which are now at 1.53% of total assets, decreased over $13 million from last quarter. $9 million of the decrease was in nonperforming loans and $4 million of the decrease was in other real estate.

  • Breaking it down a little further, other real estate property continues to decrease with $2 million of additions to other real estate and $6 million in sales during the quarter. About a third of the other real estate sales were land development properties, which further indicates improvements in our local economies as those vacant lots get sold and developed. As we have seen our other real estate holdings decline over the year, we have also had a significant reduction in other real estate expense, which has provided an additional lift to earnings.

  • Our cumulative net other real estate expense for the first three quarters of this year is just under $1 million. This year to date amount is lower than any individual quarter last year and $4.5 million lower than the first three quarters of last year.

  • Nonperforming loans decreased $9 million this quarter. Inflow into nonperforming loans was $6 million, while outflow consisted of $5 million in charge-offs, $7 million in payoffs, and $3 million moved back to accrual status.

  • Moving on to loan growth, we are cautiously encouraged with our growth for the quarter. Despite having $12 million of charged off and paid off nonperforming loans, we still had $35 million of loan growth for the quarter. With the year to date growth of 2.6%, we are optimistic that we will obtain our 3% overall loan growth goal by the end of the year.

  • One of the main areas of growth was to the consumer portfolio, which increased about 3% for the quarter. The majority of this growth was in the indirect portfolio. Our indirect portfolio consists of automobile and recreational equipment loans and, at $477 million, is 11% of our total loan portfolio.

  • While we have extended the boundaries of indirect lending into Idaho and eastern South Dakota, the majority of the growth is coming from within our current markets. The indirect portfolio is closely tied to consumer spending and, with deposits of data we see in our markets related to employment and personal income, we think this is an area of the business that should continue to experience strong growth.

  • Turning to our revenue trends, the boom we have enjoyed over the last three years from refinance activity appears to have come to an end. Total home loan production is down about 21% from the second to the third quarter. There is a bright side, however, and that is that purchase production in the third quarter accounted for 72% of the current quarter's activity. We think we are well-positioned to continue to capture additional market share of purchase activity within our market area.

  • I would like to touch just a little bit on the economies within our footprint. Over Labor Day, the Montana Department of Labor and Industry issued a report that indicated Montana was a leader in the nation in several different indicators during 2012 with the third fastest employment growth, the second-fastest private wage growth, and the fifth fastest personal income growth in the nation. We believe we are seeing the impact of those leading indicators this year.

  • The Bakken activity continues to have a positive impact, particularly in eastern Montana, and is part of the reason for the growth in the indirect portfolio. Across our entire footprint, the housing industry remains strong, hotel occupancy and average daily rates are up, and national park visits remain high.

  • Foreclosure (technical difficulty) rates in Montana and South Dakota are less than 1% and Wyoming has the lowest foreclosure rate in the country at 0.6%. Unemployment levels in all three states continue to be some of the lowest in the nation.

  • That wraps up my comments. At this time, I would like to introduce Kevin Riley. I'm sure most of you read the press release in July, so I won't go into his background again.

  • Kevin has been with us a couple of months now, so he has had a little time to get his feet on the ground. We are sure pleased to have him join us. So, Kevin, I'll let you take it from here.

  • Kevin Riley - EVP & CFO

  • Thanks, Ed. I'll start by saying is great to be part of the First Interstate banking team. I still feel like I am drinking from a fire hose, but this is a well-run Company and I am excited about our future.

  • As Ed indicated, we had a strong quarter with earnings of $23.8 million and $0.54 in earnings per share. Even if you back out the $0.04 per-share impact attributed to the $3 million reversal of our loan loss provision, we have maintained a strong level of core earnings with pretax, pre-provision earnings increasing each quarter this year.

  • Let's look at our income. Our net interest income was pretty much stable quarter over quarter. The net interest margin did, however, decline 4 basis points from the second quarter.

  • Although we had a larger base of earning assets, our average yield declined 6 basis points, with most of the impact coming from the decrease in our loan yields. This decline was partially offset by a 2-basis-point drop in our funding costs.

  • While it seems like we are seeing some stabilization in our loan pricing, it is hard to predict the impact the economy is going to have on our interest rates going forward. Since our cost of funds can't go much lower, we anticipate our net interest margin could decline a few more basis points over the next quarter.

  • Noninterest income remains strong during the quarter at 32% of total revenues. As anticipated, our income from the origination and sale of loans did decline, and it was 21% down from the prior quarter, or $8 million.

  • However, as Ed indicated, we are encouraged by the strong purchase home activity this quarter, which was 72% of our volume. With this level of purchase activity, we anticipate the fourth quarter mortgage origination revenue to remain fairly flat compared to this quarter.

  • Debit and credit card revenue remains steady this quarter at about $6 million in revenue revenues.

  • Our wealth management assets under management and the related revenue continues to grow. Our wealth management team is doing a great job in bringing in new clients. And so for 2013, we anticipate wealth management revenue to be between 15% to 20% above the 2012 levels.

  • Noninterest expense for third quarter was down $2.4 million, or 4% from the second quarter. Salary expense, the largest non-interest expense, was also down from the second quarter. And, as we look forward, we think a good run rate for salary expense should be around $23 million per quarter.

  • Decreases in FDIC insurance, legal expenses, and fraud losses, have all been part of the decline in our other expense category. All other non-interest expenses should remain within their current spending bands.

  • Now I would like to talk a little bit about balance sheet sensitivity. We continue to keep our investment portfolio short, with the current average life of the portfolio being about 3.6 years. And this does not include approximately $400 million we have in overnight funds.

  • The shortness of our investment portfolio will allow us the ability to reprice about a third of it over the next 12 months. With 80% of our deposits now being in non-contractual products, we are mindful of the shift we have seen over the last two years out of CDs.

  • With that said, we have already begun to make strategic changes to correct this trend. Once interest rates begin to rise, we believe our customers will be starved for a return on their money and we intend to be positioned to meet their expectations. So, although we are slightly liability sensitive, we are focused on eliminating the risks associated with a rising rate environment.

  • Capital. Our capital levels remain strong. And with the improvement in asset quality that we have seen over the last year, it is important for us to consider how to deploy our excess levels of capital.

  • So besides the payment of dividend that we announced with our earnings release, I will talk a little bit about M&A, which I know you are all curious about. With a couple of transactions we have seen on the West Coast, we think our area of the country is heating up a little. And, as Ed had indicated many times, this Company has always been open to doing an acquisition, and that position has not changed.

  • But, as you all know, unless it is done right, it is not worth doing. So we will continue to look for the right fit, at the right price, that results in the overall growth of our franchise and a great return for our shareholder. Once again, I want to state what a pleasure it is to have joined the First Interstate team.

  • And, with that, I will turn the call back over to Ed.

  • Ed Garding - President & CEO

  • Thanks, Kevin. I will wrap up by saying that we are pleased with the positive trends we have experienced in asset quality and the declines in our criticized loans. While commercial and commercial real estate growth still remain a challenge, we are doing a good job in managing our expenses in order to maintain solid levels of profitability.

  • So, on that note, let's open it up for questions.

  • Operator

  • (Operator Instructions) Jeff Rulis, D. A. Davidson.

  • Jeff Rulis - Analyst

  • Good morning, guys.

  • Ed Garding - President & CEO

  • Good morning, Jeff.

  • Jeff Rulis - Analyst

  • Question on the -- sort of a follow-up on the operating cost, and I understand that you suggest that maybe the comp expense goes up a bit next quarter. But I guess overall costs, I mean, absent the OREO expense, which is a little lumpy, is this a sustainable run rate going forward? Do you see any significant additions over the next year?

  • Kevin Riley - EVP & CFO

  • We don't see any significant growth in that. It should be in this area, maybe a slight tick up from here, but not much.

  • Jeff Rulis - Analyst

  • And in the release when you comment on there was some timing issues, is that just the comp expense was just a bit lower based on timing?

  • Kevin Riley - EVP & CFO

  • No. It is more down in the other expense category.

  • Jeff Rulis - Analyst

  • Okay.

  • Marcy Mutch - IR Officer

  • Jeff, I think when Kevin was talking about the $22 million as a run rate, that is for total -- the total salary and wage line.

  • Jeff Rulis - Analyst

  • Got it. Yes. Okay. Thank you. And then, on the wealth management side, is this a process of a pretty good growth year-over-year expectations? Is this just a more aggressive rollout to additional locations within the footprint? Or what is the focus or what is driving that growth?

  • Ed Garding - President & CEO

  • We haven't expanded the footprint. I think we are just doing a better job of penetration of our own customers and new customers within our footprint. And, as you can see, adding assets under management at a nice rate; credit the wealth management people for their reputation and salesmanship for that.

  • Jeff Rulis - Analyst

  • Okay. And then, maybe just last one just on the provision -- the reverse provision was rather large. Do you view that as sort of a one-time catch up or any sort of thoughts on future provision levels?

  • Ed Garding - President & CEO

  • I think it is a one-time catch up. That said, we are always unsure of loan recoveries and actually rehabilitation. It is really hard to predict exactly when that happens, but it is unusual, obviously, to have a $3 million reversal. And, also, if we start ramping up loan growth a little more, that would be one more reason why we have to add to the reserves versus reverse out.

  • Jeff Rulis - Analyst

  • Okay. Thanks.

  • Ed Garding - President & CEO

  • Thank you, Jeff.

  • Operator

  • Brad Milsaps, Sandler O'Neill.

  • Brad Milsaps - Analyst

  • Hey, good morning.

  • Ed Garding - President & CEO

  • Good morning, Brad.

  • Brad Milsaps - Analyst

  • Just wanted to follow up on some of Kevin's comments about trying to position the balance sheet a low bit more asset sensitive. I noticed you guys had another strong growth of deposits; certainly created quite a bit of liquidity on the balance sheet. Your average cash, I think, was maybe down a bit, but on a [puritan] basis, you were up close to $200 million just in Fed funds and cash equivalents.

  • Kind of curious, did some of that reverse out over the next couple of quarters? Or do you plan to hold onto more cash in hopes of putting that -- when run rate do rise, putting that to use at higher levels? Because it seems holding that much excess cash would create more margin compression than maybe you guys sort of guided to in terms of a couple of bps over the next few quarters.

  • Kevin Riley - EVP & CFO

  • Yes. We're going to try to put that cash to work, but we are also -- what we're trying to do is spend some time in trying to restructure the liability side. So as we lock up some more of the liability side of the balance sheet, it is going to free up us to put more of that cash to work. So it is a kind of balance again. We don't just want to chase margin and put the Company at risk with regards to the sensitivity of the balance sheet.

  • Brad Milsaps - Analyst

  • Got it. But in the near term, that couple hundred million you have got, Kevin, in excess, are there municipal deposits there that kind of run out? Or is that -- is this kind of the new run rate level of cash that you have got to -- that are sort of faced with putting somewhere? Or are the margins going to come in maybe more?

  • Kevin Riley - EVP & CFO

  • I think, Brad -- I think it is a new level. It is a level that we are going to be operating on. If you look at year-end, actually deposits are slightly down from year-end levels. So I think this is it back to -- you know, going back to what our year-end levels that we had in deposits.

  • So I think it is kind of the level that the bank has been operating under in prior quarters. It was just deposits were down in the first and second quarter. So these really are not municipal deposits. These are more or less corporate deposits and personal.

  • Brad Milsaps - Analyst

  • Okay. Okay. Great. And then, just on the loan growth, I appreciate your color on this consumer-driven piece of it. I mean, do you think that commercial borrowing will follow? Just kind of curious what your guys' thoughts are there on maybe ramping up from this kind of 3% growth rate you are looking for in 2013.

  • Ed Garding - President & CEO

  • Brad, right now, I don't want to predict much more than that 3% level that we have been talking about. We are seeing some construction activity, both in commercial and residential, but we are also continuing to get a very good payment stream. And so the good news is that our customers are paying.

  • The bad news is that, when they are very healthy and paying, it is that much harder to get loan growth. So I am not going to step out and say it's going to ramp up much.

  • Brad Milsaps - Analyst

  • Okay. Great. Thank you.

  • Ed Garding - President & CEO

  • Thank you, Brad.

  • Operator

  • Jacque Chimera, KBW.

  • Jacque Chimera - Analyst

  • Hi. Good morning, everyone.

  • Ed Garding - President & CEO

  • Hi, Jackie.

  • Jacque Chimera - Analyst

  • Kevin, I wanted to touch back on your comment about the liability restructure. Are you looking at that from a deposit standpoint or are you looking at some of the debt you hold?

  • Kevin Riley - EVP & CFO

  • Mostly on a deposit structure.

  • Jacque Chimera - Analyst

  • Okay. And then, just looking to the national park -- the shut down that recently happened, I know you said that visitation has been pretty good now. Will there be any sort of a meaningful impact from that? I know it was brief, but it does impact your areas.

  • Ed Garding - President & CEO

  • And the answer is that it was so brief and, at this time of year, the impact would not be meaningful.

  • Jacque Chimera - Analyst

  • Okay. That's good to hear.

  • Ed Garding - President & CEO

  • Yes.

  • Jacque Chimera - Analyst

  • I am glad they are reopened. And then, lastly, the 21% decline in mortgage generation, did that refer purely to what is held for sale? Or did that also include what you put into the portfolio as well?

  • Ed Garding - President & CEO

  • Both.

  • Jacque Chimera - Analyst

  • Okay. So the decline, then, since more of that was portfolio than maybe in other quarters, might have been sold just based on the term of it, then the decline would have been from the held for sale, in essence, all equal, more than 21%, if I look at it as to what would have been the income from gain on sale.

  • Ed Garding - President & CEO

  • Yes. Essentially, that is right. The amount that we have held in portfolio is such a small percentage of the monthly volume, though, that it didn't move the bar a lot. But the total volume was down 21%, so that would include those that we sell to the secondary market and those that we held in the portfolio.

  • Jacque Chimera - Analyst

  • And, was that just the types of loans that you generated in the quarter, or was there any sort of a change in policy in what you wanted to hold on into the portfolio?

  • Ed Garding - President & CEO

  • No. There was no change in the policy.

  • Jacque Chimera - Analyst

  • Okay. Great. Those were all my questions. Thank you.

  • Ed Garding - President & CEO

  • Thank you, Jackie.

  • Operator

  • (Operator Instructions) Bret Rabatin, Sterne, Agee.

  • Brett Rabatin - Analyst

  • Hi, good morning.

  • Ed Garding - President & CEO

  • Hi, Brett.

  • Brett Rabatin - Analyst

  • Wanted to ask, on the loan portfolio, yields, you have been talking about generating loans that are pretty high yields, especially in C&I relative to some peers, given that you focus on some smaller loans relative to maybe some of the bigger credits that some others generate. Can you talk maybe about where you are seeing production?

  • And just kind of given the compression you had in the loan portfolio yield this quarter, should we be thinking about a similar decline in loan yields over the next few quarters, kind of given what has happened with rates?

  • Ed Garding - President & CEO

  • Well, assuming rates are going to stay where they are at, and of course that is a fair assumption, we are going to continue to see the overall yield of the loan portfolio go down as we refinance existing loans into lower rates -- existing loans that were made three, four, and five years ago. And, coupled with that, of course, is that there is a lot of competition for the quality borrowers.

  • And so if you want to keep those people, you probably have to price down a little bit too. So I think, in general, we are going to see that overall loan yield to continue to come down. Hopefully, that will be offset with some modest growth.

  • Brett Rabatin - Analyst

  • And just going back to the question on magnitude, do you think the pace of compression on the yield might slow from here? Was there anything outsized that impacted this quarter more than Q2?

  • Ed Garding - President & CEO

  • No. There wasn't anything worth mentioning this quarter. And going forward I think you're going to see it continue at about the level we have seen.

  • Brett Rabatin - Analyst

  • Okay. And then the other question was just a follow up on mortgage and just thinking about kind of the -- I know you have got a higher percentage of purchase now -- 72%, I believe, this quarter. Any thoughts on production levels over the next few quarters in terms of where you see the market? Again, assuming the rates stay what they are.

  • Ed Garding - President & CEO

  • We think it is going to flatten out. We don't anticipate another 21% drop. So I would say fourth quarter will be similar to third quarter.

  • Brett Rabatin - Analyst

  • Okay. Great. Thanks. Those were my questions.

  • Ed Garding - President & CEO

  • Thank you, Brett.

  • Operator

  • Having no further questions, this concludes our question and answer session. I would like to turn the conference back over to Ed Garding for any closing remarks.

  • Ed Garding - President & CEO

  • Thanks very much for your interest in First Interstate today. As always, you can contact us through investor relations on our website and we would be glad to respond to any follow-up questions. Again, thanks for your time and goodbye.

  • Operator

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