First Interstate Bancsystem Inc (FIBK) 2013 Q4 法說會逐字稿

Good morning and welcome to the First Interstate BancSystem, Inc. fourth-quarter 2013 earnings 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.

Now I would like to call turn the conference over to Ms. Marcy Mutch, Investor Relations Officer. Ms. Mutch, please go ahead.

Thanks, Keith. Good morning. Thank you for joining us for our fourth-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 could cause actual results to differ materially from any forward-looking statements are listed in the earnings release and in our SEC filings. The Company does not intend to correct or update any of the forward-looking statements made today.

Joining us from management this morning are 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 would like to turn the call over to Ed Garding. Ed?

Thanks, Marcy, and thanks again to all of you for joining us. Yesterday we reported the highest annual level of earnings in the history of our Company, at just over $86 million or $1.96 per share. Our quarterly earnings were $20.8 million or $0.47 per share.

We have many reasons to be pleased with our 2013 performance. Our return on average assets for the year is 1.16%. It's great to have that ratio above 1% again. Our return on equity was just over 11%.

Going forward, we continue to seek ways to deploy our capital in order to maintain higher levels of return. So in addition to reporting another solid quarter, we announced a 14% increase in our dividend to $0.16 per share.

We are beginning to see some loan growth; however, as typical, loan growth slowed in the fourth quarter. In addition to our normal seasonal slowing, we had that below-zero weather for a big part of the fourth quarter, and that slowed things further. The only good part about that was that in Montana, we are fairly used to the below-zero weather; but this year we were able to share that with all the rest of you.

Back to loan growth, anyway: total loans grew approximately 3% in 2013. Our construction portfolio continued to increase each quarter this year, which is indicative of improvement in our economies and allows us to be optimistic going forward.

Our indirect portfolio grew 9% in 2013. This portfolio performs very well and has a net charge-off rate of only 19 basis points, well below the national average.

All credit quality metrics have improved over the year. While we communicated early in 2013 that we hoped to reduce nonperforming assets by 30% this year, we missed this goal, but did have a significant reduction from last year of 21%. Nonperforming assets are now at 1.48% of total assets, a 37 basis point reduction over 2012.

At this point I would like to have Kevin Riley go over the financial statements with you; then I will come back and touch on our economy and some other 2013 highlights. So, Kevin, I will turn the call over to you.

Thanks, Ed, and good morning, everyone. I would like to start off with the balance sheet. Earning assets were up for both last quarter and for the fourth quarter -- from the fourth quarter of 2012.

On a linked quarterly basis, our loan portfolio was up $24 million, which excluded loans held for sale. A $41 million growth we saw in our real estate lending area, which was offset by a decrease in ag and consumer loans. The decline in ag loans was expected, as these lines typically pay down during this time of year, as cattle are sold and crops are harvested.

The investment portfolio continues to make up about 31% of our average earning assets. Our emphasis there is to continue to keep our duration short, and it currently stands at 3.7 years, as we position ourselves to take advantage of opportunities when rates start to rise.

Our non-earning assets are moving in the right direction, which is down from last quarter and from the fourth quarter 2012. Most of this change can be attributed to the decline in our other real estate owned, which decreased to $16 million, a 16% decrease from the third quarter and a 52% decrease from a year ago.

On the liability side our average deposits this year have fluctuated a little from quarter to quarter. We started the year with the first two quarters posting declines, and then in the third and the fourth quarter we saw posted increases. All in all we saw a 1.7% decline in deposits for the year.

The shift out of timed deposits and into savings and NOW accounts continued throughout the year, as customers were hesitant to tie up their money in Certificates of Deposit in this low-rate environment.

Our capital levels remain strong, with our leverage ratio at just over 10% and our total risk-based capital at 16.75%. Our return on average equity for the quarter was 10.31% and 11.05% for the year.

We continue to look for opportunities to deploy our excess capital, with organic growth always being our preferred route. And as Ed mentioned earlier, we did increase our dividend to our shareholders.

We have also put in place a stock repurchase plan. But as we stated before, we are always looking at M&A opportunities that would complement our franchise and that could be acquired for the right price.

Moving into the income statement, net interest income was up for the fourth quarter, as average loan yields improved 6 basis points quarter over quarter and our cost of funds declined. In a year where we expected our net interest margin to decline a few basis points each quarter, we were encouraged that our net interest margin was down only 3 basis points from the fourth quarter of last year. At 3.52% our net interest margin was stable from the third to the fourth quarter.

Negative provisions for loan losses had a positive impact on our net income for the quarter and for the year. Improvements in asset quality has helped drive the reversal this quarter.

Although historically, income from real estate loan originations would be down in the fourth quarter, we were a little disappointed at the level of decline. We would like to blame this on the polar vortex that seems to be sweeping the country, but we don't think that had a substantial impact.

On the bright side, new home production remains strong as refinancing volume has fallen off. We are focused on increasing our market share of purchase activity, of which we saw the volume increase year over year by approximately 20%.

Wealth management revenues increased this quarter, considering the third-quarter adjustment for the one-time insurance premiums we had mentioned last quarter. Our service charges in commissions and fees continued to grow, and Ed will discuss some of the drivers behind that growth in just a few minutes.

We also recently purchased $60 million in Bank-owned life insurance, which will have a positive impact on our noninterest income. It will help partially offset the decline we anticipate in our real estate income.

There were a few key drivers behind the increase in noninterest expense this quarter. Our record level of earnings led to an increase in our incentive compensation accrual.

Also, in order to help move out some of our other real estate, we took an additional $1 million write-down. Other miscellaneous expenses, like marketing and professionals fees, were higher than anticipated; but when looking back to last year, this appears to be a seasonal trend.

Let's look ahead to 2014. Encouraged by the fact that our average loan and investment portfolio yields increased this quarter, we are optimistic that the net interest margin will not deteriorate more than a few basis points. With any increase in loan growth, our net interest income should improve nicely next year.

We anticipate net charge-offs to be about 25 basis points of total loans. And with continued improvement in asset quality, our provisioning might be somewhat less than that.

As far as noninterest income, we know that mortgage origination revenue won't be what used to be; so our focus is on other levers we can pull to minimize the impact of this lost revenue. In regards to noninterest expense we do not believe the fourth quarter was indicative of the run rate going forward, so we anticipate noninterest expense to be in the area of 2.8% to 2.9% of total assets.

I would like to wrap up by saying what I have seen in my first six months is very encouraging. We have a strong bank with strong capital. Our footprint is healthy, and we have a great team of employees.

I think the future is bright out here in the West. With that, I will turn the call back over to Ed.

Thanks, Kevin. I would like to just hot touch on our economies for a minute. Unemployment continues to decrease and is 5% or below in each of the states in which we do business. As you all know, that is at or near full employment levels. A lot of that can be attributed to the jobs that have been created over in the Bakken oilfield.

We are seeing housing starts back to the pre-recession levels in some of our largest market areas. And with the 5% growth we saw in construction real estate portfolio in 2013, we are optimistic the commercial and residential construction growth will continue.

Tourism has been strong, particularly this winter. Snowfall in December has helped our ski resort areas, particularly in Montana, kick off the season; and they are having a good year.

Back to the Bank. Wealth management continues to grow, and assets under management have increased 17% each of the last two years. We still see potential for growth in this area, both within our current customer base and through attracting new customers. One of the reasons we are so optimistic about the growth potential is because we are seeing quite a bit of wealth created in some of our markets because of the Bakken energy play.

We continue to expand our credit card business. New cards issued and card volume both went up 8% this year. We entered into an exclusive agreement with MasterCard, which has resulted in a better product for our customers and a higher percentage of interchange fee revenue for the Bank.

We have also introduced a new rewards program that is more market-focused that allows our customers to spend their rewards points within their own communities. Our goal here is to encourage our customers to use their cards more often, which will result in increased interchange revenue for the Bank.

We talked earlier about loan growth and credit quality improvement, and I would like to expand more on this point. With the improvement we have seen in our classified loan levels over the last year, our lenders will be spending less time cleaning up the loan portfolio and more time making new loans. To help make that happen, we have committed ourselves to leveraging technology to better understand our customers' needs.

In the past we have operated like a typical small community bank, and haven't used the data our customers have provided us in a meaningful way. In the last few months we have hired staff that understand data mining and are helping us better understand and serve our current customers. The information that will now be available to our customer-facing employees will allow us to introduce more products based on the relationship we have with that customer and our understanding of their financial goals.

Moving on to mortgage activity, with the low interest rates we have experienced the last few years, we have kept busy and had record levels of volume, simply as a result of folks walking in the door and wanting to refinance. With rising rates and a fall-off in the refi business, that isn't the case anymore.

We are in a more normalized mortgage market and expect about 70% or more of our business to come from purchase activity. With that we'll see a slowdown over the winter months, with activity picking up in May through September. We have recently hired an experienced home loans manager to work with our team to create a more robust selling culture. We understand that with most of our business coming from purchase activity, we need to be in the marketplace, meeting with the builders and realtors, to continue to grow this business and gain more market share.

In 2014, with the continued reduction in criticized and past-due loans, we are optimistic that we'll see our nonperforming loans down to a more normalized level and further declines in other real estate. While loan growth won't come easy, we will be working hard to increase our outstanding balances and improve the quality of our portfolio at the same time over the next year.

With that, I will open up to questions.

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

Ed, just to kind of follow up on your discussion of the loan growth, it sounds like it's a bit more optimistic, I guess, to characterize that. Would it be safe to say that you think that 2014 growth could outstrip the 3% this last year?

Yes. And, by the way, good morning, Jeff. That's a real short answer, but we have been talking about that very subject. And yes, we think we can have growth that will exceed the 2013 growth.

And if that were to -- if growth was more modest than you expect, would this year be a little more of a year that you look on an acquisition front to augment some of that, if the growth strategy isn't really coming together? That may not be the reason that you are looking more for acquisitions, but maybe you could give us an update on what you are seeing out on the acquisition front and your appetite?

I think we'll see more opportunities to take a look this year than we saw last year. Kind of similar to what I said about our lenders. Now that we've got most of the problems behind us, we in senior management will have more time to look at the acquisition trail also. That certainly isn't a strategy for loan growth, but it's something that we are all thinking about.

Okay. And then one last one. I know that you had mentioned the focus is going to be on the purchase side on mortgages. But just trying to get a feel for the mortgage loan sale gains going forward. Is this a bottom? Or you expect that to continue to trickle lower?

I am not sure I understand the question.

The gain on sale line item. What's the expectation on gain on sale for the mortgage side? I know that you said you want to grow the purchase side, but what's the gain on sale look in the coming year?

I can tell you, for the first quarter it's going to be less than it has been in the four quarters of 2013.

And the outlook for the year?

Then, typically, it takes up -- the middle two quarters are the most active. But we are following along the lines of the Mortgage Bankers Association in regards to volume dropping off this year.

However, we don't think our volume will drop as much as they are predicting nationally, partly because the economy is pretty strong here. Again, the influence from the Bakken, interestingly, is -- even though we are 350 miles away in Billings, the influence here in Billings, our biggest market, has just been huge. And so partly because of that, and partly because we just think we can gain some market share.

Sure. Okay. Thanks, Ed.

Matthew Keating, Barclays.

Ed, I was hoping you could help me. You talked about how job growth in the footprint has remained strong, and with encouraging signs of residential and commercial construction. If you take those trends, normally you would expect a fairly vibrant loan demand environment. Maybe could you explain some of the factors that have been keeping loan demand somewhat more depressed than you might expect, given the levels of economic activity in your footprint?

Good morning, Matthew. I've got to think about this for a minute. My first thought is that there are two sides to the loan growth equation. There is new loans; then there is payments. So we are continuing to make new loans, but that stream of payments is coming in very strong.

That's a good news story from the standpoint of our customers are doing well and repaying us rapidly. Of course, the bad news is it's hard to maintain growth when that's happening. So that's one piece of it.

The other piece, though, is that we are seeing quite a few requests that simply don't meet our standards. We are not interested in going back to the issue of spending a great deal of time cleaning up problems. So the ones that don't meet our standards just have to borrow elsewhere.

Understood. That's helpful. My next question would be for Kevin. Kevin, you mentioned the BOLI purchase that you made. What kind of phantom benefits should we expect from that $60 million purchase you did in the quarter as we look out?

Approximately $2.5 million.

Annualized? Okay.

Yes.

That's helpful. Then I think you guys mentioned that [MTA] should return to a normalized level is your expectation. Are you willing, like last year, to put a target on a decline? Or what kind of magnitude of decline or normalized level did you have in mind with that comment?

I am going to ask Bob Cerkovnik, our Chief Credit Officer, to address that. Go ahead, Bob.

Matt, I guess the thing that we would want -- to be a high-performing bank, we would want to be at 1%, less than 1% of total assets of our nonperforming assets.

Sort of by the end of 2014, is kind of the expectations? Or that would be a target that you would like to achieve, but who knows how things transpire?

That's very much a target we would want to achieve.

Understood. And my final question -- I was just curious. I know back in July, you gave us a metric. You may not have it readily available, but I think you said that you had about 15,000 mobile banking customers. Any update on where that metric trended as we kind of closed the year of 2013?

19,000 -- so it continues to grow. To put that into perspective, our original goal was to have 14,000 signed up by October. So now, three or four months after that, we are up to 19,000. So it's been more robust than we had hoped.

Very good. Thanks for the color.

Brad Milsaps, Sandler O'Neill.

Kevin, just a question on -- I know you have talked the last couple of quarters about trying to make the balance sheet more asset sensitive. I noticed the average liquidity was up again this quarter on some deposit growth from the last couple of quarters.

I am just curious what your plans are there. Do you expect some of that to reverse out? Do you anticipate maybe building the securities portfolio a little bit more? I am just trying to get a sense of what your plans for the additional liquidity would be.

To be honest with you, we are trying to keep -- you know, to be more -- we are a little bit, as you know, liability sensitive. So we are trying to stay more asset sensitive. So at this point we don't plan to on parking that out into the investment portfolio to make that matter worse at all. I think that liquidity will stay there for a while, because we don't have any plans currently right now to put that in the investment portfolio.

Okay. Great. And then just to follow up on the asset quality, I think I heard you say about 25 basis points of charge-offs is what you guys are looking for for 2014. You mentioned a lower level of provisioning. Is it safe to say we wouldn't see the negative provisions that we have seen in the last couple of quarters in 2014?

We are not anticipating that. But again, it's all driven by, Brad, the accounting aspects. Bob does a great job in knocking down asset quality levels to the way he just spoke a few minutes ago. I'm not going to rule that out.

Okay. Great. Very helpful. Thank you.

Tim Coffey, FIG Partners.

Just so I'm clear: the net charge-offs expectation -- did you say 45 bps?

25.

25. Okay. That's what I thought. Given kind of what we are seeing in terms of new expectations for loan growth and earning asset growth, how do you plan on targeting or improving efficiencies in the next year or two?

We have a long-term initiative for operating efficiency -- or we are calling it process improvement. I can tell you that it's not about cost-cutting. And as much as people like to see a cost-cutting measure, we think we would rather concentrate on process improvement, so to speak, the idea being we would like to do more business with more customers with the same number of FTEs.

And we think process improvement is the way to do that. So some of that includes Lean Six Sigma training, which we have been doing for over a year. And we have actually created a process improvement department. We've got four people staffing that department right now. That's fairly new, but that is all they are going to do across the Company for the foreseeable future.

Okay. And I know you talked about that in previous quarters. What was in the noninterest expense line item, other expenses, that made it blow up this quarter?

Kevin, would you answer that one?

Yes. We had some -- you know, it's that time of year. So some of the travel/entertainment was a little higher than we anticipated. Some marketing expenses were a little higher than anticipated, with some initiatives being so-so. There were just kind of some seasonal expenses that went a little higher than we anticipated in the other expense category. Again, nothing we anticipate that will continue at that rate going forward on a quarterly basis.

Okay. In terms of efficiency ratio going forward, is it fair to expect that the efficiency ratio stays at 65% or lower?

Hopefully lower than that, Tim.

Okay. Those are all my questions. Thank you.

Jacque Chimera, KBW.

Just thinking about mortgage gain on sale and then the portfolio of those loans rather than sale of them -- I know right now you are looking at the 15 years as to what you are putting in the portfolio book. Is there a point to where you might be more interested in putting more longer-term loans into the portfolio?

The short answer is no. And we are actually putting fewer of the 15s in the portfolio than we were a year ago. Obviously the interest rate risk weighs heavily. So we don't want to load up anymore with long-term fixed rate.

Is that a function of just not wanting that long-term fixed rate in this portfolio, or is it more just where we are in the rate cycle? So once rates increase, you could look to increase those mortgages more?

It's more a function of the first -- that we just don't want long-term fixed rate in the portfolio. It is not so much about where rates are today.

Okay. Do you have an ideal mix of where you would like to see the single-family loans from an exposure standpoint?

Yes, I do. Marcy keeps telling me that I am not supposed to reveal that. Is that true, Marcy?

Well, I don't want to get you in trouble with Marcy, so --. (laughter)

Just touching back on some of the data mining people that you have hired, do you see yourself developing new products as you learn more about your customers?

Yes.

Anything that -- could we just get more color on that?

Not to the extent we were -- I'm sorry, I wanted to expand on that a little bit. New products, yes; but mostly they will be tied to what I would call traditional banking products, meaning we are not looking to get into new product lines. We are more looking into knowing what we do well and figuring out how to do it even better. If you keep tweaking until it's better, and better, and better for our customers.

Okay. Do you see that more of an NII benefit or more of a fee benefit as we go along?

I would say both.

Okay. Fair enough. And then just one quick last one: the 25 basis points that you are looking towards for net charge-offs next year -- do those include expected recoveries in there, as well?

Yes.

And how does the recovery pool look now? Is it still pretty substantial -- we could see a continuation of that going forward for the next year or two?

Yes. Pretty substantial would be a good way to put it.

Okay. That was all I had. Thank you very much.

As there are no more questions at the present time, I would like to turn the call back over to management for any closing remarks.

Thank you. I will just wrap up by saying, again, we are pleased with our year, and we have entered 2014 with renewed focus and energy going forward. I'd like to thank all the people across our Company who helped us accomplish everything we did this year.

I'd also like to thank you shareholders and let you know that we are continuing to work hard to deliver a high return to you. Thanks and goodbye.

Thank you. The conference has now concluded. Thank you for participating in today's presentation. You may all disconnect. Have a nice day.