First Interstate Bancsystem Inc (FIBK) 2015 Q1 法說會逐字稿

Good morning and welcome to the First Interstate's First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) I would now like to turn the conference over to Marcy Mutch, please go ahead.

Thank you, Zelda, good morning. Thank you for joining us for our first quarter earnings conference call. As we begin, I'd like to direct all listeners to the cautionary note regarding forward-looking statements and factors that could affect future results and our most recently filed Form 10-K. Relevant factors that would 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. At this time, I'll turn the call over to Ed Garding. Ed?

Thanks, Marcy. Good morning and thanks again to all of you for joining us on the call. Yesterday, we reported earnings of $21 million or $0.46 per share. We were encouraged by our year-over-year increase in pre-tax, pre-provision income, which was up 17% from the first quarter of 2014. Net interest income combined with non-interest income or total revenue growth was up 12%, compared to the first quarter of 2014. Year-over-year, our revenues grew faster than our expenses, a lot of which can be attributed to the Mountain West acquisition and the realization of those cost savings.

Overall, we had a good first quarter, so I'll start by hitting the highlights. Organic loan growth was approximately 5% year-over-year and 1% quarter-over-quarter. Most of this growth was in the commercial real estate portfolio. Mortgage revenue, which is typically slower during the winter months, was up 27% over the first quarter of last year.

During the first quarter, we opened an office in Sioux Falls, South Dakota, focused primarily on mortgage lending. While this didn't have an impact on first quarter results, we expect it will provide a boost to revenue in the latter part of the second quarter. I'll provide a little more detail on the Sioux Falls location in a minute.

We also entered into a definitive agreement to purchase Absarokee Bancorporation, a parent company of United Bank. This deal will provide us with branches in communities complementary to our headquarters in Billings, and about $74 million in assets. We can offer a broader base of financial services to the new United Bank customers, while also better serving our existing customers that reside in those communities. Kevin will talk more about United Bank in his comments.

We did see non-performing assets creep up this quarter to 1.1% of total assets, over 50% of the increase was related to one commercial credit in the oil industry. This downgrade is due to facts specific to this borrower and isn't indicative of a broader trend within our loan portfolio or the energy portfolio.

Our direct exposure to the oil and gas industry continues to remain at right around $70 million, with another $40 million committed. Our goal is to keep the non-performing asset ratio below 1% and we believe we will get back down within that range over the next quarter or two. On the positive side, both classified and criticized loans decreased for the quarter, which is indicative of our future expectations.

Moving to capital, we had a 25% increase in the dividend paid during the first quarter. We also repurchased over 500,000 shares of stock. Adding these activities to what I've already discussed, we've hit on all cylinders in our capital deployment strategy, which is organic growth, strategic acquisitions, stock repurchases and payment of dividends.

Now I'd like to circle back to the office we opened in Sioux Falls. I don't know how many have you been to the Sioux Falls area recently, but it is a very vibrant corner of South Dakota. 29% of the state's population resides in the Sioux Falls area, and population growth is expected to be over twice the national average over the next five years. We had the opportunity to bring in a mortgage team who have worked together in the past. The team already has a well-established network in the Sioux Falls area, so they've been able to hit the ground running or should I say, lending. The branch, which was officially opened in March, is focused on residential home mortgages and construction loans. This new location will help us meet our aggressive mortgage production goals for the year.

Now a little about what's happening across our footprint. Looking ahead, the economic benefit, the tourism and Ag industries will see from low gas prices, should help offset any weakening in our general economy from lower oil prices. While crude oil prices have gone back up a little in the last three weeks, it's too early to tell if this will result in any increased activity in the Bakken. And while there have been layoffs over in North Dakota, our unemployment rate in Montana and Wyoming has actually declined since the end of the year.

We expect the tourism season will go well this summer. If you're planning to go to Yellowstone Park this summer, you should make reservations soon, a lot of the lodging in the park is already booked. If you do try to get reservations and can't find anything, call me and you can stay at my place which is just an hour away from the park. All you have to do is, sit through a short presentation on why you ought to own stock in First Interstate.

This year also marks the 75th anniversary of the Sturgis Bike Rally. If you're not familiar with this event, motorcycle enthusiasts head to Sturgis, South Dakota for a three week long celebration. The time of Sturgis, normally about 6,500 people will welcome around one million bikers into their community for this event.

The rally is the type of event that benefits from low gas prices, which may be an incentive for more tourists to make the trip out West. So we may see surrounding areas like Yellowstone and Glacier have an even stronger year than in the past. We're just kicking off the prime tourism season, and I'll be able to give you a more clear picture on how that's going over the next couple of quarters.

We're also cautiously optimistic about agriculture this year. While cattle prices remained strong heading into 2015, sugar and grain prices are depressed. A good crop year along with low gas and diesel prices would go a long way towards helping our farmers have a productive year.

So with those comments, I'd like to turn this over to Kevin for a little more detail behind the numbers. Go ahead, Kevin.

Thanks, Ed and good morning everyone. GAAP earnings for the quarter were $0.46 per share and our pre-tax pre-provision basis income increased $4.6 million or 17% over the same quarter a year ago. The organic growth seen across all of our key business lines. Let's start off with the balance sheet.

For the quarter, we had organic loan growth of about $30 million. Commercial real estate increased about $32 million or 2% this quarter. This was partially fueled by construction real estate loans moving into permanent financing. In addition, other commercial loans grew about 2%, while our consumer loans grew around 1%, but all the consumer loan growth attributed to the indirect loan portfolio. As is typical for the first quarter, agricultural loans continued to pay down, and we would expect borrowing to pick up as we head into the second quarter.

This quarter, our investment portfolio increased slightly to $2.3 billion and remains at 27% of total assets. Our strategy remains steady and we continue to keep the duration of the portfolio short, declining this quarter to 2.61 years from 2.98 years last quarter. The steep drop in duration during the last quarter was the result of declining interest rates, which resulted in faster prepayment speeds on our securitized investments. I'll keep saying this, if and when rates rise, we will be well positioned.

As we expected, our total deposits declined slightly this quarter. The decline was dispersed across all deposit types, the saving accounts being the only category showing an increase. The decline in time deposits exceeded the -- decline in demand and non-interest bearing accounts resulting in a two basis point decrease in our cost of funds.

Now let's look at the income statement. The decrease in net interest income of $1.2 million compared to last quarter was largely due to two less days of interest this quarter. The net interest margin rebounded five basis points for the quarter to 3.43%. Exclusive of the purchase loan discounts related to early pay-offs of acquired loans and the recovery of charge-off interest, our margins increased six basis points. Breaking this down further, it was an eight basis point increase attributed to reducing the unusual high balances we carried in overnight funds last quarter and this increase was offset by two basis points, resulting from lower yield on our outstanding loans. We're hopeful that we can grow loans at a pace that mitigates further margin erosion and increases net interest income. Provision expense for the quarter was $1.1 million. While we had previously indicated, we expected that provision to cover our net charge-offs that didn't quite work this quarter, since we had net recoveries for the quarter. The increase in non-performing assets requires an additional allowance and as Ed mentioned earlier, we believe this slight uptick in non-performing assets will be temporary.

Moving onto non-interest income, income from the origination of sale of mortgage loans was $5.9 million, up 6% from the prior quarter and 27% for the same quarter last year. Since mortgage revenues are an area we specifically targeted to grow, we're encouraged by the year-over-year increase. Purchase activity accounted for 57% of our production this quarter. We are seeing quite a bit of refinancing activity with rates where they are today. That said, we are seeing an influx of buyers and new building in the residential market.

Ed mentioned the Sioux Falls office in his opening comments. I'll just add to that, within the first three weeks of the official opening of this office, the team had pre-qualified 10 buyers and had an additional 13 deals in the pipeline. Two of these deals have closed already in April. So, as we focus on growing non-interest income, the mortgage business will continue to be an area of emphasis. Well, major revenues continue to grow as well as assets under management. Assets under management at the end of the quarter were $4.6 billion. Revenues grew 3% quarter-over-quarter and 11% over the first quarter of 2014.

Revenues from both debit and credit card business continues to increase, while down from last quarter due to normal seasonal fluctuations in the number of transactions, we saw an 8% growth over the first quarter of last year. Our non-interest expense is exactly where we expect it to be, right around $60 million a quarter as we guided you to that in the month of January.

I'll wrap-up my comments by talking about capital. As Ed mentioned, our deployment priorities remain unchanged and we effectively managed each leg of our strategy this quarter. We've already talked about organic growth, so let's move toward acquisition.

Most of you've heard me say that we were looking for ways to efficiently acquire smaller institutions that make strategic sense to us, because there are a lot of those in our market. United Bank is a perfect example of this type of opportunity and we are excited to welcome their customers and employees to our bank. We have filed our regulatory applications and expect to close early in the third quarter. With an all cash deal and a small shareholder base, our acquisition cost should be minimal and the execution risk is very limited and it should be immediately accretive to earnings.

This deal is on the smaller end of what we would typically consider, but it's a great fit for the company and a great test to see if we can do these types of acquisition in an efficient manner.

Going forward, we'll continue to evaluate these types of deals to see if they make sense, while looking at larger transactions as well. As you saw in our release, we repurchased 566,000 shares of stock in the first quarter at an average price of under $26. We'll continue to look for opportunities to repurchase shares as the market allows. And of course, we continue to pay quarterly dividends back to our shareholders with the intent of hitting our targeted payout ratio of 35% to 40% of earnings. Capital ratios remain strong, and even with the impact of [2003] we have plenty of capital to allow us to continue to consider growth opportunities.

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

Thanks, Kevin. I want to wrap up by briefly mentioning the 8-K we put out last week, related to the litigation involving a former customer. Now that we've received the final order issued last week by the District Court Judge, it will allow us to move forward and appeal our case before the Montana Supreme Court. As you know, we accrued $4 million in the third quarter of 2014 related to this litigation and more detailed information about this is included in our SEC filings. I will try to respond to any general questions you might have, but I won't speak in great detail about this ongoing litigation. So with that, we'll open it up to questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The question comes from Jared Shaw with Wells Fargo. Please go ahead.

Hi, good morning.

Good Morning!

When we look at the move in asset quality and the growth in non-performers and the resultant change in the allowance, should we expect to see as the asset quality improves going forward, would we expect to see the allowance come down as a percentage of loans through potential additional reserve releases or as the assert quality improves in results, would it be more as loan growth comes in and we see the allowance ratio come down?

Well, I think as asset quality improves, I don't know if we'll have many real share releases, but we have to the build the allowance as loan growth continues. But as assert quality improves, the allowance will be -- not needed as much. So it's kind of a hard question to answer, but I would still project that our (inaudible) have pretty much cover our net charge-offs.

Okay. And then, was most of the – did you say, most of the provision this quarter was due to that specific increase in non-performers versus last year?

Correct.

Okay. And then, when you look at shifting of that looking at the M&A landscape, do you think you could do multiple deals at the same time if the opportunities arise? I mean, this is -- this recent deal is relatively small in terms of an asset size. How many do you think you could be working on it at any given time, the similar size?

Well, we've never done more than one at a time and in fact, we've usually allowed some space between acquisitions, because we are very deliberate about the implementation. So more directly to your question, if there were to in the size range of the United Bank one in that $100 million under size range, I would say, yes. We could challenge our people and they would rise to the challenge, whether that will happen or not it is probably unlikely, just because it takes a while to find and negotiate those kinds of deals.

Okay, great. And just circling back I guess on the asset quality and provision question, was there loan recovery benefit included in interest income this quarter?

Yes, there was a little bit of interest recovery. Your question was on non-accrual loans or –

Yes, there is a little bit of interest recovery. Your question was on non-accrual loans or

No. I'm sorry. Was there an interest income, was there any benefit from loan recovery this quarter?

Yes, 591,000. It's in our press release.

Okay, great. Thank you.

Jeff Rulis, D.A. Davidson.

Thanks, good morning.

Good morning, Jeff.

Question on the non-interest expense run rate. Maybe first to clarify, the Mountain West, is that fully converted at this point?

Yes. We actually converted them to our core operating system and did the name change last fall.

Got it. And so from expected cost savings or kind of what's trickling through the non-interest expense line item is Q1's level, albeit a little higher on the comp side, that's a pretty good base for representative of going forward.

Yes, that is correct.

Okay. And then Ed, I guess I could slightly on the litigation, but maybe specifically if you could answer on, would you expect more accruals or likely to play out the appeal process before possibly out into the -- you've accrued $4 million so far, which you possibly accrue more ahead of any appeal decision?

From an accounting standpoint, it is so uncertain that I wouldn't expect more accruals prior to having better knowledge about the final number. And where you've got our insurance company in the mix and of course we were working and have been working on the appeal process, but that had kind of been put on hold as we waited for the District Judge to finalize the ruling, but now that's finalized we can move forward with that piece of it too, but there is an awful lot of uncertainties. So I don't expect accruals in the near future once we know a number, then perhaps there would be an expense.

Got it, okay. And then I guess the last question just on -- I guess maybe to Kevin, on the core margin then there's some puts and takes in there, but I guess the outlook for assuming a pick-up in loan growth, what's your view of kind of margin direction going forward?

Well, I mean, as loan picks-up, we believe larger will be here and we could see a basis point erosion, if we stay in this low rate environment, but we still have some mixes bounces where we could put to work, which could offset any kind of erosion on the yield at loan. So, it's going to be right around here or it could be like a basis point down.

Jackie Chimera, KBW.

Hi, good morning everyone. I wonder if you could provide a little bit more color on, you mentioned in your prepared remarks, that you have aggressive mortgage growth goals, if you could just give us more information on some of those.

I'm sorry, I didn't understand the question, Jackie.

You had mentioned that this year you have pretty aggressive mortgage growth goals, I was just wondering, what those were?

Yes. Well, we believe that mortgage -- the gain on sale mortgage will increase substantially over last year, especially with what we were seeing with regards to [VDAT] financing and also our continued emphasis on trying to pick-up more market share in our current markets, as well as our expansion in the Sioux Falls area. So we're expecting a nice growth pattern with regards to that business this year.

We believe that mortgage, the gain and sale mortgage will increase substantially over the last year, especially with what we're seeing with regard to free that financing and also our in continued emphasis on, I'm trying to pick up more market share in our current markets as well as our expansion in the (inaudible) area, so we're expecting a nice growth pattern with regards to that business this year.

Is it possible you might add additional offices throughout the year or is Sioux Falls kind of it?

I'll answer that. And Jackie, Sioux Falls is the only additional office, but we have added people. And so, when we can find top originators within our existing communities, we hire and have been adding because, we firmly believe that they pay for themselves with the volume that they bring us.

We challenge our originators. They all have minimum volume goals that we watch closely. And then, in order to help them reach their goals we're working on all new software, which will be installed probably late summer. And with a long-term goal to significantly lower the number of days between application and closing which typically makes the realtors and the homeowners very happy, and we're actually already seeing movement in lowering the number of days from application to closing, and we think that helps us get referrals, which in turn will help with the volume goals.

Okay, great. That's wonderful color. Thank you.

Matthew Ferguson, Sandler O'Neill & Partners.

Hi. Good morning. Can you give us, what was the balance of the loan pipeline at quarter end? And can you give us some insight into the complexion and the weighted average rates?

I'm looking at Marcy to see if she's got that. And it looks like maybe, Kevin is going to answer that.

Weighted average rate of loans that were booked this quarter were about 4.81%. What we're hearing from the field is that, the pipelines are pretty robust right now but sometimes they could be optimistic and that could bring it to fruition but they seem pretty excited about, what they're seeing right now in loan growth. So we hope the second quarter could look something like the second quarter of last year where we saw most of our loan growth in the second quarter. What we've seen so far in April is that, we have seen some pick-up in loan growth. So we're hoping that the second quarter is a strong quarter.

Okay. And then just in terms of your M&A outlook, can you give us your most recent thoughts on crossing the $10 billion threshold and how M&A and the $10 billion mark kind of come into play in your eyes and when we might expect that?

We intend to be ready for the $10 billion mark well before we hit the $10 billion mark. And so we have an internal task force that's working on that, that's made up of three of our board members and three of our executive team. And one of the big things about being over $10 billion is the fast stress testing, we've already bought the software to do that and want to be ahead of the curve there. And we don't have any strategies to stay under or goal way over. We don't want the numbers to manage us, so much as we want to manage the numbers.

Okay, all right. And then lastly, I sense a bit of change in tone, you guys sound even more optimistic than you were last quarter about your indirect exposure to the Bakken. Am I hearing that right? And kind of, what takes you in that direction?

Well, we have seen an uptick in the past new rate specific to indirect loans in the Bakken, but it's been very minor and that's a very minor part of that $550 million portfolio. And our exposure to the Bakken in regards to indirect is about 5% of that portfolio. So that's part of what we're saying, it's not going to be an issue. And we're continuing to see that indirect portfolio grow and interestingly the sale of automobiles has fallen off and we think that's probably related to the drop in oil prices. But the sale of motorhomes and travel trailers has significantly jumped up, which is related to the lower gas prices.

This concludes our question and answer session. I'd now like to turn the conference back –- we have Jackie back again. I apologize for that.

Welcome back, Jackie.

I'm sorry. I got cut off a little earlier.

I am sorry Jackie that was my fault.

No problem. I was able to get back in queue. I just wanted a quick clarification on something in the press release. There was a mention about $1 million in accruals related to Mountain West, was that a non-interest income or non-interest expense?

That was a non-interest income.

Okay. And just in the other category, I'm guessing?

That's correct.

Okay. And sorry if I missed this in your prepared remarks, but the two larger credits that caused the uptick in NPAs this quarter, those were not related to the Bakken, correct?

No, one of them. One of them is directly related. It's an oil production loan and there's just no question that the borrower was highly leveraged and the drop in the price of oil has affected their cash flow.

Okay. And was that already in one of the credit size loan buckets, when it flowed into NPA?

Yes, it was.

Okay. And then just lastly, you seem very positive on tourism, more so perhaps than in last year. Do you expect it to be a larger factor than it was in 2014?

Yes. We can do a little bit of gauging based on the reservation. And there is no official report on that. You just have to visit with your Hotel Owners Association in each state and so forth. But reservations in all three states are up more than they were last year, especially over in South Dakota that 75th anniversary of that Sturgis Rally is a very big deal to the Sturgis Rally people, and we keep hearing over there that, don't even try to come to Sturgis because you won't get in. And so for those reasons we think it will be good, but also, last year we hit record numbers in both Yellowstone and Glacier, and this year gas prices are significantly lower than they were last year.

Okay. And then is it fair to say that the increase in tourism might provide some jobs for others who may have lost them the Bakken?

Yes. It will certainly provide jobs and I can tell you, like talking to the builders, especially in the Eastern Montana, the home builders, they are all, if you ask them about the drop in oil prices, they are saying, the good thing is that, I can now hire skilled labor again, because a year ago that was their biggest challenge, they were taking an inordinately long time to finish projects because they couldn't find skilled labor, and now they're saying the skilled labor has come back to the market. So that's the good part of that.

Now, those people are probably not making the same level of wages as they were in the oil field, but nevertheless, they are working. So we really think that the economy centered around that oilfield has gone from gold rush camp crazy to just a really good economy, because there are still 90 oil drilling rigs working in North Dakota. Now year-and-a-half ago there was 180. So it's a heck of a drop, but 90 rigs working meaning, they are still doing some drilling. It's still a lot of economic activity for a sparsely populated area.

Now that makes great sense. Okay, thank you very much for the added color. I appreciate it.

You're welcome Jackie.

Thank you, and this now concludes our question-and-answer session. I would like to turn the conference back over to Ed Garding for any closing remarks.

No closing remarks, just as always we welcome calls from investors and analysts. So reach out to us at any time. Thank you for tuning in and have a good day.

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