First Interstate Bancsystem Inc (FIBK) 2021 Q4 法說會逐字稿

Good morning and welcome to today's First Interstate BancSystem, Inc Fourth Quarter Earnings Conference Call. My name is Bailey, and I will be your moderator for today's call (Operator Instructions)

I would now like to pass the conference over to our host, Lisa Slyter-Bray. Lisa, Please go ahead.

Thanks, Bailey. Good morning. Thank you for joining us for our fourth quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed in those statements. I would like to direct all listeners to read the cautionary note regarding forward-looking statements in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward-looking statements made today.

A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release and on reconciliations to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.

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

Thanks, Lisa. Good morning, and thanks again to all of you for joining us on our call today. Again, this quarter, along with our earnings release, we have published an updated investor presentation that has some additional disclosures that we believe will be helpful. The presentation can be accessed on our investor website. And if you haven't downloaded a copy yet, I would encourage you to do so.

I'm going to start off today by providing an overview of the major highlights for the quarter and then I'll turn the call over to Marcy to provide more details on our financials. We delivered another strong quarter as healthy economic conditions across our markets resulted in strong deposit inflows, a strong level of new loan production and further improvement in asset quality. Combined with our disciplined expense management, this produced a strong quarter of earnings with net income coming in at $51.2 million or $0.83 per diluted shares. Excluding $0.06 per share of merger-related expenses, our earnings per share was $0.03 higher than the operating earnings per share in the prior quarter.

While we're disappointed with our net loan growth in the quarter, the highlight was exceptional levels of loan production that we had. Although we are still seeing some impact from supply chain disruption and labor shortages causing projects and investments to be delayed, we had a strong level of new loan production with all of our markets making strong contributions. We are particularly pleased with the positive trends we are seeing in the Mountain division as Montana led all of the markets. This is indicative of both increasing demand and our improved business development efforts.

While we had an extremely productive quarter of new business development, this was offset by an unusually high level of loan payoffs, which impacted our total loan growth. Some of the payoffs were a result of sales of companies prior to year-end, while others were related to both banks and nonbanks offering low long-term fixed rate pricing where we made a balance sheet management decision not to compete.

As always, we balance growth with risk management. In this case, we are not going to take unnecessary interest rate risk just to show loan growth, particularly ahead of potential rise in interest rates. This long-term approach has enabled us to grow the company while maintaining exceptional asset quality and our target level of interest rate sensitivity, producing results that have consistently created long-term value for our shareholders.

As a result of the elevated payoffs and the continued strong deposit growth, our cash position grew by nearly $600 million on average during the quarter to $2.3 billion or approximately 13% of our earning assets. This leaves us a lot of room to optimize our balance sheet mix over time.

As we announced earlier this month, we have received all regulatory and shareholder approvals for the merger with Great Western Bancorp, which is expected to be to complete it on or about February 1. We are very pleased that we are on track to complete this merger just 4.5 months after announcement. This is a testament to our acquisition experience, efficiencies and strong regulatory standings.

Over that time, we have made great progress in our integration planning and continue to feel good about our ability to meet our announced financial targets for the merger. The system conversion is scheduled for the weekend of May 20, with Great Western branches to open under the First Interstate brand on May 23. We expect full realization of cost synergies shortly thereafter.

As you may have seen, Great Western announced its fourth quarter results last night as well, showing tremendous progress working through its problem loan portfolio. Nonperforming assets declined 13%, while criticized loans declined by nearly $150 million, excluding the loans held for sale. On that point, the team did a great job reaching an agreement to sell $75 million of mostly criticized hotel loans at a 12% discount, which is below the mark we disclosed on hospitality loans designated as PCD in our initial due diligence. Great Western is consistently resolving problem loans inside of our original estimate for PCD loan marks, which may lead to a lower level of loan marks assumed in the transaction than initially projected.

Great Western also had a good quarter of loan production, with total loans increasing over $100 million, adjusted for $122 million impact on PPP loans and $36 million related to the disposition of nonperforming loans. With the strong progress Great Western has made on working through its problem loans, the frontline has been able to shift its focus back to business development and capitalizing on the strong growth in many of its markets which is a trend we expect to continue.

And lastly, we hope you saw that earlier this week, we announced significant changes in our consumer overdraft practices, including the elimination of NSF fees and a significant reduction in overdraft fees. We are also introducing a checkless account that has no ability to be overdrawn and includes debit and online banking access that will allow us to expand our product set and better serve the underbanked in our community.

As a regional bank, it is important for us to be setting the example in our market on this front. It is the right thing to do, and we hope other local market participants will follow our lead. With an effective date of April 1, we estimate this change will reduce First Interstate's NSF and OD fees by around $5 million in 2022.

Helping your neighbor and being a good corporate citizen, those are the core values that First Interstate was founded on, and they will not change as we grow. They will only get stronger. And with that, I'll turn the call over to Marcy, so she can provide some additional details on our fourth quarter results. Go ahead, Marcy.

Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the third quarter of 2021, and I'll begin with our income statement.

On a GAAP basis, our net interest income decreased by $5.1 million, which was primarily due to $4.5 million decrease in PPP loan income. Accretion income was also $400,000 lower on a linked-quarter basis. Excluding the impact of PPP and accretion income, our net interest income was relatively flat compared with the prior quarter.

Our net interest margin declined 22 basis points from the prior quarter to 2.69%, partially attributable to the lower level of PPP income. Excluding PPP from both periods, our net interest margin decreased by 15 basis points, primarily due to a shift in the mix of our earning assets toward investment securities and cash, along with modestly lower loan yields. This offset a 1 basis point decline in our cost of funds.

Yields on new loan production were about 20 basis points lower than the prior quarter but still in the very high 3% range. This decline is attributable to an intentional shift in the mix of new production to our variable rate loans, which were about 54% of the total production in the quarter. Our noninterest income decreased $2.3 million quarter-over-quarter to $37.4 million, primarily due to lower mortgage banking revenues, which was partially offset by higher wealth management and swaps revenues.

Moving to total noninterest expense. We recorded $5 million in acquisition-related expense in the fourth quarter. Excluding acquisition-related expense in both periods and the litigation accrual last quarter, we were pleased with our expense management in the quarter with noninterest expense declining by $900,000.

Moving to the balance sheet. Our loans held for investment decreased $291 million from the end of the prior quarter, which included a net decline in PPP loans of approximately $190 million. Excluding PPP loans and deferred fees, total loans held for investment declined by approximately $107 million from the end of the prior quarter primarily due to declines in the construction and consumer loan portfolios. This was partially offset by an increase in our commercial real estate portfolio.

The commercial portfolio was essentially unchanged from the prior quarter, excluding the PPP loan impact. As of December 31, we had approximately $96 million of PPP loans on our balance sheet, net of $3.8 million of remaining associated deferred loan fees.

On the liability side, our deposits continued to increase and were up $262 million from the end of the prior quarter, with most of the growth coming in interest-bearing demand deposits.

Moving to asset quality. Our portfolio continued to perform exceptionally well. Nonperforming assets declined by 16% in the quarter and criticized loans declined by another 14% due to upgrades and paydowns. Our credit losses continued to be low with $2.7 million of net charge-offs, which, on an annualized basis, represented only 11 basis points of average loans in the quarter.

Given the improvement in asset quality and a strong macroeconomic backdrop, we had a negative provision for credit losses of $9.5 million. This reduced our allowance as a percentage of loans held for investments to 1.31% at December 31 while our coverage of nonaccrual loans increased to 491%. Excluding the $96 million of remaining PPP loans, our allowance represented 1.32% of loans held for investment at the end of the quarter.

I'll wrap up with a few comments about our outlook for 2022, which at this point are for First Interstate on a stand-alone basis. We will provide additional color on the combined company once we have a clear understanding of the purchase accounting impact at the end of the first quarter.

Our outlook has seen three 25 basis point Fed hikes beginning -- at the beginning of April, August and November. Excluding PPP, we expect mid-single-digit loan growth and for deposit balances to be relatively flat for the year. Excluding PPP income, we expect mid-single-digit net interest income growth. We would expect the net interest margin to be relatively flat in the first quarter again excluding PPP and for the first quarter to be the low point of the year.

Excluding the MSR impairment recoveries and securities gains we saw in 2021, we expect total fee income to be down mid-single digits, which includes a conservative outlook for our mortgage banking revenue and fully considers the roughly $5 million impact we discussed earlier related to consumer, NSF and overdraft fees. This also assumes no MSR impact in 2022.

Excluding the merger charges and litigation accruals that were incurred in 2021, we expect our operating noninterest expense growth to be in the low single digits. This is a great result considering the inflationary pressures in the market today and is a result of the scale of efficiencies we have worked so hard to put in place over the last few years. Of course, we know we won't be operating on a stand-alone basis, but we thought it was important to provide a sense for the positive trends we expect in our historical business.

In regard to the acquisition, there's still a lot of moving pieces. But at this point, we feel good about our ability to deliver the earnings and performance metrics we projected at the time of deal announcement.

So with that, I'll turn it back to Kevin. Kevin?

Nice job, Marcy. Atop of our priority list this year is executing a smooth and efficient integration of Great Western's operation. After this system conversion is completed in May, we should realize most of the cost savings projected for the transaction starting in the third quarter. As our franchise grows to more than $32 billion in assets with more than 300 branches across 14 states, we believe it is important that we continue to maintain the culture that has led to a long track record of success. That culture includes a strong commitment to making our communities that we live and work positive. We are excited to support the effort of the $20 million contribution to the First Interstate Foundation that we announced with the deal. These funds will allow us to continue to make impact in our legacy communities and immediately provide support across our expanded footprint.

As I mentioned earlier, we're already seeing Great Western's commercial banking team shift its focus back towards business development, which we expect to continue after the merger. With the progress that Great Western has made working down its problem loans prior to the closing, we should have fewer headwinds to our total loan growth than we expect at the time we announced the deal. Combined with strong levels of loan production that we are currently seeing at both First Interstate and Great Western, we believe our original pro forma growth expectations may prove conservative.

As we look ahead to the year, we're excited by a number of catalysts that we have in place to deliver strong performance. Economic conditions in our markets are fundamentally healthy. We are seeing increasing loan demand and will increase our exposure to faster-growing markets following the closure of the merger. Both First Interstate and Great Western have good momentum in business development that should only accelerate as we leverage the combined strength of each organization. We'll start seeing the accretive benefits of the transaction in a more meaningful way during the second half of the year following the system conversion.

Our balance sheet is very well positioned to benefit from rising interest rates. And we have the technology and the products to stay relevant in this highly competitive marketplace. So with that, I'll open the call for questions.

(Operator Instructions)

Our first question comes from Jared Shaw of Wells Fargo.

I guess maybe starting with loan growth. Your tone sounds optimistic, but then when we look at the original deal announcement guide of 3% to 4%, that seems pretty light compared to the optimism that we've seen from peers with growth. I guess with Great Western being able to dispose of more of those troubled loans earlier, why aren't you more aggressive and looking at your loan growth or setting your loan growth targets for the year? It still seems pretty low.

Well, as -- Jared, as you know, in the past, we are always conservative with our estimates of what we can do. We feel good about it, but we don't want to get out over our skis with regard to projecting more than what we have already projected.

And I think what we do feel optimistic about Great Western that they're resolving their problem loans at a pretty good pace. So we just still look at that at this point at a net zero.

Okay. I guess if we did see growth come in better than expected, what would be driving that? Would that be lower paydowns, higher utilization, new customer acquisition? I guess where do you see the most optimism to potentially...

I see the most optimism if the marketplace hopefully get some rational thought process in what they're doing with regards to loans. I mean, I think in the fourth quarter, people believe that interest rates are going to be 0 for a long, extended period of time, and they were doing things that I would say that are pretty risky to put on the balance sheet. People put a lot of loan growth on -- at rates that I'm sure they probably have a little bit of indigestion on right now.

Okay. And then can you just give us an update or a reminder of what happens with the B shares? And how much of that is automatic versus something needing to happen? And so when do you think those could be gone and the stock potentially could be included in some indexes?

Right now, my belief is that they will be -- they go away at the end of March.

Well, it's at the record date of the annual shareholder meeting and it is automatic.

And it's automatic, we believe, at the end of March.

Okay. So there's no vote required, no procedural, just...

No.

And I guess just finally for me. An announcement, it sounded like Mark was going to be staying on as part of the management and he's not on this list. I guess, any update on what is going on there? And any other thoughts on who from Great Western could be involved going forward.

Well, we have 2 people from Great Western that we announced are moving forward. That's the CIO, Scott, and their Chief Risk Officer, Karlyn, will be moving on with us to take over those positions at the combined institution. Mark has decided to move on and pursue other interests.

The next question comes from Matthew Clark of Piper Sandler.

Maybe getting back to the payoff activity. It sounds like it's a function of a number of things, but do you have a sense for how much of that might have been unusual or outsized? Were there any lumpy payoffs? I'm trying to get a sense for your payoff expectations going forward and whether or not you need that because that phenomenon may not necessarily change in the near term. And kind of what your embedded assumptions are for growth that drives that mid-single-digit NII growth?

Yes. This is just -- you can't just totally predict the market. I'll give you my own opinion on what's going to happen. What we're seeing right now is that people were forcing growth in their balance sheet in the fourth quarter and they were doing stuff. I think people are not in the mood of forcing that activity as much. So I think paydowns, we're seeing it might subside a little bit due to the fact that the aggressiveness of people trying to book low-rate deals is slowing.

Okay. Okay. And then on the core NIM outlook being relatively stable here in the first quarter, that's encouraging, but also a little surprising to me, given that you had deposits up and loans down this quarter and what that can do to your average earning assets in the upcoming quarters. So I guess what other -- what's also helping to kind of stabilize your view there?

Again, I think the first quarter will be the low point for next year. But that said, we are seeing some better yields on the investment portfolio than we've seen in the past. And so that's going to help drive that to be a little bit better than you might expect.

Okay. And then just on the excess cash, I mean, it continues to build. And I know you guys are keeping your powder dry with rates expected to go up. But how quickly might we see you redeploy that excess cash here this year?

Well, we're going to be diligent on that. We're going to continue to deploy it. And I would make a projection that we will not have this much cash on the balance sheet as we go from quarter to quarter. It will continue to move down as we go out throughout the year as we invest either in the security portfolio or into loans.

Okay. And then just the timing of the $5 million coming out of revenue from the overdraft, when does that start? And is it...

It starts April 1.

The next question comes from Jeff Rulis at D.A. Davidson.

So this is actually Jeff's associate on for Jeff this morning.

Can you speak up? We can't hear you.

Yes. This is [Andrew Corsica] on for Jeff Rulis at D.A. Davidson. First question, does the fact that Great Western had net loan growth in Q4 changed your outlook for consolidated growth in 2022? I believe you guys did not expect any net growth out of Great Western through 2023.

Well, as I would say, one quarter doesn't make a trend. Do we feel better about the future? Absolutely. And we're hoping that continues. So it could change our outlook, but I don't want to have one quarter change the whole view of what might happen. So it makes us feel that we were conservative at this juncture, and we hope to see better results moving forward.

Our final question comes from Andrew Terrell from Stephens.

Maybe just to start, Marcy, I was a little bit surprised to hear the guidance for -- I think it was relatively flat deposit growth in 2022 on an organic basis. I was hoping you could just provide just some more context there. Is it -- is there any kind of intentional runoff you're anticipating to kind of improve deposit mix? Or just can you maybe just talk to the drivers behind that?

I just think with the PPP loan impact gone, the stimulus impact gone and just what the markets are seeing just with the muni, it could be some fluctuations in muni deposits and things like that. We just don't expect -- it will be flat year-over-year is what the expectation is following our normal seasonal trend. So again, down in the first quarter and then building back up as we go through the year, but relatively flat year-over-year.

And Andrew, as we move through the year, if we don't have the normal run down of deposits that we normally see in the first quarter over the history of this company outside of the PPP process, we could have positive loan growth -- positive deposit growth. The question is, when does it stop? And a lot of our customers have higher-than-average balances of deposits. When did they start utilizing that and do we see a rundown? If we don't see a normal seasonal rundown in the first quarter, our deposits normally grow starting in the second quarter through the third quarter and then kind of slowdown in the fourth.

So we're -- we don't know when they're going to start utilizing those deposits. Maybe it's a new place in banking where people keep higher balances. But we just don't want to over forecast. Deposits continue to grow when we're kind of charting new territory here with regards to how consumers are behaving.

But so far, the indications are that we follow historical trends.

Deposit -- we'll know at the end -- we'll know more at the end of the first quarter. Because our deposits will grow in the second and third because we are -- as you know, we're a tourist industry kind of -- we have a big tourist industry here, and that's -- brings a lot of extra money into our markets, which causes our deposits to grow.

Yes. Okay. That's really helpful color. I appreciate it. And then maybe on -- I heard your point on kind of full realization of cost synergies after kind of the May conversion process. I was curious. I appreciate your guide on low single-digit expense growth. Just thinking about kind of the $56 million in cost saves coming from Great Western.

Any reason to think this number might have potentially changed just given any potential wage inflation pressures at Great Western? Or should we still kind of view the $56 million a good kind of net cost save number?

I think you should feel good about that. We already have the plans in place. So we feel good about it, so you should feel good about it.

Okay. And just last one for me. I think we've generally seen a dividend increase in the first quarter. I think it's the same here at $0.41 per share. Is it more just related to kind of pending merger, anything changed with dividend strategy? And then can you just remind us how you're thinking about potential for a buyback at these levels?

Well, I would tell you, buybacks are probably not going to happen at this level. The dividend payout ratio might be a little higher this year just due to the purchase accounting and stuff like that, but we're going to maintain what we can with regards to dividend. And as next year, hopefully, pans out the way we think it's going to be with the success of Great Western integration, dividend should increase from there out.

There are currently no further questions registered. (Operator Instructions) There are no additional questions waiting at this time, so I'll pass the conference over to the managing team for closing remarks.

Thank you all for your questions. As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thanks for tuning in today, and goodbye.

That concludes the First Interstate BancSystem Inc. Fourth Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.