Earnings Call Transcript - FIBK Q4 2020

Operator, Operator

Good morning, and welcome to the First Interstate BancSystem, Incorporated Fourth Quarter Earnings Conference Call. Please note, today's event is being recorded. I'd now like to turn the conference over to Lisa Slyter-Bray. Please go ahead, ma'am.

Lisa Slyter-Bray, Executive

Thanks, Rocco. 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 by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements and factors that could affect future results contained 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.

Kevin Riley, CEO

Thanks, Lisa. Good morning, and thanks again to all of you for joining us on the 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 Relations website and if you haven't downloaded a copy yet, I encourage you to do so. I'm going to start off today by providing an overview of the major highlights of the quarter and then I'll turn the call over to Marcy to provide more details on our financial results. During the fourth quarter, we continued to see economic strength throughout our markets that resulted in high-quality lending opportunities, significant inflows of core deposits and a reduction of our problem loan categories. As a result, we delivered another strong quarter of earnings and pretax pre-provision income. For the quarter, we generated net income of $46.9 million or $0.76 per share and a pretax pre-provision income of $64.9 million. Across our markets, employment levels are increasing, and many of the commodity prices are at near or all-time highs, providing a boom for our ag borrowers. A mild winter has been a positive for the construction industry, but we have still received some snow in the mountains and the ski season has gone well, helping our tourist industry. As a result, we continue to see many of our commercial clients performing at record levels and our retail clients, having a lot of money in their pockets, which is generating strong inflows of core deposits. Our total deposits increased at an annualized rate of 9.5% in the fourth quarter, with all the growth coming in our lower-cost deposit categories. The one drawback to this is that companies are doing so well that they are awash in liquidity. They don't have the need to utilize their credit lines or take on new debt. Excluding PPP loans, which started to run off in a material way in the fourth quarter, our loans held for investment balances increased at an annualized rate of 3.6%, with a broad growth across our residential and commercial real estate portfolios. We made the decision to put more of our liquidity to work by retaining a greater portion of our residential mortgage loan production.

Marcy Mutch, CFO

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 2020. I'll begin with our income statement.

Kevin Riley, CEO

Thanks, Marcy. I'm going to wrap up with a few comments about our outlook and priorities for 2021. We feel good about how we are positioned and our opportunities to continue enhancing the value of our franchise going forward. As a starting point, when we look across our operations, we feel confident in our position, and we are grateful not to have any significant legacy issues that we need to address that would distract us from our focus on driving profitable growth. Our credit is strong, so we don't need to resolve a bunch of problem loans. We aren't looking to run off any portfolios of any meaningful size. We aren't looking to exit any business or lending areas. We have great leadership in place and a solid organizational structure. We feel good about our technology platform, and we're thankful we're not facing a massive investment of time and money to get that up to speed. We are confident in the foundation we have put in place and now it's just about executing and capitalizing on our growth opportunities. Like I always tell my executive team, just don't screw it up. We see positive trends in many of our markets in terms of population and employment growth, with Idaho and Oregon among the fastest-growing states in the country. We believe the environment and the lifestyle our footprint offers is driving people and companies to relocate to our markets. All of this growth provides more opportunity. In this COVID environment, our bankers are finding creative ways to serve active clients. We are making sure we have the right resources in place to meet their financial needs and are putting more focus on cross-selling efforts to demonstrate the advantage of our broad offering of products and services. We will continue to leverage the robust technology platform we have built to refine our current digital capabilities and add new products. This will help us increase productivity, enhance efficiencies and improve revenue generation. We are happy with the digital application portals that we introduced in 2020 for business and consumer credit cards and residential mortgage loans. The digital channels will continue to generate a higher percentage of our overall production as time goes on. And in 2021, we will be initiating some digital marketing campaigns to attract additional volume to these channels.

Operator, Operator

Today's first question comes from Jared Shaw at Wells Fargo Securities.

Jared Shaw, Analyst

I would like to know about the mortgages you're retaining. Are they 30-year fixed? What is their duration, annual growth, and yield?

Kevin Riley, CEO

Go ahead, Marcy.

Marcy Mutch, CFO

It’s a combination. We're keeping some 10 and 15-year loans, but we're also keeping some 30-year loans, and the yield on the 30-year loans is approximately 3.26%.

Jared Shaw, Analyst

Okay. Should we expect the growth mix we saw this quarter to continue, or is there potential for it to accelerate as an opportunity for the portfolio?

Marcy Mutch, CFO

Yes. So we'll continue this at about the same pace. As long as we have the excess liquidity that we have, we expect to continue this at the same pace in the next quarter or two.

Jared Shaw, Analyst

Okay. Regarding the allowance, your credit is very strong and you have built up a substantial reserve. What will be the key factors in returning to the initial CECL level? Will it depend primarily on the overall economy as we progress through 2021, or could it take longer than 2021 to reach that initial level again?

Kevin Riley, CEO

Well, no, Jared, we're going to look at how is the vaccine rollout happening? Is this virus getting really contained? I think some people might be a little aggressive in the early stages. We don't know how this is all going to play out. So we're just being cautious. If the vaccine works and the virus kind of dissipates, then we'll feel more confident to see that the economy is growing, and I feel confident about our reserve levels that can come down.

Jared Shaw, Analyst

Okay. And then I guess, just finally for me. Looking at the commercial lending, what would have to happen to maybe potentially see upside to that growth target? Is it just customers have a lot of liquidity themselves and there's just not a lot of demand? Or is it, again, more of the broader economic backdrop? What could drive that potentially higher throughout the year?

Kevin Riley, CEO

We are observing significant economic growth. As the weather improves, we expect to have more information, but early indicators are promising. Many individuals are relocating to our markets, and numerous companies are moving their operations here. If this trend continues, we might experience even better outcomes if migration surpasses our forecasts. Overall, we feel optimistic, and more clarity will come as conditions stabilize.

Operator, Operator

And our next question today comes from Jackie Bohlen with KBW.

Jackie Bohlen, Analyst

Just curious about your thoughts on the next round of stimulus. You're obviously having fantastic deposit growth. From preliminary demands that you might be getting from your customers, how does it seem like their appetite is for PPP and then there's a bit of a lay-up to that, what could that mean for additional deposit growth in the early part of this year?

Kevin Riley, CEO

Yes, that's a good question, Jackie. I think that, that is going to bring us more deposit growth. I will say that we're monitoring the number of people that are applying for the second round of PPP and I would say on the numbers of loans, we're running right around 15%. But I think the dollars are coming a little bit lighter than that. So it will provide us some deposit growth. As the government gives consumers extra money through stimulus and gives it to the business, this should have a positive impact on our deposit growth.

Jackie Bohlen, Analyst

Okay. And I mean, I would guess other factors from 2020, just given the economic comments you have carrying into '21 with retail and business remaining strong and continuing to drive deposit growth from that too, is that your assumption?

Kevin Riley, CEO

Yes. And I'll go out on a limb here a little bit and say, I think that we had a pretty strong tourism season last summer, and a lot of our companies did record sales in a number of the industries because of the pent-up demand. I think the tourism season is going to set a record this summer that won't be for years to come. I just think it's going to be a big year for our markets, and that could have a tremendous impact on our performance.

Jackie Bohlen, Analyst

Okay. Okay. That's good color. And then just one last one. I know that loan purchases are not in your wheelhouse, and you actually spend a long time divesting acquired loan purchases from Cascade. I just want to double check that, that still remains the case, and you're going to use securities purchases and retaining mortgages with liquidity deployment.

Marcy Mutch, CFO

Yes. Jackie, we really don't look at purchasing loans as kind of part of our core business. I mean we would look at something if it came across our desk. We're never going to not look at anything, but I don't see us doing that. We'll just continue to retain mortgages and put the money to work in the investment portfolio.

Kevin Riley, CEO

Yes, the likelihood of that, Jackie, is slim to none.

Jackie Bohlen, Analyst

Okay. I figured, but I just wanted to double check.

Operator, Operator

And our next question today comes from Levi Posen with D.A. Davidson.

Levi Posen, Analyst

This is Levi Posen on for Jeff Rulis. I was wondering if you guys had quantified the basis point impact to margin of the PPP forgiveness in the quarter?

Marcy Mutch, CFO

So the basis point impact to margin of the accelerated fees was about 19 basis points.

Levi Posen, Analyst

Okay. And then could you also speak to your loan pipelines now versus a quarter ago? And within your loan growth outlook, maybe the segments that are driving that?

Kevin Riley, CEO

Yes, we see the pipeline is similar to what we observed in the fourth quarter, with a comparable rate. Some of the growth we experienced in the fourth quarter was due to our agricultural borrowers paying down their lines after harvest, and we anticipate that they will start using those lines again as they plant their crops. We expect utilization to increase. Currently, it looks quite similar to prior periods. Overall, we feel positive about our prospects, as we've seen mid-single-digit growth over the last two quarters, which gives us confidence that this trend could continue into 2021. Of course, the extent of economic growth in our markets could influence this outlook, but that is our current observation.

Operator, Operator

And our next question today comes from Andrew Terrell with Stephens.

Andrew Terrell, Analyst

Can you just remind us how much in shares you have remaining under the current repurchase authorization? And maybe just any update to kind of the appetite of how you're looking to do repurchases going forward, I guess, particularly given the growth outlook?

Marcy Mutch, CFO

There's about 540,000 shares remaining under the current repurchase authorization.

Kevin Riley, CEO

Marcy, we can't hear you.

Marcy Mutch, CFO

Can you hear me now?

Kevin Riley, CEO

I'll take. I'll take it. So when we look at repurchases, I don't remember exactly what we have still remaining. Well certainly it's not that much. But we look at our repurchases in a sense where we always talk about our payback period and we'll take action accordingly.

Andrew Terrell, Analyst

One last housekeeping one. Can you remind us how much left you have in remaining PPP round 1 fees left to accrete through interest income?

Marcy Mutch, CFO

It's about $15 million.

Operator, Operator

And our next question today comes from Matthew Forgotson with Piper Sandler.

Matthew Forgotson, Analyst

Marcy, can you confirm your guidance on fee income? What base are you using for 2020? I believe you mentioned it could be flat to up, but I have $169 million, which would imply a significant increase from the most recent quarter.

Marcy Mutch, CFO

On the fee income? Yes. I just wanted to clarify your fee income guidance and kind of the base revenue that you were using for 2020, just to confirm it. We believe our mortgage banking revenue will decline, but we expect growth in other areas like wealth management and payment services, which should help offset the drop in mortgage banking revenues. Therefore, we anticipate that overall revenue will remain relatively flat compared to last year.

Matthew Forgotson, Analyst

Okay. Okay, got it. And then could you give us the weighted average rate on new loans? I know you gave us the new securities 1.11%, but just wanted to get the rate on new production as well.

Marcy Mutch, CFO

This was encouraging because it was actually up from last quarter, and it was 4.04%. So it's up about 8 basis points from the fourth quarter, I mean, from the third quarter.

Matthew Forgotson, Analyst

Okay. And then the mid-single-digit loan growth guidance, is that ex-PPP?

Marcy Mutch, CFO

Yes.

Matthew Forgotson, Analyst

Okay. And then can you just confirm the remaining net revenues you expect to realize from PPP?

Marcy Mutch, CFO

The remaining fees on the book are about $15 million.

Matthew Forgotson, Analyst

Okay. And then lastly, just on M&A. I mean, are you seeing any opportunities? Or are you looking to consider maybe acquiring a bank that has a much higher loan-to-deposit ratio, kind of blend the 2 and help your excess liquidity position?

Marcy Mutch, CFO

So I'm going to see if Kevin can talk, are you on, Kevin? We're having a little bit of connection problems.

Kevin Riley, CEO

I'm on.

Marcy Mutch, CFO

Did you hear the question?

Kevin Riley, CEO

No, I just got on.

Marcy Mutch, CFO

Okay. So Matt, can you repeat the question for Kevin?

Matthew Forgotson, Analyst

Sure, sure. Yes, I was just asking if you were considering or had an appetite to acquire a bank that's loaned up, that's got a high loan-to-deposit ratio that could help kind of rightsize your excess liquidity position?

Kevin Riley, CEO

Well, yes, we'll look at banks that are loaned up. The question is what were they loaned up with to asset quality goods. So I mean, we'll look at all opportunities and see what they have. But if we have a bank that has a bigger growth market that could put these funds to work a lot better than we can in some of our markets, we will surely look at that acquisition as a possibility.

Matthew Forgotson, Analyst

Okay. And then do you have a limit on how large you'd like your single-family resi-mortgage portfolio to get? I think it's around 15% today. Is 20% the max? Or you don't feel like you'll even get that close?

Marcy Mutch, CFO

Yes. We're looking up to another $300 million, but kind of based on where our liquidity lands, that's kind of up to $300 million additional, but not over that.

Operator, Operator

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back over to management, if you have any closing remarks.

Kevin Riley, CEO

Thank you for your question. Sorry for the disruption on my connection. But as always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. And thanks for tuning in today, and goodbye.

Operator, Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.