First Interstate BancSystem Inc
NASDAQ:FIBK
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
24.37
34.45
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Good morning, and welcome to the First Interstate BancSystem, Second Quarter 2018 Earnings Conference Call. (Operator Instructions). Please note, today’s event is being recorded.
I would now like to turn the conference over to Lisa Slyter-Bray. Please go ahead, ma’am.
Thanks Rocco. Good morning. Thank you for joining us for our second quarter earnings conference call. As we begin, it is worth noting 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 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 the non-GAAP financial measures is available on our website at www.fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the Earnings Release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the Earnings Release for your reference.
Joining us form management this morning are Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer, along with other members of our management team.
At this time, I will 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.
I’m going to provide an overview of the major highlights of the quarter and then Marcy will provide more detail on our financials.
We continue to execute well in the second quarter, and we saw positive trends across most of our key metrics. As a result, we delivered another strong quarter of earnings growth and further improved our level of financial returns.
We generated $41.7 million in net income in the second quarter or $0.74 earnings per share. This compares with our reported earnings of $0.65 per share last quarter, which included $0.05 of merger and severance related expenses.
As we gain scale and generate profitable growth, we are establishing new heights in our level of financial returns. In the second quarter our return on average assets was 1.38%. Our return on average equity was 11.61% and our return on average tangible common equity was 18.2%.
Earnings improvement this quarter was largely driven by higher levels of revenue, reflecting our seasonally strong period of the year for economic activity in our markets. Our total loans increased at an annualized rate of 5.9% in the quarter. While this is a pickup in our growth from the first quarter, it was a bit softer than we expected based on our pipeline going into April.
The wet spring had a significant impact on our construction timing, resulting in lower levels of the construction loans outstanding and a higher level of commitments, but unfunded balances, which were about $287 million at the end of June. With the weather improving, we expect continued strong growth in the third quarter.
With the exception of construction and residential real-estate, each of the major lending areas increased during the quarter, with the strongest growth coming from our Ag portfolios. From a geographic perspective, we saw strongest loan growth in the state of Oregon, Eastern Montana and the Idaho markets, and while the growth in Wyoming wasn’t as strong as these other markets, it was still up 1.6% for the quarter as we continue to see a nice recovery in that market.
In the second quarter, our average rate on new loans originated was 5.47%, an increase of 41 basis points from the prior quarter. We continue to see expansion in our net interest margin, which is reflected in the asset sensitivity of our balance sheet.
We believe we are reaching an inflection point, where clients are paying a little more attention to the yield they are receiving on their deposits. Because of the flexibility of our balance sheet, we have the opportunity to maintain a strong position near the top of the deposit pricing market in our footprint.
Even though this resulted in slightly higher deposit beta, this is making it more expensive for some of the competitors to track deposits. And as a result, we are starting to see a decline in some of the irrational loan pricing that was taking place in some of our markets.
A strong deposit base has always been a foundation of our franchise, and we view deposit generation as being just as important as loan generation. By continuing to invest in technology to ensure we provide our customers with the best-in-class mobile and online beta capabilities, and by offering very competitive rates across our deposit price, we believe we are in a good position to take market share and capitalize on the funding challenges being experienced by smaller banks in our footprint. And we could do this while still realizing expansion in our net interest margin, which we believe is a very favorable position to be in.
We also saw a seasonal pickup in our noninterest income, particularly in the areas of payments services and residential mortgage banking. Our mortgage banking revenue was up from the last quarter and fairly stable compared to the second quarter of last year.
Consistent with national trends, our refinancing volume reached its lowest level of total production in recent history in June. Year-over-year purchase volumes are steady, but with refinancing activity drying up and the increased competition, this is putting a little pressure on the gain on sale margins. Overall our total revenue increased 4.7% from the previous quarter. With the increase in our revenue, our efficiency ratio improved to 58.8%.
A couple of other noteworthy items: Our Kroll rating was recently reaffirmed as a BBB+. While we have no intention to issuing debt at this time, it is always nice to have debt in our back pocket. We’ve also received approval for acquisition of Inland Northwest Bank or INB from the Federal Reserve and are just waiting for final state approvals in the INB shareholder vote. This process has gone very smoothly and we anticipate the closing of this deal in the third quarter.
So with those comments, I’d like to turn the call over to Marcy, for a little more detail behind the numbers. 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 first quarter of 2018.
I’ll begin with our income statement and our net interest margin. On a reported basis, our net interest margin increased 12 basis points to 3.87% in the second quarter, excluding the impact of charged-off interest and loan accretion, our operating net interest margin increased eight basis points to 3.69%.
With each increase in the Fed funds rate, we’re seeing a great increase in our yield on earning assets than in our cost of funds. During the second quarter, our yield on earning assets increased 16 basis points, while our cost of funds increased just four basis points. Our net interest margin also benefited from a slight increase in our loan-to-deposit ratio in the quarter.
Included in net interest income this quarter was charged-off interest of $1.9 million, compared to $700,000 last quarter. Total accretion income on the acquired portfolios was $2.9 million this quarter, which was $200,000 less than last quarter. Early payoffs contributed $1.1 million to accretion income this quarter, the same amount as last quarter.
While the unpredictability of early payoffs will continue to cause volatility in our accretion income, we anticipate that scheduled accretion will contribute about $1.6 million in the third quarter and $1.4 million in the fourth quarter.
As Kevin discussed, we’re committed to maintaining attractive deposit rates that we offer in our markets. However, we expect the increase in our deposit costs to be more than offset by the increase in our yield on earning assets, and we believe that we should continue to see an expansion in our operating net interest margin in the third quarter.
Moving to non-interest income, we saw an increase of $2.4 million quarter-over-quarter to $37.6 million, which is consistent with the seasonal pickup we typically see in our fee businesses during the second quarter.
Our payment services revenues increased 22.9% from the prior quarter, reflecting higher debit and credit card volume, while our mortgage banking revenue increased 33.3%, driven primarily by the typical seasonality in this revenue stream.
As Kevin mentioned earlier, refinance activity is very weak and 80% of our loan production came from the purchase market activity this quarter. The increases in payments and mortgage revenues slightly offset decreases in our other major fee generating areas.
Wealth management continues to produce steady results and also revenues were down slightly from the prior quarter. They were up 13.7% year-over-year, primarily due to growth in our assets under management, which reached $5.1 billion as of June 30. As a reminder, the Durbin Amendment will take effect for us in the third quarter. We anticipate that this will reduce our payment services revenue by approximately $3.3 million per quarter.
Moving to total noninterest expense, we had a decline of approximately $1 million from the prior quarter, which was due to the acquisition related expenses we recorded last quarter. Excluding acquisition related expense, non-interest expense increased by $1.3 million, primarily due to an increase of $1 million in our employee benefits. This increase in employee benefits reflects a return to more normalized levels of medical claim after an unusually low amount during the first quarter. Additionally, benefits expenses resulting from bringing on the Bank of the Cascades employees have been slightly higher than anticipated.
The largest component of our expenses, salaries and wages continues to be very stable. This line item has been within a range of $34.3 million to $34.7 million in each of the past four quarters. As we continue to transition employees, there was approximately $800,000 of severance and hiring costs included in salary expense this quarter.
Other expenses were up quarter-over-quarter as a result of our engagement with third parties to assist us with process improvement efforts around our commercial and consumer operating processes and the implementation of CECL. In addition, we had a loss of about $300,000 related to the write down of a bank property that we put on the market.
Going forward for the next few quarters, while we might see slight relief, we expect our overall non-interest expense to continue to be in the same range we saw in the second quarter, which is higher than our originally projected $81 million run rate.
As I mentioned, employee benefits expenses are higher than we originally anticipated and other expenses are up as a result of decisions we’ve made this year to engage third-party assistance with our process improvement initiatives and CECL evaluation. Over the next year, we should gain efficiencies as we implement these new processes.
Looking at the balance sheet, Kevin already discussed our loans, so I’ll move on to our deposit trends. Although overall deposits are up from the end of last year, our total deposits decreased $80 million from the end of the prior quarter. The decline was primarily attributable to outflows we saw in April and June due to tax payments. As we head into our seasonally stronger month, we expect to see net inflows of deposits over the rest of the year.
Turning to asset quality, we saw an increase of $12.5 million in our non-performing assets. The increase was primarily related to the migration of previously identified problem loans that continue to move through the workout process. Although the loans were downgraded to nonperforming status, there was no material increase to our specific reserves for these credits.
The remainder of the trends we found in the portfolio were largely positive, including a $14 million decline in or criticized loans and a $20 million decline in classified loans, along with improvements in our delinquency ratios. We had $2.3 million of net charge-offs during the quarter or 12 basis points of average loans on an annualized basis. We recorded $2.9 million in provision expense, which puts our allowance for loans losses at 96 basis points of total loans and provides 98% coverage of our non-performing loans.
And with that, I’ll turn the call back over to Kevin. Kevin.
Thanks Marcy. Nice job! I’m going to wrap up with a few comments about our outlook.
We’ve spoken a lot over the past few years about our focus on people, processes and technology, and we continue to invest in these areas to further strengthen our infrastructure and to position the bank to be a more effective competitor in our larger markets.
We recently hired Kade Petersen, our new Chief Information Officer. Kade has over 25 years’ experience with financial institutions and technology and operational areas. We are excited to have his experience and leadership on board.
As we remain relevant with our technology, is it a critical part of our overall strategy. We also hired a Chief Data Officer, David Redmon, to assist us in furthering our efforts to leverage our strategic use of data. David’s primary responsibility will be to develop and implement a data governance strategy at enterprise level and further develop our data management capabilities. Kade and David will work closely together to advance our analytic capabilities.
We also hired Tawnie Nelson, to lead our Oregon market. Tawnie was most recently with Wells Fargo, where she oversaw five markets across three states included in the Northwest and Bay area.
Moving to the backroom, we have initiated a couple of important technology-related projects that we’ll be implemented over the next several quarters. Marcy mentioned engaging a third party to help us with process improvements in our lending area.
The first project is an evaluation of our consumer and commercial loan operations, with the goal of making our origination and closing processes more efficient and scalable. This help would bring our backroom loan processing more in line with the changes we have made organizationally.
The second focus is enhancing our core system functionality and building an integration layer that will more effectively have us integrate with third party vendors. These two efforts will set up a more mobile, more flexible and more responsive, and allow us to be better coordinated between various parts of the organization that will ultimately enable us to be faster to market.
This represents our evolution from a community bank to a regional bank with systems and technology needed to compete with the larger banks as we grow and enter more dynamic markets. We’ve been able to negotiate favorable deals with our vendors assisting us with these efforts and the expenses associated with these initiatives will not have a material impact on our overall current expense levels.
Of course, other major focus for the remainder of year is to complete the acquisition of INB and capitalizing our presence in the several high-growth markets. From the organic standpoint, we expected the continuation of positive trends we experienced, and we believe the addition of INB, will provide another catalyst for driving earnings growth in the years ahead.
So with that, we’ll open the call up for questions.
Thank you, sir. (Operator Instructions). Today’s first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.
Hi, good morning.
Good morning Jared.
Maybe I could start with your views on the deposits. You have a good loan-to-deposit ratio. As we go forward and expect to see more deposit flows coming in, I guess how aggressive will you be with pricing to attract new deposits versus using some of the cash flow from securities to fund those? Could we see that loan-to-deposit ratio going higher or do you like it where it is?
We’re hoping it goes a little higher, but again, we don’t want to just let go of the deposits to get it too high. So yes, we believe it might slightly trend higher, but we want to make sure we continue bringing the funded bases. But on the deposit pricing side, we’re going to be not overly aggressive market, but really the kind of the top of the market, which I think that we’ve done in the past. We’re already there; we don’t plan on really going too hot while going forward, but just to maintain our positive position.
Okay, so in terms of deposit mix you don’t see necessarily a big change in the composition of the deposit portfolio?
No, we actually had some high CD kind of campaigns out there, but we have seen really no shift in the deposit mix that much. So even with that higher rates in the market, we have some new money going in there, but it seems like we have as much runoff as we have going into that new product, so…
We’re really stable quarter-after-quarter.
Yes, pretty stable.
Okay. And then on the Ag lending side, can you give an update on sort of the discussions you’ve had with customers regarding the tariffs and the potential for more tariffs and how they are handling that? And do you anticipate any changes in either sort of the credit profile of Ag or how you’re going to be working with customers?
Currently, you know mostly again, let’s go back to what our Ag loans are? Our Ag loans are primarily a lot more around cow-calf than what the tariffs are going to be based on. So we’re kind of cow-calf and we really don’t have any soybean. So at this juncture, we’re not really that concerned about our Ag portfolio.
Okay. And then finally I guess, you know you’re continuing to grow capital. What’s the thoughts around capital management now that you’re getting closer to finalizing the last deal? Could we see more acquisitions or we potentially see a buyback or more on the dividend side?
Probably won’t see buybacks. And we set our dividend payout ratio every year somewhere between 35% and 45% is our payout ratio, so you’re probably not going to see much change there.
I think the thing is that we have a change in our capital strategy. As we always said, we wanted to take capital and deploy it through organic growth. The second would be to do strategic M&A transactions to utilize capital. The third would be share buyback, and right now the prices our shares are trading, it’s really not a real financial – a good financial decision. And then would be pay a normal dividend payout. And if we have capital and we just can’t get rid of it, then we’ll probably do a special dividend, but I don’t think that’s going to be the case. So we’re continuing monitoring capital, and we’re not going to let it burn a hole in our pocket.
And in terms of M&A, you think you could get back into the market potentially this year or do you want to wait until after the integration?
We’re always in the market. We’re always looking at the deals out there, so – and we can’t control when the banks are sold, the seller does that, but we’re always playing in the market. We have not pulled ourselves out of that game and when that attractive acquisition comes in front of us, we will enter into a deal.
Great, thank you.
And today’s next question comes from Jackie Bohlen with KBW. Please go ahead.
Hi, good morning.
Good morning Jackie.
Hi Jackie.
Realizing that there are a lot of moving parts here with the state approvals that you need and then the shareholder vote, do you think that you are more likely to close INB towards the middle of the quarter or towards the end of the quarter?
Our plan right now is to close it pretty much dead middle of the quarter.
Okay. Well, that makes it easy, thank you. In terms of just cost saving timings and a few of the conversions scheduled, could you remind us on what your expectations are in terms of when those might come out and when we might see a clean run rate from the cost saving?
The clean run rate will be definitely the first quarter of 2019. The conversion is scheduled for November right now of ‘18. So some cost will come out when we close the deal and then more will come out once we have the conversions.
Okay, that’s helpful. And then Marcy, if we could just drill into expenses a little bit on legacy First Interstate just ahead of the deal closed, you mentioned that just given CECL and some of the other initiatives that you’ve got, that expenses will be a little bit elevated from where you were talking about before. Can you remind me what a new range would be?
It will be right around $84 million run rate.
Okay. And I know there is a lot of moving parts within what you are doing, but in terms of discretionary spending, how has the valuation of that been coming?
So the discretionary spending has actually become more in line with what our expectations would be, and so we feel like we have a pretty good handle on that, and it’s really these additional costs that we’ve added related to some of our initiatives that have driven up the expense levels this quarter.
Okay. And I would expect just as the franchise gets bigger, that will help you to gain scale with some of those?
Absolutely.
And also once we get these initiatives put in place, we believe we’re going to be a lot more efficient and so these expenses will come out of our normal run rate.
Okay. And do you – you know do you target more than expense to asset ratio or an efficiency ratio when you think about where you could be, say towards the end of 2019?
We do look at our expense to asset ratio. Our long-term goal is to get down to $265 million and we’re running around I think $279 million. So we’re really focused on getting that down to $265 million.
Okay, great. That’s very helpful. Thank you.
You bet.
(Operator Instructions). Today’s next question comes from Matthew Clark with Piper Jaffray. Please go ahead.
Hi, good morning.
Good morning Matt.
The purchase accounting accretion expectations, I think for the fourth quarter you mentioned $1.4 million, but it sounds like that does not include the Northwest deal. Is that right?
That’s correct.
Okay. And then on loan pricing and repricing portfolio or new business well above the portfolio, but can you remind us how much of your loan portfolio is truly variable and how much reprices are expected to reprice within the next 12 months?
Yes, so our variable loans – with each fed rate increase, about 72% of the variable rate loans are repriced with each rate increase.
Okay, okay great. And then just thinking about the margin outlook, it does sound like you should see continued expansion and I think there’s no reason why you shouldn’t, given your loan-to-deposit ratio, your dominant share in your legacy footprint and I would think here that again, kind of control price at least in your legacy footprint.
So is it fair to assume and you should be among the banks that should show margin expansion, may be longer than many others, obviously depending upon what competition does in any given quarter. But I just wanted to get your sense, your kind of longer-term thoughts on deposit pricing and may be the NIM too.
Well, I think the thing is to be honest with you, we’re going to continue trying moving up, because again, I think we’re kind of cautious to get too cocky with our deposit pricing, even in our legacy market, because the world is being attacked outside of our market. I mean there’s a lot of non-banks on the market that are offering favorable rates. I mean I know the last time we opened our American Express team, but they were offering way higher rates of money markets, so you got to ally out your non-bank. So we are keeping our deposit rates, so you know it will keep our customers happy and not let the competition take any.
But we’re just going play games. I don’t know what the competition is going to do. Some of those smaller banks now in our market are suffering really high loan to deposit rates and they’re starting to increase deposit rates, because they have no money to lend, that’s why the irrational loan pricing is slowing down. So right now we’re in a great spot, but I can’t – I don’t have a crystal ball to predict exactly what’s going to happen in our market.
Okay, that’s fair. And then just on the loan growth outlook. It sounded like construction may have been held off for a little bit in terms of the related growth until this quarter. But can you talk about the pipeline and what it’s done maybe linked quarter into 3Q?
I’ll let Bill Gottwals cover that.
Yes, our pipeline right now, looking out – and we’ve seen some shifting certainly as Kevin alluded to. It was with the weather in most of our markets. We’ve seen some things kind of shift from quarter-to-quarter, but right now looking into the third, our pipeline is higher now than it’s been going into prior third quarters.
Great, thanks.
(Operator Instructions). Our next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.
Hi, this is Jennifer on Jeff Rulis.
Hi.
Hi.
Did you say Jennifer?
Yes.
Okay.
Hi, Jennifer.
So with a November conversion, can we expect a clean run rate going into 2019 on expenses?
Yes, so the first quarter of 2019 is when we’d expect a clean run rate from INB.
Great. What is your outlook on mortgage banking and payment services going into 3Q?
You know, we think mortgage banking will pretty comparable to where we were last year. Like we said, the production volume is pretty steady. It’s just the refinance activity that fell off and that really fell off more heavily in the first quarter. That’s kind of where we saw it the most and so I think that our mortgage servicing revenues will be pretty comparable – our mortgage revenues will be pretty comparable with where we were last year.
Okay. And we have total Ag exposures that are at 2%, but is the larger one including agricultural real estate?
Say that one more time, our total Ag exposure…?
Yes, how would you quantify it, including real estate?
Could you – Jennifer, could you speak a little louder? We can’t really hear you.
So we have total agricultural exposure at 2% to like recent agricultural stresses. Is it larger when including the real estate component of agriculture?
Yes.
Yes, it’s probably closer to 4%.
Great. And can we get some color on some – on interest expense levels going forward?
We expect our run rate to be around $84 million a quarter.
That’s all I have, thank you.
Thanks Jennifer.
And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to the management team for any closing remarks.
Thank you for your questions and before we sign off, I would be remiss not to take a moment to reflect on the light of one of the early pioneers of interstate regional banking. My father Victor Riley, past Chairman and CEO of KeyCorp for 22 years, he passed away last weekend. Dad, you left your mark on banking and you will be missed by many. Rest in peace. As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions and thank you for tuning in today. Goodbye.
And thank you, sir. Today’s conference call has now concluded and we thank you all for attending today’s presentation. You may now disconnect.