First Interstate BancSystem Inc
NASDAQ:FIBK
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Good morning, and welcome to the First Interstate BancSystem, Incorporated Fourth Quarter Earnings Conference Call. [Operator Instructions].
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.
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.
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 guarding our use of the non-GAAP financial measures may be found in the body of the earnings release. And the reconciliation to their most directly comparable GAAP financial measure 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 other members from 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 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.
By retaining these mortgage loans and also adding to our investment portfolio, we are able to utilize a strong deposit growth to increase our net interest income and positively impact earnings. In the current environment, we believe this is the right strategy. We're willing to trade-off a lower net interest margin to generate higher net interest income dollars. We have the view that deposits are raw materials, and we're not going to turn away, even though these little cost funds are invested in the security portfolio or residential mortgages at a relatively low rate.
We'll take those incremental interest income dollars all day long. The positive economic trends we are seeing in our markets are also driving improvements in our asset quality. For the third consecutive quarter, we had declines in both nonperforming loans and nonperforming assets. And also the fourth quarter, our criticized loans were down in the quarter. We also continue to see more of our loan deferrals return to regular scheduled payments. At December 31, we only had $23.7 million of loans on -- of deferral status and $9 million of our residential mortgages in forbearance. Together, this is less than 0.25% of our outstanding loan balances.
These positive trends in asset quality, along with the significant reserve build we had earlier in the year, resulted in a small provision requirement this quarter. Our allowance coverage is relatively consistent with that of the prior quarter. Given our strong financial performance and low risk profile, we continue to have the ability to return a significant amount of capital to our shareholders.
During the fourth quarter, we repurchased over 1 million shares of our common stock. And today, we declared an increase in our quarterly dividend to $0.41 per share, which is almost an 8% increase from last quarter's dividend and a 21% increase from the third quarter of last year. We are committed to a balanced approach to capital deployment consisting of organic growth, acquisitions, stock repurchases and quarterly dividends. We believe this will continue to have a positive impact to the total return that we generate for our shareholders.
And with that, I'll turn the call over to Marcy, so she could provide a little more detail 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 2020. I'll begin with our income statement.
As with last quarter, we once again saw an increase in our net interest income, but the excess liquidity we continue to carry put additional pressure on our net interest margin. Our net interest income increased by $5.4 million from the prior quarter as a result of the acceleration of fee income related to PPP loan forgiveness. PPP contributed $16.7 million of interest income in the fourth quarter, up from $10.6 million in the prior quarter.
On a reported basis, our net interest margin decreased 4 basis points to 3.25% in the fourth quarter, a decline of 17 basis points was the result of our continued deposit growth, which was deployed at lower yields in the securities portfolio and held in cash. This was offset by the impact of PPP loan fee acceleration.
Taking all the noise out from both accretion and the all-in impact of the PPP loans, the yield on loans went down about 9 basis points, which was offset by a drop in deposit costs of 4 basis points. In the near term, we'll be focused on putting a significant portion of our excess liquidity to work in the investment portfolio by the end of the first quarter, where we're getting average rates of around 1.1% on new purchases without significantly extending our duration, which is currently at about 3.3 years.
As a result, we'll likely see some continued modest pressure on our net interest margin until we see stronger loan growth. Our noninterest income decreased $10.8 million quarter-over-quarter to $33.9 million. This was primarily due to lower mortgage banking revenues resulting from normal seasonal declines coupled with our decision to retain a greater portion of our loan production in our loan portfolio. The decision to retain these mortgages on our balance sheet had an impact of about $4.3 million to revenue or after tax about $0.05 per share, but it's provided us with an earning asset that will benefit us for years to come.
Aside from the decline in mortgage banking revenue, the 2 other significant contributors to the decline in noninterest income were a decrease of $2.3 million in swap fees and a decrease of $2.4 million related to a reimbursement for taxes on a bank-owned life insurance policy that was rewritten last quarter. These declines were partially offset by higher payment services revenue as we continue to see a rebound in transaction volumes and from higher wealth management revenues due to improved market performance.
Looking at 2021, we're expecting refinancing volumes in the mortgage business to decline about 50% and total production to decline about 30%. We're still projecting 2021 to be our second best year. It'd be hard to beat 2020, but we do expect the gain on sale margins to decline from last year's record levels as demand lessens. With the growth expected in other fee-generating areas, we believe our total noninterest income in 2021 will be at or modestly down from 2020 record levels.
Moving to total noninterest expense. We had a decrease of $2.1 million from the prior quarter. This was primarily due to lower salaries and wage expense, resulting from the onetime items that we discussed last quarter, leaving our normal run rate flat quarter-over-quarter. Looking at 2021, we continue to invest in initiatives that will support a growing company, identifying areas to reduce costs as an offset. As a result, we expect total expenses to be right at 1% higher in 2021.
Moving to the balance sheet. Our loans held for investment decreased $345 million from the end of the prior quarter, primarily due to the forgiveness of approximately $425 million of PPP loans during the fourth quarter. The PPP loan forgiveness resulted in a decline in our commercial loan portfolio, which was partially offset by modest growth in our commercial real estate portfolio and the increase we saw in the residential real estate loans due to our decision to retain more of our production. We saw modest declines this quarter in a number of other portfolios, including our indirect portfolio.
After the indirect portfolio decline in 2019, we focused on expanding our dealer network across our footprint in 2020. We saw good results from this effort as our indirect balances increased by 3.6% through the first 9 months of the year. While we typically see declining indirect balances in the fourth quarter, inventory shortages also impacted our production levels this year. As inventory begins to build again, we should see improved loan volumes and expect similar growth in 2021 as we saw in 2020.
Credit performance in the indirect portfolio is good with the delinquency rate declining from 2019 levels and remaining below industry averages. As of December 31, we had approximately $740 million of PPP loans remaining on our balance sheet, and our expectation is that the majority of these loans will receive forgiveness during the first quarter of 2021. On the liability side, our deposits increased $335 million from the end of the prior quarter, with most of the growth coming in interest-bearing demand and savings deposits.
Moving to asset quality. We saw decreases in all of our problem asset categories. Relative to the end of the third quarter, our nonperforming loans declined $6.4 million, our nonperforming assets declined $9.6 million and our criticized loans declined $37.2 million. Our credit losses continue to be very manageable, with just $4.2 million of net charge-offs, representing just 16 basis points of average loans in the quarter.
We recorded a provision for credit losses of $3.2 million, which reflects our improved asset quality. Although this did not cover our net charge-offs in the quarter, our allowance as a percentage of loans held for investment increased to 1.47%. When PPP loans are excluded, our allowance coverage was 1.59% as of December 31.
So after discussing our strong quarter, I'll turn the call back over to Kevin.
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 told 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 company to relocate to our markets. All of this growth provides more opportunity. In this COVID environment, our bankers are finding creative ways to the 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.
In May, we will launch our digital small business lending portal. We believe the ability to offer online small business lending has become table stakes and will improve our ability to add small business customers. As I've talked about in the past, we're able to offer a highly automated PPP application process, with banker interaction at key points, which led to our success in the first round of stimulus. Now we're using that portal to efficiently manage loan forgiveness process. For the new PPP program this year, we will have the same process in place. Since this program is targeted at companies that have been a little bit more severely impacted by the pandemic, and we don't have a lot of those in the markets, we expect only a modest volumes that we saw compared to the first program.
Excluding the impact of PPP, both in terms of loans from the first program running off and loans from the second program coming on the books, we expect loan growth for the year to be in the mid-single-digit range. As has been the case in the past few years, most of the growth has come from the West division. While we expect the Mountain division to be slightly up for the year.
As Marcy has said, we expect operating expenses to be relatively flat. So we should have good operating leverage as we continue growing the balance sheet and generating higher net interest income. This should translate into a solid year of earnings growth. If the vaccine rollout and the stimulus continues to have a positive impact and drives continued economic recovery, it's likely that we'll be in a position to release reserves this year, which will be another driver of earnings growth.
With another strong year expected, we believe that we'll be able to generate solid returns to our shareholders. As we return to a more normalized environment, we're starting to see M&A discussions pick up, and we'll continue to look for opportunities to enhance our franchise value. We have built a highly scalable platform that can support a much larger bank, and we want to take advantage of that and continue using acquisitions to complement our organic growth and further increase our earnings power.
In closing, we believe we're in a really good spot with good credit quality, good capital, good liquidity, a good technology platform, good product development, our branch network and our personnel. And as a result, we're confident that we can continue to execute well on our growth strategy, drive a higher level of earnings, return more capital to our shareholders and further enhance the value of our franchise in the years to come.
So with that, we'll open the call up for questions.
[Operator Instructions]. Today's first question comes from Jared Shaw at Wells Fargo Securities.
I guess, first, maybe just on the mortgages that you're retaining, what's the -- are those 30 year fixed? What's the duration and annual growth and the yield?
Go ahead, Marcy.
So it's a mix. We're retaining 7, 10 and 15, but we're also retaining some 30 and the duration -- I mean, the yield on the 30-year loans is about 3.26%.
Okay. And then should that growth -- should we expect that growth sort of mix, what we saw this quarter? Or is that actually -- should that accelerate as an opportunity for the portfolio?
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.
Okay. And then just looking at the allowance, I mean your credit is really strong. You did a -- you obviously built up a strong reserve. What's going to be the main drivers for you to look to get back towards that maybe CECL day 1 level? Is it just going to be the strength of the broader economy as we go through '21? Or is it really going to be maybe longer than 2021 before we get back to maybe a day 1 level?
Well, no, Jared, we're going to look at how is the vaccine rollout happening? Is this virus get 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 be come down.
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?
Well, Jared, we're seeing a lot of economic growth. I think when -- we'll know more as the weather kind of clears, but we're already seeing signs. We have a lot of people moving into our markets, and we have a lot of companies relocate. So I think it's going to pick up that, if that continues. So it could be better if there's more in migration than we anticipate. So we're feeling good, and we'll know more and more as the weather kind of gets better.
And our next question today comes from Jackie Bohlen with KBW.
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?
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 -- it's interesting because 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.
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?
Yes. And I'll go out on a limb here a little bit and say, I think that we had a pretty strong tour season last summer, and a lot of our companies did a record sales in a number of the industries because of the pent-up demand. I think the tour season is going to set a record this summer that won't be barricaded 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 to our performance.
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.
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, that I don't see us doing that. We'll just continue to retain mortgages and put the money to work in the investment portfolio.
Yes, the likelihood of that, Jackie, is slim to none.
Okay. I figured, but I just wanted to double check.
And our next question today comes from Levi Posen with D.A. Davidson.
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?
So the basis point impact to margin of the accelerated fees was about 19 basis points.
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?
Yes. We see the pipeline similar to what we saw in the fourth quarter. It's about the same rate. And I think some of the growth also -- in the fourth quarter, our ag borrowers paid down their lines when they harvest their crops. So that's going to come back. They'll start utilizing those lines as they plant their crops and stuff. So we see that utilization go up. So it's pretty similar right now. But again -- so that's why we're pretty -- we feel good about because the last 2 quarters, we did about mid-single-digit growth. So that's why we feel good that, that could persist going into 2021. Again, all bets are off of how robust the economy starts growing in our markets, but that's kind of what we're seeing right now.
And our next question today comes from Andrew Terrell with Stephens.
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?
There's about 540,000 shares remaining under the current repurchase...
Marcy, we can't hear you.
Can you hear me now?
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...
I am too.
They can hear you.
Marcy, I can hear both of you guys.
Okay. He can hear both of us. All right. So it's about 540,000 shares remaining under the existing plan. And so not much. And so again, we look at our 5-year payback period, and we repurchase shares accordingly so.
One last housekeeping one. Can you remind us how many -- or how much left you have in remaining PPP round 1 fees left to accrete through interest income?
It's about $15 million.
And our next question today comes from Matthew Forgotson with Piper Sandler.
Marcy, can you confirm the -- on your fee income related guidance, what the base is that you're using for 2020? Because I think you said flat to up, but I have $169 million, and that would suggest a nice step-up from this latest quarter?
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.
Yes. So Matt, we believe our mortgage banking revenue will be down but that the other areas, wealth management, payment services will be up and kind of mitigate the decline in mortgage banking revenues. And so we really do think it will be closer to flat quarter-over-quarter -- I mean, year-over-year.
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.
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 fourth quarter. I mean, from third quarter.
Okay. And then the mid-single-digit loan growth guidance, is that ex-PPP?
Yes.
Okay. And then can you just confirm the remaining net revenues you expect to realize from PPP?
The remaining fees on the book are about $15 million.
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?
So I'm going to see if Kevin can talk, are you on, Kevin? We're having a little bit of connection problems.
I'm on.
Did you hear the question?
No, I just got on.
Okay. So Matt, can you repeat the question for Kevin?
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?
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.
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?
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.
And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back over to the management, if you have any closing remarks.
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 today, and goodbye.
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.