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First Interstate BancSystem, Inc. (FIBK)

Q1 2012 Earnings Call· Tue, Apr 24, 2012

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Transcript

Operator

Operator

Good day and welcome to the First Interstate BancSystem Q1 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Marcy Mutch, Investor Relations Officer. Ms. Mutch, the floor is yours, ma’am.

Marcy Mutch

Analyst

Thanks, Mike. Good morning. Thank you for joining us for our earnings conference call for the first quarter of 2012. Before we begin, I’d like to direct all listeners to the cautionary note regarding forward-looking statements and factors that could affect future results and our most recently filed Forms 10-Q and 10-K. Joining us from management this morning are Ed Garding, our Chief Executive Officer; and Terry Moore, our Chief Financial Officer. Ed will begin by giving you a general overview of this quarter’s results, along with a credit -- a review of credit quality information. Terry will follow up with more specific information behind the quarterly results. Bob Cerkovnik, our Chief Credit Officer, will also be available during the Q&A time to address specific questions regarding asset quality. At this time, I’d like to turn the call over to Ed Garding. Ed?

Edward Garding

Analyst

Thanks, Marcy, and good morning and thanks again to all of you for joining us. Since this is my first call, I wouldn’t feel right without mentioning Lyle Knight’s retirement. Lyle, who most of you know was our CEO, who retired at the end of the first quarter. In case you’re wondering, Lyle worked long and productive days [indiscernible]. I'd like to remember him as an outstanding leader. So if you're out there, Lyle, hello and we miss you. So, let’s move on to this quarter’s results. Last night, we reported [Audio Gap] Okay, thank you. I think, I’ll start in with this quarter’s results. Last night, we reported earnings for the first quarter of $11.4 million, which equates to diluted earnings per share of $0.26. Earnings were down 8% from last quarter; largely due to a $3 million expense we reported during the quarter related to a settlement of a dispute with a borrower. In spite of that, earnings increased 30% from fist quarter of last year. While it continues to be a challenging environment for any loan growth, we were encouraged that the level of outstanding loans was fairly stable for this quarter. The $28 million decline in outstanding balances was mainly a result of $14 million of transfers to other real estate and $9 million in charge-offs. Because this is a quarter in which we don’t typically see loan growth, we are happy that outstanding balances remain steady, particularly after last year, where we experienced over $100 million decline in loan balances during the first quarter. As most of you know, I spent 11 years as our Chief Credit Officer and I continue to be very involved in all aspects of our credit administration. So, you will probably find that I talk more about our credit quality…

Terrill Moore

Analyst

Thanks, Ed, and thanks to all of you for joining us this morning. I’d like to start with the interest margin, which was reported at 3.72% for the first quarter, which is down 7 basis points from Q4, 2011. A driver in the compression of the margin quarter-over-quarter was a lack of new loan demand, which caused a further shift in our earning asset mix from loans to investments. This combined with slightly lower yields on loans and securities resulted in the yield on earning assets declining at a faster pace than cost of funds. It was just a year ago or so when cost of funds was at 73 basis points and we weren’t sure how much lower it could go, but today we are at 52 basis points, a 29% decrease from first quarter last year, and we still expect to see a bit more opportunity for improvement even from this low point. However, the decline in cost of funds is not expected to keep pace with declining earning asset yields in this interest rate environment. As far as the investment portfolio goes, we don’t expect to realize improvement in yield in the next few quarters as new purchases are typically priced at lower yields than what is maturing or paying down. However, we do expect or anticipate operating with less interest-bearing deposits, which are principally funds held at the Federal Reserve Bank, by deploying funds toward loan growth and the purchase of more investments, both of which will offset margin compression. While I hate to sound like a broken record, but loan growth remains the biggest driver in any substantial improvement in net interest margin. While we are seeing positive signs with loan requests in the pipeline, this is yet to translate into balance sheet growth. Competition…

Edward Garding

Analyst

Thanks Terry, I want to mention that also in relation to Lyle’s retirement and my change from Chief Operation Officer to CEO, we announced last month that Mike Houston was appointed Chief Banking Officer. Mike was previously a Regional President in our Casper, Wyoming market and has been with the bank for 22 years. Mike has recently relocated to Billings and we’re excited to have him as a part of our executive team. So, with that we’re ready to open up for questions.

Operator

Operator

[Operator Instructions] The first question we have comes from Brett Rabatin of Sterne Agee.

Brett Rabatin

Analyst

Wanted to first ask, Terry, I think you mentioned that you expected the provision to be similar or higher than charge offs going forward, and I guess I’m just curious with the improvement you have had in the credit quality metrics the past 2 quarters, I’m curious as to why you wouldn’t be reaching somewhat of an inflection point or maybe you would be similar to charge-offs or potentially lower given the reserve levels.

Terrill Moore

Analyst

Yes, Brett, just to follow up on that, we would expect as we get in the later stages of the credit cycle that charge-offs would exceed provisions in the overall reserve levels as measured as a percentage of outstanding loans would decline. So we just have fewer outstanding classified assets. So I think they'll -- they may teeter back and forth a little bit, approximate the same number, but we would expect over the next several quarters that generally speaking we would see charge-offs being a bit higher in -- relative to provisions.

Brett Rabatin

Analyst

Okay. So the other way around, so charge-offs higher than provision in the next few quarters?

Terrill Moore

Analyst

That’s correct, I may have stated that, and if I did, I apologize.

Brett Rabatin

Analyst

No, it’s probably me. Okay. And then as it relates to credit, I’m curious, the special mention loans didn’t really change much this quarter. Was there anything underlying the trends there that was notable? Obviously you had a decline in overall NPAs, but I guess I’m just curious about the level of criticized assets this quarter.

Edward Garding

Analyst

I think, Brett, I’m going to have Bob Cerkovnik answer that with some more specifics. Go ahead, Bob.

Robert M. Cerkovnik

Analyst

Brett, really there’s nothing significant that we can point to, trend or pattern that we see. The decline in substandard -- or increase in substandard, excuse me, was really related to 2 credits, but overall we did not see a significant trend or pattern there.

Brett Rabatin

Analyst

Okay. And then just one last point of clarification. I assume, Terry, that the guidance that you gave for the margins that’d be in a few basis point decline excluded the trust preferred pre-pay?

Terrill Moore

Analyst

That is correct. And of course that won’t occur until the latter part of second quarter. So, it won’t have an impact of any consequence in the second quarter, but for future quarters, that could be factored in as well. And as I mentioned, to the extent that we actually have some real loan growth, that could also stem that decline.

Operator

Operator

The next question we have comes from Simonas Matulionis of D. A. Davidson.

Simonas Matulionis

Analyst

I just had a question about the junior debt redemption, could you just shed some color on why now and what financial impact the decision could have for the P&L going forward?

Terrill Moore

Analyst

Yes. The -- this is Terry and this -- we have a number of different layers of trust preferred, a total of a $120 million outstanding. This is the oldest issuance that we have and the mostly costly issuance that we have. And so as we look at our capital position and what we see for the future, that this hybrid capital instrument would not be necessary for the long-term. So, as we kind of look at the realm of hybrid debt securities or hybrid capital securities, this seemed like the prudent one to pick-off. In terms of financial impact, we’ve indicated approximately a $0.02 per share EPS impact following redemption. And that should just flow through the earnings statement on about a $0.05 per share each quarter. Obviously, it will have an impact on a couple other financial measures, a little bit on the margin and a little bit in that our assets are down $40 million, but pretty inconsequential. Did you have further specific questions there?

Simonas Matulionis

Analyst

Not concerning to that. I expect that you can’t comment on the $3 million expense, but I just wanted to know if there are any more further charges that could be associated with that expense going forward?

Edward Garding

Analyst

No, there are not.

Operator

Operator

[Operator Instructions] It looks like we have a follow-up question from Brett Rabatin of Sterne, Agee.

Brett Rabatin

Analyst

I was just hoping to get some commentary around, everyone is complaining about the obvious competition and rates we’re seeing from larger competitors, I know you have a few in your markets, which you make small ones and maybe some of your competitors. Can you talk about 5.64% loan yield in 1Q? Are you seeing much pressure to originate below 5%? And is -- would that be a decent estimate for where you are originating new production?

Edward Garding

Analyst

I’ll start and then I’m going to have Bob finish that answer, Brett. But we’re seeing some pressure. It certainly depends on loan size and loan quality, because we’re still able to price for risk to some extend and price for efficiency. So overall I would say, it’s somewhat rare that we’re seeing pressure to price below 5%, but on very large, high quality requests, then yes, we are. Bob, do you want to add to that?

Robert M. Cerkovnik

Analyst

Brett, Ed’s comments were pretty much what I would have to say. I would just add that a lot of the competition comes in from extending terms, so going out fixed 10 years and fixed 5 years, in those rate categories that are sometimes very difficult to match for us. The bigger banks, we get the pressure from, and the smaller banks are starting to see some stretching out in their turns.

Brett Rabatin

Analyst

Okay. And then just going to the loan pipeline and utilization rates, there is obviously some positives on C&I, but can you talk about the rest of the portfolio? Was the utilization rate any different than maybe the prior quarters? And generally speaking, does the pipeline suggest you’re going to have loan growth in the next few quarters aside from -- including payoffs and construction?

Edward Garding

Analyst

Bob, go ahead.

Robert M. Cerkovnik

Analyst

The loan pipeline is, as it has been in the past quarters, has been good, but we continue to see that the level of competition, so it’s been difficult for us to -- we get looks at deals and we’re getting our share of them, but again, there is a lot of our customers just aren’t borrowing to, Brett. And that’s created a little bit of lack of demand out there too, and then the good high quality credit continues to see the price pressure. So the loan pipeline, we think as we come [indiscernible] much, we’ll see some growth in there. The usage on the lines of credit are the same. We’ve been very consistent quarter-over-quarter and year-over-year.

Brett Rabatin

Analyst

Okay. And then I wanted to ask a question around expenses. I know last year there was going to be a big initiative on becoming more efficient, and obviously ORE [ph] costs effected this quarter somewhat, that can you talk about any potential impacts in the latter part of this year on efficiency based on what you guys have been trying to get done to since last year?

Edward Garding

Analyst

Terry, do you want to address that?

Terrill Moore

Analyst

Yes, Brett, we did launch an initiative early last year and have set some internal goals and targets, which we have fulfilled and so those goals and initiatives have been fully implemented during this quarter to the extent that they haven’t already been. So we do not have a specific goal or initiative over the next quarter or 2 that is specific and a financial metric. Obviously we are interested in becoming more efficient and continue to strive toward looking at improving our revenue sources as the first line and secondly to look at every opportunity to manage expenses and look at different work flows in order to become more efficient in the way we process work internally. I think that we’ll see continued progress in this regard, but that it will be incremental on any one quarter and it would be over a period -- number of quarters and perhaps even years before you see the consistent trend of improvement in the efficiency ratio as an example.

Brett Rabatin

Analyst

Okay. And was there any seasonality in the personnel line with the usual first quarter -- either increases in merit or FICA expenses?

Terrill Moore

Analyst

There are, Brett. The salaries are up a little bit just from normal early in the year increases and most employees’ salaries. The employee benefits, in particular, are spiked with social security taxes and some adjustment with valuation on deferred income. And perhaps that was nearly $9 million for the first quarter, but that would be more likely to be around $7.5 million to $8 million, on an average quarterly basis for the rest of the year.

Operator

Operator

Well, it appears that there are no further questions at this time, we’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Edward Garding

Analyst

I don’t have any closing remarks. It sounds like we’ve answered what questions there are and so I move for adjournment.

Operator

Operator

All right thank you sir. We thank you for your time. The conference call has now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you.