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.

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.

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.

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.

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.

. 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 some 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 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.