First Interstate BancSystem, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Unaudited results are not necessarily indicative of full-year performance. Unless stated otherwise, financial statement figures below are in millions of dollars.
Business context and key financial metrics
First Interstate is a bank holding company headquartered in Billings, Montana, operating 74 banking offices in Montana, Wyoming and western South Dakota. Its core business is lending and deposit-taking, funded primarily by customer deposits.
| Metric | Q1 2014 / March 31, 2014 | Comparable period / change |
|---|---|---|
| Total assets | $7,618 | Up $53, or less than 1%, from year-end 2013 |
| Total loans | $4,365 | Up $20 from year-end 2013 |
| Total deposits | $6,135 | Up $1 from year-end 2013 |
| Net interest income | $58.1 | $59.3 in Q1 2013; down 1.9% on a fully taxable-equivalent basis |
| Net interest margin | 3.52% FTE | 3.55% in Q1 2013 |
| Net income | $21.4 | $20.0 in Q1 2013; up 6.7% |
| Diluted earnings per share | $0.48 | $0.46 in Q1 2013 |
| Cash and cash equivalents | $610.5 | Up $75.7 from year-end 2013 |
| Stockholders’ equity | $825.6 | Up $24.1 from year-end 2013 |
Net cash provided by operating activities was $22.0 million, versus $39.7 million in Q1 2013. Investing activities provided $27.6 million, compared with $44.7 million used in the prior-year quarter; financing activities provided $26.1 million, compared with $297.8 million used. The prior-year financing outflow included a $50 million preferred-stock redemption and substantial deposit outflows.
At March 31, long-term debt was $36.9 million and subordinated debentures were $82.5 million. Repurchase agreements were $488.9 million. Regulatory capital ratios were 10.27% leverage, 15.16% Tier 1 risk-based and 16.83% total risk-based; the bank subsidiary exceeded “well-capitalized” thresholds.
Material changes versus prior comparable period
- Net interest income fell as lower loan and investment yields outweighed growth in average loans and lower funding costs. The FTE margin declined 3 basis points to 3.52%.
- The company recorded a $5.0 million reversal of loan-loss provision, compared with a $0.5 million provision in Q1 2013. Management attributed the reversal to lower specific and general reserve requirements, improving local economic conditions and credit-loss trends, and fewer criticized real estate and construction loans.
- Non-interest income declined 16.4% to $24.1 million. Mortgage origination and sale income fell 56.3% to $4.7 million, primarily with weaker refinancing demand and approximately 50% lower mortgage production. Other service charges and wealth management revenues increased.
- Non-interest expense decreased 4.1% to $54.3 million, including lower compensation, FDIC premiums and OREO expense. Net OREO income was $19,000, compared with $1.9 million of expense in Q1 2013, when property write-downs were higher.
- Non-performing loans declined to $89.8 million from $96.7 million at year-end; non-performing assets declined to $106.4 million from $112.2 million. The allowance for loan losses was $81.4 million, or 1.86% of period-end loans, versus $85.3 million, or 1.96%, at year-end.
Outlook, commentary, risks and unusual items
- The company agreed to acquire Mountain West Financial Corp. for consideration expected to be approximately $78.8 million based on the March 31 share price, including cash and Class A shares. Mountain West reported approximately $405.4 million in loans and $539.9 million in deposits at December 31, 2013. Closing was expected in mid-2014, subject to regulatory and shareholder approvals; the filing provides no earnings guidance.
- Management said it knew of no events reasonably likely to materially harm liquidity, capital resources or operations, and no regulatory liquidity recommendations with such an effect. Cash and liquid securities support liquidity; management noted statutory, regulatory and debt-covenant limits on the bank’s ability to pay dividends to the holding company.
- Key disclosed risks include deterioration in economic conditions in Montana, Wyoming and western South Dakota; credit losses and allowance adequacy; interest-rate changes; access to low-cost funding; liquidity; competition, regulation, technology and operational controls; and acquisition execution. Management warned that economic or asset-quality deterioration could require additional loan-loss provisions.
- Unrealized losses on investment securities were attributed primarily to interest-rate movements; management said it did not intend, and was not likely required, to sell the affected available-for-sale securities before recovery. No investment-security impairment losses were recorded in either comparison period.
- The company paid a $0.16-per-share common dividend in Q1 and repurchased 100,355 Class A shares for $2.5 million. A further quarterly dividend of $0.16 per share was declared after quarter-end for payment in May 2014.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors or legal proceedings were reported.
Important facts for investors to verify
- Whether the $5.0 million provision reversal is sustainable and how credit quality, criticized loans and the allowance evolve in subsequent quarters.
- Whether the decline in mortgage refinancing and loan-sale income continues, and whether commercial loan growth offsets it.
- How net interest margin responds to changing rates, deposit mix and funding costs.
- Mountain West’s final purchase consideration, approvals, closing timing, integration costs and contribution to earnings and capital.
- Liquidity and funding trends, including cash levels, repurchase agreements, deposit composition and the bank’s capacity to upstream dividends.
- The effect of market-rate changes on securities values and the company’s exposure to the $471 million of securities in loss positions for more than 12 months.