First Interstate BancSystem, Inc. — Q1 2013 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2013, compared with Q1 2012; balance-sheet comparisons are with December 31, 2012. The company is a Montana-based bank holding company operating 76 banking offices across Montana, Wyoming and western South Dakota. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income (GAAP) | $59.3 | $60.6 in Q1 2012 |
| Net interest margin (FTE) | 3.55% | 3.72% in Q1 2012 |
| Provision for loan losses | $0.5 | $11.3 in Q1 2012 |
| Non-interest income | $28.8 | $26.4 in Q1 2012 |
| Non-interest expense | $56.7 | $57.4 in Q1 2012 |
| Net income | $20.0 | $12.2 in Q1 2012 |
| Net income available to common shareholders; diluted EPS | $20.0; $0.46 | $11.4; $0.26 in Q1 2012 |
| Total assets | $7,439 | $7,722 at Dec. 31, 2012 |
| Total loans | $4,225 | $4,224 at Dec. 31, 2012 |
| Total deposits | $6,028 | $6,240 at Dec. 31, 2012 |
| Cash and cash equivalents | $499 | $801 at Dec. 31, 2012 |
| Allowance for loan losses | $97.9; 2.32% of period-end loans | $100.5; 2.38% at Dec. 31, 2012 |
| Stockholders’ equity | $771 | $751 at Dec. 31, 2012 |
Cash flow and funding: Operating cash flow was $39.7; investing activities used $44.7 and financing activities used $297.8. Cash declined $302.8, primarily reflecting a $212.1 decrease in deposits, a $50.0 million preferred-stock redemption, and lower repurchase-agreement balances. The company reported $37.2 million of long-term debt, $82.5 million of subordinated debentures and $467.2 million of repurchase agreements at quarter-end. Management says funding relies primarily on customer core deposits, with minimal wholesale funding and generally no brokered deposits.
Capital: Consolidated total risk-based, Tier 1 risk-based and leverage ratios were 15.9%, 14.1% and 9.2%, respectively, up from 15.6%, 13.6% and 8.8% at year-end. The bank subsidiary exceeded regulatory “well-capitalized” thresholds.
Material changes and management commentary
- Net income increased about 64% year over year, mainly as the provision for loan losses fell sharply. Management attributed the lower provision to improving economic trends, improving credit quality and recoveries of prior charge-offs.
- FTE net interest income declined 2.2% year over year as loan and investment yields fell; lower funding costs partly offset the decline. FTE margin was down 17 basis points year over year.
- Non-interest income rose 9.2%, including higher mortgage origination and sale income and wealth-management revenue. Salaries and wages rose 8.5%, while total non-interest expense edged down 1.3%; Q1 2012 expense included a $3.0 million accrual related to one borrower.
- Total assets fell 3.7% from year-end, while loans were essentially flat and deposits declined 3.4%. Management said year-end deposits were unusually high and attributed the subsequent decline to customer investment and business spending, as well as tax payments.
- Non-performing assets declined to $133.0 million, or 3.12% of loans and OREO, from $142.6 million, or 3.35%, at year-end. Non-accrual loans were $98.6 million; net charge-offs were $3.1 million, or an annualized 0.30% of average loans.
- OREO was $32.5 million, approximately unchanged from year-end. The quarter included $2.3 million of OREO valuation write-downs and an $0.8 million net gain on OREO sales.
- The company redeemed its $50 million, 6.75% Series A preferred stock in January. A $0.13-per-share common dividend was declared after quarter-end, payable May 15, 2013.
Outlook, risks and contingencies
The filing provides no quantified earnings or financial guidance. Management stated that Q1 results are not necessarily indicative of full-year results and reported no known events expected to materially adversely affect liquidity, capital resources or operations. It also reported no material changes in market-risk disclosures, legal proceedings or risk factors from the 2012 Form 10-K.
Key stated risks include adverse economic conditions in the company’s regional markets, real-estate and commercial credit concentrations, loan-loss allowance estimation, interest-rate changes, access to low-cost funding and liquidity, regulatory and capital requirements, competition, operational and technology risks, and the ability to manage growth and retain qualified staff. Management said ordinary-course litigation was not expected to have a material adverse effect. At quarter-end, commitments to extend credit were approximately $1.177 billion and standby letters of credit were $71.4 million; these off-balance-sheet amounts do not necessarily represent expected cash outflows. Management recorded no investment-security impairment losses in the quarter.
Important facts for investors to verify
- Whether the exceptionally low $0.5 million loan-loss provision is sustainable, given remaining non-performing assets of $133.0 million and the judgment involved in reserve adequacy.
- Drivers of margin pressure and the sensitivity of net interest income to interest rates, deposit pricing and asset repricing.
- Deposit outflows and the reduction in cash balances, including whether liquidity remains adequate under adverse funding conditions.
- Credit quality trends, particularly real-estate exposures, criticized loans, OREO valuations and subsequent performance of troubled debt restructurings.
- Effect of the preferred-stock redemption and the declared common dividend on capital and future cash needs; the filing reports no common dividends paid during Q1 2013.