Business context and reporting period
First Interstate BancSystem, Inc. is a Montana-based bank holding company operating 81 banking offices across Montana, Wyoming and South Dakota. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless otherwise stated. Dollar amounts below are in millions unless specified.
On July 24, 2015, the company acquired Absarokee Bancorporation for $7.2 million in cash. Absarokee brought approximately $73 million of assets, $38 million of loans and $64 million of deposits.
Financial results and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $66.3 | $65.1 | $195.9 | $182.9 |
| Provision for loan losses | $1.1 | $0.3 | $3.5 | $(6.7) reversal |
| Non-interest income | $30.5 | $29.4 | $90.0 | $80.0 |
| Non-interest expense | $65.5 | $65.0 | $187.1 | $175.2 |
| Net income | $20.2 | $19.2 | $63.4 | $61.6 |
| Diluted earnings per share | $0.44 | $0.42 | $1.39 | $1.37 |
- Fully taxable-equivalent net interest margin was 3.47% for Q3 and 3.45% year to date, down from 3.55% and 3.54%, respectively. Management attributed margin pressure mainly to lower loan and securities yields, partly offset by lower funding costs and asset growth.
- At September 30, total assets were $8.605 billion, loans $5.176 billion, deposits $7.036 billion and stockholders’ equity $938.6 million. Loans grew 5.7% and deposits 0.4% from December 31, 2014; total assets were nearly unchanged.
- Cash and cash equivalents were $708.3 million, down $90.4 million from year-end. Nine-month operating cash flow was $61.9 million; investing cash outflow was $10.4 million and financing cash outflow was $141.9 million, including $27.3 million of dividends and $20.5 million of share repurchases.
- Long-term debt was $43.1 million and subordinated debentures $82.5 million; repurchase-agreement funding was $437.5 million. Deposits remained the principal funding source. The filing states the company exceeded applicable capital adequacy requirements; at September 30, consolidated CET1 was 12.5%, total risk-based capital 15.3%, and leverage capital 10.1%.
- The allowance for loan losses was $74.3 million, or 1.43% of period-end loans, versus 1.52% at year-end. Nine-month net charge-offs were $3.5 million.
Material changes versus prior comparable periods
- Q3 net income rose 5.3%; nine-month net income rose 2.8%. Growth in net interest income and non-interest income was partly offset by higher provisions and operating expenses.
- Nine-month net interest income increased 7.0%, supported by acquired assets and organic loan growth; the reported margin nevertheless declined. Acquired-loan fair-value accretion contributed $4.1 million to nine-month interest income.
- Nine-month non-interest income increased 12.5%, including stronger mortgage origination and sale income and a $0.9 million land-sale gain. Other income also included reversal of a $1.0 million accrual related to secondary investor claims assumed in the Mountain West acquisition.
- Nine-month non-interest expense increased 6.8%, reflecting acquisition-related operating costs, technology and professional fees, and other items. Non-performing assets fell to $77.7 million from $78.3 million at year-end; the non-performing asset ratio declined to 0.90% from 0.91%. Non-performing loans increased to $69.7 million from $64.8 million, including higher commercial non-performing loans, while OREO declined to $8.0 million from $13.6 million.
Outlook, risks, contingencies and unusual items
The filing provides no specific earnings or financial guidance. Management said it was not aware of events reasonably likely to materially adversely affect liquidity, capital resources or operations. Results for the nine months are not necessarily indicative of full-year results.
- The company recorded $5.0 million of Q3 2015 loss-contingency expense related to a lender-liability lawsuit, compared with $4.0 million in Q3 2014; the lawsuit was settled on August 31, 2015. Management stated other claims and litigation were not expected to have a material adverse effect.
- Management identifies credit quality and allowance adequacy, regional economic conditions, interest rates and margin pressure, funding access, regulatory changes, technology and cybersecurity, competition, litigation and execution of growth strategies among key risks. A deterioration in the economy or asset quality could require additional loan-loss provisions.
- Off-balance-sheet commitments included approximately $1.591 billion of commitments to extend credit and $59.7 million of standby letters of credit; commitment amounts do not necessarily represent future cash requirements.
- Management reported effective disclosure controls at September 30, 2015, with no material changes in internal control over financial reporting during the quarter. A quarterly dividend of $0.20 per share was declared October 6, payable November 13, 2015.
Important facts for investors to verify
- Whether loan growth and acquired-loan accretion can offset continued pressure on net interest margin.
- Developments in commercial non-performing loans, criticized assets, charge-offs and the adequacy of the allowance.
- How sustainable mortgage income and other non-interest revenue are, and whether expense growth moderates after acquisitions and unusual costs.
- The final purchase-accounting values for Absarokee and the performance of its acquired loans and deposits.
- The financial and regulatory implications of the settled lawsuit, outstanding credit commitments and the company’s liquidity and capital position.