First Interstate BancSystem, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; comparisons are with the corresponding 2012 periods unless noted. The company is a bank holding company operating 74 banking offices in Montana, Wyoming and western South Dakota. Figures below are in millions of dollars except per-share data and ratios.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $59.0 | $61.0 | $177.0 | $182.8 |
| Non-interest income | $27.6 | $30.2 | $86.0 | $84.2 |
| Non-interest expense | $52.6 | $57.1 | $164.3 | $171.8 |
| Provision for loan losses | $(3.0) | $9.5 | $(2.1) | $32.8 |
| Net income | $23.8 | $16.2 | $65.4 | $41.4 |
| Diluted earnings per share | $0.54 | $0.35 | $1.49 | $0.90 |
- Interest and margins: Q3 fully taxable-equivalent (FTE) net interest income was $60.1 million, down 3.4%; FTE net interest margin was 3.52%, down 11 basis points. For nine months, FTE net interest income was $180.4 million, down 3.2%, and margin was 3.54%, down 16 basis points. Lower loan and investment yields outweighed lower funding costs.
- Balance sheet at September 30: Assets were $7.50 billion, down 2.9% from year-end 2012; loans were $4.33 billion, up 2.6%; deposits were $6.11 billion, down 2.1%; and equity was $792.9 million, up 5.5%. Cash and cash equivalents were $542.3 million versus $801.3 million at year-end.
- Credit and reserves: Allowance for loan losses was $93.0 million, or 2.15% of period-end loans, versus $100.5 million, or 2.38%, at year-end. Non-performing assets fell to $114.7 million (2.64% of loans plus OREO) from $142.6 million (3.35%). Criticized loans declined to $391.5 million from $467.6 million. Net charge-offs were $2.5 million in Q3.
- Cash flow, nine months: Operating activities provided $110.7 million; investing activities used $108.2 million; financing activities used $261.6 million. Cash and cash equivalents decreased $259.0 million.
- Debt and capital: Long-term debt was $37.1 million and subsidiary-trust subordinated debentures were $82.5 million. The company redeemed $50 million of preferred stock in January 2013. Consolidated regulatory capital ratios at September 30 were 10.01% leverage, 14.85% Tier 1 risk-based and 16.68% total risk-based; the bank exceeded well-capitalized thresholds.
Material changes versus comparable periods
- Net income rose 47% in Q3 and 58% for the nine months. The improvement was substantially supported by lower credit costs: the company reversed loan-loss provisions in 2013, compared with significant provisions in 2012.
- Q3 non-interest income declined 8.5%, primarily because mortgage origination and sale income fell 32% amid lower refinancing demand. Nine-month non-interest income increased 2.1%; wealth management revenue rose, while mortgage revenue was slightly lower.
- Non-interest expense declined 7.9% in Q3 and 4.4% year to date. Lower OREO expense and, year to date, lower other expenses—including the absence of certain 2012 charges—were notable contributors.
- Loans grew, led by residential real estate and consumer lending; commercial and commercial real estate balances declined. OREO fell 43% from year-end, following property sales and other resolutions.
- Available-for-sale securities had a net unrealized loss of $6.5 million at September 30, versus a net unrealized gain of $17.5 million at year-end 2012. The nine-month after-tax other comprehensive loss was $23.9 million, primarily reflecting interest-rate-related securities valuation changes.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management cited improving and stabilizing credit quality and local and national economic conditions, but cautioned that results for the first nine months are not necessarily indicative of full-year results.
- Management said its initial analysis indicated the company would meet fully phased-in Basel III capital adequacy requirements; relevant minimum requirements begin taking effect in 2015, with the capital conservation buffer phased in thereafter.
- Key stated risks include regional economic weakness, real-estate and commercial credit concentrations, allowance adequacy, interest-rate changes, funding access and liquidity, regulatory changes, competition, technology/vendor dependence, and the possibility of additional credit losses. The allowance estimate depends on management judgments and could require additional provisions if the economy or asset quality deteriorates.
- Off-balance-sheet commitments included approximately $1.23 billion of commitments to extend credit and $47.3 million of standby letters of credit; amounts are not necessarily expected to be drawn in full. Management did not expect pending claims or litigation to have a material adverse effect.
- The company registered the ability to offer up to $160 million of Class A common shares but reported no specific offering plans. A quarterly common dividend of $0.14 per share was declared after quarter-end, payable November 15, 2013.
- Management reported effective disclosure controls as of quarter-end and no material changes to internal control over financial reporting. No material changes to previously disclosed legal proceedings or risk factors were reported.
Most important facts for investors to verify
- Whether lower loan-loss provisions are sustainable and whether reserve coverage remains adequate as criticized and non-performing assets evolve.
- Whether the decline in net interest margin and loan yields continues, and how rate changes affect securities values, funding costs and earnings.
- Whether mortgage-related income remains pressured as refinancing demand changes, and whether growth in wealth management and other fee income offsets it.
- Deposit trends, liquidity after the reported cash decline, and the potential funding impact of customer credit commitments and repurchase agreements.
- Capital ratios under Basel III, the implications of the available $160 million equity shelf, and the effect of securities-related accumulated other comprehensive losses on reported equity.