Business Context and Reporting Period
Company: First Interstate BancSystem, Inc. (FIBS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2006
Business Overview: FIBS operates primarily through two segments: Community Banking (commercial and consumer banking) and Technology Services (data processing for financial institutions). The company is headquartered in Billings, Montana, and serves markets in Montana, Wyoming, Colorado, Idaho, and Oregon.
Key Financial Metrics
| Metric (in thousands) | Q3 2006 | Q3 2005 | 9 Months 2006 | 9 Months 2005 |
|---|---|---|---|---|
| Net Interest Income | $47,802 | $44,617 | $139,381 | $124,822 |
| Noninterest Income | $21,378 | $17,563 | $60,557 | $52,251 |
| Total Revenue | $69,180 | $62,180 | $199,938 | $177,073 |
| Net Income | $16,746 | $15,274 | $49,017 | $40,113 |
| Diluted EPS | $2.02 | $1.88 | $5.92 | $4.94 |
| Total Assets (Period End) | $4,823,959 | $4,562,313 | - | - |
| Total Loans (Period End) | $3,288,470 | $3,034,354 | - | - |
| Total Deposits (Period End) | $3,616,063 | $3,547,590 | - | - |
| Stockholders' Equity (Period End) | $388,482 | $349,847 | - | - |
Liquidity & Capital: Cash and cash equivalents totaled $207.2 million at September 30, 2006. The company and its bank subsidiary exceeded "well-capitalized" requirements. Net cash provided by operating activities for the nine months ended September 30, 2006, was $46.1 million.
Material Changes vs. Prior Period
- Profitability: Net income increased 9.6% ($1.5 million) for the quarter and 22.2% ($8.9 million) for the nine months compared to the prior year periods. This was driven by growth in average earning assets (up 10.2% QoQ and 11.1% YoY) and increased noninterest income.
- Interest Income/Expense: Net interest income rose due to asset growth, though the net yield on earning assets decreased slightly (4.48% vs 4.60% in Q3 2005) due to competitive pressure on deposit rates. Interest expense increased significantly due to higher rates on borrowings and deposits.
- Noninterest Income: Increased 21.7% for the quarter, driven by higher debit/credit card transaction volumes, technology services revenue, and financial services fees. Net losses on investment securities in 2005 turned to small gains in 2006.
- Noninterest Expense: Increased 10.9% for the quarter. Key drivers included inflationary wage increases, higher incentive bonuses, and the adoption of SFAS 123R (share-based compensation), which added $232,000 in expense for the quarter.
- Asset Quality: The provision for loan losses increased 47.6% for the quarter to $2.0 million, primarily due to downgrades in risk classifications for a residential real estate developer. Non-performing assets remained stable at 0.69% of total loans and OREO.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payments) effective January 1, 2006, resulting in recognized compensation expense for stock options and restricted stock. The company is also evaluating the impact of SFAS 155, 156, 157, 158, and FIN 48, though no significant impact is currently expected.
- Operational Changes: The company completed the discontinuation of nine Wal-Mart in-store banking offices, with the final office sold in Q3 2006. Expenses related to this discontinuation were $952,000 in 2005 and $23,000 in the first nine months of 2006.
- Regulatory Matters: The company received an examination report from the Federal Reserve Bank in August 2006 regarding its transfer agent function, noting operating deficiencies. The SEC commenced an examination in October 2006. Management is correcting identified deficiencies.
- Market Risk: The company's income simulation model predicts a 1.6% decrease in net interest income if short-term rates rise 1% and long-term rates rise 2%. Conversely, a 2% decrease in short-term rates and 1% decrease in long-term rates would result in a less than 1.0% decrease in net interest income.
- Joint Venture: The company holds a minority equity interest in an unconsolidated joint venture exploring an acquisition that could result in a substantial gain, though no assurance of a transaction exists.
Investor Verification Checklist
- Loan Portfolio Concentration: Verify the specific exposure to the residential real estate developer cited as the cause for the increased provision for loan losses.
- Transfer Agent Deficiencies: Monitor the status of the SEC and Federal Reserve examinations regarding the transfer agent function and the timeline for remediation.
- Interest Rate Sensitivity: Assess the impact of the current yield curve environment on future net interest margins, given the company's sensitivity to short-term rate increases.
- Non-Performing Assets: Track the trend of accruing loans past due 90 days or more, which increased from $1.0 million in Q3 2005 to $5.0 million in Q3 2006.
- Joint Venture Status: Confirm if the potential acquisition by the unconsolidated joint venture materializes, as this could impact future earnings.