Business Context and Reporting Period
Company: First Interstate BancSystem, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: The Company operates two primary business lines: Community Banking (consumer and commercial services) and Technology Services (data processing and support for financial institutions). The Company is headquartered in Billings, Montana.
Key Financial Metrics
| Metric | Three Months Ended 9/30/03 | Nine Months Ended 9/30/03 | Nine Months Ended 9/30/02 |
|---|---|---|---|
| Net Income | $11.83 million | $30.90 million | $25.90 million |
| Diluted EPS | $1.50 | $3.92 | $3.31 |
| Total Assets | $3.86 billion (as of 9/30/03) | N/A | N/A |
| Total Loans | $2.57 billion (as of 9/30/03) | N/A | N/A |
| Total Deposits | $3.12 billion (as of 9/30/03) | N/A | N/A |
| Net Interest Income | $35.47 million | $103.92 million | $102.81 million |
| Non-Interest Income | $17.29 million | $53.53 million | $44.80 million |
| Non-Interest Expense | $31.77 million | $101.83 million | $100.31 million |
| Operating Cash Flow | N/A | $45.24 million | $45.22 million |
| Allowance for Loan Losses | $38.78 million (as of 9/30/03) | N/A | N/A |
Material Changes vs. Prior Period
- Profitability: Net income for the nine months ended September 30, 2003, increased by $5.0 million (19.3%) compared to the same period in 2002. This was driven primarily by higher revenues from the origination and sale of residential real estate loans.
- Revenue Growth: Non-interest income increased $8.7 million (19.5%) year-to-date. "Other service charges, commissions and fees" rose $9.4 million (63.9%), largely due to increased residential loan origination volumes fueled by low interest rates.
- Expense Management: Non-interest expense decreased $5.4 million (14.6%) for the quarter but increased $1.5 million (1.5%) year-to-date. The quarterly decrease was driven by a $2.6 million reversal of impairment charges on mortgage servicing rights, offset by a $320,000 fraud loss and a $475,000 valuation reserve for loans held for sale.
- Balance Sheet Expansion: Total loans grew 14.7% to $2.57 billion, and total deposits grew 7.3% to $3.12 billion since year-end 2002. This growth was partially due to the January 2003 acquisition of Silver Run Bancorporation.
- Net Interest Margin: The fully taxable equivalent (FTE) net interest margin ratio decreased 41 basis points to 4.38% for the nine-month period, attributed to the redeployment of funds from prepayment of mortgage-backed securities into lower-yielding assets.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Impairment Reversals: The Company recorded a $2.6 million reversal of impairment charges on mortgage servicing rights in Q3 2003, compared to $2.9 million in charges in Q3 2002.
- Fraud Loss: A $320,000 fraud loss was recorded in Q3 2003.
- Debt Issuance Costs: A $1.9 million charge was recorded in Q2 2003 for unamortized costs associated with redeemed trust preferred securities.
- Investment Losses: Net losses of $1.6 million on investment securities were recorded in Q3 2003, primarily to offset the aforementioned impairment reversals.
- Acquisitions: Completed the acquisition of Silver Run Bancorporation in January 2003 for $8.7 million (cash and stock), adding $35.7 million in loans and $41.6 million in deposits.
- Capital Actions: Issued $40 million in new Trust Preferred Securities in March 2003 and redeemed $40 million of existing securities in April 2003. Declared a quarterly dividend of $0.34 per share.
- Risks and Outlook:
- Interest Rate Risk: Management models predict a 10.3% increase in net interest income if rates rise 1% and a 10.3% decrease if rates fall 1% over the next 12 months. Management considers a 1% rate decline highly unlikely.
- Asset Quality: Non-performing loans decreased to $30 million (1.17% of total loans) from $34 million at year-end 2002. The allowance for loan losses was 1.51% of total loans.
- Regulatory: The Company and its subsidiary exceeded "well-capitalized" requirements as of September 30, 2003.
Investor Verification Checklist
- Loan Growth Quality: Verify the composition of the 14.7% loan growth to ensure it is not overly concentrated in high-risk residential real estate segments.
- Impairment Volatility: Monitor the stability of mortgage servicing rights valuations, as significant reversals and charges have materially impacted recent earnings.
- Fraud Exposure: Review internal controls regarding the $320,000 fraud loss recorded in Q3 2003 to assess potential systemic risks.
- Net Interest Margin Pressure: Assess the sustainability of the 4.38% net interest margin given the trend of lower yields on reinvested funds.
- Off-Balance Sheet Commitments: Note the $652 million in commitments to extend credit and $55 million in standby letters of credit.