First Interstate BancSystem, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. The company is a Montana-based regional banking holding company operating 80 banking offices in Montana, Wyoming and western South Dakota.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparison |
|---|---|---|
| Net interest income | $64.3 million | Up 10.6% from $58.1 million; fully taxable equivalent (FTE) net interest income was $65.4 million, up 10.6%. |
| FTE net interest margin | 3.43% | Down from 3.52% a year earlier; excluding specified acquired-loan accretion and recoveries, 3.38% versus 3.49%. |
| Provision for loan losses | $1.1 million expense | Compared with a $5.0 million provision reversal in Q1 2014. |
| Non-interest income | $27.8 million | Up 15.2% from $24.1 million. |
| Non-interest expense | $59.6 million | Up 9.7% from $54.3 million. |
| Net income / diluted EPS | $21.0 million / $0.46 | Net income was $21.4 million and diluted EPS $0.48 in Q1 2014. |
| Loans / deposits | $4.93 billion / $6.97 billion | Loans up $30 million and deposits down $38 million from December 31, 2014. |
| Cash and cash equivalents | $637.8 million | Down $160.9 million from year-end. |
| Stockholders’ equity | $914.5 million | Up $5.5 million from December 31, 2014. |
| Allowance for loan losses | $75.3 million; 1.53% of period-end loans | Compared with $74.2 million and 1.52% at year-end. |
Net interest income growth primarily reflected the July 2014 Mountain West acquisition and higher average earning assets; lower asset yields and a narrower margin partially offset the benefit. The company reported $1.1 million of acquired-loan accretion, including $351,000 from early payoffs. Fee income gains included higher mortgage origination and sale income, wealth management revenue and a $1.0 million reversal of accrued expenses associated with settlement of secondary-investor claims assumed in the Mountain West acquisition.
Operating cash flow was negative $1.4 million, versus positive $22.0 million in Q1 2014. Investing activities used $63.1 million and financing activities used $96.4 million; cash fell by $160.9 million during the quarter. The company said the cash decline reflected normal business activity, not a change in business strategy. Funding remained primarily customer deposits, with minimal reliance on wholesale funding, according to management. Long-term debt was $43.0 million and subsidiary-trust subordinated debentures were $82.5 million; repurchase agreements were $462.1 million.
Material changes and notable developments
- Non-performing assets rose to $94.3 million, or 1.11% of total assets, from $78.3 million, or 0.91%, at year-end. Non-performing loans increased to $79.1 million from $64.8 million, primarily after one commercial and one commercial real estate borrower were placed on non-accrual.
- Other real estate owned increased to $15.1 million from $13.6 million. Net charge-offs were negative $41,000 (net recoveries), compared with net recoveries of $1.0 million in Q1 2014.
- Commercial real estate, commercial and indirect consumer lending grew; agricultural and agricultural real estate lending declined, primarily due to seasonal reductions and scheduled repayments.
- On March 26, the company agreed to acquire Absarokee Bancorporation for approximately $7.2 million in cash, subject to adjustments and regulatory approval. The transaction, involving approximately $74 million in assets, $37 million in net loans and $64 million in deposits, was expected to close in Q3 2015.
- The company repurchased and retired 565,875 Class A shares for approximately $14.7 million and declared a $0.20-per-share quarterly dividend. A further 434,125 shares remained authorized for repurchase under the current program.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said Q1 results are not necessarily indicative of full-year results and expressed no awareness of events reasonably likely to materially impair liquidity, capital resources or operations. Management reported that the company and its bank subsidiary exceeded applicable capital adequacy requirements; at March 31, consolidated CET1 was 12.6% and the bank subsidiary’s was 13.2%.
Material litigation: On April 21, 2015, after quarter-end, the court upheld a jury’s punitive damages award in the Kelly Logging case and entered a final judgment of $24.6 million, plus interest. This included $7.5 million in plaintiff attorney fees and $91,000 in costs. The company had accrued $4.0 million in Q3 2014, believes it has grounds to appeal, and intends to appeal. It warned that the outcome is uncertain and could materially adversely affect financial condition, results or liquidity.
Other stated risks include adverse regional economic conditions, credit losses and allowance adequacy, interest-rate changes, funding access, regulatory changes, technology and cybersecurity failures, and the outcome of litigation. Basel III took effect for the company on January 1, 2015, with certain capital adjustments and the conservation buffer phasing in over subsequent years. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Developments in the Kelly Logging appeal, potential judgment exposure, interest and whether the existing $4.0 million accrual is adequate.
- Whether the increase in non-accrual and past-due loans persists, particularly in commercial and commercial real estate portfolios, and its effect on provisions and the allowance.
- Drivers of the margin decline and sustainability of acquired-loan accretion, mortgage income and the Mountain West settlement-related expense reversal.
- Closing, purchase-price adjustments, regulatory approval and integration risks for the planned Absarokee acquisition.
- Causes and ongoing implications of the cash decline and negative operating cash flow, alongside deposit trends and repurchase-agreement funding.
- Capital and liquidity effects of share repurchases, dividends, Basel III phase-ins and the company’s other funding commitments.