First Interstate BancSystem, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. First Interstate is a community bank holding company headquartered in Billings, Montana, operating 80 banking offices in Montana, Wyoming and South Dakota.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net interest income | $68.9 million | $68.0 million | +1.4% |
| Net interest margin (FTE) | 3.49% | 3.54% | Down 5 bps |
| Non-interest income | $29.1 million | $28.6 million | +1.6% |
| Non-interest expense | $63.7 million | $62.3 million | +2.3% |
| Provision for loan losses | $1.7 million | $4.0 million | Down $2.3 million |
| Net income | $23.1 million | $20.1 million | +14.9% |
| Diluted EPS | $0.51 | $0.45 | +$0.06 |
Management reported FTE net interest income of $70.0 million, up 1.4%. Excluding the prior-year leap-day benefit, it estimated growth of approximately $1.7 million, primarily from higher average loan balances and yields on securities and bank deposits, partly offset by higher funding costs. The FTE margin declined to 3.49%; excluding acquired-loan accretion and recoveries of charged-off interest, it was 3.41%, versus 3.45% a year earlier.
The Q1 2017 effective tax rate was 29.0%, versus 33.7%. A newly adopted stock-compensation accounting standard produced a $1.8 million tax benefit; excluding it, management said the effective rate was 33.3%. The filing does not provide a clear operating margin measure.
Financial position, cash flow and credit
- Assets and lending: Total assets were $9.06 billion, essentially unchanged from year-end 2016. Total loans were $5.40 billion, down 1.4% from $5.48 billion; loans held for investment declined about 0.7% to $5.38 billion.
- Deposits and liquidity: Deposits were $7.30 billion, down 1.0% from year-end. Cash and cash equivalents were $808.0 million, up from $782.0 million. Repurchase-agreement funding rose $50.0 million to $587.6 million. Management said it knew of no events likely to materially adversely affect liquidity or capital resources.
- Debt and equity: Long-term debt was $28.0 million and subordinated debentures were $82.5 million. Total stockholders’ equity was $1.00 billion, up from $982.6 million. The filing reports regulatory capital ratios above applicable well-capitalized requirements; at March 31, consolidated total risk-based capital was 14.94%, CET1 was 12.50%, and leverage was 10.09%.
- Cash flows: Operating activities provided $73.0 million, compared with $20.2 million in Q1 2016. Investing activities used $10.7 million, versus $84.7 million used; financing activities used $36.4 million, versus $60.4 million used. Cash increased $25.9 million during the quarter.
- Credit quality: Non-performing loans were $79.1 million, or 1.47% of loans, versus $76.6 million, or 1.40%, at year-end 2016 and $68.2 million, or 1.30%, a year earlier. Non-performing assets were $88.5 million. The allowance was $76.2 million, or 1.41% of period-end loans; quarterly net charge-offs were $1.7 million, an annualized 0.13% of average loans.
Material changes, outlook and risks
- Net income and EPS increased, aided by the lower loan-loss provision and the $1.8 million stock-compensation tax benefit. Non-interest expense rose, including $0.7 million of Cascade Bancorp acquisition costs.
- Payment-services and wealth-management revenue increased; mortgage-banking revenue declined 2.7%, and mortgage production was down 5% year over year. Management attributed technology-services cost growth to systems enhancements supporting future growth.
- First Interstate agreed to acquire Cascade Bancorp for cash and stock, at an indicated aggregate value of approximately $595 million as of March 31. Closing was expected after business hours May 30, 2017, subject to shareholder approval. Cascade had $3.14 billion of assets, $2.71 billion of deposits and $2.09 billion of net loans. Management expected the combined company to exceed $12 billion in assets and operate across six states. The filing identifies integration, execution and additional regulatory requirements after exceeding $10 billion in assets as risks.
- The company acquired First Interstate-related trademarks and domain names from Wells Fargo in January. Other assets increased, primarily due to the trademark acquisition; cash flows included $28.0 million for acquired intangible assets.
- No specific earnings guidance was provided. Management cited risks including regional economic weakness, energy-sector conditions, credit losses and allowance adequacy, interest-rate and funding changes, acquisition completion and integration, technology and cybersecurity, regulation, and liquidity. Management stated the allowance was adequate, while warning that economic deterioration or weaker asset quality could require additional provisions.
- The company declared a $0.24-per-share quarterly dividend on April 17, payable May 12, 2017. Management reported no material changes in market-risk disclosures, legal proceedings or risk factors from its 2016 Form 10-K. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether the Cascade Bancorp transaction closed as expected, its final consideration and the integration, capital and regulatory effects.
- Trends in non-performing loans, criticized assets, charge-offs and the allowance as loans grow or local economic conditions change.
- Whether net interest margin stabilizes as asset yields and deposit and other funding costs change.
- The recurring earnings effect of the one-time stock-compensation tax benefit and ongoing acquisition-related expenses.
- Deposit trends, reliance on repurchase agreements and liquidity needs, including commitments to extend credit of approximately $1.60 billion.