First Interstate BancSystem, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company is a regional bank holding company operating 79 banking offices in Montana, Wyoming and South Dakota. Results for the quarter are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net interest income | $68.0 | $64.3; up 5.6% on a fully taxable equivalent basis, to $69.0 from $65.4 |
| Net interest margin | 3.54% | 3.43%; up 11 basis points |
| Provision for loan losses | $4.0 | $1.1 |
| Non-interest income | $27.2 | $27.8 |
| Non-interest expense | $60.9 | $59.6 |
| Income before taxes | $30.3 | $31.4 |
| Net income | $20.1 | $21.0; down about 4.1% |
| Diluted earnings per share | $0.45 | $0.46 |
Management attributed higher net interest income to loan growth, improved investment-security and bank-deposit yields, a shift toward higher-yielding loans, and acquired-loan interest accretion. Leap year added approximately $0.75 million to Q1 2016 fully taxable equivalent net interest income. The larger loan-loss provision more than offset much of the net interest income increase.
Financial position, cash flow and capital
- Balance sheet: Assets were $8.69 billion, down from $8.73 billion at year-end 2015. Loans were $5.24 billion, essentially unchanged. Deposits were $7.11 billion versus $7.09 billion.
- Liquidity: Cash and cash equivalents fell to $655.5 million from $780.5 million; management attributed the decrease in part to share repurchases and normal business activity. Operating cash flow was $20.2 million, compared with cash used of $1.4 million in Q1 2015. Investing and financing activities used $84.7 million and $60.4 million, respectively.
- Funding and debt: Repurchase agreements totaled $465.5 million, long-term debt $27.9 million, and subordinated debentures $82.5 million at quarter-end. The company says it primarily funds lending with customer core deposits and has minimal reliance on wholesale funding.
- Credit quality: The allowance for loan losses was $79.9 million, or 1.52% of period-end loans, versus $76.8 million, or 1.46%, at year-end. Net charge-offs were $0.9 million. Non-performing loans were $68.2 million, down from $72.0 million; non-performing assets were $77.5 million, down from $78.2 million. OREO rose to $9.3 million from $6.3 million.
- Capital and shareholder returns: The company reported capital ratios above applicable well-capitalized requirements; consolidated CET1 was 12.4% and leverage was 10.1%. It repurchased and retired 948,242 Class A shares for $24.8 million and declared a $0.22-per-share quarterly dividend, payable May 13, 2016.
Material changes and unusual items
- The $4.0 million provision for loan losses reflected higher specific reserves on impaired energy loans, loss factors on downgraded credits, and a higher general economic loss factor for Wyoming markets exposed to energy-sector stress.
- Direct energy-sector loans were approximately $69 million, with another $27 million of commitments. Reserves allocated to energy loans were 11.7% of those loans, up from 7.8% at year-end.
- Non-interest income declined 1.9%. Q1 2015 included a $1.0 million reversal of an accrual for acquired secondary-investor claims; lower deferred-compensation-plan asset earnings also reduced 2016 other income.
- Non-interest expense increased 2.1%. Approximately $2.1 million of software costs shifted from furniture and equipment to outsourced technology expense, affecting comparability between expense categories. Q1 2016 also included $1.2 million of one-time separation and special-bonus expense.
- After quarter-end, on April 6, the bank agreed to acquire Flathead Bank of Bigfork for approximately $34.2 million in cash, subject to adjustments and regulatory approval. Closing was expected in Q3 2016. The target reported $231.6 million in assets at December 31, 2015.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said it was not aware of events reasonably likely to materially adversely affect liquidity, capital resources or operations. Key risks identified include economic weakness in the company’s markets, declining oil and gas prices, credit losses and allowance adequacy, interest-rate changes, funding and liquidity access, acquisition integration, regulatory changes, cybersecurity and technology failures, and litigation. Management reported no material changes to previously disclosed risk factors or legal proceedings. Credit commitments totaled approximately $1.58 billion and standby letters of credit $52.4 million; these commitments do not necessarily represent future cash requirements. Management did not expect other claims and litigation to materially adversely affect financial condition, results or liquidity.
Important facts for investors to verify
- Whether energy-sector conditions, particularly in Wyoming, cause further downgrades, reserve increases, charge-offs or OREO growth.
- The quality and valuation of impaired loans and collateral, and whether the allowance remains adequate as credit conditions evolve.
- The source and sustainability of margin improvement, including acquired-loan accretion and the impact of interest-rate changes.
- The Flathead Bank acquisition’s final consideration, regulatory approval, closing timing and integration outcomes.
- Liquidity and deposit trends after the quarter, given the reduction in cash and continued capital returns through repurchases and dividends.