First Interstate BancSystem, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. The company is a bank holding company operating 71 banking offices in Montana, Wyoming and western South Dakota.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $62.5 million | $63.2 million | $124.3 million | $124.8 million |
| Net interest income, FTE | $63.7 million | $64.3 million | $126.6 million | $127.1 million |
| Net interest margin, FTE | 3.84% | 3.96% | 3.78% | 3.98% |
| Provision for loan losses | $15.4 million | $19.5 million | $30.4 million | $31.4 million |
| Non-interest income | $21.6 million | $21.0 million | $41.8 million | $40.5 million |
| Non-interest expense | $54.2 million | $55.4 million | $107.2 million | $108.2 million |
| Net income | $9.9 million | $6.7 million | $19.4 million | $17.8 million |
| Net income available to common shareholders | $9.0 million | $5.8 million | $17.7 million | $16.1 million |
| Basic and diluted EPS | $0.21 | $0.14 | $0.41 | $0.43 |
For the six months, operating cash flow was $89.7 million versus $47.7 million in 2010. Cash and cash equivalents fell $270.1 million to $415.5 million, reflecting financing outflows, including lower deposits and repurchase-agreement balances. The filing reports no explicit full-year earnings or revenue guidance.
Financial position and liquidity
- At June 30, 2011, assets were $7.20 billion, loans $4.28 billion, deposits $5.79 billion and stockholders’ equity $759.3 million.
- Compared with December 31, 2010, assets declined 4.0%, loans 2.0% and deposits 2.2%; equity increased 3.1%. Investment securities rose 4.6% to $2.02 billion.
- Long-term debt was $37.5 million; subordinated debentures held by subsidiary trusts were $123.7 million. Repurchase agreements declined 29.8% to $435.0 million. Management said it was not aware of events expected to materially adversely affect liquidity.
- Consolidated regulatory capital ratios were 9.69% leverage, 14.01% Tier 1 risk-based and 16.01% total risk-based. The bank exceeded well-capitalized requirements.
- Common dividends declared were $0.225 per share for the first half; a $0.1125-per-share quarterly dividend was declared for payment in July.
Material changes and credit quality
- Q2 net income improved year over year, while six-month EPS declined from $0.43 to $0.41. Net interest margin contracted amid lower yields and weaker loan demand; lower funding costs partly offset the pressure.
- Non-performing assets increased to $291.8 million, or 6.77% of loans and OREO, from $244.3 million, or 5.55%, at year-end. Non-performing loans reached $263.5 million; nonaccrual loans were $229.7 million.
- Real estate represented 85.3% of non-performing loans; construction and land-development exposures were notable contributors. About 46% of non-performing assets were in the Flathead, Gallatin Valley and Jackson markets. Net charge-offs were $15.3 million in Q2 versus $11.5 million a year earlier.
- The allowance for loan losses was $124.6 million, or 2.91% of period-end loans, versus $120.5 million, or 2.76%, at year-end. Troubled debt restructurings totaled $102.0 million, up from $53.7 million; the company reported 96% of accruing restructured loans performing to modified terms.
- OREO declined to $28.3 million from $33.6 million at year-end. During the first half, the company added $6 million, recorded $4 million of write-downs and sold OREO with an $8 million book value.
Management commentary, risks and unusual items
- Management attributed pressure on credit quality to difficult local economic conditions and weak real estate values and sales, especially in resort- and second-home-dependent markets. It expects net charge-offs to remain elevated as problem loans work through the credit cycle. Provisions may remain near current levels until non-performing loans level off or decline; management also expects provisions to decrease as credit quality improves.
- Management cited reduced loan demand and lower earning-asset yields as margin pressures. Fee income rose, supported by card transaction volumes and wealth-management activity; deposit service charges fell, mainly due to lower overdraft-fee activity. Lower FDIC premiums helped reduce expenses.
- Potential risks include credit losses and real estate concentrations, economic and interest-rate changes, funding access and liquidity, regulatory changes, and operational or technology disruptions. The company noted that local economies were showing some signs of recovery, but the continuing effects of the recession remained uncertain.
- Credit commitments were approximately $993.6 million and standby letters of credit $72.0 million. Management said ordinary-course litigation was not expected to materially affect the company. A Visa-related derivative liability was $122,000; its valuation depends on the resolution of Visa litigation and involves judgment. No material subsequent events were identified.
- Regulatory changes included repeal of the prohibition on interest-bearing demand deposits and debit-card interchange rules; the company, with assets below $10 billion, was exempt from the interchange-fee limits described. Management did not expect the demand-deposit change to have a significant impact.
Important facts for investors to verify
- Whether rising nonaccrual loans, criticized assets and real-estate concentrations lead to additional charge-offs or allowance needs.
- How elevated net charge-offs and the timing of problem-loan resolutions affect future provisions and earnings.
- Whether margin compression continues and how deposit mix, loan growth and interest rates affect net interest income.
- The drivers of the sharp first-half cash decline and continued reductions in deposits and repurchase-agreement funding.
- Potential effects of regulatory changes, including debit-card network fee adjustments, on fee revenue and costs.