Business Context and Reporting Period
Company: First Interstate BancSystem, Inc.
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: A financial and bank holding company headquartered in Billings, Montana, operating 72 banking offices across Montana, Wyoming, and western South Dakota. The company focuses on community banking, offering commercial and consumer loans, deposits, and wealth management services. As of December 31, 2009, the company held consolidated assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Assets | $7,138 million | $6,628 million |
| Total Loans | $4,528 million | $4,773 million |
| Total Deposits | $5,824 million | $5,174 million |
| Net Interest Income | $243.1 million | $235.4 million |
| Provision for Loan Losses | $45.3 million | $33.4 million |
| Net Income | $53.9 million | $70.6 million |
| Net Income Available to Common Shareholders | $50.4 million | $67.3 million |
| Diluted Earnings Per Share | $6.37 | $8.38 |
| Return on Average Assets | 0.79% | 1.12% |
| Return on Average Common Equity | 9.96% | 14.73% |
| Non-Performing Assets | $163.1 million (2.28% of total assets) | $96.9 million (1.46% of total assets) |
| Allowance for Loan Losses | $103.0 million (2.28% of total loans) | $87.3 million (1.83% of total loans) |
| Net Charge-offs | $29.6 million | $12.9 million |
Material Changes vs. Prior Period
- Earnings Decline: Net income decreased 23.6% to $53.9 million, driven primarily by a 35.8% increase in the provision for loan losses ($45.3 million) and a 21.7% decrease in non-interest income.
- Asset Quality Deterioration: Non-performing assets increased 68.2% to $163.1 million, largely due to real estate development loans and commercial real estate loans. Net charge-offs more than doubled to $29.6 million.
- Net Interest Income Growth: Despite a compression in the net interest margin (4.05% in 2009 vs. 4.25% in 2008) due to low interest rates, net interest income increased 3.3% due to growth in average earning assets.
- Deposit Growth: Total deposits grew 12.6% to $5.8 billion, with significant growth in time deposits and CDARS (Certificate of Deposit Account Registry Service) deposits.
- Expense Management: Non-interest expense decreased 2.2% to $217.7 million, aided by the sale of the technology subsidiary (i_Tech) in late 2008, though FDIC insurance premiums surged 316.6% due to regulatory changes.
Guidance, Outlook, and Risks
- Outlook: Management expects continued credit deterioration and higher levels of non-performing loans in the near term due to economic conditions. The company anticipates FDIC insurance premiums to remain at high levels.
- Capital Management: To conserve capital, the company reduced quarterly common dividends to $0.45 per share (from $0.65) starting in Q2 2009 and limited stock repurchases. The company elected not to participate in the TARP Capital Purchase Program.
- Initial Public Offering (IPO): On January 15, 2010, the company filed a registration statement for a proposed IPO of Class A common stock. A special shareholder meeting was scheduled for March 2010 to approve related charter amendments.
- Debt Covenants: The company has been in default of its syndicated credit agreement covenants three times since 2008 due to credit quality deterioration. While waivers were obtained, management warns that continued credit deterioration could lead to further defaults, potentially making debt immediately due and payable.
- Key Risks: Significant exposure to real estate loans (65% of portfolio), potential goodwill impairment ($184 million), and reliance on the subsidiary bank for dividends to meet holding company obligations.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the status of waivers for the syndicated credit agreement and the likelihood of future defaults given the trajectory of non-performing assets.
- Allowance Adequacy: Assess whether the 2.28% allowance for loan losses is sufficient to cover projected charge-offs in the real estate and commercial sectors.
- Goodwill Impairment: Monitor the $184 million goodwill balance for potential impairment charges, which could impact regulatory capital and dividend capacity.
- FDIC Assessment Impact: Confirm the ongoing impact of the $32 million FDIC prepayment and elevated assessment rates on future liquidity and earnings.
- IPO Progress: Track the status of the proposed IPO and shareholder vote on charter amendments, as this represents a major liquidity event for shareholders.