First Interstate BancSystem, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter report. First Interstate is a community banking holding company operating 76 offices in Montana, Wyoming and western South Dakota.
Financial performance and position
| Metric | FY 2012 / Dec. 31, 2012 | Comparable period |
|---|---|---|
| Total assets | $7.72 billion | $7.33 billion at Dec. 31, 2011; up 5.4% |
| Deposits | $6.24 billion | $5.83 billion; up 7.1% |
| Total loans | $4.22 billion | $4.19 billion; up less than 1% |
| Net interest income | $243.8 million | $250.9 million; down 2.8% |
| Non-interest income | $114.9 million | $91.9 million; up 25.0% |
| Provision for loan losses | $40.8 million | $58.2 million; down 29.9% |
| Net income | $58.2 million | $44.5 million; up 30.7% |
| Net income available to common shareholders | $54.9 million; diluted EPS $1.27 | $41.1 million; diluted EPS $0.96 |
| Net interest margin, FTE | 3.66% | 3.80%; down 14 basis points |
| Cash and cash equivalents | $801.3 million | $472.4 million at Dec. 31, 2011 |
- Net cash provided by operating activities was $135.8 million; investing activities used $141.1 million and financing activities provided $334.1 million. Cash increased $328.9 million during the year.
- Common stockholders’ equity was $751.2 million at year-end. The Bank’s regulatory capital ratios exceeded “well capitalized” thresholds; its total risk-based, Tier 1 risk-based and leverage ratios were 14.6%, 13.0% and 8.4%, respectively.
- Year-end obligations included $505.8 million of repurchase agreements, $37.2 million of long-term debt and $82.5 million of subordinated debentures. The $50 million preferred stock redemption was classified as a liability at year-end and was completed January 18, 2013.
- The loan-to-deposit ratio was 67.69%. The company reported no brokered time deposits and had $801.3 million in cash and cash equivalents. It also reported access to FHLB and Federal Reserve borrowing facilities, subject to collateral and availability.
Changes, outlook and notable items
- Earnings improved as the loan-loss provision fell and mortgage origination-and-sale income nearly doubled to $41.8 million, amid record-low mortgage rates. Refinancing accounted for 65% of 2012 residential mortgage production. Management did not expect that refinancing level to continue.
- Asset quality improved: non-performing assets declined to $174.6 million, or 2.26% of assets, from $278.9 million, or 3.81%. Non-performing loans fell to $142.0 million from $241.5 million; criticized loans declined 25.8% to $467.6 million. Net charge-offs remained elevated at $52.8 million, or 1.26% of average loans.
- Real estate represented about 64% of total loans; commercial loans, including commercial real estate, represented about 52%. Management expected credit provisions to decline as quality improved, while cautioning that charge-offs could remain elevated as problem loans worked through the credit cycle.
- Management expected further net interest margin compression due to the low-rate environment and lower asset yields. The filing’s interest-rate model estimated a 1.1% increase in 12-month net interest income under a 0.5% parallel rate increase, but management cautioned that model results depend on assumptions and are not forecasts.
- Non-interest expense rose 5.1% to $229.6 million. Notable 2012 items included $3.0 million of estimated loan collection and settlement costs for one borrower, $1.5 million of donations expense associated with a building sale, a $428,000 debt-extinguishment charge, and a $581,000 one-time building-sale gain. OREO expense was $9.4 million, including $6.7 million of property write-downs.
- Common dividends were $0.61 per share for 2012, including an accelerated fourth-quarter dividend; the quarterly-results table reports $0.25 per share paid in Q4, versus $0.12 in each prior quarter. Future dividends are discretionary and subject to regulatory and other restrictions.
- No formal earnings guidance is provided. Key risks include regional economic weakness, real-estate and commercial-credit concentration, interest-rate and funding pressure, loan-loss estimation, regulatory change, liquidity and technology/vendor risks. The company reported no legal matters expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls, and management concluded disclosure controls were effective.
Investor verification priorities
- Review the quality and collectability of the real-estate-heavy loan portfolio, the decline in non-performing assets, and whether charge-offs and provisions continue to fall.
- Assess whether the sharp increase in mortgage origination income is sustainable after refinancing activity normalizes, and how margin compression affects core earnings.
- Verify the cash-flow and funding profile, including deposit stability, repurchase-agreement balances, collateral availability for borrowing facilities, and holding-company dependence on Bank dividends.
- Confirm the post-year-end completion and funding of the $50 million preferred-stock redemption, and distinguish recurring operating performance from the year’s unusual gains and expenses.
- Evaluate capital adequacy, dividend sustainability, and the effects of proposed regulatory capital rules; also consider the Scott family’s more than 80% voting control and the resulting governance and liquidity implications for Class A shares.