First Interstate BancSystem, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company is a bank holding company headquartered in Billings, Montana, operating 72 banking offices in Montana, Wyoming and western South Dakota. Unless noted otherwise, amounts below are in millions of dollars; the filing presents financial statement amounts in thousands.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $61.2 | $62.5 | $121.8 | $124.3 |
| Non-interest income | $27.7 | $21.6 | $54.0 | $41.8 |
| Non-interest expense | $57.3 | $54.2 | $114.7 | $107.2 |
| Net income | $13.0 | $9.9 | $25.2 | $19.4 |
| Net income available to common shareholders | $12.2 | $9.0 | $23.5 | $17.7 |
| Basic and diluted EPS | $0.28 | $0.21 | $0.55 | $0.41 |
| Net interest margin, fully taxable-equivalent | 3.74% | 3.84% | 3.73% | 3.78% |
- Q2 net income increased about 32%; six-month net income rose about 30%. Higher mortgage origination and sale income was a major contributor: $9.4 million in Q2 and $17.8 million for the six months, compared with $4.1 million and $7.6 million, respectively, in 2011.
- Net interest income declined despite lower deposit funding costs. Management attributed margin pressure to lower loan balances and asset yields, partly offset by reduced liability costs and a shift toward lower-cost demand deposits. Six-month FTE net interest income was $124.2 million versus $126.6 million.
- At June 30, total assets were $7,305 million, deposits $5,901 million, total loans $4,170 million, net loans $4,067 million and stockholders’ equity $786 million. Since year-end 2011, deposits rose 1.3%, loans fell less than 1%, and assets were nearly flat.
- Cash and cash equivalents were $536.7 million, up from $472.4 million at year-end. Six-month operating cash flow was $37.2 million versus $89.7 million in 2011; investing activities provided $65.0 million, while financing activities used $38.0 million. Deposit growth of $74.4 million was partly offset by lower repurchase-agreement balances and debt redemption.
- Long-term debt was $37.2 million, subordinated debentures $82.5 million and repurchase agreements $456.0 million. The company redeemed $41.2 million of junior subordinated debentures in June. Regulatory capital ratios remained above requirements: consolidated total risk-based capital was 16.2%, Tier 1 risk-based capital 14.2% and leverage 9.5%.
Changes, outlook and risks
- Credit indicators improved overall: non-performing assets fell to $226.2 million (5.35% of loans and OREO) from $278.9 million (6.60%) at year-end 2011. Non-accrual loans declined to $129.9 million from $200.0 million, primarily through charge-offs and foreclosure. Criticized loans decreased to $545.9 million from $630.9 million.
- Credit costs remain significant. Q2 net charge-offs were $25.1 million, compared with $7.9 million in Q1 2012 and $15.3 million in Q2 2011; most Q2 charge-offs related to land development, commercial construction and commercial real estate loans. The allowance was $102.8 million, or 2.47% of total loans, versus 2.69% at year-end.
- OREO increased 43.7% from year-end to $53.8 million, including $33.1 million of transfers into OREO during the first half. Land and land-development properties represented 42% of OREO. This rise offsets some of the improvement in non-performing assets.
- Management expects further net interest margin compression in future quarters absent meaningful loan growth. It expects 2012 net charge-offs to approximate 2011 levels as problem loans continue through the credit cycle. Management cautioned that first-half refinancing activity, which accounted for 65% of residential mortgage originations, is not expected to continue at that level.
- Management identified credit losses, real-estate concentration, economic conditions in its markets, interest rates, funding access, liquidity, regulation and capital requirements among key risks. It said it believed the company could meet proposed Basel III-related requirements on a fully phased-in basis; the proposals were not final. The company reported no material change in market-risk disclosures, risk factors or legal proceedings, and management did not expect pending litigation to materially affect financial condition, results or liquidity.
- Other notable items: Q2 included a $1.5 million donation expense connected with selling a bank building to a charitable organization, a $581,000 gain on the building sale, and $428,000 of unamortized debt issuance costs expensed upon redemption. First-quarter other expense also included $3.0 million of estimated collection and settlement costs related to one borrower. A proposed Visa interchange litigation settlement was described as not expected to have a material financial impact.
- The board declared a $0.12-per-share quarterly common dividend, paid July 16, 2012. The filing gives no formal earnings guidance. Results for the six months are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether lower non-performing loans translate into sustained credit improvement, given elevated Q2 charge-offs and rising OREO.
- Future loan growth, net interest margin and deposit mix, particularly management’s warning of further margin compression without meaningful loan growth.
- Whether mortgage origination income remains resilient if refinancing activity normalizes.
- The adequacy of the loan-loss allowance and outcomes for real-estate concentrations, troubled restructurings and the borrower-related collection and settlement costs.
- Final regulatory capital rules and their effect on capital ratios, including following the trust-preferred redemption.