Business Context and Reporting Period
Company: First Interstate BancSystem, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates as a community banking segment offering commercial and consumer banking services in Montana, Wyoming, and South Dakota. Following the sale of its technology services subsidiary (i_Tech) in December 2008, the Company now reports a single operating segment. The reporting period reflects the impact of a broad recession, declining real estate markets, and rising unemployment in its service areas.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Interest Income | $118,253 | $115,174 |
| Provision for Loan Losses | $21,300 | $7,684 |
| Net Income | $30,024 | $36,702 |
| Net Income Available to Common Stockholders | $28,327 | $35,080 |
| Diluted EPS | $3.56 | $4.36 |
| Total Assets (as of June 30, 2009) | $6,776,918 | $6,628,347 (Dec 31, 2008) |
| Total Loans (as of June 30, 2009) | $4,665,550 | $4,772,813 (Dec 31, 2008) |
| Total Deposits (as of June 30, 2009) | $5,525,315 | $5,174,259 (Dec 31, 2008) |
| Allowance for Loan Losses (as of June 30, 2009) | $98,395 | $87,316 (Dec 31, 2008) |
| Cash and Cash Equivalents (as of June 30, 2009) | $551,907 | $314,030 (Dec 31, 2008) |
Net Interest Margin (FTE): 4.08% for the six months ended June 30, 2009, down from 4.28% in the prior year period.
Non-Performing Assets: $167.3 million (3.56% of total loans and OREO) as of June 30, 2009, up from $96.9 million (2.03%) as of December 31, 2008.
Material Changes vs. Prior Period
- Profitability Decline: Net income available to common stockholders decreased 19.3% year-over-year, primarily driven by a 177.2% increase in the provision for loan losses ($21.3 million vs. $7.7 million) due to deteriorating credit quality.
- Asset Quality Deterioration: Non-performing loans increased 49.0% to $135.5 million. Other Real Estate Owned (OREO) surged 427.6% to $31.8 million, largely due to foreclosures on real estate development properties.
- Liquidity Increase: Cash and cash equivalents increased 75.7% to $552 million. This was driven by organic deposit growth ($351 million increase) combined with decreased loan demand, leading to higher balances in federal funds sold.
- Non-Interest Income: Income from the origination and sale of loans increased 207.3% to $20.6 million due to low interest rates stimulating refinancing activity. However, wealth management revenues declined 20.6% due to lower asset values under management.
- Expense Increases: FDIC insurance premiums increased 710.1% to $7.4 million due to higher assessment rates and a special assessment of $3.1 million. Outsourced technology services increased 221.3% following the sale of the internal tech subsidiary.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects non-performing loans to continue increasing in future quarters due to the recession and rising unemployment. Income from loan origination is expected to decrease substantially if long-term interest rates remain elevated, as they increased in June 2009.
- Capital Management: The Company decreased quarterly common dividends to $0.45 per share and limited stock repurchases to conserve capital. While approved for the TARP Capital Purchase Program, the Company elected not to participate.
- Debt Covenants (Critical Risk): As of June 30, 2009, the Company was in violation of two financial performance covenants related to non-performing assets under its syndicated credit agreement ($39.3 million outstanding). Management has requested a waiver and modification; failure to obtain this could result in acceleration of the debt.
- Regulatory Capital: The Company remains "well-capitalized" under regulatory guidelines. Tier 1 risk-based capital ratio was 10.01% and total risk-based capital ratio was 11.93% as of June 30, 2009, improved by a regulatory change allowing goodwill deduction adjustments.
- Investment Portfolio: Management does not believe any investment securities are impaired due to credit quality; unrealized losses are attributed to interest rate fluctuations.
Investor Verification Checklist
- Covenant Waiver Status: Verify if the Company has successfully obtained the waiver for the syndicated credit agreement covenants regarding non-performing assets.
- Asset Quality Trends: Monitor the trajectory of non-performing loans and OREO, specifically in the real estate construction and commercial real estate sectors.
- Loan Origination Volume: Assess the impact of rising long-term interest rates on the Company's income from loan origination and sales in subsequent quarters.
- FDIC Assessments: Confirm if additional special FDIC assessments are levied beyond the 5 basis points already accrued.
- Capital Strategy: Evaluate the Company's progress in securing alternative capital sources given the decision to decline TARP participation.