Business Context and Reporting Period
Company: First Interstate BancSystem, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Overview: The Company operates as a community banking holding company with one operating segment. During the third quarter of 2009, the Company completed the merger of its three bank subsidiaries (First Western Bank, Wall, and The First Western Bank Sturgis) into First Interstate Bank, which is now its sole bank subsidiary. The Company is a non-accelerated filer.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net Income Available to Common | $11,456 | $15,033 | $39,783 | $50,114 |
| Diluted EPS | $1.46 | $1.89 | $5.02 | $6.25 |
| Total Assets | $6,923,218 | $6,628,347 (Dec 31, 2008) | - | - |
| Total Loans | $4,606,454 | $4,772,813 (Dec 31, 2008) | - | - |
| Total Deposits | $5,683,130 | $5,174,259 (Dec 31, 2008) | - | - |
| Net Interest Income | $61,299 | $60,694 | $179,552 | $175,868 |
| Provision for Loan Losses | $10,500 | $5,636 | $31,800 | $13,320 |
| Non-Interest Expense | $57,376 | $55,189 | $162,558 | $158,034 |
| Cash and Cash Equivalents | $512,442 | $314,030 (Dec 31, 2008) | - | - |
| Stockholders' Equity | $570,684 | $539,062 (Dec 31, 2008) | - | - |
Capital Ratios (Sept 30, 2009): Tier 1 Risk-Based Capital: 10.28%; Total Risk-Based Capital: 12.21%. The Company exceeded all regulatory capital adequacy requirements.
Material Changes vs. Prior Period
- Profitability Decline: Net income available to common shareholders decreased 23.8% in Q3 2009 and 20.6% for the nine months ended Sept 30, 2009, compared to the prior year periods. This was primarily driven by increased provisions for loan losses and higher non-interest expenses.
- Asset Quality Deterioration: Non-performing assets increased to $157.0 million (3.38% of total loans and OREO) from $96.9 million (2.03%) at year-end 2008. Net loan charge-offs for the first nine months of 2009 totaled $17.4 million, compared to $3.0 million in the same period in 2008.
- Provision Increase: The provision for loan losses rose to $10.5 million in Q3 2009 (from $5.6 million in Q3 2008) and $31.8 million for the nine-month period (from $13.3 million in 2008) due to deteriorating economic conditions and credit quality.
- OREO Growth: Other Real Estate Owned (OREO) increased significantly to $31.9 million from $6.0 million at year-end 2008, largely due to foreclosures on real estate development properties. Net OREO expense was $5.2 million in Q3 2009.
- Deposit Growth: Total deposits increased 9.8% to $5.68 billion, driven by organic growth and a shift toward higher-cost savings and time deposits.
- Non-Interest Income: Income from the origination and sale of loans increased 84.4% in Q3 2009 due to low interest rates stimulating refinancing activity. However, wealth management revenues declined due to lower asset values under management.
Guidance, Outlook, Risks, and Unusual Items
- Capital Management: In response to the recession, the Company reduced quarterly common dividends to $0.45 per share and limited stock repurchases. Management is evaluating financing alternatives, including a potential initial public offering (IPO), to enhance capital and eliminate the need for repurchases.
- Debt Covenant Violations: The Company was in violation of financial performance covenants related to non-performing assets under its syndicated credit agreement as of March 31, June 30, and September 30, 2009. On October 28, 2009, the Company entered into an engagement letter to obtain a waiver and amend the agreement. If not consummated, the banks could accelerate the full amount due.
- FDIC Assessments: FDIC insurance premiums increased significantly due to higher assessment rates and a special assessment of $3.1 million accrued in Q2 2009. Management expects premiums to remain elevated.
- Unusual Items:
- Visa Sale: The Company sold its Visa Inc. Class B shares in Q3 2009, recording a non-recurring gain of $2.1 million.
- Technology Services: Following the sale of its technology subsidiary (i_Tech) in late 2008, the Company no longer reports technology services as a separate segment and has incurred higher outsourced technology service expenses.
- Risks: Key risks include credit losses, concentrations in real estate loans, commercial loan risk, and the impact of economic conditions in Montana, Wyoming, and South Dakota. The Company expects non-performing loans to continue to increase in future quarters.
Investor Verification Checklist
- Debt Covenant Status: Verify the finalization of the waiver and amendment for the syndicated credit agreement to ensure no acceleration of debt.
- Asset Quality Trends: Monitor the trajectory of non-performing assets and OREO, specifically the valuation of the real estate development properties written down in Q3.
- Capital Strategy: Confirm the timeline and likelihood of the potential IPO or other capital raising activities mentioned by management.
- Loan Portfolio Concentration: Review the exposure to real estate construction and commercial real estate, which drove the increase in non-performing loans.
- FDIC Costs: Assess the impact of ongoing elevated FDIC insurance premiums on future net interest margins and non-interest expenses.