First Interstate BancSystem, Inc. — Q1 2012 Form 10-Q
Unaudited results for the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Amounts are in millions except per-share data and ratios.
Business context and financial position
The Montana-based bank holding company operated 71 banking offices in Montana, Wyoming and western South Dakota. Its core business is taking customer deposits and making loans. At March 31, 2012, it reported assets of $7,394.3, loans of $4,158.6 and deposits of $5,910.8.
| Metric | March 31, 2012 | Prior comparable |
|---|---|---|
| Total assets | $7,394.3 | $7,325.5 at Dec. 31, 2011 |
| Cash and cash equivalents | $622.9 | $472.4 at Dec. 31, 2011 |
| Total deposits | $5,910.8 | $5,827.0 at Dec. 31, 2011 |
| Total loans, including held-for-sale | $4,158.6 | $4,186.5 at Dec. 31, 2011 |
| Stockholders’ equity | $779.3 | $771.0 at Dec. 31, 2011 |
| Long-term debt / trust subordinated debentures | $37.2 / $123.7 | Both broadly unchanged from year-end |
Results, cash flow and capital
- Net interest income was $60.6, down 1.9% from $61.8 in Q1 2011. Net interest margin on a fully taxable-equivalent basis was 3.72%, versus 3.73% a year earlier and 3.79% in Q4 2011.
- Provision for loan losses was $11.3, down 25.0% from $15.0. Net charge-offs were $7.9, versus $11.0 a year earlier.
- Non-interest income rose 30.9% to $26.4, led by loan origination and sale income of $8.4 versus $3.4. Non-interest expense rose 8.5% to $57.4.
- Net income was $12.2, up 28.5% from $9.5. Net income available to common shareholders was $11.4; basic and diluted EPS were $0.26 versus $0.20.
- Operating cash flow was $28.3, compared with $66.3 in Q1 2011; investing cash flow was $68.6 and financing cash flow was $53.6. Cash and cash equivalents increased $150.5 during the quarter.
- Consolidated regulatory capital ratios were 10.01% leverage, 14.90% Tier 1 risk-based and 16.89% total risk-based. The company and bank exceeded applicable capital adequacy requirements; the bank exceeded “well-capitalized” thresholds.
Material changes and asset quality
- Total loans declined $28.0 from year-end, attributed to weak demand and lower-quality loans leaving the portfolio through charge-offs or foreclosure. Deposits increased $83.9. Deposit mix shifted toward demand accounts after the company discontinued its savings sweep product, moving approximately $300 of balances from savings into demand deposits.
- Non-performing assets decreased to $267.5 from $278.9 at year-end, or 6.36% of loans and OREO versus 6.60%. Non-accrual loans fell to $180.9 from $200.0, while OREO increased to $44.8 from $37.5.
- The allowance for loan losses was $115.9, or 2.79% of period-end loans, versus $112.6, or 2.69%, at year-end. Criticized loans declined to $611.8 from $630.9.
- Troubled debt restructurings totaled $88.9; $52.1 was non-accrual and $36.8 was accruing. Management reported approximately 74% were performing under modified terms.
Outlook, commentary, risks and unusual items
- Management expected further net interest margin compression in future quarters absent meaningful loan growth, citing weak loan demand and lower loan and securities yields, partly offset by reduced funding costs.
- Management said net charge-offs were expected to remain high as problem loans continued through the credit cycle. It cautioned that economic deterioration or weaker asset quality could require material additional loan-loss provisions. The allowance depends on estimates and judgments about collateral, borrower repayment, portfolio quality and economic conditions.
- Q1 non-interest expense included an estimated $3.0 of collection and settlement costs related to one borrower. Management also cited higher incentive compensation, employee benefit costs and deferred-compensation plan market-value changes. Lower FDIC premiums and an $0.9 mortgage-servicing-rights impairment recovery partially offset expense pressures.
- On April 23, 2012, after quarter-end, the company announced its intention to redeem $41 of subordinated debentures, with redemption expected June 26, 2012. The filing identified credit risk, real-estate loan concentrations, regional economic conditions, interest rates, funding access, regulation and technology/vendor disruptions among risks. Management said litigation was not expected to have a material adverse effect; no material subsequent event requiring disclosure was identified in the financial-statement note.
- Off-balance-sheet exposures included approximately $1,060.5 of commitments to extend credit and $66.5 of standby letters of credit; commitment totals are not necessarily future cash requirements.
Key facts for investors to verify
- Whether loan demand and net interest margin stabilize, given management’s warning of further compression absent loan growth.
- Whether non-performing loans, OREO and net charge-offs continue to improve, and whether the allowance remains adequate as problem assets are resolved.
- How sustainable the increase in mortgage origination income is, particularly given its dependence on refinancing activity and interest rates.
- The actual timing and financial effect of the planned $41 subordinated-debt redemption, and the company’s liquidity and capital position afterward.
- Whether the $3.0 borrower-related collection and settlement costs recur and how operating expenses trend against revenue.