First Interstate Bancsystem is taking a $49.3 million hit from a loan to a troubled distribution company, a charge-off that one analyst described as larger than expected.
While the action rids the Billings, Montana, bank of a loan that’s long been on its watch list, First Interstate is expecting to recover only $13.5 million from the $62.8 million it had lent. The news comes as First Interstate’s recently hired CEO, veteran bank executive Jim Reuter, looks to put his own stamp on the bank.
Analysts had a mixed reaction to the news, which was triggered by the borrower failing to improve its position by year-end and the bank turning to the courts to recoup its funds. First Interstate declined to comment beyond its filing to investors.
Andrew Terrell, an analyst at Stephens, said resolving the monthslong troubled loan helps “clear the deck for the company moving forward” and lets investors focus on the bank’s more positive profitability trends.
“Rather than letting this sit out there forever, it seems they moved pretty quickly and stuck to their underwriting standards,” Terrell said in emailed comments.
But Timur Braziler, an analyst at Wells Fargo, said the charge-off was “more punitive than I would have thought.” The loan was among First Interstate’s largest and thus presumably had “the most amount of work behind it” to guard against a negative scenario, Braziler said. In the end, the bank expects to recover less than a quarter of its funds.
In October, Braziler downgraded his view of the stock to underweight, citing concerns that the $29.6 billion-asset bank’s loan portfolio was looking a little less healthy than its peers.
While First Interstate’s credit quality remains benign, Braziler said the bank has “already had some issues in advance of everybody else” and could thus be
There is little sign of economic weakness, with Friday’s jobs report showing
“We haven’t really gone through a credit cycle yet,” Braziler said.
First Interstate’s stock fell 3.7% after the news, though bank stocks were down broadly over the prospect of higher interest rates dinging their loan portfolios.
The bank had already taken a reserve of $26.5 million tied to the loan, which it had placed into a watch list early last year. First Interstate said Friday it must set aside more to cover the rest of the loan.
While that will weigh on its earnings, it will be offset by the company being able to resolve a separate loan to an agricultural company. That firm paid off a $22.2 million loan that the bank had previously identified as potentially troubled.
When they first flagged the loan to investors in April, First Interstate executives had said the company had replaced its leadership and hired a consultant after undergoing management issues.
In Friday’s filing, the bank said it took action against the borrower after “a careful review of the available collateral,” continued weakening of the troubled company’s finances and its inability to live up to a past agreement to sell itself before year-end.
Last week, First Interstate asked a court to appoint a receiver to take over the company’s assets. The court-appointed receiver entered a deal with a buyer that’s expected to close this month, with proceeds going toward resolving the loan from First Interstate.