Business context and reporting period
First Interstate BancSystem, Inc. is a community-banking holding company operating 150 banking offices across Idaho, Montana, Oregon, South Dakota, Washington and Wyoming. This Form 10-K reports the fiscal year ended December 31, 2020; financial comparisons are primarily with 2019.
At year-end, the company reported $17.65 billion in assets, $14.22 billion in deposits, $9.81 billion in loans held for investment before allowance, and $1.96 billion in stockholders’ equity.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $497.0 million | $495.0 million |
| Net interest margin (FTE) | 3.47% | 3.99% |
| Provision for credit losses | $56.9 million | $13.9 million |
| Non-interest income | $156.7 million | $142.6 million |
| Non-interest expense | $387.5 million | $388.6 million |
| Net income | $161.2 million | $181.0 million |
| Diluted earnings per share | $2.53 | $2.83 |
| Return on average assets | 1.00% | 1.28% |
| Return on average common equity | 8.12% | 9.53% |
| Efficiency ratio | 57.61% | 59.19% |
Fourth-quarter 2020 net income was $46.9 million, or $0.76 per diluted share, versus $52.4 million, or $0.80 per diluted share, in fourth-quarter 2019.
Cash and cash equivalents were $2.28 billion, up $1.20 billion year over year. Cash provided by operating activities was $268.3 million (2019: $127.3 million); investing activities used $1.87 billion, largely reflecting securities purchases and net loan funding; financing activities provided $2.80 billion, primarily from deposit growth. Total deposits grew 21.9% to $14.22 billion, including substantial growth in non-interest-bearing demand and savings deposits. The company reported no brokered deposits at year-end.
The allowance for credit losses on loans was $144.3 million, or 1.47% of loans held for investment, compared with $73.0 million, or 0.82%, in 2019. Non-performing loans were $48.0 million; non-performing assets were $50.5 million, or 0.29% of assets. Net charge-offs were 0.14% of average loans.
Long-term debt was $112.4 million, compared with $13.9 million in 2019, following a May 2020 issuance of $100 million of subordinated notes due 2030. The company also had $87.0 million of subordinated debentures held by subsidiary trusts and $1.09 billion in repurchase agreements. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.89% and leverage ratio 7.88% at year-end. Management said it was unaware of events likely to materially impair liquidity or capital resources.
Material changes versus the prior comparable period
- Net income fell 10.9%, as the $43.0 million increase in credit-loss provision and lower asset yields outweighed higher non-interest income and reduced funding costs.
- Net interest margin contracted 52 basis points to 3.47%, principally reflecting lower market rates and asset yields. Average loan yield fell to 4.63% from 5.32%; the average cost of interest-bearing liabilities declined to 0.27% from 0.67%.
- Loans held for investment, net of deferred fees and costs, increased 9.8% to $9.81 billion, including $739.8 million of PPP loans. Excluding PPP loans, commercial loans declined $259.5 million, primarily due to paydowns.
- Investment securities grew 33.0% to $4.06 billion, while deposits grew 21.9%. Non-interest-bearing demand deposits increased $1.21 billion; management attributed deposit growth and mix changes partly to pandemic-related behavior and government stimulus.
- Non-interest income rose 9.9%, led by mortgage banking revenues, up 42.5% to $47.3 million amid refinance activity. Deposit service charges fell 16.6% to $17.6 million.
- Non-interest expense was nearly flat: lower acquisition costs and travel expenses largely offset wage and other cost increases. The company recorded no acquisition-related expenses in 2020, compared with $20.3 million in 2019.
Outlook, management commentary, risks and unusual items
The filing does not provide quantified earnings or revenue guidance. Management described the pandemic’s continuing economic and credit effects as uncertain and said it would continue monitoring conditions. The company participated in the PPP, approving approximately 11,700 applications for about $1.2 billion in 2020; as of February 19, 2021, it had approved more than 3,150 additional-round applications for approximately $296.3 million. At December 31, 2020, about 295 loans totaling $23.7 million remained on deferral, and 29 residential mortgage loans totaling $9.0 million had forbearance requests granted.
Effective January 1, 2020, the company adopted CECL. Adoption increased the loan allowance by $30.0 million and the off-balance-sheet allowance by $2.3 million, with a $24.1 million after-tax reduction to retained earnings. The 2020 provision also reflected management’s changed economic forecasts in response to COVID-19. The auditor identified the allowance’s adjustments for current and forecast conditions as a critical audit matter; the financial statements received an unqualified audit opinion.
Key risks include pandemic-related borrower stress, concentrated commercial real estate and commercial lending, regional economic exposure, energy-sector weakness, interest-rate and margin sensitivity, deposit mix and funding costs, and the transition away from LIBOR. The company reported direct oil-and-gas loan commitments of $75.9 million and said 19.7% of outstanding oil-and-gas loans were criticized. Its interest-rate model estimated net interest income would rise 7.00% under an immediate 100-basis-point increase and fall 7.04% under an immediate 100-basis-point decrease, assuming a static balance sheet; management cautioned that simulations are not forecasts.
Other notable items: mortgage servicing impairment was $9.9 million; goodwill of $621.6 million was not considered impaired in the annual test; and the company repurchased 3.54 million Class A shares during 2020. A $0.60-per-share special dividend was paid in March 2020; the January 2021 declaration set the regular quarterly dividend at $0.41 per share. Management, after consulting counsel, did not expect pending or anticipated legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether the elevated CECL allowance adequately reflects subsequent credit performance, especially in commercial real estate, commercial, hospitality and energy exposures.
- PPP loan balances, forgiveness and repayment timing, and the underlying loan trends excluding PPP balances.
- Whether pandemic-related deposits persist and how deposit mix, asset yields and interest-rate changes affect net interest margin and earnings.
- Capital and liquidity after dividends, repurchases and subordinated-debt costs; also review restrictions on Bank dividends to the holding company.
- Progress and exposure related to LIBOR replacement in loans, derivatives and trust-preferred debentures.
- The treatment and status of COVID-related deferrals and forbearances, including any deterioration after reporting date.