FIRST INTERSTATE BANCSYSTEM INC annual report, FY2019

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First Interstate BancSystem, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 26, 2020. This is an annual report, not a standalone fourth-quarter filing.

Business context

First Interstate is a Montana-based bank holding company operating 152 banking offices across Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming, alongside online and mobile services. At year-end, it reported $14.6 billion in assets, $11.7 billion in deposits, $9.0 billion in loans, and $2.0 billion in stockholders’ equity.

On April 8, 2019, the Company acquired Idaho Independent Bank and Community 1st Bank for aggregate consideration of approximately $176.1 million in Class A shares. Their operations were integrated into First Interstate Bank in June.

Financial performance and condition

  • Earnings and revenue: Net income was $181.0 million, or $2.83 diluted EPS, versus $160.2 million and $2.75 in 2018. Net interest income was $495.0 million, up 14.4%; non-interest income was $149.9 million, up 4.6%. Combined, these revenue components were $644.9 million, compared with $575.8 million in 2018.
  • Interest margin: Net interest margin (fully taxable-equivalent) rose to 3.99% from 3.88%. Higher loan balances and asset yields helped; higher funding costs partly offset the gains. Average cost of interest-bearing liabilities increased to 0.67% from 0.51%.
  • Expenses and profitability: Non-interest expense increased 9.7% to $395.9 million, including $20.3 million of acquisition-related expenses. The efficiency ratio improved to 59.65% from 61.31%. Return on average assets was 1.28%, versus 1.27%; return on average common equity declined to 9.53% from 10.50%.
  • Credit costs and quality: Provision for loan losses rose to $13.9 million from $8.6 million; net charge-offs were $13.9 million, or 0.16% of average loans, versus $7.7 million and 0.10%. Non-performing loans declined to $48.6 million from $58.1 million, and non-performing assets to $57.1 million from $72.5 million. The allowance was $73.0 million, equal to 0.81% of loans versus 0.86%.
  • Balance sheet and funding: Assets grew 10.1% to $14.64 billion; loans grew 6.2% to $9.03 billion, with $417.1 million of loan growth attributable to the acquisitions. Deposits increased 9.2% to $11.66 billion, including $706.7 million from the acquisitions. The loan-to-deposit ratio improved to 77.43% from 79.62%. Cash and cash equivalents were $1.08 billion; investment securities totaled $3.05 billion.
  • Debt and capital: Long-term debt was $13.9 million and subordinated debentures were $86.9 million; repurchase agreements were $697.6 million. Regulatory capital ratios remained well above stated minimums: consolidated CET1 12.62%, Tier 1 13.41%, total capital 14.10%, and leverage 10.13%. The Bank had no FHLB advances outstanding and reported approximately $1.62 billion of available FHLB lines, subject to collateral availability.
  • Cash flow and shareholder returns: Operating cash flow was $127.3 million, down from $219.0 million. Investing activities used $16.8 million, while financing activities provided $144.3 million. Cash and cash equivalents increased $254.8 million. Dividends declared were $1.24 per share for 2019; after year-end, the Board declared a $0.34 quarterly dividend and a $0.60 special dividend.

Changes, outlook, and material items

  • Growth in assets, loans, deposits, earnings, and net interest income reflected acquisitions as well as organic activity; organic loan growth was 1.3%. Acquisition-related expenses increased to $20.3 million from $12.4 million.
  • Payment-services revenue fell 4.2%, partly reflecting the Durbin Amendment interchange-fee cap. Mortgage banking revenue rose 22.1%, primarily on refinancing activity following lower interest rates.
  • Cash flow from operations fell substantially year over year. The filing does not provide a numerical earnings or growth forecast. Management said it knew of no events expected to materially adversely affect liquidity, capital resources, or operations.
  • The Company expected adoption of the CECL credit-loss standard on January 1, 2020 to increase the allowance for loan losses by an estimated 30%–45%; management said the estimate could change as implementation and validation continued.
  • Interest-rate modeling estimated net interest income would increase 0.76% under an immediate 100-basis-point increase, but decline 6.93% under an immediate 100-basis-point decrease. These are model scenarios, not forecasts. The filing also identifies the planned LIBOR transition after 2021 as a risk.
  • Key risks include sensitivity to local economic conditions, commercial real estate and business lending, commodity and energy exposure, deposit competition and funding costs, interest-rate changes, acquisition integration, cybersecurity and third-party systems, and heightened regulation. The Company reported that 30.6% of outstanding oil-and-gas loans were criticized. The filing also flagged potential coronavirus-related borrower and economic effects.
  • Goodwill was $621.6 million, or 30.9% of equity; the annual impairment assessment found no impairment. The financial-statement and internal-control audit opinions were unqualified. The acquired Idaho banks, representing about 6% of consolidated assets at merger, were excluded from the 2019 internal-control assessment and audit scope.
  • Management said outstanding or anticipated legal matters were not expected to have a material adverse effect. No unresolved SEC staff comments or fourth-quarter Form 8-K items omitted from the report were identified.

Important facts for investors to verify

  • Separate acquisition-driven growth from organic performance, and assess integration costs, synergies, and acquired-loan quality.
  • Track net interest margin, deposit mix and pricing, and results under falling-rate scenarios.
  • Review criticized and non-performing exposures, particularly commercial real estate, energy, and other cyclical borrowers, alongside charge-offs and reserve coverage.
  • Validate the CECL adoption impact against the disclosed 30%–45% allowance estimate and subsequent implementation disclosures.
  • Assess liquidity and funding resilience, including uninsured time deposits, pledged securities, repurchase agreements, and availability of contingent borrowing lines.
  • Consider goodwill concentration, the LIBOR transition, the controlled-company voting structure, and the sustainability of dividends and any future repurchases.