First Interstate BancSystem, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; figures are generally compared with fiscal 2014. The fourth quarter ended December 31, 2015. First Interstate is a community banking holding company operating 79 offices across Montana, Wyoming and South Dakota.
Financial results and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets at year-end | $8.73 billion | $8.61 billion |
| Loans at year-end | $5.25 billion | $4.90 billion |
| Deposits at year-end | $7.09 billion | $7.01 billion |
| Net interest income | $264.4 million | $248.5 million |
| Non-interest income | $120.9 million | $111.4 million |
| Net income | $86.8 million | $84.4 million |
| Diluted earnings per share | $1.90 | $1.87 |
| Net interest margin, FTE | 3.46% | 3.49% |
| Efficiency ratio | 64.37% | 65.82% |
| Return on average assets | 1.02% | 1.06% |
| Allowance for loan losses / total loans | 1.46% | 1.52% |
Total operating revenue, calculated as net interest income plus non-interest income, was $385.3 million, up from $359.9 million. Operating cash flow was $115.4 million, versus $122.0 million; investing cash flow was negative $95.3 million and financing cash flow negative $38.3 million. Cash and cash equivalents declined $18.2 million to $780.5 million.
Year-end stockholders’ equity was $950.5 million. Regulatory capital ratios remained above applicable well-capitalized thresholds; the consolidated common equity Tier 1 ratio was 12.7% and leverage ratio 10.1%. Long-term debt was $27.9 million, with $82.5 million of subordinated debentures outstanding; repurchase agreements were $510.6 million. The company reported no brokered time deposits and approximately $752.6 million of available FHLB lines, subject to collateral availability.
Changes and notable developments
- Net income rose 2.8%, while diluted EPS increased from $1.87 to $1.90. Net interest income grew 6.4%, supported by higher earning-asset balances and lower funding costs; the FTE margin nevertheless narrowed three basis points.
- Loans grew 7.1%, and deposits 1.2%. The loan-to-deposit ratio increased to 74.01% from 69.90%. Investment securities declined 10.0% to $2.06 billion as maturities and paydowns helped fund loan growth.
- Credit costs shifted from a $6.6 million provision reversal in 2014 to a $6.8 million provision in 2015. Net charge-offs were $4.2 million, or 0.08% of average loans. Non-performing loans rose to $72.0 million from $64.8 million; non-performing assets were essentially flat at $78.2 million, as lower OREO offset higher non-performing loans.
- On July 24, 2015, the company acquired Absarokee Bancorporation for $7.2 million cash. The acquired bank had approximately $75 million of assets, $37 million of loans and $64 million of deposits. The 2014 Mountain West acquisition contributed to year-over-year comparisons.
- Other shareholder actions included $19.9 million of open-market and privately negotiated Class A share repurchases and $36.3 million of common dividends in 2015. The quarterly dividend rose from $0.16 in 2014 to $0.20 in 2015; a $0.22 dividend was declared in January 2016.
Outlook, risks and unusual items
- No quantified earnings or growth guidance is provided. Management describes a strategy of disciplined organic growth and selective expansion in existing or complementary markets, while emphasizing community banking and customer service.
- Energy-sector exposure is a significant stated risk: direct oil and gas loans were approximately $75 million, with another $24 million in commitments; 36.4% of outstanding oil and gas loans were criticized at year-end. Management warned that prolonged low prices could affect borrowers and regional economies, including Wyoming’s public finances.
- Commercial lending and geographic concentration are material exposures. Commercial loans were approximately $2.6 billion, including $1.8 billion of commercial real estate; the filing also highlights risks from local economic weakness, collateral values, loan losses, interest rates and deposit competition.
- Assets were $8.7 billion, below the $10 billion threshold that would trigger additional requirements, including stress testing, a dedicated risk committee and CFPB examination. Management expects the threshold could be reached over time; the filing estimates debit interchange income could have been about $8 million lower under the applicable large-issuer fee caps, based on 2015 transaction volume.
- Non-interest expense included $5.0 million in 2015 loss-contingency expense related to a lender-liability lawsuit settled in August 2015, plus $0.8 million of acquisition expenses. Other notable 2015 items included $1.7 million in fraud losses, an $876,000 payment-service contract termination fee, $806,000 of write-downs on vacated buildings, and an $863,000 land-sale gain.
- Goodwill was $204.5 million; the annual impairment test found estimated fair value above carrying value. Management identifies the allowance for loan losses and goodwill valuation as critical estimates. Other disclosed risks include cybersecurity and vendor disruptions, regulatory costs, liquidity, litigation, and the possibility of higher provisions if credit conditions worsen.
Important facts for investors to verify
- Review subsequent energy-related credit trends, criticized and non-performing loans, specific reserves, and the adequacy of the allowance.
- Assess the sustainability of net interest income and margin, including acquired-loan accretion, interest-rate sensitivity and deposit pricing.
- Confirm organic loan and deposit growth apart from acquisitions, and monitor liquidity as the loan-to-deposit ratio rises.
- Track the approach to $10 billion in assets and the potential regulatory and debit-interchange consequences.
- Review the settled lender-liability matter, remaining contingencies, unusual expense items, and the assumptions supporting goodwill and acquired-loan valuations.
- Consider dividend capacity and parent-company liquidity in light of regulatory limits on bank-subsidiary distributions. The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2015.