First Interstate BancSystem, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing. The company is a community bank holding company operating 74 banking offices across Montana, Wyoming and western South Dakota. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Financial performance and position
| Metric | FY 2013 / Dec. 31, 2013 | FY 2012 / Dec. 31, 2012 |
|---|---|---|
| Interest income | $257.7 million | $273.9 million |
| Net interest income | $237.0 million | $243.8 million |
| Non-interest income | $111.7 million | $114.9 million |
| Net income | $86.1 million | $58.2 million |
| Net income available to common shareholders | $86.1 million | $54.9 million |
| Diluted EPS | $1.96 | $1.27 |
| Total assets | $7.565 billion | $7.722 billion |
| Loans, gross | $4.345 billion | $4.224 billion |
| Deposits | $6.134 billion | $6.240 billion |
| Stockholders’ equity | $801.6 million | $751.2 million |
- Margins and returns: Net interest margin was 3.54%, down 12 basis points from 3.66%; interest-rate spread was 3.44%, down 8 basis points. Return on average assets improved to 1.16% from 0.79%; return on average common equity rose to 11.05% from 7.46%.
- Credit quality: Non-performing assets declined to $112.2 million, or 1.48% of assets, from $142.6 million, or 1.85%. Net charge-offs fell to $9.0 million (0.21% of average loans) from $52.8 million (1.26%). The allowance for loan losses was $85.3 million, or 1.96% of loans, versus $100.5 million, or 2.38%.
- Liquidity and funding: Cash and cash equivalents were $534.8 million, down from $801.3 million. The loan-to-deposit ratio increased to 70.84% from 67.69%. The company reported no brokered time deposits at year-end.
- Debt and capital: Long-term debt was $36.9 million and subordinated debentures held by subsidiary trusts were $82.5 million; repurchase agreements totaled $457.4 million. The Bank’s regulatory ratios exceeded “well-capitalized” thresholds, including total risk-based capital of 14.7%, Tier 1 risk-based capital of 13.2%, and leverage capital of 8.9%.
- Cash flows: Operating activities provided $150.2 million; investing activities used $204.9 million; financing activities used $211.8 million. Cash and cash equivalents decreased by $266.5 million during the year.
Material changes versus the prior year
- Net income increased 48% and diluted EPS rose from $1.27 to $1.96, principally reflecting the $46.9 million year-over-year swing in loan-loss provision—from a $40.8 million expense in 2012 to a $6.1 million reversal in 2013. Net interest income and non-interest income both declined.
- Net interest income fell 2.8% as yields on loans and securities decreased; lower funding costs and higher average loan and securities balances partly offset the pressure. Management expected further margin compression in the low-rate environment.
- Non-interest expense declined 3.3%, including lower OREO expense and the absence of certain 2012 non-recurring charges. Salaries and employee benefits increased.
- Gross loans increased 2.9%, driven notably by residential real estate growth; deposits decreased 1.7%, with a continued shift from higher-cost time deposits toward demand and savings accounts.
- Shareholders’ equity rose 6.7%, primarily from retained earnings, partly offset by a $32.0 million after-tax loss in other comprehensive income, largely from unrealized losses on available-for-sale securities.
Outlook, commentary, risks and unusual items
- Management described credit quality as improving and expected non-performing and impaired loans to continue declining as problem credits move through the credit cycle, while noting that a weaker economy or deteriorating asset quality could require additional loan-loss provisions.
- The filing gives no specific earnings or revenue guidance. Management cautioned that prolonged low rates could further compress margins. A model scenario estimated a $5.1 million, or 2.1%, decrease in 12-month net interest income under successive quarterly rate increases of 0.5%; management noted that actual outcomes could differ materially.
- Key risks include concentration in regional markets and commercial real estate, sensitivity to local energy activity and the Bakken, borrower defaults and collateral values, interest-rate and liquidity risks, regulatory changes, technology and vendor disruptions, and restrictions on Bank dividends to the holding company. Goodwill was $183.7 million, about 23% of equity; management reported that its annual impairment test found estimated fair value above carrying value.
- Unusual and notable items included the $6.1 million loan-loss provision reversal; purchase of $45 million of company-owned life insurance in the fourth quarter; redemption of $50 million of preferred stock in January 2013; and a $32.0 million after-tax decline in accumulated other comprehensive income. The filing reported no investment-security impairment losses in 2013.
- After year-end, the company agreed to acquire Mountain West Financial Corp. for a combination of cash and Class A shares. Closing was expected in mid-2014, subject to regulatory and shareholder approvals; the filing does not provide a completed-transaction outcome.
- The company declared a quarterly common dividend of $0.16 per share in January 2014. It also had an effective shelf registration permitting up to $160 million of Class A shares, with no specific offering plans stated, and a repurchase authorization for up to 2 million Class A shares through November 14, 2014; no shares had been repurchased by year-end.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether asset-quality gains and the provision reversal are sustainable; review criticized loans, non-accrual exposures, troubled debt restructurings and allowance coverage, particularly for commercial real estate.
- How net interest margin, deposit pricing and asset yields respond to rate changes, and whether the company’s modeled sensitivity assumptions hold.
- The sources and uses of liquidity as cash balances declined, alongside lower deposits and repurchase agreements; confirm available borrowing capacity and collateral availability.
- The fair value and interest-rate sensitivity of the securities portfolio, including its duration increase to 3.7 years and the effect of unrealized losses on equity.
- The terms, regulatory approvals, financing, dilution and integration assumptions for the announced Mountain West acquisition, and any subsequent status updates.
- The holding company’s reliance on Bank dividends, regulatory distribution limits, and any changes to dividends, repurchases or capital-raising plans.