First Interstate BancSystem, Inc. — 2014 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2014, filed February 27, 2015. The Montana-based bank holding company operated 79 offices across Montana, Wyoming, and western South Dakota. It reported $8.61 billion in assets, $7.01 billion in deposits, $4.90 billion in loans, and $909 million in stockholders’ equity at year-end.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $248.5 million | $237.0 million |
| Net interest margin, fully taxable equivalent | 3.49% | 3.54% |
| Non-interest income | $111.4 million | $111.7 million |
| Non-interest expense | $236.9 million | $222.1 million |
| Net income | $84.4 million | $86.1 million |
| Diluted earnings per share | $1.87 | $1.96 |
| Return on average assets | 1.06% | 1.16% |
| Efficiency ratio | 65.82% | 63.69% |
- Fourth quarter: Net income was $22.8 million, or $0.49 per diluted share, versus $20.8 million, or $0.47, in Q4 2013. Net interest income was $65.5 million; non-interest income was $31.4 million; and non-interest expense was $61.7 million.
- Credit quality: The company recorded a $6.6 million provision reversal in 2014, compared with a $6.1 million reversal in 2013. Net charge-offs fell to $4.5 million, or 0.10% of average loans, from $9.0 million, or 0.21%. Non-performing loans declined to $64.8 million (1.32% of loans) from $96.7 million (2.22%); non-performing assets were $78.3 million, or 0.91% of assets.
- Cash flow and liquidity: Operating cash flow was $121.4 million; investing cash outflow was $195.8 million; and financing cash inflow was $338.3 million. Cash and cash equivalents ended the year at $798.7 million, up from $534.8 million. Deposits were the principal funding source; the company reported no brokered time deposits.
- Debt and capital: Long-term debt was $38.1 million and subordinated debentures held by subsidiary trusts were $82.5 million. Repurchase agreements totaled $502.3 million and are due overnight. First Interstate Bank reported total risk-based capital of 15.1%, tier 1 risk-based capital of 13.7%, and a leverage ratio of 9.2%; the filing states the Bank exceeded well-capitalized requirements. Consolidated stockholders’ equity was $908.9 million.
Material changes versus prior year
- Total assets increased 13.8% and deposits increased 14.2%, in part due to the July 2014 acquisition of Mountain West Financial Corp. The acquisition added approximately $612 million in fair-value assets, $360 million in loans, and $515 million in deposits. Consideration was $74.5 million, comprising $38.5 million cash and approximately $36.0 million in Class A shares. The company recorded approximately $21.9 million of goodwill and $11.0 million of core deposit intangibles.
- Excluding acquired loans, total loans grew 4.4%; total loans including acquired balances rose 12.7% to $4.90 billion. Deposits excluding acquired balances also grew, supported by organic customer deposit growth.
- Net interest income rose 4.9%, but margin declined five basis points. Acquired-loan interest accretion contributed $2.6 million, including $1.0 million from early payoffs; recoveries of previously charged-off interest contributed $3.6 million, compared with $1.4 million in 2013.
- Net income declined 2.0% as higher expenses offset revenue and credit improvements. Expenses included $4.0 million of acquisition costs and $4.0 million related to a litigation contingency. Mortgage origination and sale income fell $10.3 million, partly offset by higher service fees, wealth management revenue, and other income.
Outlook, risks, contingencies, and unusual items
- Management described a strategy of disciplined organic growth and selective expansion; the filing provides no specific quantitative earnings or revenue guidance.
- Management identified lower oil prices as a risk to the regional economies, particularly given the importance of Bakken oil and gas activity. Other material risks include local economic weakness, commercial real estate and other credit exposures, interest-rate changes, funding and liquidity pressures, cyber and vendor disruptions, and regulatory requirements.
- A jury awarded $17.0 million in damages in the Kelly Logging lender-liability case, including $16.8 million in punitive damages. The judgment was non-final and subject to court review; the company intended to appeal and accrued $4.0 million for the matter. Management said the ultimate outcome could materially affect financial condition, results, or liquidity.
- Goodwill was $205.6 million, about 23% of equity. The annual impairment test found estimated fair value above carrying value, but impairment remains a risk if assumptions or market conditions change.
- The company transferred $396.6 million of available-for-sale securities to held-to-maturity in June 2014. It reported $8.0 million of gross unrealized losses on securities in a continuous loss position for more than 12 months, primarily attributed to interest-rate movements, and recorded no securities impairment losses.
- The company declared a $0.20-per-share quarterly dividend in January 2015 and authorized repurchases of up to one million Class A shares. Dividends remain subject to regulatory and other restrictions. The Scott family held more than 79% of voting power through the dual-class share structure.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Review the Kelly Logging case’s final disposition, appeal status, and any change to the recorded contingency.
- Assess the acquired Mountain West loan marks, goodwill and intangible valuations, integration costs, and realized cost savings against management’s expectations.
- Check whether lower oil prices or regional economic changes affect energy-related borrowers, commercial real estate, criticized loans, and the allowance for loan losses.
- Separate recurring net interest performance from acquired-loan accretion and recoveries of charged-off interest; monitor margin trends and the effects of interest-rate changes.
- Confirm capital, liquidity, dividend capacity, and share repurchases remain consistent with regulatory requirements and the Bank’s funding needs.