10-K: First Interstate BancSystem Reports Full-Year 2024 Results: Net Income Declines Amid Economic Headwinds

First Interstate BancSystem's 2024 annual report reveals a decrease in net income, driven by increased credit loss provisions and higher funding costs, despite growth in assets and deposits.

Summary

• First Interstate BancSystem, Inc.'s Form 10-K filing for the year ended December 31, 2024, details the company's financial performance and strategic direction.
• The company operates 300 banking offices across 14 states, with consolidated assets of $29.1 billion, deposits of $23.0 billion, and loans of $17.8 billion.
• Net income decreased by 12.2% to $226.0 million, or $2.19 per diluted share, compared to $257.5 million, or $2.48 per diluted share, in 2023.
• The decrease in net income is attributed to an increase in the provision for credit losses and lower net interest income due to higher funding costs.
• The company's strategic focus includes community banking, organic growth, and disciplined acquisitions.
• The company plans to stop originating indirect loans as of February 28, 2025.
• A material partial charge-off of approximately $49.3 million was recognized in the fourth quarter of 2024 related to a single commercial and industrial loan relationship.
• The company's capital ratios exceed all regulatory requirements to be deemed well-capitalized.
• The company's quarterly yield on interest earning assets increased to 4.86% as of December 31, 2024.
• The company's cost of funds decreased to 1.72% during the three months ended December 31, 2024.
• The company's FTE net interest margin increased to 3.20% during the three months ended December 31, 2024.
• The company recorded a provision for credit losses of $67.8 million in 2024, compared to $32.2 million in 2023.
• Noninterest income increased $31.1 million in 2024, primarily due to the absence of investment securities losses.
• Noninterest expense decreased $19.4 million in 2024, mainly due to lower FDIC insurance expense and other expenses.
• The effective federal tax rate was 18.1% for 2024, compared to 18.4% for 2023.
• Total assets decreased by 5.0% to $29.1 billion as of December 31, 2024.
• Investment securities decreased by 14.4% to $7.7 billion as of December 31, 2024.
• Loans held for investment decreased by 2.4% to $17.8 billion as of December 31, 2024.
• Total deposits decreased to $23.0 billion as of December 31, 2024.
• The company has available borrowing capacity of $4.4 billion with the Federal Home Loan Bank (FHLB) and $1.9 billion with the Federal Reserve Bank (FRB) based on pledged investment securities and loan collateral.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While the company maintains strong capital positions and has seen growth in certain areas, the decline in net income and the recognition of a material charge-off indicate challenges.

Positives

• The company's capital ratios exceed all regulatory requirements to be deemed well-capitalized.
• Noninterest income increased $31.1 million in 2024, primarily due to the absence of investment securities losses.
• Noninterest expense decreased $19.4 million in 2024, mainly due to lower FDIC insurance expense and other expenses.
• The company's quarterly yield on interest earning assets increased to 4.86% as of December 31, 2024.
• The company's cost of funds decreased to 1.72% during the three months ended December 31, 2024.
• The company's FTE net interest margin increased to 3.20% during the three months ended December 31, 2024.

Negatives

• Net income decreased by 12.2% to $226.0 million, or $2.19 per diluted share, in 2024.
• The decrease in net income is attributed to an increase in the provision for credit losses and lower net interest income due to higher funding costs.
• A material partial charge-off of approximately $49.3 million was recognized in the fourth quarter of 2024 related to a single commercial and industrial loan relationship.
• The company plans to stop originating indirect loans as of February 28, 2025.
• Total assets decreased by 5.0% to $29.1 billion as of December 31, 2024.
• Investment securities decreased by 14.4% to $7.7 billion as of December 31, 2024.
• Loans held for investment decreased by 2.4% to $17.8 billion as of December 31, 2024.
• Total deposits decreased to $23.0 billion as of December 31, 2024.

Risks

• Regulatory and compliance risks, including new governmental regulations and changes in existing regulations.
• Credit risks, including lending risks and risks associated with loan sector concentrations.
• Liquidity risks, including the ability to meet cash flow needs and availability of financing sources.
• Market risks, including changes in interest rates and their effect on investment securities.
• Operational risks, including cybersecurity risks and reliance on third-party service providers.
• Strategic risks, including risks related to acquisitions, mergers, and competition from new or existing financial institutions.
• Common stock risks, including volatility in the price and trading volume of the company's common stock.
• General risk factors, including the effect of global conditions, earthquakes, and other natural catastrophic events.
• The impact of climate change and environmental sustainability matters.

Future Outlook

The company expects the pace of merger and acquisition activity to decline as it focuses on organic growth opportunities. The Federal Reserve indicated in December 2024 that there may be further interest rate decreases during 2025, although we cannot control or predict with certainty changes in interest rates.

Management Comments

• Under the direction of James A. Reuter, who was recently appointed as our President and Chief Executive Officer effective as of November 2024, we are conducting an internal review and assessment of our internal credit policies.
• Management endeavors to respond proactively to any instances of non-compliance and to implement and update appropriate procedures to prevent instances of non-compliance and other violations from occurring.
• Management believes our positions are reasonable, we are subject to audit by the Internal Revenue Service in the United States and by state and local tax authorities in all the jurisdictions in which we conduct business operations.
• Management believes net interest income on an FTE basis provides an insightful picture of the interest margin for comparison purposes.
• Management considers an accounting estimate to be critical if: (1) the accounting estimate requires management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain, and (2) changes in the estimate that are reasonably likely to occur from period to period, or the use of different estimates that management could have reasonably used in the current period, would have a material impact on our consolidated financial statements, results of operations, or liquidity.
• Management monitors trends in the loan portfolio, including changes in the levels of past due, internally classified, and non-performing loans.
• Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of any such ongoing or anticipated matters to have a material, adverse effect on our business, financial condition, or operating results.

Industry Context

The document provides insight into the performance of a regional bank within the context of broader economic conditions, including inflation, interest rate changes, and regulatory developments affecting the financial services industry. It highlights the competitive landscape and the need for technological adaptation.

Comparison to Industry Standards

• The document references the KBW NASDAQ Bank Index and the KBW NASDAQ Regional Banking Index for performance comparison.
• The company's capital ratios are compared to regulatory minimums and peer performance.
• The company competes with larger banks and non-bank financial service providers, some of which have greater resources and higher lending limits.
• The company's performance is evaluated against similar bank holding companies on factors that include return on average assets, return on average equity, total shareholder return, and growth in earnings.

Legal Proceedings

• The company may be named as a defendant in various lawsuits in the normal course of business.

Related Party Transactions

• Certain executive officers, directors, and greater than 5% shareholders of the company and certain entities and individuals related to such persons had transactions with the company in the ordinary course of business.
• The company sold its share of a hangar for use of the company's plane for $0.4 million to an entity in which James R. Scott indirectly owned a one-third interest at the time.
• The company completed the repurchase of one million shares of its common stock from the estate of the Homer Scott, Jr. Revocable Trust (the Trust) at a price of $32.14 per share, or the closing price per share of the common stock as reported on the Nasdaq Stock Market on December 14, 2023, representing an aggregate purchase price of $32.1 million.

Stakeholder Impact

• Shareholders may be impacted by the decrease in net income and potential volatility in the stock price.
• Employees may be affected by changes in compensation and benefits, as well as potential workforce reductions.
• Customers may experience changes in product offerings and service delivery.
• The company's performance impacts the communities it serves through financial contributions and community involvement.

Next Steps

• Continue to evaluate bank acquisitions and other transaction opportunities in a strategic and thoughtful manner.
• Focus resources on relationship banking opportunities.
• Monitor economic conditions and adjust business strategies accordingly.
• Enhance processes to embed climate risk considerations into risk management strategies.

Key Dates